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 December 31, 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
Class Outstanding at
Common Stock, February 10, 2004
------------- -----------------
par value, $0.01 12,803,133
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 2003 and
March 31, 2003.........................................................1
Consolidated Statements of Income for the Quarter
and Nine Months Ended December 31, 2003 and 2002.......................2
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended December 31, 2003............................3
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 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.................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............18
Item 4. Controls and Procedures...............................................18
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............................................................20
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) December 31, March 31,
2003 2003
------------ ---------
Assets
Cash and due from banks $ 11,068 $ 8,776
Federal funds sold and other overnight deposits 11,784 36,121
--------- ---------
Total cash and cash equivalents 22,852 44,897
--------- ---------
Securities available for sale, at fair value (including
$30,113 and $29,100 pledged as collateral for borrowings
under repurchase agreements at December 31, 2003 and
March 31, 2003, respectively) 356,260 295,048
Loans, net:
Mortgage loans 462,673 428,575
Consumer loans 1,417 1,551
Allowance for loan losses (Note 5) (2,637) (2,442)
--------- ---------
Total loans, net 461,453 427,684
--------- ---------
Accrued interest receivable 3,557 3,678
Federal Home Loan Bank stock 5,303 4,141
Premises and equipment, net 5,625 5,467
Deferred income taxes 2,310 392
Goodwill 13,970 13,970
Bank-owned life insurance 10,000 --
Other assets 1,612 811
--------- ---------
Total assets $ 882,942 $ 796,088
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 698,416 $ 604,260
Borrowings (Note 6) 35,000 35,000
Mortgagors' escrow funds 5,176 4,603
Due to brokers for securities purchased 9,468 10,495
Accrued expenses and other liabilities 2,791 3,409
--------- ---------
Total liabilities 750,851 657,767
--------- ---------
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 95,840 95,395
Treasury stock, at cost (444,000 shares at December 31, 2003) (6,929) --
Common stock held by the Employee Stock Ownership Plan ("ESOP") (6,682) (7,059)
Common stock awards under the Recognition and Retention Plan ("RRP") -- (100)
Retained earnings 52,789 49,937
Accumulated other comprehensive (loss) income, net of taxes (Note 7) (3,059) 16
--------- ---------
Total stockholders' equity 132,091 138,321
--------- ---------
Total liabilities and stockholders' equity $ 882,942 $ 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 Nine Months Ended
December 31, December 31,
--------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Interest and Dividend Income
Loans $ 6,641 $ 7,527 $19,900 $22,767
Mortgage-backed and other securities 3,186 2,130 8,693 6,177
Federal funds sold and other overnight deposits 46 158 220 390
Other earning assets -- 55 123 139
------- ------- ------- -------
Total interest and dividend income 9,873 9,870 28,936 29,473
------- ------- ------- -------
Interest Expense
Deposits 2,798 3,025 8,342 9,211
Borrowings 381 409 1,130 1,236
Other interest-bearing liabilities 7 38 42 75
------- ------- ------- -------
Total interest expense 3,186 3,472 9,514 10,522
------- ------- ------- -------
Net interest income 6,687 6,398 19,422 18,951
Provision for loan losses (Note 5) 75 50 200 175
------- ------- ------- -------
Net interest income after provision for loan losse 6,612 6,348 19,222 18,776
------- ------- ------- -------
Non-Interest Income
Service charges and fees 252 229 765 610
Gain on sale of real estate owned -- -- -- 13
------- ------- ------- -------
Total non-interest income 252 229 765 623
------- ------- ------- -------
Non-Interest Expense
Compensation and benefits 2,107 1,650 6,105 4,701
Occupancy and equipment 553 495 1,699 1,324
Data processing service fees 320 237 751 724
Advertising and promotion 231 328 782 754
Other 725 620 2,231 1,879
------- ------- ------- -------
Total non-interest expense 3,936 3,330 11,568 9,382
------- ------- ------- -------
Income before income tax expense 2,928 3,247 8,419 10,017
Income tax expense 1,133 1,220 3,257 3,799
------- ------- ------- -------
Net income $ 1,795 $ 2,027 $ 5,162 $ 6,218
======= ======= ======= =======
Earnings per share (Note 4)(1):
Basic earnings per share $ 0.15 $ 0.16 $ 0.42 $ 0.48
======= ======= ======= =======
Diluted earnings per share $ 0.14 $ 0.15 $ 0.41 $ 0.47
======= ======= ======= =======
(1) Earnings per share data for the 2002 periods have been adjusted to reflect
the shares outstanding after the completion of the second-step conversion
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 Nine Months Ended December 31, 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 -- -- -- -- -- 5,162 -- 5,162
Other comprehensive loss (Note 7) -- -- -- -- -- -- (3,075) (3,075)
---------
Total comprehensive income 2,087
Dividends paid ($0.16 per share) -- -- -- -- -- (1,940) -- (1,940)
Purchases of treasury stock
(474,000 shares) -- -- (7,400) -- -- -- -- (7,400)
Resissuance of treasury stock for
exercise of stock options
(30,000 shares) -- -- 471 -- -- (370) -- 101
Tax benefit from exercise of
stock options -- 145 -- -- -- -- -- 145
Vesting of RRP shares -- -- -- -- 100 -- -- 100
ESOP shares committed to be released
for allocation -- 300 -- 377 -- -- -- 677
------ ------- ------- ------- ---- ------- ------- ---------
Balance at December 31, 2003 $ 132 $95,840 $(6,929) $(6,682) $ -- $52,789 $(3,059) $ 132,091
====== ======= ======= ======= ==== ======= ======= =========
3
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Nine Months
(In thousands) Ended December 31,
-------------------
2003 2002
------ ------
OPERATING ACTIVITIES
Net income $ 5,162 $ 6,218
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 200 175
Depreciation, amortization and accretion 1,801 1,035
ESOP and RRP expense 777 394
Income taxes (902) 19
Other adjustments, net (234) 454
--------- ---------
Net cash provided by operating activities 6,804 8,295
--------- ---------
INVESTING ACTIVITIES
Purchases of securities available for sale (189,246) (127,045)
Proceeds from principal payments, maturities and
calls of securities available for sale 121,557 63,229
Disbursements for loan originations in excess of
principal payments (34,742) (16,639)
Proceeds from sales of real estate owned -- 127
Purchase of bank-owned life insurance (10,000) --
Purchase of Federal Home Loan Bank stock (1,162) --
Purchases of premises and equipment (746) (538)
--------- ---------
Net cash used in investing activities (114,339) (80,866)
--------- ---------
FINANCING ACTIVITIES
Net increase in deposits 94,156 72,512
Proceeds from borrowings 20,000 --
Repayment of borrowings (20,000) (82)
Increase in stock subscription proceeds -- 68,134
Net increase in mortgagors' escrow funds 573 553
Purchases of treasury stock (7,400) --
Proceeds from exercise of stock options 101 27
Dividends paid on common stock (1,940) (492)
--------- ---------
Net cash provided by financing activities 85,490 140,652
--------- ---------
(Decrease) increase in cash and cash equivalents (22,045) 68,081
Cash and cash equivalents at beginning of period 44,897 26,778
--------- ---------
Cash and cash equivalents at end of period $ 22,852 $ 94,859
========= =========
SUPPLEMENTAL INFORMATION
Interest paid $ 9,604 $ 10,459
Income taxes paid 4,122 2,316
Loans transferred to real estate owned -- 171
Net (decrease) increase in due to brokers for
securities purchased (1,027) 6,195
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 "Initial Reorganization") and
related Subscription and Community Offering (the "Initial Offering"). In the
Initial Reorganization, Sound Federal Savings and Loan Association 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 net income and earnings per common share would have
been adjusted to the following pro forma amounts:
6
Quarter Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands, except per share data)
Net income, as reported $ 1,795 $ 2,027 $ 5,162 $ 6,218
Add RRP expense included in reported
net income, net of related tax effects 17 23 61 67
Deduct RRP and stock option expense
determined under the fair-value-based
method, net of related tax effects (32) (41) (111) (121)
--------- --------- --------- ---------
Pro forma net income $ 1,780 $ 2,009 $ 5,112 $ 6,164
========= ========= ========= =========
Earnings per share:
Basic, as reported $ 0.15 $ 0.16 $ 0.42 $ 0.48
========= ========= ========= =========
Basic, pro forma $ 0.15 $ 0.16 $ 0.41 $ 0.48
========= ========= ========= =========
Diluted, as reported $ 0.14 $ 0.15 $ 0.41 $ 0.47
========= ========= ========= =========
Diluted, pro forma $ 0.14 $ 0.15 $ 0.40 $ 0.47
========= ========= ========= =========
4. Earnings Per Share
Earnings per share data for the quarter and nine months ended December 31,
2002 have been adjusted to reflect the shares outstanding after completion of
the offering and share exchange on January 6, 2003.
Weighted average common shares used in calculating basic and diluted
earnings per share for the quarter ended December 31, 2003 were 12,219,933 and
12,552,442, respectively. For the quarter ended December 31, 2002, weighted
average common shares used in calculating basic and diluted earnings per share
were 12,914,684 and 13,244,481, respectively.
For the nine months ended December 31, 2003, weighted average shares used
in calculating basic and diluted earnings per share were 12,360,180 and
12,695,304, respectively. For the nine months ended December 31, 2002, the
respective weighted average shares were 12,913,177 and 13,217,530.
5. Allowance for Loan Losses
The allowance for loan losses is increased by provisions for loan losses
charged to income. 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 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.
7
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Quarter Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
------------------ ------------------- ----------
2003 2002 2003 2002 2003
------------------ ------------------- ----------
(In thousands)
Balance at beginning of period $ 2,562 $ 2,346 $ 2,442 $ 2,221 $ 2,221
Provision for loan losses 75 50 200 175 275
Loans charged off -- -- (5) -- (54)
------------------ ------------------- -------
Balance at end of period $ 2,637 $ 2,396 $ 2,637 $ 2,396 $ 2,442
================== =================== =======
6. Borrowings
The Company had the following outstanding borrowings from the Federal Home
Loan Bank (the "FHLB") at December 31, 2003:
Coupon Rate Borrowings
----------- ----------
(Dollars in thousands)
Securities repurchase agreements maturing in:
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
-------
Total borrowings 4.11% $35,000
=======
Accrued interest payable $ 142
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 $15.6 million and mortgage-backed securities available for sale with a
carrying value of $14.5 million. Accrued interest receivable on the securities
was $183,000 at December 31, 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 Nine Months Ended
December 31, December 31,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
(In thousands)
Net unrealized holding (loss) gain arising during
the period on securities available for sale $(1,843) $ 68 $(5,010) $ 1,671
Related deferred income tax effect 650 (29) 1,935 (649)
------- ------- ------- -------
Other comprehensive (loss) income $(1,193) $ 39 $(3,075) $ 1,022
======= ======= ======= =======
The Company's accumulated other comprehensive (loss) income, which is
included in stockholders' equity, is summarized as follows:
December 31, March 31,
2003 2003
------------ ---------
(In thousands)
Net unrealized holding (loss) gain on securities
available for sale $(1,515) $ 3,495
Additional minimum pension liability (3,468) (3,468)
Related deferred income taxes 1,924 (11)
------- -------
Accumulated other comprehensive (loss) income $(3,059) $ 16
======= =======
9
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 and borrowings. 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 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.
Financial Condition
Assets. The Company's total assets amounted to $882.9 million at December
31, 2003 as compared to $796.1 million at March 31, 2003. The $86.8 million
increase in total assets is primarily due to a $61.2 million increase in
securities available for sale to $356.3 million, a $33.8 million increase in net
loans to $461.5 million, and the purchase of bank-owned life insurance with a
cash surrender value of $10.0 million. These increases were partially offset by
a decrease in federal funds sold of $24.3 million. The asset growth was funded
principally by a $94.2 million increase in deposits to $698.4 million.
Liabilities. Total deposits were $698.4 million at December 31, 2003 as
compared to $604.3 million at March 31, 2003, an increase of $94.1 million.
Certificates of deposit increased $72.5 million to $436.2 million from $363.7
million, savings and club accounts increased $9.1 million to $145.9 million from
$136.8 million, and money market and NOW accounts increased $12.6 million to
$116.3 million from $103.7 million.
Stockholders'Equity. Total stockholders' equity decreased $6.2 million to
$132.1 million at December 31, 2003 as compared to $138.3 million at March 31,
2003. The decrease reflects the purchase of treasury shares at a cost of $7.4
million, dividends paid of $1.9 million and a decrease of $3.1 million
attributable to accumulated other comprehensive (loss) income, partially offset
by net income of $5.2 million, and proceeds and related tax benefits of $246,000
on the reissuance of treasury shares for stock options exercised. The change in
accumulated other comprehensive (loss) income reflects a net unrealized holding
10
loss of $5.0 million on securities available for sale (less a $1.9 million
income tax effect) attributable to a decline in fair value of debt securities
due to rising long-term interest rates during the nine-month period.
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 depends 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. As of December 31,
2003, we repurchased 474,000 shares of the Company's common stock at a cost of
$7.4 million and reissued 30,000 of these shares upon the exercise of stock
options.
Comparison of Results of Operations for the Quarters Ended December 31, 2003 and
2002
Net Income. Net income amounted to $1.8 million or diluted earnings per
share of $0.14 for the quarter ended December 31, 2003, as compared to $2.0
million or diluted earnings per share of $0.15 for the quarter ended December
31, 2002. The decrease in net income for the current quarter was due primarily
to a $606,000 increase in non-interest expense, partially offset by an increase
of $289,000 in net interest income and a decrease of $87,000 in income tax
expense.
Interest Income. Interest income was unchanged at $9.9 million for the
quarters ended December 31, 2003 and 2002. The average yield on interest-earning
assets decreased 120 basis points to 4.68% for the quarter ended December 31,
2003 as compared to the same quarter in 2002, and was partially offset by a
$170.8 million increase in average interest-earning assets to $837.0 million as
compared to $666.2 million for those same periods. The increase in the average
balance of interest-earning assets was due primarily to a $184.5 million
increase in the average balance of securities to $350.9 million and a $13.9
million increase in the average balance of loans to $452.1 million, partially
offset by a decrease of $28.6 million in average Federal funds sold and other
overnight deposits to $28.4 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, the purchase of securities at lower rates than
the existing portfolio and the downward repricing of adjustable-rate securities
during recent periods of declining interest rates.
Loans. Interest income on loans decreased $886,000, or 11.8%, to $6.6
million for the quarter ended December 31, 2003 as compared to $7.5 million for
the same quarter in 2002. This decrease is due to a 98 basis point decrease in
the yield earned to 5.83% partially offset by a $13.9 million increase in the
average balance of loans to $452.1 million.
The Bank originated $53.1 million of new loans during the quarter ended
December 31, 2003 as compared to $59.4 million for the same quarter in the prior
year. In addition, $25.8 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 continued
to decline during the current quarter. The Bank has not historically sold
mortgage loans it originates.
Mortgage-Backed and Other Securities. Interest on mortgage-backed
securities increased $795,000 to $2.4 million for the quarter ended December 31,
2003, as compared to the same quarter in 2002, due primarily to an increase of
$139.6 million in the average balance to $259.6 million, partially offset by a
decrease of 170 basis points in the average yield to 3.73%. 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 average yield of the existing portfolio.
Interest on other securities increased $261,000 to $747,000 for the quarter
ended December 31, 2003, as compared to the same quarter in 2002, due primarily
to a $44.9 million increase in the average balance of
11
other securities to $91.3 million, partially offset by a 91 basis point decrease
in the average yield to 3.25%. 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
December 31, 2003, interest on Federal funds sold and other overnight deposits
decreased $112,000 to $46,000, reflecting a $28.6 million decrease in the
average balance to $28.4 million and a 46 basis point decrease in the average
yield earned to 0.64%. The decrease in the average yield is the result of the
continued low market interest rates. The decrease in the average balance is due
primarily to the reinvestment of funds received in the stock offering into
higher yielding investments.
Other Earning Assets. The Company had an investment of $5.3 million in FHLB
of New York common stock at December 31, 2003. The FHLB of New York suspended
the October dividend payment on this stock and, as a result, the Company's
earnings before tax were reduced by approximately $57,000 for the quarter ended
December 31, 2003 as compared to the same quarter a year ago. The FHLB announced
in January 2004 that it had declared a current dividend that was less than the
amounts previously paid. For the Company, the current quarterly dividend is
approximately $19,000.
Interest Expense. Interest expense for the quarter ended December 31, 2003
totaled $3.2 million, as compared to $3.5 million for the quarter ended December
31, 2002. The average balance of interest-bearing liabilities increased $95.9
million to $717.2 million for the quarter ended December 31, 2003 from $621.3
million for the same quarter in the prior year, while the average cost of these
liabilities decreased 44 basis points to 1.76%. 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, 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 $2.5 million for the current
quarter as compared to $2.6 million for the same quarter in 2002. The decrease
is due primarily to a 55 basis point decrease in the average cost to 2.31%
partially offset by a $72.7 million increase in the average balance of time
deposits to $427.8 million from $355.1 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 $193,000 for the current
quarter as compared to $296,000 for the quarter ended December 31, 2002. This
decrease is the result of a 40 basis point decrease in the average cost of
savings accounts to 0.53% partially offset by a $17.7 million increase in the
average balance of savings accounts to $143.8 million.
Interest expense on other deposits (NOW and money market accounts) amounted
to $117,000 for the quarter ended December 31, 2003 as compared to $165,000 for
the same quarter in the prior year. The average cost decreased 27 basis points
to 0.46% and the average balance of these accounts increased $10.9 million to
$103.4 million.
For the quarter ended December 31, 2003, interest expense on borrowings
amounted to $381,000 as compared to $409,000 for the same quarter in the prior
year. The average balance of borrowings for the current quarter was $41.5
million and the average cost was 3.65%. For the quarter ended December 31, 2002,
the average balance of borrowings was $35.0 million and the average rate was
4.64%.
Net Interest Income. Net interest income for the quarter ended December 31,
2003 amounted to $6.7 million, a $289,000 increase from the same period in the
prior year. The interest rate spread was 2.92% and 3.66% for the quarters ended
December 31, 2003 and 2002, respectively. The net interest margin for those
periods was 3.17% and 3.81%, 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 1.17 for
the 2003 quarter from 1.07 for the
12
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.
In December 2003, the Company purchased a bank-owned life insurance
("BOLI") product for $10.0 million. The BOLI purchase was funded from
interest-earning assets, however, the BOLI asset is classified separately from
interest-earning assets on the accompanying Consolidated Balance Sheet. As a
result, the ratio of average interest-earning assets to average interest-bearing
liabilities is expected to decrease in future periods. The changes in the cash
surrender value of the BOLI will be recognized as non-interest income. The
Company's interest rate spread and net interest margin may decrease as a result
of the financial statement classification of the BOLI asset and related income.
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 87.1% of total loans at December 31, 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 December
31, 2003 as compared to $50,000 for the quarter ended December 31, 2002.
Non-performing loans amounted to $1.3 million or 0.28% of total loans at
December 31, 2003, as compared to $795,000 or 0.18% of total loans at December
31, 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
$812,000. The loans are secured by a single family home with a loan-to-value
ratio of less than 60%. The allowance for loan losses amounted to $2.6 million
and $2.4 million at December 31, 2003 and March 31, 2003, respectively. There
were no charge-offs for the quarters ended December 31, 2003 and 2002,
respectively.
Non-Interest Income. Non-interest income totaled $252,000 and $229,000 for
the quarters ended December 31, 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 $3.9 million for the
quarter ended December 31, 2003 as compared to $3.3 million for the quarter
ended December 31, 2002. This increase is due primarily to increases of $457,000
in compensation and benefits, $58,000 in occupancy and equipment expense,
$83,000 in data processing service fees and $105,000 in other non-interest
expense, partially offset by a decrease of $97,000 in advertising and promotion
expense.
The increase in compensation and benefits is primarily due to a $192,000
increase in compensation costs and a $109,000 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 119 and 103 at December 31, 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 (additional paid-in capital). For the quarter
ended December 31, 2003, the difference credited to equity amounted to $122,000
as compared to $92,000 for the same period in 2002.
13
The increase in occupancy and equipment expense is primarily due to the
Company's new corporate office which opened in April 2003.
Income Taxes. Income tax expense amounted to $1.1 million and $1.2 million
for the quarters ended December 31, 2003 and 2002, respectively. The effective
tax rates for those same periods were 38.7% and 37.6%, respectively.
Comparison of Results of Operations for the Nine Months Ended December 31, 2003
and 2002
Net Income. Net income amounted to $5.2 million or diluted earnings per
share of $0.41 for the nine months ended December 31, 2003, as compared to $6.2
million or diluted earnings per share of $0.47 for the same period in the prior
year. The decrease in net income for the nine months ended December 31, 2002 was
due to an increase of $2.2 million in non-interest expense, partially offset by
increases of $471,000 in net interest income and $142,000 in non-interest income
and a decrease of $542,000 in income tax expense.
Interest Income. Interest income totaled $28.9 million for the nine months
ended December 31, 2003, as compared to $29.5 million for the same period in the
prior year. The decrease in interest income reflects a 138 basis point decrease
in the average yield on interest-earning assets to 4.80% from 6.18%, partially
offset by an increase of $166.8 million in average interest-earning assets to
$800.2 million as compared to $633.3 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 $173.2 million in securities available for sale,
partially offset by a $6.0 million decrease in federal funds sold and other
overnight deposits and a $1.0 million decrease in loans. The decrease in the
average yield on interest-earning assets reflects the origination of fixed-rate
loans at lower rates, the purchase of securities at lower rates than the
existing portfolio and the downward repricing of adjustable-rate securities
during recent periods of declining interest rates.
Loans. For the nine months ended December 31, 2003, interest income on
loans amounted to $19.9 million as compared to $22.8 million for the same period
in the prior year. This decrease was due to a decrease of $1.0 million in the
average balance of loans to $434.0 million and an 86 basis point decrease in the
yield earned to 6.09% from 6.95%.
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 $158.1 million of new loans during the nine months ended December 31,
2003. In addition, $126.7 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 result, the decline in average yield earned
on the loan portfolio continued in the first nine 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 nine months ended December 31, 2003 increased $2.0 million to
$6.7 million as compared to $4.7 million for the same period in the prior year.
The increase was due to an increase of $131.6 million in the average balance to
$239.2 million partially offset by a decrease of 203 basis points in the average
yield to 3.73% from 5.76%. 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 nine months ended December 31, 2003, interest on other securities
increased $460,000 to $2.0 million as compared to $1.5 million for the same
period in the prior year. The increase was due to an increase of $41.6 million
in the average balance to $86.2 million for the nine months ended December 31,
2003, partially offset by a decrease of 146 basis points in the average yield to
3.03% from 4.49%.
Federal Funds Sold and Other Overnight Deposits. For the nine months ended
December 31, 2003, interest on federal funds and other overnight deposits
decreased $170,000 to $220,000, reflecting a 42 basis
14
point decrease in the average yield to 0.83% and a decrease of $6.0 million in
the average balance to $35.3 million. The decrease in the average yield is the
result of the continued low market interest rates.
Interest Expense. For the nine months ended December 31, 2003, interest
expense on interest-bearing liabilities decreased $985,000 to $9.5 million, as
compared to $10.5 million for the nine months ended December 31, 2002. The
decrease in interest expense was due to a 50 basis point decrease in the average
cost of these liabilities to 1.87% from 2.37%, partially offset by an increase
of $87.4 million in the average balance of interest-bearing liabilities to
$677.0 million.
For the nine months ended December 31, 2003, interest expense on
certificates of deposit amounted to $7.2 million as compared to $7.7 million for
the same period in the prior year. The decrease was due to a 62 basis point
decrease in the average cost to 2.42%, partially offset by a $59.7 million
increase in the average balance of certificates of deposit to $395.7 million as
compared to $336.0 million for the same period in the prior year.
For the nine months ended December 31, 2003, interest on savings accounts
decreased $239,000 to $697,000 as compared to the same period in the prior year.
The average cost of savings accounts decreased 36 basis points to 0.65%
partially offset by an increase of $19.5 million in the average balance of
savings accounts to $142.8 million.
For the nine months ended December 31, 2003, interest expense on other
deposits amounted to $430,000 as compared to $568,000 for the same period in the
prior year. The average cost of these accounts decreased 27 basis points to
0.60%, partially offset by an increase of $8.3 million in the average balance of
these accounts to $95.2 million.
For the nine months ended December 31, 2003, interest expense on borrowings
was $1.1 million as compared to $1.2 million for the same period in the prior
year. The decrease in interest expense was due to an 89 basis points decrease in
the average cost of borrowings to 3.80%, partially offset by a $4.5 million
increase in the average balance of borrowings to $39.5 million.
Net Interest Income. For the nine months ended December 31, 2003, net
interest income amounted to $19.4 million as compared to $19.0 million for the
same period in the prior year. The interest rate spread was 2.93% and 3.82% and
the net interest margin was 3.22% and 3.98% 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 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 1.18 for the nine months ended December 31, 2003
from 1.07 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 $200,000 for
nine months ended December 31, 2003 as compared to $175,000 for the same period
in the prior year. Non-performing loans amounted to $1.3 million or 0.28% of
total loans at December 31, 2003, as compared to $795,000 or 0.18% of total
loans at December 31, 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 $812,000. The loans are secured by a single family home with a
loan-to-value ratio of less than 60%. The allowance for loan losses amounted to
$2.6 million or 0.57% of total loans at December 31, 2003 and $2.4 million or
0.57% of total loans at March 31, 2003. Charge-offs amounted to $5,000 for the
nine months ended December 31, 2003 (none for same period in 2002).
Non-Interest Income. Non-interest income for the nine months ended December
31, 2003 totaled $765,000 as compared to $623,000 for the nine months ended
December 31, 2002. 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.
15
Non-Interest Expense. For the nine months ended December 31, 2003,
non-interest expense increased $2.2 million to $11.6 million as compared to $9.4
million for the same period in the prior year. This increase was due primarily
to increases of $1.4 million in compensation and benefits, $375,000 in occupancy
and equipment expense and $352,000 in other non-interest expense.
The increase in compensation and benefits is primarily due to a $652,000
increase in compensation costs and a $373,000 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 nine months ended December 31,
2003, the difference credited to equity amounted to $300,000 as compared to
$204,000 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 nine months ended December 31, 2003 and 2002, income
tax expense amounted to $3.3 million and $3.8 million, respectively. The
effective tax rates for those same periods were 38.7% and 37.9%, 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 repayments on loans, mortgage-backed securities and other
investment securities. For the nine months ended December 31, 2003, the Company
originated loans totaling $158.1 million and purchased $189.2 million of
securities. These disbursements were funded by $121.6 million in principal
payments, maturities and calls of securities and $123.4 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 December 31, 2003, the Company had outstanding loan commitments of $72.6
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 December 31, 2003, totaled $313.9 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
16
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
December 31, 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
December 31, 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
----------------------------------------------------
Classification as Well
Bank Actual Minimum Capital Adequacy Capitalized
------------------ ------------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------ ------------------------ ----------------------
(Dollars in thousands)
December 31, 2003
Tangible capital $92,596 10.7% $12,929 1.5% $43,096 5.0%
Tier I (core) capital 92,596 10.7 34,477 4.0 51,715 6.0
Risk-based capital:
Tier I 92,596 23.9
Total 95,233 24.6 31,028 8.0 38,785 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
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 (revised), Consolidation of Variable Interest
Entities ("FIN 46R"), which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and, accordingly, should consolidate the variable interest
entity ("VIE"). FIN 46R replaces FASB Interpretation No. 46, which was issued in
January 2003. As a public company that is not a small business issuer (as
defined in applicable SEC regulations), the Company is required to apply FIN 46R
to variable interests generally as of March 31, 2004 and to special-purpose
entities as of December 31, 2003. For any VIE's that must be consolidated under
FIN 46R that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts and any difference between the net amount added to the balance
sheet and any previously recognized interest would be recorded as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure
the assets, liabilities and noncontrolling interest of the VIE. The Company held
no interests in special-purpose entities as of December 31, 2003. Adoption of
FIN 46R with respect to other types of VIE's in the quarter ending March 31,
2004 is not expected to have a significant effect on the Company's consolidated
financial statements.
In December 2003, the FASB also issued Statement of Financial Accounting
Standards No. 132 (revised), Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132R"). This standard prescribes employers'
disclosures about pension plans and other postretirement benefit plans, but does
not change the measurement or recognition of those plans. SFAS No. 132R retains
and revises the disclosure requirements contained in the original standard. It
also requires additional disclosures about the assets,
17
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other postretirement benefit plans. As a public company, the
Company will be required to provide substantially all of the revised disclosures
beginning with its March 31, 2004 consolidated financial statements. Certain
disclosures will also be required in the Company's interim financial statements
beginning with the quarter ending June 30, 2004.
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 December 31, 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 December 31, 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 December 31, 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.
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 a Special Meeting of Stockholders on February 4, 2004. The
purpose of the meeting was to consider and act upon the approval of the Sound
Federal Bancorp, Inc. 2004 Incentive Stock Benefit Plan. The results of the
votes were as follows:
For Against Abstain
----------- ------------- -----------
6,755,409 1,042,504 94,077
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 - Supplemental Executive Agreement - Richard P.
McStravick
(b) Exhibit 10.2 - Supplemental Executive Agreement - Anthony J. Fabiano
(c) Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(d) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(e) 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.
(f) Reports on Form 8-K
a. The Company filed a Form 8-K on January 29, 2004 that contained
the Company's news release announcing earnings for the quarter
and nine months ended December 31, 2003.
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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
February 11, 2004
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