SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-24811
SOUND FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3887679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1311 Mamaroneck Ave., White Plains, New York 10605
(Address of principal executive offices)
(Zip Code)
(914) 761-3636
(Registrant's telephone number including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
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 twelve 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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Shares
Outstanding at
Class November 12, 2003
---------------- -----------------
Common Stock, 13,170,133
par value, $0.01
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2003
and March 31, 2003 ................................................ 1
Consolidated Statements of Income for the Quarter and
Six Months Ended September 30, 2003 and 2002 ...................... 2
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months Ended September 30, 2003 ................ 3
Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 2003 and 2002 ................................. 4
Notes to Unaudited Consolidated Financial Statements .............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 17
Item 4. Controls and Procedures ........................................... 17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 19
Item 2. Changes in Securities and Use of Proceeds ......................... 19
Item 3. Defaults upon Senior Securities ................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ............... 19
Item 5. Other Information ................................................. 19
Item 6. Exhibits and Reports on Form 8-K .................................. 19
Signatures ........................................................ 21
i
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data) September 30, March 31,
2003 2003
------------- ---------
Assets
Cash and due from banks $ 10,911 $ 8,776
Federal funds sold and other overnight deposits 13,739 36,121
--------- ---------
Total cash and cash equivalents 24,650 44,897
--------- ---------
Securities available for sale, at fair value (
including $31,245 and $29,100 pledged as
collateral for borrowings under repurchase
agreements at September 30, 2003 and
March 31, 2003, respectively) 357,891 295,048
Loans, net:
Mortgage loans 438,401 428,575
Consumer loans 1,366 1,551
Allowance for loan losses (Note 5) (2,562) (2,442)
--------- ---------
Total loans, net 437,205 427,684
--------- ---------
Accrued interest receivable 3,604 3,678
Federal Home Loan Bank stock 5,303 4,141
Premises and equipment, net 5,711 5,467
Deferred income taxes 1,490 392
Goodwill 13,970 13,970
Other assets 1,164 811
--------- ---------
Total assets $ 850,988 $ 796,088
========= =========
Liabilities and Stockholders' Equity
Liabilities: $ 653,395 $ 604,260
Deposits
Borrowings (Note 6) 55,000 35,000
Mortgagors' escrow funds 1,948 4,603
Due to brokers for securities purchased -- 10,495
Accrued expenses and other liabilities 2,865 3,409
--------- ---------
Total liabilities 713,208 657,767
--------- ---------
Stockholders' equity (Note 1):
Preferred stock ($0.01 par value; 1,000,000
shares authorized;
none issued and outstanding) -- --
Common stock ($0.01 par value; 24,000,000
shares authorized; 13,247,133
shares issued) 132 132
Additional paid-in capital 95,573 95,395
Treasury stock, at cost (77,000 shares
at September 30, 2003) (1,203) --
Common stock held by the Employee Stock
Ownership Plan ("ESOP") (6,808) (7,059)
Common stock awards under the Recognition
and Retention Plan ("RRP") (28) (100)
Retained earnings 51,980 49,937
Accumulated other comprehensive (loss)
income, net of taxes (Note 7) (1,866) 16
--------- ---------
Total stockholders' equity 137,780 138,321
--------- ---------
Total liabilities and
stockholders' equity $ 850,988 $ 796,088
========= =========
See accompanying notes to unaudited consolidated financial statements.
1
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Quarter Ended For the Six Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
------- ------- -------- -------
Interest and Dividend Income
Loans $ 6,490 $ 7,626 $13,259 $15,240
Mortgage-backed and other securities 2,670 2,007 5,507 4,047
Federal funds sold and other overnight deposits 46 127 174 232
Other earning assets 66 38 123 84
------- ------- ------- -------
Total interest and dividend income 9,272 9,798 19,063 19,603
------- ------- ------- -------
Interest Expense
Deposits 2,665 3,102 5,544 6,186
Borrowings 384 411 749 827
Other interest-bearing liabilities 18 17 35 37
------- ------- ------- -------
Total interest expense 3,067 3,530 6,328 7,050
------- ------- ------- -------
Net interest income 6,205 6,268 12,735 12,553
Provision for loan losses (Note 5) 75 50 125 125
------- ------- ------- -------
Net interest income after provision for loan losses 6,130 6,218 12,610 12,428
------- ------- ------- -------
Non-Interest Income
Service charges and fees 228 211 513 381
Gain on sale of real estate owned -- 13 -- 13
------- ------- ------- -------
Total non-interest income 228 224 513 394
------- ------- ------- -------
Non-Interest Expense
Compensation and benefits 2,006 1,623 3,998 3,051
Occupancy and equipment 584 385 1,146 829
Data processing service fees 189 258 431 487
Advertising and promotion 137 278 551 426
Other 732 665 1,506 1,259
------- ------- ------- -------
Total non-interest expense 3,648 3,209 7,632 6,052
------- ------- ------- -------
Income before income tax expense 2,710 3,233 5,491 6,770
Income tax expense 1,060 1,203 2,124 2,579
------- ------- ------- -------
Net income $ 1,650 $ 2,030 $ 3,367 $ 4,191
======= ======= ======= =======
Earnings per share (Note 4)(1):
Basic earnings per share $ 0.13 $ 0.16 $ 0.27 $ 0.33
======= ======= ======= =======
Diluted earnings per share $ 0.13 $ 0.15 $ 0.26 $ 0.32
======= ======= ======= =======
(1) Earnings per share data for the 2002 periods have been adjusted to reflect
the shares issued in the second-step conversion completed on January 6,
2003.
See accompanying notes to unaudited consolidated financial statements.
2
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended September 30, 2003
(Unaudited)
(Dollars in thousands, except per share data)
Common Common Accumulated
Additional Stock Stock Other Total
Common Paid-In Treasury Held By Awards Retained Comprehensive Stockholders'
Stock Capital Stock ESOP Under RRP Earnings (Loss)Income Equity
------ ---------- -------- ------- --------- -------- ------------- -------------
Balance at March 31, 2003 $ 132 $95,395 $ -- $(7,059) $(100) $ 49,937 $ 16 $ 138,321
Net income -- -- -- -- -- 3,367 -- 3,367
Other comprehensive loss (Note 7) -- -- -- -- -- -- (1,882) (1,882)
---------
Total comprehensive income 1,485
Dividends paid ($0.10 per share) -- -- -- -- -- (1,324) -- (1,324)
Purchases of treasury stock
(77,000 shares) -- -- (1,203) -- -- -- -- (1,203)
Vesting of RRP shares -- -- -- -- 72 -- -- 72
ESOP shares committed to be
released for allocation -- 178 -- 251 -- -- -- 429
------ ------- ------- ------- ----- -------- ------- ---------
Balance at September 30, 2003 $ 132 $95,573 $(1,203) $(6,808) $ (28) $ 51,980 $(1,866) $ 137,780
====== ======= ======= ======= ===== ======== ======= =========
See accompanying notes to unaudited consolidated financial statements.
3
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
September 30,
------------------------
2003 2002
---------- ---------
OPERATING ACTIVITIES
Net income $ 3,367 $ 4,191
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 125 125
Depreciation, amortization and accretion 1,131 532
ESOP and RRP expense 501 276
Income taxes (559) 216
Other adjustments, net (77) (565)
--------- --------
Net cash provided by operating
activities 4,488 4,775
--------- --------
INVESTING ACTIVITIES (171,187) (46,561)
Purchases of securities available for sale
Proceeds from principal payments, maturities
and calls of securities available for sale 94,436 39,238
Disbursements for loan originations in
excess of principal payments (10,150) (24,986)
Proceeds from sales of real estate owned -- 127
Purchase of Federal Home Loan Bank stock (1,162) --
Purchases of premises and equipment (625) (502)
--------- --------
Net cash used in investing
activities (88,688) (32,684)
--------- --------
FINANCING ACTIVITIES
Net increase in deposits 49,135 45,929
Proceeds from borrowings 20,000 --
Net decrease in mortgagors' escrow funds (2,655) (2,233)
Purchases of treasury stock (1,203) --
Issuance of stock pursuant to
stock option plan -- 27
Dividends paid on common stock (1,324) (313)
--------- --------
Net cash provided by
financing activities 63,953 43,410
--------- --------
(Decrease) increase in cash and
cash equivalents (20,247) 15,501
Cash and cash equivalents at
beginning of period 44,897 26,778
--------- --------
Cash and cash equivalents at
end of period $ 24,650 $ 42,279
========= ========
SUPPLEMENTAL INFORMATION $ 6,402 $ 7,018
Interest paid
Income taxes paid 2,712 2,316
Decrease in due to brokers for
securities purchased 10,495 --
Loans transferred to real estate owned -- 171
See accompanying notes to unaudited consolidated financial statements.
4
Sound Federal Bancorp, Inc. and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization and Stock Offering
Initial Public Offering
On October 8, 1998, Sound Federal Bancorp issued shares of its common
stock in connection with a Plan of Reorganization ("the "Reorganization") and
related Subscription and Community Offering (the "Initial Offering"). In the
Initial Reorganization, Sound Federal Savings and Loan Association (the "Bank")
converted from a federally chartered mutual savings association to a federally
chartered stock savings association. Sound Federal Savings and Loan Association
became the wholly-owned subsidiary of Sound Federal Bancorp, which became the
majority-owned subsidiary of Sound Federal, MHC (the "Mutual Holding Company").
Sound Federal Bancorp issued a total of 5,212,218 shares of its common
stock, consisting of 2,810,510 shares (or 53.92%) issued to the Mutual Holding
Company and 2,401,708 shares (or 46.08%) issued to other stockholders. The
shares issued to other stockholders consisted of 192,129 shares purchased by the
Company's Employee Stock Ownership Plan (the "ESOP") using $1.9 million in
proceeds from a loan made by Sound Federal Bancorp; 102,200 shares contributed
by the Company to establish the Sound Federal Savings and Loan Association
Charitable Foundation (the "Charitable Foundation"); and 2,107,379 shares sold
for cash of $21.1 million ($10.00 per share) in the Initial Offering. After
deducting offering costs of $1.1 million, the net cash proceeds from the Initial
Offering were $20.0 million.
Second Step Conversion
On June 13, 2002, the respective Boards of Directors of Sound Federal
Bancorp and the Mutual Holding Company adopted a plan to convert from the mutual
holding form of organization to a fully public holding company structure (the
"Conversion"). The Conversion was completed on January 6, 2003. As part of the
conversion the Mutual Holding Company merged out of existence. Sound Federal
Bancorp was succeeded by a new Delaware corporation known as Sound Federal
Bancorp, Inc. (the "Holding Company"). Common shares representing the ownership
interest of the Mutual Holding Company were sold in a subscription offering and
a community offering. Common shares owned by public shareholders (shareholders
other than the Mutual Holding Company) were converted into the right to receive
new shares of the Holding Company's common stock determined pursuant to an
exchange ratio. Immediately after the Conversion and exchange of existing shares
for new shares, the public shareholders owned the same aggregate percentage of
the Holding Company's common stock that they owned immediately prior to the
Conversion, excluding any shares purchased in the offering. As part of these
transactions, the Bank changed its name to Sound Federal Savings (the "Bank"),
which is now a wholly-owned subsidiary of the Holding Company. The Bank and the
Holding Company are referred to herein as "the Company".
The Holding Company sold 7,780,737 shares of common stock at $10.00 per
share in the offering, including 622,458 shares purchased by the ESOP. In
addition, each of the outstanding shares of common stock of Sound Federal
Bancorp (1,967,782 shares, net of 444,926 treasury shares) was converted into
2.7667 shares of the Holding Company resulting in 5,444,263 outstanding shares.
A total of 13,225,000 shares were outstanding as a result of the offering and
share exchange.
5
Net cash proceeds from the offering were as follows (in thousands):
Total cash proceeds (7,780,737 shares) $ 77,807
Offering costs (1,897)
--------
Net offering proceeds 75,910
Assets received from the Mutual Holding Company 366
--------
Increase in common stock and additional paid-in capital 76,276
Shares purchased by the ESOP (622,458 shares) (6,225)
--------
Net cash proceeds $ 70,051
========
The Conversion and related transactions were accounted for at historical
cost, with no resulting change in the historical carrying amounts of assets and
liabilities. Consolidated stockholders' equity increased by the net cash
proceeds from the offering. Share and per share data for all periods have been
adjusted to reflect the additional shares outstanding as a result of the
offering and share exchange.
2. Basis of Presentation
The consolidated financial statements included herein have been prepared
by the Company without audit. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for the periods presented. Certain information and
footnote disclosures normally included in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. The operating results for the
periods presented are not necessarily indicative of results to be expected for
any other interim period or for the entire fiscal year ending March 31, 2004.
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates. A material estimate that is particularly susceptible to
near-term change is the allowance for loan losses, which is discussed in Note 5.
The unaudited interim consolidated financial statements presented herein
should be read in conjunction with the annual audited consolidated financial
statements of the Company for the fiscal year ended March 31, 2003, included in
the Company's 2003 Annual Report on Form 10-K.
3. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, encourages the use of a fair-value-based method of
accounting for employee stock compensation plans, but permits the continued use
of the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25. Under SFAS No. 123, the grant-date fair
value of options is recognized as compensation expense over the vesting period.
The Company has elected to continue to apply APB Opinion No. 25 and disclose the
pro forma information required by SFAS No. 123. Had stock-based compensation
expense been recognized in accordance with SFAS No. 123, the Company's
6
net income and earnings per common share would have been adjusted to the
following pro forma amounts:
Quarter Ended Six Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(In thousands, except per share data)
Net income, as reported $ 1,650 $ 2,030 $ 3,367 $ 4,191
Add RRP expense included in reported
net income, net of related tax effects 22 22 44 44
Deduct RRP and stock option expense
determined under the fair-value-based
method, net of related tax effects (40) (40) (79) (80)
----------- ----------- ----------- -----------
Pro forma net income $ 1,632 $ 2,012 $ 3,332 $ 4,155
=========== =========== =========== ===========
Earnings per share:
Basic, as reported $ 0.13 $ 0.16 $ 0.27 $ 0.33
=========== =========== =========== ===========
Basic, pro forma $ 0.13 $ 0.16 $ 0.27 $ 0.32
=========== =========== =========== ===========
Diluted, as reported $ 0.13 $ 0.15 $ 0.26 $ 0.32
=========== =========== =========== ===========
Diluted, pro forma $ 0.13 $ 0.15 $ 0.26 $ 0.32
=========== =========== =========== ===========
4. Earnings Per Share
Earnings per share data for all periods have been adjusted to reflect the
additional shares outstanding as a result of the offering and share exchange.
Weighted average common shares used in calculating basic and diluted
earnings per share for the three months ended September 30, 2003 were 12,390,225
and 12,730,942, respectively. For the quarter ended September 30, 2002, weighted
average common shares used in calculating basic and diluted earnings per share
were 12,890,553 and 13,194,847, respectively.
For the six months ended September 30, 2003, weighted average shares used
in calculating basic and diluted earnings per share were 12,402,521 and
12,740,223, respectively. For the six months ended September 30, 2002, the
respective weighted average shares were 12,888,286 and 13,173,252.
5. Allowance for Loan Losses
The allowance for loan losses is increased by provisions for loan losses
charged to income and by recoveries of prior charge-offs, and is decreased by
charge-offs. Losses are charged to the allowance when all or a portion of a loan
is deemed to be uncollectible. Recoveries of loans previously charged-off are
credited to the allowance for loan losses when realized. Management's periodic
determination of the allowance is based on continuing reviews of the portfolio,
using a consistently-applied methodology. The allowance for loan losses consists
of losses that are both probable and estimable at the date of the financial
statements. In determining the allowance for loan losses, management considers
factors such as the Company's past loan loss experience, known risks in the
portfolio, adverse situations affecting a borrower's ability to repay, the
estimated value of underlying collateral, and current economic conditions.
Determining the allowance for loan losses involves significant management
judgments utilizing the best information available. Those judgments are subject
to further review by various sources, including the Company's regulators.
Changes in the allowance may be necessary in the future based on changes in
economic
7
and real estate market conditions, new information obtained regarding known
problem loans, the identification of additional problem loans and other factors,
certain of which are outside of management's control.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Quarter Ended Six Months Ended Year Ended
September 30, September 30, March 31,
------------------------- -------------------------- ----------
2003 2002 2003 2002 2003
-------- -------- -------- -------- --------
(In thousands)
Balance at beginning of period $ 2,492 $ 2,296 $ 2,442 $ 2,221 $ 2,221
Provision for loan losses 75 50 125 125 275
Loans charged off (5) -- (5) -- (54)
-------- -------- -------- -------- --------
Balance at end of period $ 2,562 $ 2,346 $ 2,562 $ 2,346 $ 2,442
======== ======== ======== ======== ========
6. Borrowings
The Company had the following outstanding borrowings from the Federal Home
Loan Bank (the "FHLB") at September 30, 2003:
Coupon Rate Borrowings
----------- ----------
Securities repurchase agreements maturing in: (Dollars in thousands)
January 2008(1) 5.42% $10,000
December 2008(1) 4.72 5,000
March 2004 3.57 7,000
March 2005 4.22 6,000
March 2006 2.27 7,000
Short-term advances maturing in October 2003 1.18 20,000
-------
Total borrowings 3.05% $55,000
=======
Accrued interest payable $ 165
(1) Callable Quarterly
The securities transferred to the FHLB subject to the repurchase
agreements include U.S. Government and agency securities available for sale with
a carrying value of $17.2 million and mortgage-backed securities available for
sale with a carrying value of $13.8 million. Accrued interest receivable on the
securities was $225,000 at September 30, 2003.
7. Comprehensive Income
Comprehensive income represents the sum of net income and items of "other
comprehensive income or loss" that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net unrealized
gain or loss on securities available for sale and minimum pension liability
adjustments. The Company has reported its total comprehensive income in the
consolidated statement of changes in stockholders' equity.
8
The Company's other comprehensive (loss) income is summarized as follows:
Quarter Ended Six Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
------- ------- ------- -------
(In thousands)
Net unrealized holding (loss) gain arising during
the period on securities available for sale $(3,536) $ 580 $(3,167) $ 1,603
Related deferred income tax effect 1,441 (224) 1,285 (620)
------- ------- ------- -------
Other comprehensive (loss) income $(2,095) $ 356 $(1,882) $ 983
======= ======= ======= =======
The Company's accumulated other comprehensive (loss) income, which is
included in stockholders' equity, is summarized as follows:
September 30, March 31,
2003 2003
------------ ---------
(In thousands)
Net unrealized holding gain on
securities available for sale $ 328 $ 3,495
Additional minimum pension liability (3,468) (3,468)
Related deferred income taxes 1,274 (11)
------- -------
Accumulated other comprehensive
(loss) income $(1,866) $ 16
======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Our principal business consists of offering savings and other deposits to
the general public and using the funds from these deposits to make loans secured
by residential real estate. Our net income depends primarily upon our net
interest income, which is the difference between interest income earned on
interest-earning assets, such as loans and investments, and the interest expense
paid on deposits. To a much lesser degree, our net income is affected by
non-interest income, such as banking service charges and fees. Net income is
also affected by, among other things, provisions for loan losses and
non-interest expenses. Our principal non-interest expenses consist of
compensation and benefits, occupancy and equipment, data processing service
fees, advertising and promotion and other expenses, such as ATM expenses,
professional fees and insurance premiums. Our net income also is affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates; government legislation and policies affecting
fiscal affairs, housing and financial institutions; monetary policies of the
Federal Reserve System; and the actions of bank regulatory authorities.
Forward-Looking Statements
When used in this report on Form 10-Q, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements reflect our current view with respect to future-looking
events and are subject to certain risks
9
and uncertainties that could cause actual results to differ materially from
Management's current expectations. Among others, these risks and uncertainties
include changes in general economic conditions, changes in policies by
regulatory agencies, hostilities involving the United States, fluctuations in
interest rates, demand for loans in the Company's market area, changes in the
quality or composition of the Company's loan and investment portfolios, changes
in accounting principles, policies or guidelines and other economic,
competitive, governmental and technological factors affecting our operations,
markets and products. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. The Company wishes to advise readers that the factors listed above could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from its forward-looking
statements. We do not intend to update these forward-looking statements.
Financial Condition
Assets. The Company's total assets amounted to $851.0 million at September
30, 2003 as compared to $796.1 million at March 31, 2003. The $54.9 million
increase in total assets is due primarily to a $62.8 million, or 21.3%, increase
in securities available for sale to $357.9 million, and a $9.5 million increase
in net loans to $437.2 million, partially offset by a $22.4 million decrease in
federal funds sold. The asset growth was funded primarily by a $49.1 million
increase in deposits to $653.4 million and a $20.0 million increase in
borrowings to $55.0 million partially offset by a $10.5 million decrease in
amounts due to brokers for securities purchased.
Liabilities. Total deposits were $653.4 million at September 30, 2003, as
compared to $604.3 million at March 31, 2003. Certificates of deposit increased
$24.8 million to $388.5 million from $363.7 million, savings and club accounts
increased $9.0 million to $145.8 million from $136.8 million, and money market
and NOW accounts increased $15.4 million to $119.1 million from $103.7 million.
Borrowings increased $20.0 million to $55.0 million at September 30, 2003 as
compared to $35.0 million at March 31, 2003.
Stockholders' Equity. Total stockholders' equity decreased $541,000 to
$137.8 million at September 30, 2003 as compared to $138.3 million at March 31,
2003. The decrease reflects the purchase of 77,000 shares of the Company's
common stock at a cost of $1.2 million, dividends paid of $1.3 million and a
decrease in accumulated other comprehensive income of $1.9 million, partially
offset by net income of $3.4 million and an increase in additional paid-in
capital of $178,000. The decrease in stockholders' equity attributed to
accumulated other comprehensive income (loss) is primarily due to a net
unrealized holding loss of $3.2 million on securities available for sale, less a
$1.3 million income tax effect.
In July 2003, we announced the commencement of a stock repurchase program
to repurchase up to 530,482 (4%) of our outstanding shares of common stock in
order to provide shares for reissuance upon exercise of outstanding stock
options. The timing of the repurchases will depend on certain factors, including
but not limited to, market conditions and prices, the Company's liquidity
requirements and alternative uses of the Company's capital.
Comparison of Results of Operations for the Three Months Ended September 30,
2003 and 2002
Net Income. Net income amounted to $1.7 million or diluted earnings per
share of $0.13 for the quarter ended September 30, 2003, as compared to $2.0
million or diluted earnings per share of $0.15 for the quarter ended September
30, 2002. The decrease in net income for the current quarter was due primarily
to a $439,000 increase in non-interest expense and a $63,000 decrease in net
interest income, partially offset by a decrease of $143,000 in income tax
expense.
Interest Income. Interest income decreased $526,000 to $9.3 million for
the quarter ended September 30, 2003, as compared to the same quarter in 2002.
The decrease is due to a 153 basis point decrease in the average yield on
interest-earning assets to 4.64%, partially offset by a $161.6 million increase
in average interest-earning assets to $792.1 million during the quarter ended
September 30, 2003 as compared to $630.5
10
million for the same quarter in the prior year. The increase in the average
balance of interest-earning assets was due primarily to a $184.8 million
increase in the average balance of securities to $333.0 million partially offset
by a $13.0 million decrease in the average balance of loans to $427.2 million
and a decrease of $11.2 million in Federal funds sold and other overnight
deposits to $26.4 million. The increase in average interest-earning assets was
funded principally by deposit growth in the Bank's branches and the investment
of net proceeds from the Company's stock offering. The decrease in the average
yield on interest-earning assets reflects the origination of fixed-rate loans at
lower rates and the downward repricing of adjustable-rate securities during
recent periods of declining interest rates.
Loans. Interest income on loans decreased $1.1 million, or 14.9%, to $6.5
million for the quarter ended September 30, 2003 as compared to $7.6 million for
the same quarter in 2002. This decrease is due to a $13.0 million decrease in
the average balance of loans to $427.2 million and an 84 basis point decrease in
the yield earned to 6.03%.
The decrease in the loan portfolio reflects higher refinancing and
prepayment activity as a result of continued low market interest rates. The Bank
originated $58.2 million of new loans during the quarter ended September 30,
2003 as compared to $37.7 million for the same quarter in the prior year. In
addition, $65.2 million of the Bank's existing mortgage loans refinanced with
the Bank to lower rates during the 2003 quarter. These loans were originated at
rates lower than the yields being earned on the existing loan portfolio. As a
result, the average yield earned on the loan portfolio decreased during the
second quarter of fiscal 2004. The Bank has not historically sold mortgage loans
it originates.
Mortgage-Backed and Other Securities. Interest on mortgage-backed
securities increased $662,000 to $2.1 million for the quarter ended September
30, 2003, as compared to the same quarter in 2002, due primarily to an increase
of $140.6 million in the average balance to $245.6 million, partially offset by
a decrease of 226 basis points in the average yield to 3.46%. The increase in
the average balance of mortgage-backed securities reflects the investment of the
net proceeds from the Company's stock offering as well as the investment of
funds from deposit growth. The decrease in the average yield is a result of the
downward repricing of adjustable rate mortgage-backed securities and the
accelerated amortization of purchase premiums as a result of prepayments on
mortgage-backed securities. In addition, new purchases of mortgage-backed
securities are at lower rates than the existing portfolio.
Interest on other securities increased $37,000 to $531,000 for the quarter
ended September 30, 2003, as compared to the same quarter in 2002, due to a
$44.2 million increase in the average balance of other securities to $87.4
million, partially offset by a 213 basis point decrease in the average yield to
2.41%. The decrease in the average yield is the result of the continued low
market interest rates.
Federal Funds Sold and Other Overnight Deposits. For the quarter ended
September 30, 2003, interest on Federal funds sold and other overnight deposits
decreased $81,000 to $46,000, reflecting an $11.2 million decrease in the
average balance to $26.4 million and a 65 basis point decrease in the average
yield earned to 0.69%. The decrease in the average yield is the result of the
continued low market interest rates.
Other Earning Assets. The Company had an investment of $5.3 million in
FHLB of New York common stock at September 30, 2003. The FHLB of New York
reported that it suspended the October dividend payment on this stock. While
this announcement had no impact on the Company's results through September 30,
2003, earnings before tax for the quarter ending December 31, 2003, compared to
the same quarter a year ago, will be reduced by approximately $57,000. Future
earnings will be impacted to the extent the FHLB continues the dividend
suspension or reduces the dividend amount from that previously paid.
Interest Expense. Interest expense for the quarter ended September 30,
2003 totaled $3.1 million, as compared to $3.5 million for the quarter ended
September 30, 2002. The average balance of interest-bearing liabilities
increased $82.6 million to $666.8 million for the quarter ended September 30,
2003 from $584.2 million for the same quarter in the prior year, while the
average cost of these liabilities decreased 58 basis points to 1.82%. The
increase in the average balance of interest-bearing liabilities includes deposit
growth in the Somers branch, which opened in July 2002, and in the Stamford
branch, which opened in September 2003,
11
as well as growth in the existing branches. The decrease in the average cost of
liabilities is the result of declining market interest rates during recent
periods.
Interest expense on time deposits totaled $2.3 million for the current
quarter as compared to $2.6 million for the same quarter in 2002. The decrease
is due primarily to a 67 basis point decrease in the average cost to 2.42%
partially offset by a $48.3 million increase in the average balance of time
deposits to $380.6 million from $332.3 million for the same quarter last year.
The increase in the average balance includes growth in the Bank's new branch
offices as well as in existing branches.
Interest expense on savings accounts totaled $221,000 for the current
quarter as compared to $330,000 for the quarter ended September 30, 2002. This
decrease is the result of a 44 basis point decrease in the average cost of
savings accounts to 0.61% partially offset by a $19.6 million increase in the
average balance of savings accounts to $144.7 million.
Interest expense on other deposits (NOW and money market accounts)
amounted to $125,000 for the quarter ended September 30, 2003 as compared to
$188,000 for the same quarter in the prior year. The average cost decreased 35
basis points to 0.52% and the average balance of these accounts increased $8.6
million to $95.3 million.
For the quarter ended September 30, 2003, interest expense on borrowings
amounted to $384,000 as compared to $411,000 for the same quarter in the prior
year. The average balance of borrowings for the current quarter was $42.0
million and the average cost was 3.63%. For the quarter ended September 30,
2002, the average balance of borrowings was $35.0 million and the average rate
was 4.66%.
Net Interest Income. Net interest income for the quarter ended September
30, 2003 amounted to $6.2 million, a $63,000 decrease from the same period in
the prior year. The interest rate spread was 2.82% and 3.77% for the quarters
ended September 30, 2003 and 2002, respectively. The net interest margin for
those periods was 3.11% and 3.94%, respectively. The decreases in interest rate
spread and net interest margin are primarily the result of the effect of
mortgage refinancings and lower returns on our investment portfolio as interest
rates remained at 40 year lows. If interest rates remain at these low levels or
decrease further, mortgage refinancings may continue to adversely affect the
Company's interest rate spread and net interest margin. The decrease in interest
rate spread and net interest margin was substantially offset by an increase in
the ratio of interest-earning assets to interest-bearing liabilities to 1.19 for
the 2003 quarter from 1.08 for the 2002 quarter. This increase was due primarily
to the investment of proceeds from the Company's stock offering completed in
January 2003 in connection with the second step conversion. For information
concerning the second step conversion, see Note 1 of the Notes to Unaudited
Consolidated Financial Statements in this report.
Provision for Loan Losses. Management regularly reviews the loan portfolio
and makes provisions for loan losses in amounts required to maintain the
allowance for loan losses in accordance with generally accepted accounting
principles. The allowance consists of losses that are both probable and
estimable at the date of the financial statements. The allowance for loan losses
consists of amounts allocated to specific nonperforming loans and to loans in
each major portfolio category. Loan categories such as single-family residential
mortgage loans, which represented 90.3% of total loans at September 30, 2003,
are generally evaluated on an aggregate or "pool" basis. Our allowance for loan
losses is predominately determined on a pool basis by applying loss factors to
the current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of our historical loss
experience, delinquency trends, volume and type of lending conducted, and the
impact of current economic conditions in our market area.
The provision for loan losses was $75,000 for the quarter ended September
30, 2003 as compared to $50,000 for the quarter ended September 30, 2002.
Non-performing loans amounted to $1.8 million or 0.40% of total loans at
September 30, 2003, as compared to $876,000 or 0.20% of total loans at September
30, 2002. The increase in non-performing loans is primarily the result of the
delinquency of one borrower's mortgage and home equity loans which total
$811,000. The loans are secured by a single family home with a loan to value of
less than 60%. The allowance for loan losses amounted to $2.6 million and $2.4
million at September
12
30, 2003 and March 31, 2003, respectively. Charge-offs amounted to $5,000 for
the quarter ended September 30, 2003 (none for the 2002 quarter).
Non-Interest Income. Non-interest income totaled $228,000 and $224,000 for
the quarters ended September 30, 2003 and 2002, respectively. The increase in
non-interest income was primarily due to higher levels of income from service
charges on deposit accounts, late charges on loans and various other service
fees.
Non-Interest Expense. Non-interest expense totaled $3.6 million for the
quarter ended September 30, 2003 as compared to $3.2 million for the quarter
ended September 30, 2002. This increase is due primarily to increases of
$383,000 in compensation and benefits, $199,000 in occupancy and equipment
expense and $67,000 in other non-interest expense, partially offset by decreases
of $69,000 in data processing service fees and $141,000 in advertising and
promotion expense.
The increase in compensation and benefits is primarily due to a $216,000
increase in compensation costs and a $115,000 increase in ESOP expense. The
increase in compensation expense is due primarily to normal salary increases and
increases in staff to support the growth in the Company's lending operations and
for the Stamford branch, which opened in September 2003. Our full time
equivalent employees were 114 and 103 at September 30, 2003 and 2002,
respectively. The increase in ESOP expense reflects the increase in shares
committed to be released for allocation following the second-step conversion and
the increase in the market value of those shares. Compensation expense is
recognized for the ESOP equal to the fair value of shares committed to be
released for allocation to participant accounts. The difference between the fair
value at that time and the ESOP's original acquisition cost is charged or
credited to stockholders' equity. For the quarter ended September 30, 2003, this
difference amounted to a credit of $106,000 as compared to $69,000 for the same
period in 2002.
Income Taxes. Income tax expense amounted to $1.1 million and $1.2 million
for the quarters ended September 30, 2003 and 2002, respectively. The effective
tax rates for those same periods were 39.1% and 37.2%, respectively.
Comparison of Results of Operations for the Six Months Ended September 30, 2003
and 2002
Net Income. Net income amounted to $3.4 million or diluted earnings per
share of $0.26 for the six months ended September 30, 2003, as compared to $4.2
million or diluted earnings per share of $0.32 for the same period in the prior
year. The decrease in net income for the six months ended September 30, 2002 was
due to an increase of $1.6 million in non-interest expense, partially offset by
increases of $182,000 in net interest income and $119,000 in non-interest income
and a decrease of $455,000 in income tax expense.
Interest Income. Interest income totaled $19.1 million for the six months
ended September 30, 2003, as compared to $19.6 million for the same period in
the prior year. The decrease in interest income reflects a 148 basis point
decrease in the average yield on interest-earning assets to 4.86% from 6.34%,
partially offset by an increase of $165.3 million in average interest-earning
assets to $781.7 million as compared to $616.4 million for the same period in
the prior year. The increase in the average balance of interest-earning assets
was due primarily to increases of $167.6 million in securities available for
sale and $5.4 million in federal funds sold and other overnight deposits,
partially offset by an $8.5 million decrease in loans. The decrease in the
average yield on interest-earning assets reflects the origination of fixed-rate
loans and the repricing of our adjustable-rate securities portfolio during
periods of declining interest rates.
Loans. For the six months ended September 30, 2003, interest income on
loans amounted to $13.3 million as compared to $15.2 million for the same period
in the prior year. This decrease was due to a decrease of $8.5 million in the
average balance of loans to $424.9 million and a 79 basis point decrease in the
yield earned to 6.22% from 7.01%.
The decrease in the loan portfolio is principally a result of increased
principal prepayments as a result of continued low market interest rates. We
originated $102.5 million of new loans during the six months ended September 30,
2003. In addition, $100.9 million of existing mortgage loans were refinanced
with us. These loans were originated at rates lower than the yields being earned
on the existing loan portfolio. As a
13
result, the decline in average yield earned on the loan portfolio continued in
the first six months of fiscal 2004. The yield on the loan portfolio may
decrease further until market interest rates begin to increase.
Mortgage-Backed and Other Securities. Interest on mortgage-backed
securities for the six months ended September 30, 2003 increased $1.3 million to
$4.3 million as compared to $3.0 million for the same period in the prior year.
The increase was due to an increase of $127.6 million in the average balance to
$228.9 million partially offset by a decrease of 222 basis points in the average
yield to 3.74% from 5.96%. The increase in the average balance of
mortgage-backed securities reflects the investment of the net proceeds from the
Company's stock offering as well as the investment of funds from deposit growth.
The decrease in the average yield is a result of the downward repricing of
adjustable rate mortgage-backed securities and the accelerated amortization of
purchase premiums as a result of prepayments on mortgage-backed securities. In
addition, new purchases of mortgage-backed securities are at lower rates than
the existing portfolio.
For the six months ended September 30, 2003, interest on other securities
increased $198,000 to $1.2 million as compared to $1.0 million for the same
period in the prior year. The increase was due to an increase of $39.9 million
in the average balance to $83.7 million for the six months ended September 30,
2003, partially offset by a decrease in the average yield of 175 basis points to
2.91% from 4.66%.
Federal Funds Sold and Other Overnight Deposits. For the six months ended
September 30, 2003, interest on federal funds and other overnight deposits
decreased $58,000 to $174,000, reflecting a 49 basis point decrease in the
average yield to 0.90%, partially offset by an increase of $5.4 million in the
average balance to $38.7 million. The decrease in the average yield is the
result of the continued low market interest rates.
Interest Expense. For the six months ended September 30, 2003, interest
expense on interest-bearing liabilities decreased $722,000 to $6.3 million, as
compared to $7.1 million for the six months ended September 30, 2002. The
decrease in interest expense was due to a 53 basis point decrease in the average
cost of these liabilities to 1.92% from 2.45%, partially offset by an increase
of $83.6 million in the average balance of interest-bearing liabilities to
$656.8 million.
For the six months ended September 30, 2003, interest expense on
certificates of deposit amounted to $4.7 million as compared to $5.1 million for
the same period in the prior year. The decrease was due to a 66 basis point
decrease in the average cost to 2.48%, partially offset by a $53.2 million
increase in the average balance of certificates of deposit to $379.6 million as
compared to $326.4 million for the same period in the prior year.
For the six months ended September 30, 2003, interest on savings accounts
decreased $136,000 to $504,000 as compared to the same period in the prior year.
The average cost of savings accounts decreased 34 basis points to 0.71%
partially offset by an increase of $20.4 million in the average balance of
savings accounts to $142.3 million.
For the six months ended September 30, 2003, interest expense on other
deposits amounted to $313,000 as compared to $403,000 for the same period in the
prior year. The average cost of these accounts decreased 27 basis points to
0.67%, partially offset by an increase of $7.4 million in the average balance of
these accounts to $92.6 million.
For the six months ended September 30, 2003, interest expense on
borrowings was $749,000 as compared to $827,000 for the same period in the prior
year. The decrease in interest expense was due to a decrease in the average cost
of borrowings of 83 basis points to 3.89%, partially offset by a $3.5 million
increase in the average balance of borrowings to $38.4 million.
Net Interest Income. For the six months ended September 30, 2003, net
interest income amounted to $12.7 million as compared to $12.6 million for the
same period in the prior year. The interest rate spread was 2.94% and 3.89% and
the net interest margin was 3.25% and 4.06% for the respective periods. The
decreases in interest rate spread and net interest margin are primarily the
result of the effect of mortgage refinancings and lower returns on our
investment portfolio as interest rates remained at 40 year lows. If interest
rates remain at
14
these low levels or decrease further, mortgage refinancings may continue to
adversely affect the Company's interest rate spread and net interest margin. The
decrease in interest rate spread and net interest margin was substantially
offset by an increase in the ratio of interest-earning assets to
interest-bearing liabilities to 1.19 for the six months ended September 30, 2003
from 1.08 for the comparable 2002 period. This increase was due primarily to the
investment of net proceeds from the Company's stock offering completed in
January 2003.
Provision for Loan Losses. The provision for loan losses was $125,000 for
each of the six month periods. Non-performing loans amounted to $1.8 million, or
0.40%, of total loans at September 30, 2003, as compared to $876,000, or 0.20%,
of total loans at September 30, 2002. The increase in non-performing loans is
primarily the result of the delinquency of one borrower's mortgage and home
equity loans which total $811,000. The loans are secured by a single family home
with a loan to value of less than 60%. The allowance for loan losses amounted to
$2.6 million or 0.58% of total loans at September 30, 2002 and $2.3 million or
0.53% of total loans at March 31, 2003. Charge-offs amounted to $5,000 for the
six months ended September 30, 2003 (none for same period in 2002).
Non-Interest Income. Non-interest income for the six months ended
September 30, 2003 totaled $513,000 as compared to $394,000 for the six months
ended September 30, 2002, and included service fees of $513,000 and $381,000 for
the respective periods. The increase in non-interest income was primarily due to
higher levels of income from service charges on deposit accounts, late charges
on loans and various other service fees.
Non-Interest Expense. For the six months ended September 30, 2003,
non-interest expense increased $1.5 million to $7.6 million as compared to $6.1
million for the same period in the prior year. This increase was due primarily
to increases of $947,000 in compensation and benefits, $317,000 in occupancy and
equipment expense, $125,000 in advertising and promotion expense and $247,000 in
other non-interest expense.
The increase in compensation and benefits is primarily due to a $460,000
increase in compensation costs and a $225,000 increase in ESOP expense. The
increase in compensation expense is due primarily to normal salary increases and
increases in staff to support the growth in the Company's lending operations and
for the Somers branch, which opened in July 2002, and the Stamford branch, which
opened in September 2003. The increase in ESOP expense reflects the increase in
shares committed to be released for allocation as a result of the second-step
conversion and the increase in the market value of those shares. Compensation
expense is recognized for the ESOP equal to the fair value of shares committed
to be released for allocation to participant accounts. The difference between
the fair value at that time and the ESOP's original acquisition cost is charged
or credited to stockholders' equity. For the six months ended September 30,
2003, this difference amounted to a credit of $178,000 as compared to $108,000
for the same period in 2002.
The increase in occupancy and equipment expense is primarily due to the
two new branch locations and the Company's new corporate office which opened in
April 2003.
Income Taxes. For the six months ended September 30, 2003, income tax
expense amounted to $2.1 million and $2.6 million, respectively. The effective
tax rates for those same periods were 38.7% and 38.1%, respectively.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and mortgage-backed securities, and the
proceeds from maturities of investments. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Company's primary investing activities are the origination of mortgage
loans, and the purchase of short-term investments, government agency bonds,
adjustable-rate mortgage-backed securities and fixed-rate collateralized
mortgage obligations. These activities are funded primarily by deposit growth
and principal
15
repayments on loans, mortgage-backed securities and other investment securities.
For the six months ended September 30, 2003, the Company originated loans
totaling $102.5 million and purchased $171.2 million of securities. These
disbursements were funded by $94.4 million in principal payments, maturities and
calls of securities and $92.3 million in loan principal repayments. For the year
ended March 31, 2003, the Company originated $216.3 million of loans and
purchased $229.7 million of securities.
Liquidity management for the Company is both a daily and long-term process
which is part of the Company's overall management strategy. Excess funds are
generally invested in short-term investments such as Federal funds and
certificates of deposit. In the event that the Bank should require additional
sources of funds, it could borrow from the Federal Home Loan Bank of New York
under an available line of credit.
At September 30, 2003, the Company had outstanding loan commitments of
$79.1 million. The Company anticipates that it will have sufficient funds
available to meet its current loan commitments. Time deposits scheduled to
mature in one year or less from September 30, 2003, totaled $268.5 million.
Management believes that a significant portion of such deposits will remain with
the Company.
The Bank is subject to certain minimum leverage, tangible and risk-based
capital requirements established by regulations of the OTS. These regulations
require savings associations to meet three minimum capital standards: a tangible
capital ratio requirement of 1.5% of total assets as adjusted under the OTS
regulations; a leverage ratio requirement of 4.0% of core capital to such
adjusted total assets; and a risk-based capital ratio requirement of 8.0% of
core and supplementary capital to total risk-based assets. The OTS prompt
corrective action regulations impose a 4.0% core capital requirement for
categorization as an "adequately capitalized" thrift and a 5.0% core capital
requirement for categorization as a "well capitalized" thrift. Goodwill and most
other intangible assets are deducted in determining regulatory capital for
purposes of all capital ratios. In determining the amount of risk-weighted
assets for purposes of the risk-based capital requirement, a savings association
must multiply its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulations. At September 30, 2003, the Bank
exceeded all of the OTS minimum regulatory capital requirements, and was
classified as a well-capitalized institution for regulatory purposes.
The following table sets forth the capital position of the Bank as of
September 30, 2003 and March 31, 2003. The actual capital amounts and ratios set
forth below are for the Bank only and, accordingly, do not include additional
capital retained by Sound Federal Bancorp, Inc.
OTS Requirements
----------------------------------------------------
Minimum Classification as Well
Bank Actual Capital Adequacy Capitalized
------------------------ ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
September 30, 2003
Tangible capital $90,776 10.8% $12,580 1.5% $41,932 5.0%
Tier I (core) capital 90,776 10.8 33,547 4.0 50,318 6.0
Risk-based capital:
Tier I 90,776 24.6
Total 93,338 25.3 29,543 8.0 36,928 10.0
March 31, 2003
Tangible capital $87,313 11.3% $11,604 1.5% $38,679 5.0%
Tier I (core) capital 87,313 11.3 30,944 4.0 46,415 6.0
Risk-based capital:
Tier I 87,313 23.5
Total 89,755 24.2 29,698 8.0 37,123 10.0
16
Recent Accounting Standards and Interpretations
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, was issued in April 2003 to clarify the application of
certain aspects of the accounting for these instruments and activities. The
adoption of SFAS No. 149, which is generally effective for transactions after
June 30, 2003, did not affect our consolidated financial statements.
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, was issued in May 2003. Under
the Statement, certain freestanding financial instruments that embody
obligations for the issuer and that are now classified in equity, must be
classified as liabilities (or as assets in some circumstances). Generally, SFAS
No.150 is effective for financial instruments entered into or modified after May
31, 2003 and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of this standard did not affect our
consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, to provide guidance on the identification of entities
controlled through means other than voting rights. FIN No. 46 specifies how a
business enterprise should evaluate its interests in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity must
be consolidated by its primary beneficiary if the entity does not effectively
disperse risks among the parties involved. A public company with a variable
interest in an entity created before February 1, 2003 must apply FIN No. 46 to
that variable interest in the first interim or annual period ending after
December 15, 2003. The adoption of FIN No. 46 is not expected to have a
significant effect on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate risk,
as the majority of the Company's assets and liabilities are sensitive to changes
in interest rates. The Company's assets consist primarily of fixed rate mortgage
loans, which have longer maturities than the Company's liabilities which consist
primarily of deposits. The Company's mortgage loan portfolio, consisting
primarily of loans secured by residential real property located in Westchester
County, New York and Fairfield County, Connecticut, is also subject to risks
associated with the local economy. The Company does not own any trading assets.
At September 30, 2003, the Company did not have any hedging transactions in
place, such as interest rate swaps and caps. The Company's interest rate risk
management program focuses primarily on evaluating and managing the composition
of the Company's assets and liabilities in the context of various interest rate
scenarios. Factors beyond management's control, such as market interest rates
and competition, also have an impact on interest income and interest expense.
During the quarter ended September 30, 2003, there were no significant
changes in the Company's assessment of market risk.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
of September 30, 2003 (the "Evaluation Date"). Based upon that evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective in timely alerting them to any material
information relating to the Company and its subsidiaries required to be included
in the Company's Exchange Act filings.
17
There were no significant changes made in the Company's internal controls
or in other factors that could significantly affect these internal controls
during the period covered by this report.
18
Part II--OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
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
The Company held its Annual Meeting of Stockholders on August 14, 2003.
The purpose of the meeting was the election of three directors of the Company
and the ratification of the appointment of KPMG LLP as auditors for the Company
for the fiscal year ending March 31, 2004. The results of the votes were as
follows:
Proposal 1 - Election of Directors
For Withheld
--- --------
Donald H. Heithaus 11,152,068 449,377
Joseph A. Lanza 11,167,519 433,926
Roberta I. Bernhardt 10,971,762 629,683
Proposal 2 - Ratification of Appointment of KPMG LLP
For Against Abstain
---------- ------- -------
11,453,248 114,039 34,158
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(b) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(c) Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
19
(d) Reports on Form 8-K
The Company filed a Form 8-K on July 29, 2003 that contained the
Company's news release announcing earnings for the quarter and fiscal
year ended March 31, 2003.
The Company filed a Form 8-K on September 15, 2003 that contained the
Company's news release announcing that management was making a
presentation to investors.
20
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.
Sound Federal Bancorp, Inc.
----------------------------------------
(Registrant)
By: /s/ Anthony J. Fabiano
----------------------------------------
Anthony J. Fabiano
Duly Authorized and Chief Financial and
Accounting Officer
November 12, 2003
21