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, 1999 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, 1999
--------------------- ----------------------------
Common Stock, Par $.01 1,207,755
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ X ]
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1999
INDEX
- -----
Part I FINANCIAL INFORMATION
Page
Item 1. Interim Financial Statement....................................... 1
Consolidated Statements of Income for the Three
months ended June 30, 1999 and 1998 (Unaudited)................ 2
Consolidated Statements of Income for the Six
months ended June 30, 1999 and 1998 (Unaudited)................ 3
Consolidated Statements of Financial Condition as
of June 30, 1999 (Unaudited) and December 31, 1998.............. 4
Consolidated Statements of Changes in Stockholders' Equity for
the six months ended June 30, 1999 and 1998 (Unaudited)....... 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 (Unaudited)................ 6
Notes to unaudited consolidated interim financial statements.... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................. 9
Part II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 25
Item 2. Changes in Securities and Use of Proceeds ........................ 25
Item 3. Defaults Upon Senior Securities................................... 25
Item 4. Submission of Matters to a Vote of Security Holders............... 25
Item 5. Other Information................................................. 25
Item 6. Exhibits and Reports on Form 8-K.................................. 25
Signatures................................................................... 26
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1999
- --------------------------------------------------------------------------------
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,
------------------
1999 1998
------ ------
(Unaudited)
<S> <C> <C>
Interest income:
Loans .................................................... $2,597 $2,687
Investment securities .................................... 156 329
Securities available for sale ............................ 257 127
Federal funds sold and cash deposits ..................... 30 37
Stock in Federal Home Loan Bank .......................... 25 25
------ ------
Total interest income ............................. 3,065 3,205
------ ------
Interest expense:
Deposits
1,519 1,746
Borrowings ............................................... 9 --
------ ------
Total interest expense ............................. 1,528 1,746
------ ------
Net interest income ............................... 1,537 1,459
Provision for loan losses
15 30
------ ------
Net interest income after provision for loan losses 1,522 1,429
------ ------
Noninterest income:
Other loan charges ....................................... 27 43
Bank fees and service charges ............................ 45 44
Other .................................................... 7 34
------ ------
Total noninterest income .......................... 79 121
------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Noninterest expense:
Compensation and employee benefits ....................... 661 629
Advertising and business promotion ....................... 28 9
Office occupancy and equipment expense ................... 152 150
Federal deposit insurance premiums ....................... 22 23
Other insurance premiums ................................. 17 19
Data processing fees ..................................... 47 47
Professional service fees ................................ 63 79
Merger-related expenses .................................. 167 --
Other .................................................... 75 88
------ ------
Total noninterest expense
1,232 1,044
------ ------
Income before taxes ............................... 369 506
Income tax expense
200 208
------ ------
Net income ........................................ $ 169 $ 298
====== ======
Earnings per share:
Basic ..................................................... $ .15 .27
====== ======
Diluted ................................................... $ .15 .26
====== ======
</TABLE>
See accompanying notes to unaudited consolidated interim financial
statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
SIX MONTHS ENDED
JUNE 30,
-----------------
1999 1998
------ ------
(Unaudited)
<S> <C> <C>
Interest income:
Loans .................................................... $5,210 $5,325
Investment securities .................................... 338 763
Securities available for sale ............................ 512 198
Federal funds sold and cash deposits ..................... 42 56
Stock in Federal Home Loan Bank .......................... 47 49
------ ------
Total interest income ............................. 6,149 6,391
------ ------
Interest expense:
Deposits
3,039 3,459
Borrowings ............................................... 19 1
------ ------
Total interest expense ............................ 3,058 3,460
------ ------
Net interest income ............................... 3,091 2,931
Provision for loan losses
30 60
------ ------
Net interest income after provision for loan losses 3,061 2,871
------ ------
Noninterest income:
Other loan charges ....................................... 55 84
Bank fees and service charges ............................ 92 83
Other .................................................... 41 59
------ ------
Total noninterest income .......................... 188 226
------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Noninterest expense:
Compensation and employee benefits ....................... 1,337 1,328
Advertising and business promotion ....................... 52 19
Office occupancy and equipment expense ................... 319 307
Federal deposit insurance premiums ....................... 45 47
Other insurance premiums ................................. 34 36
Data processing fees ..................................... 98 94
Professional service fees ................................ 125 138
Merger-related expenses .................................. 167 --
Other .................................................... 162 162
------ ------
Total noninterest expense
2,339 2,131
------ ------
Income before taxes ............................... 910 966
Income tax expense ............................................. 421 399
------ ------
Net income ........................................ $ 489 567
====== ======
Earnings per share:
Basic ..................................................... $ .44 .52
====== ======
Diluted ................................................... $ .42 .49
====== ======
</TABLE>
See accompanying notes to unaudited consolidated interim financial
statements.
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<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in Thousands)
June 30, December 31,
1999 1998
--------- ---------
Assets (Unaudited)
------
<S> <C> <C>
Cash and due from banks ................................................... $ 1,693 1,712
Federal funds sold ........................................................ 1,600 2,100
--------- ---------
Total cash and cash equivalents ............................... 3,293 3,812
Securities available for sale, at fair value .............................. 20,504 16,954
Investment securities (estimated fair value of $8,978
at June 30, 1999 and $11,758 at December 31, 1998) ........... 8,947 11,661
Stock in Federal Home Loan Bank of NY, at cost ............................ 1,466 1,338
Loans receivable, net ..................................................... 140,965 140,210
Accrued interest receivable ............................................... 1,105 1,133
Premises and equipment, net ............................................... 2,109 2,191
Real estate owned ......................................................... 187 271
Prepaid expenses and other asset .......................................... 555 597
--------- ---------
Total Assets .................................................. $ 179,131 178,167
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors:
Non-interest bearing deposits ................................... $ 2,427 2,103
Interest bearing deposits ....................................... 149,208 148,475
--------- ---------
Total Deposits ................................................ 151,635 150,578
Advance payments by borrowers for property taxes and insurance ....... 1,863 1,425
Borrowings ............................................................. 700 700
Accrued expenses and other liabilities ............................... 1,199 1,854
--------- ---------
Total Liabilities ............................................. 155,397 154,557
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<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, 1999 and December 31, 1998 ................... 15 15
Additional paid-in capital ........................................... 14,609 14,576
Retained earnings, substantially restricted .......................... 14,422 14,150
Common stock acquired by employee stock ownership plan ("ESOP") ........ (718) (718)
Unearned recognition and retention plan .............................. (243) (318)
Treasury stock, at cost (287,245 shares at June 30, 1999 and
286,528 shares at December 31, 1998) ........................ (4,098) (4,089)
Accumulated other comprehensive income ................................. (253) (6)
--------- ---------
Total Stockholders' Equity .............................. 23,734 23,610
--------- ---------
Total Liabilities and Stockholders' Equity ............ $ 179,131 178,167
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial
statements.
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<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
----- ------- -------- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 1999
Balance at December 31, 1998 .... $ 15 14,576 14,150 (4,089) (718) (318) (6)
Comprehensive income
Net income .................... -- -- 489 -- -- -- --
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the year
(pre-tax $410) .......... -- -- -- -- -- -- (247)
Comprehensive income ............
Amortization of unearned RRP
Compensation ................. -- -- -- -- -- 66 --
Cash dividends declared ......... -- -- (217) -- -- -- --
Forfeiture of RRP shares ........ -- -- -- (9) -- 9 --
Tax benefit related to
vested RRP shares ............... -- 33 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 ........ $ 15 14,609 14,422 (4,098) (718) (243) (253)
======== ======== ======== ======== ======== ======== ========
Six Months Ended
June 30, 1998
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 period .
(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>
Comprehensive
Income Total
------ -----
Six Months Ended
June 30, 1999
<S> <C> <C>
Balance at December 31, 1998 .... 23,610
Comprehensive income
Net income .................... $ 489 489
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the year
(pre-tax $410) .......... (247) (247)
--------
Comprehensive income ............ $ 242
========
Amortization of unearned RRP
Compensation ................. 66
Cash dividends declared ......... (217)
Forfeiture of RRP shares ........ --
Tax benefit related to
vested RRP shares ............... 33
-------
Balance at June 30, 1999 ........ 23,734
=======
Six Months Ended
June 30, 1998
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 period .
(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>
See accompanying notes to unaudited consolidated interim financial statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
---------------------
1999 1998
------- -------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents: (Unaudited)
Reconciliation of net income to net cash provided
by operating activities:
Net income ...................................................... $ 489 567
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................................. 117 100
Net accretion on investment securities ......................... -- (74)
Net amortization (accretion) on securities available for sale .. 9 (1)
Amortization of unearned RRP compensation ...................... 66 69
Provision for loan losses ...................................... 30 60
Writedown of real estate owned ................................. 8 --
Decrease in accrued interest receivable ........................ 28 69
Decrease in prepaid expense and other assets ................... 42 1
Increase (decrease) in accrued expense and other liabilities.... (459) 239
------- -------
Total adjustments ..................................... (159) 463
------- -------
Net cash provided by operating activities ............... 330 1,030
------- -------
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities .............. 55 8,885
Proceeds from maturity/paydown of securities available for sale ...... 5,000 --
Purchase of securities available for sale ............................ (8,969) (4,000)
Purchase of Federal Home Loan Bank Stock ............................. (128) --
Principal repayments on mortgage-backed securities ................... 2,659 3,258
Net increase in loans receivable ..................................... (163) (6,059)
Purchase of loans receivable ......................................... (684) (1,504)
Capital expenditures, net of disposals ............................... (35) (29)
Proceeds from the sale of real estate owned .......................... 138 27
------- -------
Net cash provided (used) by investing activities ................ (2,127) 578
------- -------
Cash flows from financing activities:
Net increase in deposits ............................................. 1,057 2,410
Net increase in advance payments by borrowers for
property taxes and insurance .................................... 438 580
Dividends paid ....................................................... (217) (194)
------- -------
Net cash provided by financing activities ............................ 1,278 2,796
------- -------
Net increase (decrease) in cash and cash equivalents ............ (519) 4,404
Cash and cash equivalents at beginning of period ..................... 3,812 2,176
------- -------
Cash and cash equivalents at end of period ........................... $ 3,293 6,580
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid ................................................... $ 3,064 3,475
======= =======
Taxes paid ...................................................... $ 1,157 405
======= =======
Transfer of loans to other real estate owned ......................... $ 62 67
======= =======
Net unrealized loss on securities available for sale, net of taxes ... $ (247) (4)
======= =======
Deferred tax benefit on unrealized gain/loss
on securities available for sale ................................ $ 163 2
======= =======
Deferred tax benefit related to vested RRP shares .................... $ 33 46
======= =======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
- 6 -
<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 1998 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, 1999, are not necessarily
indicative of results that may be expected for the entire year ending December
31, 1999.
The unaudited consolidated interim financial statements include the accounts of
SFS Bancorp, Inc. (the "Holding Company" or "SFS") 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, 1999 and 1998.
Three Months Ended June 30:
- ---------------------------
(in thousands except share and per share information)
<TABLE>
<CAPTION>
1999
-------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS ................................ $ 169 1,114,229 $ 0.15
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 48,930
--------- ---------
Diluted EPS .............................. $ 169 1,163,159 $ 0.15
========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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>
-7 -
<PAGE>
Six Months Ended June 30:
- -------------------------
(in thousands except share and per share information)
<TABLE>
<CAPTION>
1999
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS ................................ $ 489 1,113,471 $ 0.44
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 46,188
--------- --------- --------
Diluted EPS .............................. $ 489 1,159,659 $ 0.42
========= ========= ========
<CAPTION>
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
========= ========= ========
</TABLE>
NOTE 3. Proposed Merger
On May 17, 1999, SFS and Hudson River Bancorp, Inc. ("Hudson") announced the
execution of a definitive agreement by and between SFS and Hudson (the "Merger
Agreement"). Under the terms of the Merger Agreement, SFS will merge into a
to-be-formed wholly owned subsidiary of Hudson (the "Merger"). Following the
Merger, SFS will then be merged into Hudson pursuant to an Agreement and Plan of
Merger and Schenectady Federal Savings Bank will be merged with and into Hudson
River Bank & Trust Company, a wholly owned subsidiary of Hudson. Concurrent with
the execution and delivery of the Merger Agreement, SFS and Hudson entered into
a Stock Option Agreement (the "Stock Option Agreement") pursuant to which SFS
granted Hudson an option, exercisable under certain circumstances, to acquire up
to 240,485 shares of SFS common stock (subject to adjustment). Pursuant to the
Merger Agreement, each issued and outstanding share of SFS common stock shall be
converted into and represent the right to receive $25.10 in cash. However, any
shares of SFS common stock owned beneficially or of record by either SFS or
Hudson or any of their subsidiaries shall be canceled. The Merger is intended to
qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended. The receipt of cash by the stockholders of SFS will be a taxable event
for the stockholders. Consummation of the Merger is subject to various
conditions, including: (1) receipt of approval by the stockholders of SFS; (2)
receipt of requisite regulatory approvals; and (3) satisfaction of certain other
conditions. The Merger is expected to close in the third quarter of this year.
-8 -
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1999
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
SFS Bancorp, Inc. (the "Holding Company" or "SFS") 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 May 17, 1999, SFS and Hudson River Bancorp, Inc. ("Hudson") announced the
execution of a definitive agreement by and between SFS and Hudson (the "Merger
Agreement"). Under the terms of the Merger Agreement, SFS will merge into a
to-be-formed wholly owned subsidiary of Hudson (the "Merger"). Following the
Merger, SFS will then be merged into Hudson pursuant to an Agreement and Plan of
Merger and Schenectady Federal Savings Bank will be merged with and into Hudson
River Bank & Trust Company, a wholly owned subsidiary of Hudson. Concurrent with
the execution and delivery of the Merger Agreement, SFS and Hudson entered into
a Stock Option Agreement (the "Stock Option Agreement") pursuant to which SFS
granted Hudson an option, exercisable under certain circumstances, to acquire up
to 240,485 shares of SFS common stock (subject to adjustment). Pursuant to the
Merger Agreement, each issued and outstanding share of SFS common stock shall be
converted into and represent the right to receive $25.10 in cash. However, any
shares of SFS common stock owned beneficially or of record by either SFS or
Hudson or any of their subsidiaries shall be canceled. The Merger is intended to
qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended. The receipt of cash by the stockholders of SFS will be a taxable event
for the stockholders. Consummation of the Merger is subject to various
conditions, including: (1) receipt of approval by the stockholders of SFS; (2)
receipt of requisite regulatory approvals; and (3) satisfaction of certain other
conditions. The Merger is expected to close in the third quarter of this year.
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
- 9 -
<PAGE>
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 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 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 $3.8 million at December 31, 1998, decreased $519,000 to
$3.3 million at June 30, 1999 primarily as a result of decreases 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.
<PAGE>
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS Regulations. This requirement, which may vary at the direction of the OTS
depending on economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio of liquid assets to
deposits and short-term borrowings is currently 4%. The Bank's liquidity ratio
was 18.41% and 19.24% at June 30, 1999 and December 31, 1998, respectively.
- 10 -
<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 on earning assets less
interest paid on deposits, was $330,000 and $1.0 million for the six months
ended June 30, 1999 and 1998, respectively. Net cash used by investing
activities, consisting primarily of the purchase of securities available for
sale and disbursements for the origination and purchase of loans partially
offset by principal collections on loans and mortgage-backed securities and by
proceeds from the maturity and/or the call of securities available for sale, was
$2.1 million for the six months ended June 30, 1999. 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 net increase in loans receivable. Net cash
provided by financing activities for the six months ended June 30, 1999 and 1998
of $1.3 million and $2.8 million, respectively, consisted primarily of net
increases in deposit and borrowers' escrow accounts during the period offset by
the payment of dividends.
During the six month periods ended June 30, 1999 and 1998, the Company did not
repurchase any of its shares.
At June 30, 1999, the Bank's capital exceeded each of the capital requirements
of the OTS. At June 30, 1999, the Bank's tangible and core capital levels were
both $21.0 million (11.6% of total adjusted assets) and its risk-based capital
level was $21.7 million (22.9% 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 $964,000 (0.5%) to $179.1 million at June 30, 1999 from
$178.2 million at December 31, 1998. This increase occurred as securities
available for sale increased $3.6 million (20.9%) to $20.5 million at June 30,
1999 as all new securities purchased were classified as available for sale.
Loans receivable, net, grew $755,000 (0.5%) to $141.0 million at June 30, 1999.
The net growth in the loan portfolio continued to consist primarily of
residential mortgage loans. Offsetting these increases was a decrease in
investment securities of $2.7 million (23.3%) to $8.9 million.
At June 30, 1999, total liabilities were $155.4 million, representing an
increase of $840,000 (0.5%) from December 31, 1998. The increase was primarily
attributable to an increase in retail deposits and advance payments by borrowers
for property taxes and insurance. Stockholders' equity increased $124,000 to
$23.7 million at June 30, 1999 as compared to $23.6 million at December 31,
1998. Retained earnings increased by $272,000 as a result of net income of the
Company for the six month period ended June 30, 1999 partially offset by cash
dividends declared. The increase in retained earnings was mostly offset by a
$247,000 increase in net unrealized losses.
- 11 -
<PAGE>
Loan Receivable, Net
- --------------------
A summary of loans receivable, net at June 30, 1999 and December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
Loans secured by real estate:
Residential:
<S> <C> <C>
Conventional ................................. $115,486 112,568
Home Equity .................................. 18,054 19,570
FHA Insured .................................. 1,784 2,107
VA Guaranteed ................................ 1,038 1,358
Commercial and multi-family ..................... 4,975 4,914
-------- --------
141,337 140,517
Other loans ........................................ 749 776
-------- --------
142,086 141,293
-------- --------
Less:
Unearned discount and net deferred loan fees .... 131 130
Allowance for loan losses ....................... 990 953
-------- --------
1,121 1,083
-------- --------
Loans receivable, net .............................. $140,965 140,210
======== ========
</TABLE>
The following table sets forth the information with regard to nonperforming
assets.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Loans on a nonaccrual status ..................... $1,040 725
Loans contractually past due 90 days or
more and still accruing interest .............. -- 135
------ ------
Total nonperforming loans .................. 1,040 860
Other real estate owned .......................... 187 271
------ ------
Total nonperforming assets ................. $1,227 1,131
====== ======
</TABLE>
<PAGE>
Nonperforming assets increased $95,000 (8.4%) and totaled $1.2 million at June
30, 1999. The increase was primarily attributable to an increase in nonaccrual
residential mortgage loans. The historical net chargeoff percentage of
residential mortgage loans is lower than any other loan type in the Bank's
portfolio. Management of the Bank does not view this increase as a significant
adverse trend. The ratio of nonperforming loans to total loans receivable was
.73% at June 30, 1999, compared with .61% at December 31, 1998. The ratio of
nonperforming assets to total assets was .68% at June 30, 1999 and .64% at
December 31, 1998.
- 12-
<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,
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period ........................ $953 778
Provision charged to operations ..................... 30 60
Loans charged off ................................... -- (21)
Recoveries on loans previously charged off .......... 7 38
---- ----
Balance, end of period .............................. $990 855
==== ====
</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, 1999, 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.
- 13 -
<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,
-----------------------------------------------------------------------------------------
1999 1998
---------------------------------------- -----------------------------------------
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) $142,262 $2,597 7.32% $ 139,875 $ 2,687 7.71%
Mortgage-backed securities 7,974 124 6.24 14,828 227 6.14
Securities available for sale 17,364 257 5.94 7,904 127 6.44
Debt securities 1,797 32 7.14 5,674 102 7.21
Federal funds sold
and cash deposits 2,554 30 4.71 2,736 37 5.42
FHLB stock 1,466 25 6.84 1,338 25 7.49
--------- ------- --------- -------
Total interest-earning assets 173,417 3,065 7.09 172,355 3,205 7.46
--------- ------- -------- -------
Savings accounts 36,297 224 2.48 36,561 274 3.01
Money market accounts 8,973 72 3.22 7,428 59 3.19
Demand and NOW accounts (2) 10,497 33 1.26 11,550 41 1.42
Certificate accounts 92,788 1,182 5.11 96,186 1,364 5.69
Borrowings 700 9 5.16 -- -- --
Escrow 1,458 8 2.20 1,463 8 2.19
--------- ------- --------- -------
Total interest-bearing liabilities 150,713 1,528 4.07 153,188 1,746 4.57
--------- ------- --------- -------
Net interest income $ 1,537 $ 1,459
======= =======
Net interest rate spread 3.02% 2.89%
===== =====
Net earning assets $ 22,704 $ 19,167
========== ==========
Net yield on average
interest-earning assets 3.55% 3.40%
===== =====
Average interest-earning
assets to average
interest-bearing liabilities 1.15 1.13
==== ====
- ---------------------------
</TABLE>
(1) Calculated net of deferred loan fees.
(2) Includes noninterest-bearing demand accounts.
- 14 -
<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,
----------------------------------------------------------------------------------------
1999 1998
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) $141,816 $ 5,210 7.41% $ 137,639 $ 5,325 7.80%
Mortgage-backed securities 8,646 273 6.37 15,682 486 6.25
Securities available for sale 17,206 512 6.00 6,116 198 6.53
Debt securities 1,802 65 7.27 8,033 277 6.95
Federal funds sold
and cash deposits 1,784 42 4.75 2,102 56 5.37
FHLB stock 1,409 47 6.73 1,338 49 7.39
--------- ------- --------- -------
Total interest-earning assets 172,663 6,149 7.18 170,910 6,391 7.54
--------- ------- --------- -------
Interest-bearing liabilities:
Savings accounts 36,121 443 2.47 36,443 543 3.00
Money market accounts 8,791 140 3.21 7,492 122 3.28
Demand and NOW accounts (2) 10,504 65 1.25 11,035 78 1.43
Certificate accounts 92,474 2,378 5.19 95,793 2,703 5.69
Borrowings 749 19 5.12 39 1 5.17
Escrow 1,181 13 2.22 1,209 13 2.17
--------- ------- -------- -------
Total interest-bearing liabilities 149,820 3,058 4.12 152,011 3,460 4.59
--------- ------- -------- -------
Net interest income $ 3,091 $ 2,931
======= =======
Net interest rate spread 3.06% 2.95%
====== =====
Net earning assets $ 22,843 $ 18,899
========== ========
Net yield on average
interest-earning assets 3.61% 3.46%
===== =====
Average interest-earning
assets to average
interest-bearing liabilities 1.13 1.12
==== ====
- -------------------------
</TABLE>
(1) Calculated net of deferred loan fees.
(2) Includes noninterest-bearing demand accounts.
- 15 -
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
RATE VOLUME ANALYSIS
(In Thousands) (Unaudited)
THREE MONTHS ENDED JUNE 30, 1999
COMPARED WITH
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
INCREASE (DECREASE)
--------------------------------
DUE TO
------------------
VOLUME RATE NET
------ ---- ---
Interest-earning assets:
<S> <C> <C> <C>
Loans receivable, net ................. $ 47 (137) (90)
Mortgage-backed securities ............ (107) 4 (103)
Securities-available for sale ......... 141 (11) 130
Debt securities ....................... (69) (1) (70)
Federal funds sold
and cash deposits ................ (2) (5) (7)
FHLB stock ............................ 2 (2) --
----- ----- -----
Total interest-earning assets ........... $ 12 (152) (140)
===== ===== =====
Interest-bearing liabilities:
Savings deposits ...................... $ (2) (48) (50)
Money market accounts ................. 12 1 13
Demand and NOW deposits ............... (5) (3) (8)
Certificate accounts .................. (47) (135) (182)
Borrowings ............................ 9 -- 9
Escrow ............................... -- -- --
----- ----- -----
Total interest-bearing liabilities ...... $ (33) (185) (218)
===== ===== =====
Change in net interest income ........... $ 78
=====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
COMPARED WITH
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
INCREASE (DECREASE)
--------------------------------
DUE TO
------------------
VOLUME RATE NET
------ ---- ---
Interest-earning assets:
<S> <C> <C> <C>
Loans receivable, net ................. $ 174 (289) (115)
Mortgage-backed securities ............ (222) 9 (213)
Securities-available for sale ......... 331 (17) 314
Debt securities ....................... (225) 13 (212)
Federal funds sold
and cash deposits ................ (8) (6) (14)
FHLB stock ............................ 3 (5) (2)
----- ----- -----
Total interest-earning assets ........... $ 53 (295) (242)
===== ===== =====
Interest-bearing liabilities:
Savings deposits ...................... $ (5) (95) (100)
Money market accounts ................. 21 (3) 18
Demand and NOW deposits ............... (4) (9) (13)
Certificate accounts .................. (91) (234) (325)
Borrowings ............................ 18 -- 18
Escrow ............................... -- -- --
----- ----- -----
Total interest-bearing liabilities ...... $ (62) (340) (402)
===== ===== =====
Change in net interest income ........... $ 160
=====
</TABLE>
- 16 -
<PAGE>
COMPARISONS OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999
Three months ended June 30, 1999 compared with three months ended June 30,1998
Net income for the quarter ended June 30, 1999, was $169,000 or $.15 basic and
diluted earnings per share. This represents a decrease of $129,000 (43.3%) from
the comparable quarter of the prior year. The decrease in net income was
primarily a result of an increase in noninterest expense due to professional
fees associated with the merger with Hudson. Other factors affecting the
decrease in net income were an increase in net interest income, a decrease in
the provision for loan losses and a decrease in noninterest income. Income tax
expense was consistent with the same quarter a year ago. The annualized return
on average assets ("ROA") for the current quarter amounted to .38% compared with
.68% for the comparable quarter a year ago. The annualized return on average
equity ("ROE") was 2.88% (on average equity of $23.5 million) compared with
5.57% (on average equity of $21.4 million) a year earlier.
Interest income for the three months ended June 30, 1999, totaled $3.1 million,
a decrease of $140,000 (4.4%) from 1998's second quarter. The primary reason for
the decrease was the fact that the yield on loans decreased 39 basis points from
7.71% in the second quarter of 1998 to 7.32% in the second quarter of 1999 due
to the rate environment affecting fixed and adjustable rate residential mortgage
loans. Other factors affecting interest income were an increase in the average
balance of securities available for sale, which increased on average $9.5
million from the same period in 1998. The yield on these securities caused the
overall yield of this portfolio to fall from 6.44% in the quarter ended June 30,
1998 to 5.94% in the quarter ended June 30, 1999. Interest earned on
mortgage-backed securities decreased $103,000 (45.4%) primarily as a result of a
$6.9 million (46.2%) decrease in the average balance invested due to principal
payments. Interest income on debt securities decreased $70,000 (68.6%) primarily
as a result of a decrease in average invested balances of $3.9 million (68.3%)
as management classified new securities purchased as available for sale.
Interest expense for the quarter ended June 30, 1999 amounted to $1.5 million,
$218,000 (12.5%) less than the corresponding quarter of the prior year. The
decrease occurred as a result of a $2.5 million (1.6%) decrease in average
interest-bearing liabilities to $150.7 million combined with a 50 basis point
decrease in average rates paid to 4.07%. The mix within the structure of
interest bearing liabilities changed as the average balance in certificate
accounts decreased by $3.4 million (3.5%) while the average balances in money
market accounts and borrowings increased by a combined $2.2 million (30.2%). The
average rates paid on certificate accounts decreased by 58 basis points to
5.11%. The average rates paid on savings accounts and demand and NOW accounts
decreased by 53 basis points and 16 basis points, respectively. The decreases in
rates paid on deposit accounts was a reflection of the general interest rate and
competitive environment that prevailed during the second quarter of 1999
compared with 1998.
Net interest income for the three months ended June 30, 1999 totaled $1.5
million, $78,000 (5.3%) greater than the comparable quarter a year ago. The
interest rate spread increased 13 basis points to 3.02% for the quarter ended
June 30, 1999. The net interest margin for the most recent quarter of 3.55% was
15 basis points higher than the comparable quarter a year ago.
- 17 -
<PAGE>
Provision for Loan Losses
- -------------------------
The provision for loan losses amounted to $15,000 for the quarter ended June 30,
1999 and $30,000 in the quarter ended June 30,1998. 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,
1999, the Bank's allowance for loan losses totaled $990,000 (0.70% of total
gross loans and 95.2% of nonperforming loans) compared with $953,000 (0.67% of
total gross loans and 110.8% of nonperforming loans) at December 31, 1998.
Noninterest Income
- ------------------
Noninterest income amounted to $79,000 for the three months ended June 30, 1999
compared to $121,000 for the three months ended June 30, 1998. The 34.7%
decrease was primarily attributable to a reduction in sales production in
non-deposit insurance products by the Bank's subsidiary which resulted in a
decrease of $25,000 (92.8%) in revenue over the same period a year ago and a
decrease in other loan charges of $16,000 (37.2%) to $27,000.
Noninterest Expense
- -------------------
Noninterest expense increased $188,000 (18.0%) to $1.2 million for the three
months ended June 30, 1999, as compared with the same period in 1998. The
increase was primarily attributable to merger related expenses of $167,000
associated with the merger with Hudson River Bancorp, Inc. There were no similar
expenses for the comparable quarter in 1998. Compensation and employee benefits
increased $32,000 (5.1%) between the respective quarters. This increase was a
result of annual merit increases, and increased employee benefits associated
with the Company's employee retirement plans and partially offset by a reduction
in staff. Advertising and business promotion increased $19,000 (211.1%) to
$28,000 resulting primarily from increased advertising in relation to new
product offerings and promotions. Professional service fees decreased $16,000
(20.3%) due in part to the amendment of certain incentive benefit plans which
were presented to shareholders at the Company's 1998 annual meeting held in the
second quarter. Other noninterest expense decreased $13,000 (14.8%) to $75,000
primarily due to expenses associated with the payment of back taxes and
maintenance of real estate owned during the second quarter of 1998. Office
occupancy and equipment expense, federal deposit insurance premiums, other
insurance premiums, and data processing fees remained relatively the same for
the quarters ended June 30, 1999 and 1998.
Income Tax Expense
- ------------------
Income tax expense totaled $200,000 and $208,000 for the three months ended June
30, 1999 and 1998, respectively. The effective tax rate for the three months
ended June 30, 1999 was 54.2% compared to 41.1% for the same period a year ago.
The increase in effective tax rate was attributable to the nondeductible portion
of merger-related expenses associated with the merger with Hudson as previously
mentioned.
-18-
<PAGE>
COMPARISONS OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999
Six months ended June 30, 1999, compared with six months ended June 30, 1998
Net income for the six months ended June 30, 1999 was $489,000 or $.44 basic
earnings per share and $.42 diluted earnings per share. This represents a
decrease of $78,000 (13.8%) from the comparable period of the prior year. The
decrease in net income was primarily a result of an increase in noninterest
expense due to professional fees associated with the merger with Hudson. Other
factors affecting the decrease in net income were an increase in net interest
income, a decrease in the provision for loan losses, a decrease in noninterest
income and an increase in income tax expense. The annualized return on average
assets ("ROA") for the first half of 1999 amounted to .55% compared with .65%
for the comparable period a year ago. The annualized return on average equity
("ROE") was 4.17% (on average equity of $23.4 million) compared with 5.34% (on
average equity of $21.4 million) a year earlier.
Interest income for the six months ended June 30, 1999, totaled $6.1 million, a
decrease of $242,000 (3.8%) from 1998's first half. The primary reason for the
decrease was the fact that the yield on loans decreased 39 basis points from
7.80% in the first half of 1998 to 7.41% in the first half of 1999 due to the
rate environment affecting fixed and adjustable rate residential mortgage loans.
Other factors affecting interest income were an increase in the average balance
of securities available for sale, which increased on average $11.1 million from
the same period in 1998. The yield on these securities caused the overall yield
of this portfolio to fall from 6.53% in the six months ended June 30, 1998 to
6.00% in the six months ended June 30, 1999. Interest earned on mortgage-backed
securities decreased $213,000 (43.8%) primarily as a result of a $7.0 million
(44.9%) decrease in the average balance invested due to principal payments.
Interest income on debt securities decreased $212,000 (76.5%) primarily as a
result of a decrease in average invested balances of $6.2 million (77.6%) as
management classified new securities purchased as available for sale.
Interest expense for the six months ended June 30, 1999, amounted to $3.1
million, $402,000 (11.6%) less than the corresponding period of the prior year.
The decrease occurred as a result of a $2.2 million (1.4%) decrease in average
interest-bearing liabilities to $149.8 million combined with a 47 basis point
decrease in average rates paid to 4.12%. The mix within the structure of
interest-bearing liabilities changed as the average balance in certificate
accounts decreased by $3.3 million (3.5%) while the average balances in money
market accounts and borrowings increased by a combined $2.0 million (26.7%). The
average rates paid on certificate accounts decreased by 50 basis points to
5.19%. The average rates paid on savings accounts and demand and NOW accounts
decreased by 53 basis points and 18 basis points, respectively. The decreases in
rates paid on deposit accounts was a reflection of the general interest rate and
competitive environment that prevailed during the second half of 1999 compared
with 1998.
Net interest income for the six months ended June 30, 1999 totaled $3.1 million,
$160,000 (5.5%) greater than the comparable period a year ago. The interest rate
spread increased 11 basis points to 3.06% for the six months ended June 30,
1999. The net interest margin for the six months ended June 30, 1999 was 3.61%
which was 15 basis points greater than the comparable period a year ago.
- 19 -
<PAGE>
Provision for Loan Losses
- -------------------------
The provision for loan losses totaled $30,000 and $60,000 for the six month
periods ended June 30, 1999 and 1998, respectively. See "Provision for Loan
Losses" at page 18.
Noninterest Income
Noninterest income amounted to $188,000 for the six months ended June 30, 1999
compared to $226,000 for the six months ended June 30, 1998. The 16.8% decrease
was primarily attributable to decreased sales production in non-deposit
insurance products by the Bank's subsidiary, which resulted in a decrease of
$12,000 (32.3%) in revenue over the same period a year ago and a decrease in
other loan charges of $29,000 (34.5%) to $55,000.
Noninterest Expense
- -------------------
Noninterest expense increased $208,000 (9.8%) to $2.3 million for the six months
ended June 30, 1999, as compared with the same period in 1998. The increase was
primarily attributable to merger related expenses of $167,000 associated with
the merger with Hudson River Bancorp, Inc. There were no similar expenses for
the comparable period in 1998. Compensation and employee benefits increased
$9,000 (0.7%) between the respective six-month periods. This increase was a
result of annual merit increases, and increased employee benefits associated
with the Company's employee retirement plans and partially offset by a reduction
in staff. Advertising and business promotion increased $33,000 (173.7%) to
$52,000 resulting primarily from increased advertising in relation to new
product offerings and promotions. Professional service fees decreased $13,000
(9.4%) due in part to the amendment of certain incentive benefit plans which
were presented to shareholders at the Company's 1998 annual meeting held in the
second quarter. Office occupancy and equipment expense, federal deposit
insurance premiums, other insurance premiums, data processing fees and other
noninterest expense remained relatively the same for the quarters ended June 30,
1999 and June 30, 1998.
Income Tax Expense
- ------------------
Income tax expense totaled $421,000 and $399,000 for the six months ended June
30, 1999 and 1998, respectively. The effective tax rate for the six months ended
June 30, 1999 was 46.3% compared to 41.3% for the same period a year ago. The
increase in effective tax rate was attributable to the nondeductible portion of
merger-related expenses associated with the merger with Hudson as previously
mentioned.
- 20 -
<PAGE>
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
During the second quarter of 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 deters the effective date of SFAS No. 133
by one year from fiscal quarters of fiscal years beginning after June 15, 1999
to fiscal quarters from fiscal years beginning after June 15, 2000. Management
is currently evaluating the impact of this Statement on the Company's
consolidated financial statements.
Impact of the Year 2000
General. The Year 2000 ("Y2K") issue confronting the Company and its suppliers,
customers, customers' suppliers and competitors centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems originally were programmed with six digit dates that provided only two
digits to identify the calendar year in the date field. . With the impending new
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000.
Financial institution regulators have increased their focus upon Y2K compliance
issues and have issued guidance concerning the responsibilities of senior
management and directors. The Federal Financial Institutions Examination Council
("FFIEC") has issued several interagency statements on Y2K Project Management
Awareness. These statements require financial institutions to, among other
things, examine the Y2K implications of their reliance on vendors and with
respect to data exchange and the potential impact of the Y2K issue on their
customers, suppliers and borrowers. These statements also require each federally
regulated financial institution to survey its exposure, measure its risk and
prepare a plan to address the Y2K issue. In addition, the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any Y2K
problems. The federal banking agencies have determined that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's failure to address appropriately the Y2K
issue could result in supervisory action, including the reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
- 21 -
<PAGE>
Risks. Like most financial services providers, the Company and its operations
may be significantly affected by the Y2K issue due to its dependence on
technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Company's direct control, and third
parties with whom the Company electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and the
Company could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the Y2K issue could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could result in a significant adverse impact on the Company's operations
and, in turn, its financial condition and results of operations.
State of Readiness. During May 1998, the Company formally approved its plan to
address the Y2K issue. Since that time the Company has taken the following
steps:
Established senior management advisory and review responsibilities;
Completed a Company-wide inventory of applications and system software;
Implemented a tracking database for applications and vendor software
created by regulators;
Developed compliance plans and schedules for all lines of business;
Begun computer application testing;
Initiated vendor compliance verification;
Contacted significant vendors with whom the Company interacts to determine
their state of readiness;
Begun awareness and education activities for employees through existing
internal communication channels;
Developed a process to respond to customer inquires as well as help educate
customers on the Y2K issue; and
Developed a contingency and business resumption plan.
The following paragraphs summarize the phases of the Company's Y2K plan:
1. Awareness Phase. The Company formally established a Y2K plan headed by a
senior manager, and a Y2K committee was assembled for management of the project.
The project committee created a plan of action that includes milestones, budget
estimates, strategies, and methodologies to track and report the status of the
project. Members of the project committee also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is complete.
- 22 -
<PAGE>
2. Assessment Phase. The Company's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was made to quantify the extent of the Company's Y2K
exposure. A corporate inventory (which is periodically updated as new technology
is acquired and as systems progress through subsequent phases) was developed to
identify and monitor Y2K readiness for information systems (hardware, software,
utilities, and vendors) as well as environmental systems (security systems,
facilities, etc.). Systems were prioritized based on business impact and
available alternatives. Mission critical systems supplied by vendors were
researched to determine Y2K readiness. If Y2K-ready versions were not available,
the Company began identifying functional replacements which were either
upgradeable to currently Y2K-ready, and a formal plan was developed to repair,
upgrade or replace all mission critical systems. This phase is complete.
Beginning in 1997 and throughout 1998, the Company began Y2K evaluation of all
commercial borrowers at the time of the annual review of their loans. All
commercial customers were evaluated for Y2K exposure by the Internal Loan Review
Committee using a questionnaire developed by the Company's Y2K committee and an
assessment as to the borrower's reliance on data processing and the risk to the
overall viability of the business. As part of the current credit approval
process, all new and renewed loans are evaluated for Y2K risk. While the Company
will continue to monitor the progress being made by its commercial customers in
addressing their own Y2K issues, to date the Company is generally satisfied with
customers' responses and their progress in addressing their Y2K risk. The
Company's primary assets are residential mortgage loans which have been assessed
with minimal risk as it relates to Y2K and the impact on the creditworthiness of
these loans individually or as a whole.
3. Conversion/Renovation Phase. The Company's corporate inventory revealed that
upgrades are available for all vendor-supplied mission critical systems. All
mission critical applications and the majority of other applications which are
deemed Y2K-ready have been received and placed into production and have entered
the validation process. This phase is substantially complete.
4. Validation/Implementation Phase. This phase is designed to test the ability
of hardware and software to accurately process date sensitive data. The Company
has substantially completed validation testing of mission critical applications.
The Company's Y2K test environment, periodically supplied by its service bureau
data center, is virtually insulated from production and development
environments. The Company has reassigned internal personnel responsibilities in
anticipation of the increased work efforts and has increased staff to support
normal business activities. During the validation testing process, no
significant Y2K problems were identified relating to any modified or upgraded
mission critical systems.
- 23 -
<PAGE>
Company's Resources Invested. The Company's Y2K committee has been assigned the
task of ensuring that all systems across the Company are identified, analyzed
for Y2K compliance, corrected if necessary, tested, and changes put into
service. The Y2K committee members represent all functional areas of the
Company, including retail banking, data processing, loan administration,
accounting, operations, compliance, human resources, and marketing. The
committee is headed by a senior vice president who reports directly to the
Company's chief executive officer. The Company's Board of Directors oversees the
Y2K plan and provides guidance and resources to the project committee. The Board
is updated periodically as to the progress of the committee.
The Company is expensing all costs associated with required system changes as
those projects are incurred, and such costs are being funded through operating
cash flow. Expenditures incurred for hardware upgrades are being capitalized and
depreciated in accordance with the Company's policies. The total expenditures
associated with the Y2K conversion project, exclusive of internal costs, are
estimated to be approximately $100,000. As of June 30, 1999, the Company
incurred or was contractually committed for services, equipment and software
totaling approximately $73,000 for the Y2K conversion project. The Company does
not expect significant increases in future data processing costs related to Y2K
compliance above the aforementioned estimate.
Contingency Plans. Virtually all the Company's mission critical systems are
dependent on third party vendors or service providers. The Company has developed
strategies to address possible instances in which a system or resource fails to
be compliant. The contingency plans vary with the affected systems. These
contingency plans include details for performing some key procedures or
functions manually, utilizing alternative systems, identifying Company personnel
to be on standby to address problems if, and when they arise, and drawing on
additional liquidity sources if the need for such funds arise. The Board of
Directors approved the formal contingency and business resumption plan in
December 1998.
- 24 -
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1999
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 and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 14, 1999, the Company held its Annual Meeting of
Stockholders.
(b) At the meeting, Richard D. Ammian was elected for a term to
expire in 2002.
(c) Stockholders voted on the following matter:
(i) The election of the following director of the Company:
Broker
Votes: For Withheld Non-Votes
------ --- -------- ---------
Richard D. Ammian 1,114,4551 8,429 --
(ii) The ratification of the appointment of KPMG LLP as
independent auditors of the Company for the fiscal
year ending December 31, 1999.
Broker
Votes: For Against Abstain Non-Votes
------ --- ------- ------- ---------
1,120,005 1,675 1,200 --
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On May 26, 1999, Form 8-K was filed in connection with the
announced execution of a definitive agreement between SFS
Bancorp, Inc. and Hudson River Bancorp, Inc. as previously
described in Part I Item 2. of the Form 10-QSB for the quarter
ended June 30, 1999.
- 25 -
<PAGE>
SIGNATURES
- ----------
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SFS BANCORP, INC.
------------------
(Registrant)
DATE: August16, 1999 BY: /s/ Joseph H. Giaquinto
-----------------------
Joseph H. Giaquinto
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: August 16, 1999 BY: /s/ David J. Jurczynski
-----------------------
David J. Jurczynski
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
- 26 -
<TABLE> <S> <C>
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
REPORT ON FORM 10-Q SB FOR THE FISCAL QUARTER ENDED JUNE 30, 1999 AND IS
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