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, 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 Identification Number)
incorporation or organization)
251-263 STATE STREET, SCHENECTADY, NY 12305
(Address of principal executive offices)
Registrant's telephone number, including area code: (518) 395-2300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares of outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares outstanding
Class of Common Stock as of April 30, 1999
--------------------- ---------------------------
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, 1999
INDEX
Part I FINANCIAL INFORMATION
Page
----
Item 1. Interim Financial Statements...................................... 1
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998, (Both Unaudited).......... 2
Consolidated Statements of Financial Condition as
of March 31, 1999, (Unaudited) and December 31, 1998............ 3
Consolidated Statements of Changes in Stockholders' Equity for
the three months ended March 31, 1999 and 1998, (Both Unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (Both Unaudited).......... 5
Notes to unaudited consolidated interim financial statements.... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................ 7
Part II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 20
Item 2. Changes in Securities............................................ 20
Item 3. Defaults Upon Senior Securities.................................. 20
Item 4. Submission of Matters to a Vote of Security Holders.............. 20
Item 5. Other Information................................................ 20
Item 6. Exhibits and Reports on Form 8-K................................. 20
Signatures.................................................................. 21
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
March 31, 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>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------
1999 1998
------ ------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $2,613 2,638
Investment securities 181 434
Securities available for sale 255 71
Federal funds sold and cash deposits 12 19
Stock in Federal Home Loan Bank 22 24
------ ------
Total interest income 3,083 3,186
Interest expense:
Deposits 1,520 1,713
Borrowings 10 1
------ ------
Total interest expense 1,530 1,714
------ ------
Net interest income 1,553 1,472
Provision for loan losses 15 30
------ ------
Net interest income after provision for loan losses 1,538 1,442
------ ------
Noninterest income:
Other loan charges 28 41
Bank fees and service charges 46 39
Other 34 25
------ ------
Total noninterest income 108 105
------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------
1999 1998
------ ------
(Unaudited)
<S> <C> <C>
Noninterest expense:
Compensation and employee benefits 676 699
Advertising and business promotion 24 9
Office occupancy and equipment expense 168 157
Federal deposit insurance premiums 23 23
Other insurance premiums 17 17
Data processing fees 51 47
Professional service fees 61 60
Other 86 74
------ ------
Total noninterest expense 1,106 1,086
------ ------
Income before taxes 540 461
Income tax expense
221 191
------ ------
Net income $ 319 $ 270
====== ======
Earnings per share:
Basic $ .29 $ .25
====== ======
Diluted $ .28 $ .23
====== ======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
- 2 -
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(in Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------------
Assets (Unaudited)
------
<S> <C> <C>
Cash and due from banks $ 1,419 1,712
Federal funds sold 2,100 2,100
----------- ----------
Total cash and cash equivalents 3,519 3,812
Securities available for sale, at fair value 15,790 16,954
Investment securities (estimated fair value of $10,612
at March 31, 1999 and $11,758 at December 31, 1998) 10,511 11,661
Stock in Federal Home Loan Bank of NY, at cost 1,466 1,338
Loans receivable, net 140,612 140,210
Accrued interest receivable 1,116 1,133
Premises and equipment, net 2,162 2,191
Real estate owned 263 271
Prepaid expenses and other assets 638 597
----------- ----------
Total Assets $ 176,077 178,167
=========== ==========
</TABLE>
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition (Continued)
(in Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Due to depositors:
Non-interest bearing deposits $ 1,622 2,103
Interest-bearing deposits 147,462 148,475
----------- ----------
Total Deposits 149,084 150,578
Advance payments by borrowers for property taxes and insurance 1,051 1,425
Borrowings 700 700
Accrued expenses and other liabilities 1,428 1,854
----------- ----------
Total Liabilities 152,263 154,557
----------- ----------
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, 1999 and December 31, 1998 15 15
Additional paid-in capital 14,609 14,576
Retained earnings, substantially restricted 14,360 14,150
Common stock acquired by Employee stock ownership plan ("ESOP") (718) (718)
Unearned recognition and retention plan (276) (318)
Treasury stock, at cost (286,528 shares at March 31, 1999 and
December 31, 1998) (4,098) (4,089)
Accumulated other comprehensive income (78) (6)
----------- ----------
Total Stockholders' Equity 23,814 23,610
----------- ----------
Total Liabilities and Stockholders' Equity $ 176,077 178,167
=========== ==========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
- 3 -
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Common Other
Additional Stock Stock Compre Compre
Common Paid-in Retained Treasury Acquired Acquired hensive hensive
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, 1999
- --------------
Balance at December 31, 1998 $ 15 14,576 14,150 (4,089) (718) (318) (6) 23,610
Comprehensive income:
Net income -- -- 319 -- -- -- -- $ 319 319
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the period
(pre-tax $120) -- -- -- -- -- -- (72) (72) (72)
--------
Comprehensive income $ 247
========
Amortization of unearned RRP
compensation -- -- -- -- -- 33 -- 33
Cash dividends declared -- -- (109) -- -- -- -- (109)
Tax benefit related to vested
RRP shares -- 33 -- -- -- -- -- 33
Forfeiture of RRP shares -- -- -- (9) -- 9 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1999 $ 15 14,609 14,360 (4,098) (718) (276) (78) 23,814
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Common Common Other
Additional Stock Stock Compre Compre
Common Paid-in Retained Treasury Acquired Acquired hensive hensive
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 period
(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
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1998 $ 15 14,411 12,594 (4,089) (837) (420) 7 21,681
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
-4-
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
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 $ 319 270
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 59 51
Net accretion on investment securities -- (38)
Net amortization (accretion) on securities available for sale 5 (2)
Amortization of unearned RRP compensation 33 35
Provision for loan losses 15 30
Writedown of real estate owned 8 --
Decrease in accrued interest receivable 17 124
Increase in prepaid expense and other assets (41) (117)
Increase in accrued expense and other liabilities (345) 269
--------- ---------
Total adjustments (249) 352
--------- ---------
Net cash provided by operating activities 70 622
--------- ---------
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities 48 6,044
Proceeds from maturity/paydown of securities available for sale 4,000 --
Purchase of securities available for sale ( 2,961) (3,000)
Purchase of Federal Home Loan Bank stock (128) --
Principal repayments on mortgage-backed securities 1,102 1,167
Net (increase) decrease in loans receivable (312) (2,125)
Purchase of loans receivable (166) (1,031)
Capital expenditures, net of disposals (30) (24)
Proceeds from the sale of real estate owned 61 27
--------- ---------
Net cash provided by investing activities 1,614 1,058
--------- ---------
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1999 1998
--------- ---------
(Unauditied)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits (1,494) 717
Net decrease in advance payments by borrowers for
property taxes and insurance (374) (196)
Dividends paid (109) (98)
--------- ---------
Net cash provided (used) by financing activities (1,977) 423
---------- ---------
Net increase (decrease) in cash and cash equivalents (293) 2,103
Cash and cash equivalents at beginning of period 3,812 2,176
--------- ---------
Cash and cash equivalents at end of period $ 3,519 4,279
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid $ 1,530 1,728
========= =========
Taxes paid $ 687 15
========= =========
Transfer of loans to other real estate owned $ 61 --
========= =========
Net unrealized loss on securities available for sale, net of taxes $ (72) (3)
========= =========
Tax (benefit) expense on unrealized gain/loss
on securities available for sale $ (48) (2)
========= =========
Deferred tax benefit related to vested RRP shares $ 33 46
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
- 5 -
<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 months ended March 31, 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") 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, 1999 and 1998.
<TABLE>
<CAPTION>
(in thousands except share and per share information)
1999
------------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS $ 319 1,112,704 $ 0.29
=======
Dilutive effect of potential common shares
related to stock based compensation -- 43,077
---------- --------------
Diluted EPS $ 319 1,155,781 $ 0.28
============ ============= =======
1998
------------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
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
============ ============= =======
</TABLE>
- 6 -
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 1999
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 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 and borrowings. The Bank's
operating results are also impacted by the provision for loan losses, and to a
lesser extent, by 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.
- 7 -
<PAGE>
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:
o 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;
o 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;
o 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;
o the effect of unforeseen changes in interest rates;
o 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 $300,000 to
$3.5 million at March 31, 1999 as a result of a decrease in cash and due from
banks. 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 17.53% and 19.24% at March 31, 1999 and December 31, 1998, respectively.
- 8 -
<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 $70,000 and $622,000 for the three months ended March 31, 1999 and
1998, respectively. Net cash provided by investing activities, consisting
primarily of disbursements for the origination and purchase of loans and the
acquisition of securities available for sale offset by principal collections on
loans and mortgage-backed securities and by proceeds from the maturity, call and
paydown of investment securities, was $1.1 million for the three months ended
March 31, 1998. Net cash of $1.6 million was provided by investing activities
for the three months ended March 31, 1999 and consisted primarily of proceeds
from the maturity, call and paydown of investment securities, securities
available for sale 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 for the three months ended
March 31, 1998. Net cash used by financing activities, consisting primarily of a
net decrease in deposits and in advanced payments by borrowers for property
taxes and insurance combined with dividends paid, was $2.0 million for the three
months ended March 31, 1999.
During the three month periods ended March 31, 1999 and 1998, 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, 1999, the Bank's capital exceeded each of the capital requirements
of the OTS. At March 31, 1999, the Bank's tangible and core capital levels were
both $20.7 million (11.8% of total adjusted assets) and its risk-based capital
level was $21.7 million (23.0% of total risk-weighted assets). The current
minimum regulatory capital ratio requirements are 1.5% for tangible capital,
3.0% for core capital and 8.0% for risk-weighted capital.
FINANCIAL CONDITION
Total assets decreased $2.1 million (1.2%) to $176.1 million at March 31, 1999
from $178.2 million at December 31, 1998. Securities available for sale
decreased by $1.2 million (6.9%) to $15.8 million at March 31, 1999. The
decrease in securities available for sale was primarily attributable to the
calls of certain securities. Investment securities decreased by $1.1 million
(9.9%) to $10.5 million at March 31, 1999 primarily resulting from paydowns on
mortgage-backed securities.
At March 31, 1999, total liabilities were $152.3 million representing a decrease
of $2.3 million (1.5%) from December 31, 1998. The decrease was primarily
attributable to a net decrease in deposits and payments made by the Bank for
property taxes and insurance on behalf of its borrowers. Stockholders' equity
increased $204,000 to $23.8 million at March 31, 1999 as compared to $23.6
million at December 31, 1998. Retained earnings increased by $210,000 primarily
as a result of net income of the Company for the three month period ended March
31, 1999 totaling $319,000 offset by dividends paid totaling $109,000.
- 9 -
<PAGE>
Nonperforming assets decreased $99,000 (8.8%) totaling $1.0 million at March 31,
1999, compared with $1.1 million at December 31, 1998. The ratio of
nonperforming loans to total loans receivable was .54% at March 31, 1999,
compared with .61% at December 31, 1998. The ratio of nonperforming assets to
total assets at March 31, 1999, was .59% compared with .64% at December 31,
1998.
Loan Receivable, Net
- --------------------
A summary of loans receivable, net at March 31, 1999 and December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional $ 114,269 112,568
Home Equity 18,772 19,570
FHA Insured 1,948 2,107
VA Guaranteed 1,190 1,358
Commercial and multi-family 4,817 4,914
------------- -------------
140,996 140,517
Other loans 717 776
------------- -------------
141,713 141,293
------------- -------------
Less:
Unearned discount and net deferred loan fees 131 130
Allowance for loan losses 970 953
------------- -------------
1,101 1,083
------------- -------------
Loans receivable, net $ 140,612 140,210
============= =============
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the information with regard to nonperforming assets.
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Loans on a nonaccrual status $ 688 725
Loans contractually past due 90 days or
more and still accruing interest 81 135
------------- -------------
Total nonperforming loans 769 860
Other real estate owned 263 271
------------- -------------
Total nonperforming assets $ 1,032 1,131
============= =============
</TABLE>
- 10 -
<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,
1999 1998
------------- -------------
<S> <C> <C>
Balance, beginning of period $ 953 778
Provision charged to operations 15 30
Loans charged off -- --
Recoveries on loans previously charged off 2 32
------------- -------------
Balance, end of period $ 970 840
============= =============
</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, 1999, 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.
- 11 -
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
Average Balance Data, Interest Rates and Interest Differential
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------ ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $ 141,364 $ 2,613 7.50% $ 135,377 $ 2,638 7.90%
Mortgage-backed securities 9,326 149 6.48 16,545 259 6.35
Securities available for sale 17,047 255 6.07 4,308 71 6.68
Debt securities 1,807 32 7.18 10,419 175 6.81
Other interest-earning asset
including cash equivalents 1,007 12 4.83 1,461 19 5.27
FHLB stock 1,352 22 6.60 1,338 24 7.27
---------- --------- ---------- --------
Total interest-earning assets 171,903 3,083 7.27 169,448 3,186 7.63
---------- --------- ---------- --------
Savings accounts 35,943 219 2.47 36,323 269 3.00
Money market accounts 8,608 68 3.20 7,558 63 3.38
Demand and NOW accounts (2) 12,089 33 1.11 10,514 37 1.43
Certificate accounts 92,157 1,195 5.26 95,395 1,339 5.69
Escrow 901 5 2.23 952 5 2.13
Borrowings 814 10 4.98 76 1 5.34
---------- ---------- ---------- --------
Total interest-bearing liabilities 150,512 1,530 4.12 150,818 1,714 4.61
---------- ---------- ---------- -------
Net interest income $ 1,553 $ 1,472
========= ========
Net interest rate spread 3.15% 3.02%
===== =====
Net earning assets $ 21,391 $ 18,630
========== ==========
Net yield on average
interest-earning assets 3.66% 3.52%
===== =====
Average interest-earning
assets to average
interest-bearing liabilities 1.14X 1.12X
===== =====
</TABLE>
(1) Calculated net of deferred loan fees and includes nonaccrual loans.
(2) Includes noninterest-bearing demand accounts.
- 12 -
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
RATE VOLUME ANALYSIS
(In Thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31, 1999
COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE)
----------------------------------------------
DUE TO
----------------------------
VOLUME RATE NET
------- ------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 154 (179) (25)
Mortgage-backed securities (115) 5 (110)
Securities-available for sale 191 (7) 184
Debt securities (153) 10 (143)
Other interest-earning assets (6) (1) (7)
FHLB stock 0 (2) (2)
------- ------- -------
Total interest-earning assets $ 71 (174) (103)
======= ======= =======
Interest-bearing liabilities:
Savings deposits $ (3) (47) (50)
Money market accounts 8 (3) 5
Demand and NOW deposits 5 (9) (4)
Certificate accounts (44) (100) (144)
Escrow 0 0 0
Borrowings 9 0 9
------- -------- --------
Total interest-bearing liabilities $ (25) (159) (184)
======= ======= =======
Change in net interest income $ 81
=======
</TABLE>
- 13 -
<PAGE>
COMPARISONS OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999
Three months ended March 31, 1999 compared with 1998
Net income for the quarter ended March 31, 1999, was $319,000 or $.29 basic
earnings per share and $.28 diluted earnings per share. This represented an
increase of $49,000 (18.1%) from the comparable quarter of the prior year. The
increase in net income was primarily attributable to an increase in net interest
income and a decrease in provision for loan losses. These positive impacts to
earnings were partially offset by increases in non-interest expense and income
tax expense. Noninterest income was relatively consistent with the same quarter
a year ago. The annualized return on average assets ("ROA") for the current
quarter amounted to .73% compared with .62% for the comparable quarter a year
ago. The annualized return on average equity ("ROE") was 5.68% (on average
equity of $22.5 million) compared with 5.10% (on average equity of $21.1
million) a year earlier.
Interest income for the three months ended March 31, 1999, totaled $3.1 million,
a decrease of $103,000 (3.2%) from 1998's first quarter. The factors
contributing to the decrease in interest income was a decrease in earnings on
loans which decreased $25,000 (3.2%) as a result of a 40 basis point decrease in
average rates earned offset by a $6.0 million (4.4%) increase in the average
balance invested. Average loans as a percentage of total interest-earning assets
increased from 79.9% during the first quarter 1998 to 82.2% for the same period
in 1999. Interest earned on mortgage-backed securities decreased $110,000
(42.5%) as a result of a $7.2 million (43.6%) decrease in the average balance
invested offset by a 13 basis point increase in average rates earned. Interest
income on securities available for sale increased $184,000 (259.2%) as a result
of an increase of $12.7 million (295.7%) in the average invested balance offset
by a decrease of 61 basis points in average rates earned. Interest income on
debt securities decreased $143,000 (81.7%) as a result of a decrease in average
invested balances of $8.6 million (82.7%) offset by an increase of 37 basis
points in rates earned.
Interest expense for the quarter ended March 31, 1999, amounted to $1.5 million,
$184,000 (10.7%) less than the corresponding quarter of the prior year. The
decrease occurred as a result of a $308,000 (0.2%) decrease in average interest
bearing liabilities to $150.5 million combined with a 49 basis point decrease in
average rates paid to 4.12%. The mix within the funding structure changed as the
average balances grew in money market accounts by $1.2 million (15.6%) and in
demand and NOW accounts by $1.6 million (15.0%). In addition, average borrowings
increased $738,000 (971.1%) to $814,000. The average certificate accounts
balance declined $3.3 million (3.5%) and average savings account balance
declined $380,000 (1.0%). The decrease in average rates paid on all deposit
accounts was a reflection of general interest rates and a competitive
environment that prevailed during the first quarter of 1999 compared with 1998.
Net interest income for the three months ended March 31, 1999 totaled $1.6
million, $81,000 (5.5%) greater than the comparable quarter a year ago. The
interest rate spread increased 13 basis points to 3.15% for the quarter ended
March 31, 1999. The net interest margin for the most recent quarter of 3.66% was
14 basis points greater than the comparable quarter a year ago.
- 14 -
<PAGE>
Provision for Loan Losses
- -------------------------
The provision for loan losses amounted to $15,000 for the quarter ended March
31, 1999, down $15,000 from the same quarter in 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 March 31,
1999, the Bank's allowance for loan losses totaled $970,000 (0.68% of total
gross loans and 126.14% of nonperforming loans) compared with $953,000 (0.67% of
total gross loans and 110.76% of nonperforming loans) at December 31, 1998.
Noninterest Income
- ------------------
Noninterest income amounted to $108,000 for the three months ended March 31,
1999 compared to $105,000 for the three months ended March 31, 1998.
Noninterest Expense
- -------------------
Noninterest expense increased $20,000 (1.8%) to $1.1 million for the three
months ended March 31, 1999, as compared with the same period in 1998.
Compensation and employee benefits decreased $23,000 (3.3%) between the
respective quarters. This decrease was primarily attributable to a reduction in
staffing and a decrease in the employee stock ownership plan expense.
Advertising and business promotion increased $15,000 (166.7%) to $24,000
resulting primarily from increased advertising in relation to the new product
offerings and promotions. Office occupancy and equipment expense increased
$9,000 (7.0%) to $168,000 due primarily to the outsourcing of maintenance
services previously performed by the Bank's maintenance staff. Other noninterest
expense increased $12,000 (16.2%) to $86,000 due in part to the writedown of a
foreclosed property to its net realizable value after entering into a contract
to sell the property. FDIC insurance premiums, other insurance premiums, data
processing fees and professional service fees remained relatively the same for
the quarters ended March 31, 1999 and March 31, 1998.
Income Tax Expense
- ------------------
Income tax expense totaled $221,000 and $191,000 for the three months ended
March 31, 1999 and 1998, respectively. The increase in income tax expense was
primarily attributable to the $79,000 (17.1%) increase in income before taxes to
$540,000 for the three months ended March 31, 1999. The effective tax rate for
the quarter ended March 31, 1999 was 40.9% compared to 41.4% for the comparable
quarter in the previous year.
- 15 -
<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.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management is currently evaluating the impact of this
Statement on the Company's consolidated financial statements.
Impact of the Year 2000
- -----------------------
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 assessed that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's failure to address appropriately the Y2K
issue could result in supervisory action, including the reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
- 16 -
<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:
o Established senior management advisory and review responsibilities;
o Completed a Company-wide inventory of applications and system software;
o Implemented a tracking database for applications and vendor software
created by regulators;
o Developed compliance plans and schedules for all lines of business;
o Begun computer application testing;
o Initiated vendor compliance verification;
o Contacted significant vendors with whom the Company interacts to determine
their state of readiness;
o Begun awareness and education activities for employees through existing
internal communication channels;
o Developed a process to respond to customer inquires as well as help educate
customers on the Y2K issue; and
o 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.
- 17 -
<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 to date, no
significant Y2K problems have been identified relating to any modified or
upgraded mission critical systems.
- 18 -
<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 March 31, 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. Therefore, contingency
plans include selecting a new vendor or service provider and converting to their
system. In the event a current vendor's system fails during validation testing
and it is determined that the vendor is unable or unwilling to correct the
failure, the Company will convert to a new system from a list of prospective
vendors. In each case, realistic trigger dates have been established to allow
for orderly and successful conversion. The Board of Directors approved a formal
contingency and business resumption plan in December 1998.
- 19 -
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 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
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
- 20-
<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 17, 1999 BY: /s/ Joseph H. Giaquinto
---------------------------
Joseph H. Giaquinto
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: May 17, 1999 BY: /s/ David J. Jurczynski
---------------------------
David J. Jurczynski
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
- 21 -
<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, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 1,419 1,579
<INT-BEARING-DEPOSITS> 699 0
<FED-FUNDS-SOLD> 2,100 2,700
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 15,790 7,064
<INVESTMENTS-CARRYING> 10,511 21,806
<INVESTMENTS-MARKET> 10,612 21,940
<LOANS> 140,612 136,912
<ALLOWANCE> 970 840
<TOTAL-ASSETS> 176,077 175,420
<DEPOSITS> 149,084 151,186
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 3,179 2,553
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 15 15
<OTHER-SE> 23,799 21,666
<TOTAL-LIABILITIES-AND-EQUITY> 176,077 175,420
<INTEREST-LOAN> 2,613 2,638
<INTEREST-INVEST> 436 505
<INTEREST-OTHER> 34 43
<INTEREST-TOTAL> 3,083 3,186
<INTEREST-DEPOSIT> 1,520 1,713
<INTEREST-EXPENSE> 1,530 1,714
<INTEREST-INCOME-NET> 1,553 1,472
<LOAN-LOSSES> 15 30
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 1,106 1,114
<INCOME-PRETAX> 540 461
<INCOME-PRE-EXTRAORDINARY> 540 461
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 319 270
<EPS-PRIMARY> .29 .25
<EPS-DILUTED> .28 .23
<YIELD-ACTUAL> 3.66 3.52
<LOANS-NON> 688 1,159
<LOANS-PAST> 81 19
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 953 778
<CHARGE-OFFS> 0 0
<RECOVERIES> 2 32
<ALLOWANCE-CLOSE> 970 840
<ALLOWANCE-DOMESTIC> 390 459
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 580 381
</TABLE>
