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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 June 30, 2002
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
(Exact name of registrant as specified in its charter)
Federal 13-4029393
- ------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Mamaroneck Ave., Mamaroneck, New York 10543
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(914) 698-6400
(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 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
-------------- August 12, 2002
Common Stock, ---------------
par value, $0.10 4,778,292
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2002 and March 31, 2002 1
Consolidated Statements of Income for the Three Months
Ended June 30, 2002 and 2001 2
Consolidated Statement of Changes in Stockholders' Equity for the Three
Months Ended June 30, 2002 3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2002 and 2001 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands) June 30, March 31,
2002 2002
------------- ------------
Assets
Cash and due from banks $ 6,651 $ 6,931
Federal funds sold 35,370 19,847
----------- ------------
Total cash and cash equivalents 42,021 26,778
----------- ------------
Securities available for sale, at fair value (including $35,995 and $35,779 pledged as
collateral under repurchase agreements at June 30, 2002 and March 31, 2002,
respectively) 143,842 150,231
Loans, net:
Mortgage loans 437,283 419,120
Consumer loans 2,432 1,469
Allowance for loan losses (Note 4) (2,296) (2,221)
------------ -------------
Total loans, net 437,419 418,368
----------- ------------
Accrued interest receivable 3,465 3,241
Federal Home Loan Bank stock 4,141 4,141
Premises and equipment, net 5,489 5,459
Deferred income taxes 573 942
Goodwill 13,970 13,970
Other assets 545 855
----------- -----------
Total assets $ 651,465 $ 623,985
=========== ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 544,626 $ 519,905
Borrowings (Note 5) 34,967 34,922
Mortgage escrow funds 4,402 5,021
Accrued expenses and other liabilities 3,650 3,122
--------- -----------
Total liabilities 587,645 562,970
--------- -----------
Stockholders' equity (Note 1):
Preferred stock ($0.10 par value; 10,000,000 shares
authorized; - -
none issued and outstanding)
Common stock ($0.10 par value; 20,000,000 shares authorized; 5,223,218 and
5,220,218 shares issued at June 30, 2002 and March 31, 2002, respectively) 522 522
Additional paid-in capital 22,596 22,525
Treasury stock, at cost (444,926 shares at June 30, 2002 and March 31, 2002) (4,350) (4,350)
Common stock held by the Employee Stock Ownership Plan ("ESOP") (1,057) (1,105)
Common stock awards under the Recognition and Retention Plan ("RRP") (208) (244)
Retained earnings 44,589 42,566
Accumulated other comprehensive income, net of taxes (Note 6) 1,728 1,101
------------ ------------
Total stockholders' equity 63,820 61,015
------------ -----------
Total liabilities and stockholders' equity $ 651,465 $ 623,985
============ ============
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Three Months Ended
June 30,
-------------------------------
2002 2001
Interest and Dividend Income
Loans $ 7,614 $ 5,813
Mortgage-backed and other securities 2,040 3,147
Federal funds sold and other overnight deposits 105 307
Other earning assets 65 98
--------- ---------
Total interest and dividend income 9,824 9,365
--------- ---------
Interest Expense
Deposits 3,103 5,054
Borrowings 416 269
Other interest-bearing liabilities 20 16
--------- ---------
Total interest expense 3,539 5,339
---------- ---------
Net interest income 6,285 4,026
Provision for loan losses (Note 4) 75 25
--------- ---------
Net interest income after provision for loan losses 6,210 4,001
--------- ---------
Non-Interest Income
Service charges and fees 170 139
Gain on sale of real estate owned -- 57
--------- ---------
Total non-interest income 170 196
--------- ---------
Non-Interest Expense
Compensation and benefits 1,428 1,225
Occupancy and equipment 444 321
Data processing service fees 229 192
Advertising and promotion 148 156
Other 594 440
--------- ---------
Total non-interest expense 2,843 2,334
--------- ---------
Income before income tax expense 3,537 1,863
Income tax expense 1,376 688
--------- ---------
Net income $ 2,161 $ 1,175
========= =========
Basic earnings per common share (Note 3) $ 0.46 $ 0.25
========= =========
Diluted earnings per common share (Note 3) $ 0.46 $ 0.25
========= =========
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended June 30, 2002 (Unaudited) (Dollars in thousands,
except per share data)
Common Common
Additional Stock Stock
Common Paid-In Treasury Held By Awards Retained
Stock Capital Stock ESOP Under RRP Earnings
----- ------- ----- ---- --------- --------
Balance at March 31, 2002 $ 522 $ 22,525 $(4,350) $ (1,105) $ (244) $ 42,566
Net income -- -- -- -- -- 2,161
Other comprehensive income (Note 6) -- -- -- -- -- --
Total comprehensive income
Dividends paid ($0.07 per share) -- -- -- -- -- (138)
Issuance of stock pursuant to stock option plan -- 27 -- -- -- --
Vesting of RRP shares -- -- -- -- 36 --
ESOP shares committed to be released for
allocation -- 44 -- 48 -- --
------- ----------- ------- ------- ---------- --------
Balance at June 30, 2002 $ 522 $ 22,596 $ (4,350) $ (1,057) $ (208) $ 44,589
======= ======== ======== ======== ========== ========
Accumulated
Other Total
Comprehensive Stockholders'
Income Equity
------- ------
Balance at March 31, 2002 $ 1,101 $ 61,015
Net income -- 2,161
Other comprehensive income (Note 6) 627 627
---------
Total comprehensive income 2,788
Dividends paid ($0.07 per share) -- (138)
Issuance of stock pursuant to stock option plan -- 27
Vesting of RRP shares -- 36
ESOP shares committed to be released for
allocation -- 92
---------- ---------
Balance at June 30, 2002 $ 1,728 $ 63,820
=========== ==========
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Three Months Ended
(In thousands) June 30,
------------------------------
2002 2001
------------- ------------
OPERATING ACTIVITIES
Net income $ 2,161 $ 1,175
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 75 25
Depreciation, amortization and accretion 193 (210)
ESOP and RRP expense 128 92
Income taxes 131 1,111
Gain on sale of real estate owned -- (57)
Other adjustments, net 342 (584)
---------- ----------
Net cash provided by operating activities 3,030 1,552
---------- ---------
INVESTING ACTIVITIES
Purchases of securities available for sale (13,272) (19,658)
Proceeds from principal payments, maturities and calls of securities 20,826 25,433
Disbursements for loan originations (57,689) (43,873)
Principal collection on loans 38,451 16,730
Net decrease in certificates of deposit -- 991
Proceeds from sales of real estate owned 114 254
Purchases of premises and equipment (208) (37)
----------- ----------
Net cash used in investing activities (11,778) (20,160)
----------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 24,721 (2,379)
Net decrease in mortgage escrow funds (619) (938)
Issuance of stock pursuant to stock option plan 27 --
Purchases of treasury stock -- (483)
Dividends paid on common stock (138) (140)
----------- ----------
Net cash provided by (used in) financing activities 23,991 (3,940)
----------- ----------
Increase in cash and cash equivalents 15,243 (22,548)
Cash and cash equivalents at beginning of period 26,778 40,849
---------- ---------
Cash and cash equivalents at end of period $ 42,021 $ 18,301
========== =========
SUPPLEMENTAL INFORMATION
Interest paid $ 3,348 $ 5,341
Income taxes paid (received) 1,250 (1,109)
Loans transferred to real estate owned -- 118
========== =========
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization and Stock Offerings
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 "Offering"). In the Reorganization,
Sound Federal Savings and Loan Association (the "Bank") converted from a
federally chartered mutual savings association to a federally chartered stock
savings association (the "Conversion"). The Bank became the wholly-owned
subsidiary of Sound Federal Bancorp, which became the majority-owned subsidiary
of Sound Federal, MHC (the "Mutual Holding Company"). Collectively, Sound
Federal Bancorp and the Bank are referred to herein as "the Company".
Sound Federal Bancorp issued a total of 5,212,218 shares of its common
stock in the Reorganization and Offering, consisting of 2,810,510 shares (or
53.92%) issued to the Mutual Holding Company, 102,200 shares (or 1.96%) issued
to the Sound Federal Savings and Loan Association Charitable Foundation and
2,299,508 shares (or 44.12%) issued to other stockholders. After deducting
offering costs of $1.1 million, the net cash proceeds from the Offering were
$20.0 million.
On June 13, 2002, the Mutual Holding Company adopted a plan to convert to a
capital stock corporation. Upon conversion, shares of the Company's common stock
held by the public will be exchanged for shares of a Delaware holding company
which will become the Bank's parent company. In addition, shares of the Delaware
holding company will be offered for sale to the Bank's depositors and certain
borrowers in a subscription offering. The shares to be sold in the subscription
offering represent the ownership interest of the Mutual Holding Company. The
conversion and offering will result in additional capital and an increase in the
number of shares outstanding.
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, 2003.
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 4.
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, 2002, included in
the Company's 2002 Annual Report.
3. Earnings Per Share
Weighted average common shares used in calculating basic and diluted
earnings per share ("EPS") for the three months ended June 30, 2002 were
4,650,458 and 4,744,132, respectively. For the quarter ended June 30, 2001,
weighted average common shares used in calculating basic and diluted EPS were
4,632,924 and 4,661,953, respectively. Diluted EPS reflects incremental shares
for stock options and unvested RRP shares, computed using the treasury stock
method.
4. 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 inherent in the loan portfolio 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 and inherent 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.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Three Months Ended Year Ended
June 30, March 31,
2002 2001 2002
------------- ------------- --------
(in thousands)
Balance at beginning of period.... $ 2,221 $ 2,047 $ 2,047
Provision for loan losses......... 75 25 175
Charge-offs....................... -- -- (15)
Recoveries........................ -- -- 14
------------ ------------ -------------
Balance at end of period.......... $ 2,296 $ 2,072 $ 2,221
========= ========= =============
5. Borrowings
The Company had the following outstanding borrowings under securities
repurchase agreements with the FHLB at June 30, 2002:
Accrued
Interest
Maturity Date Call Features Rate Borrowings Payable
------------- ------------- ---- ---------- -------
(dollars in thousands)
January 2008 Quarterly beginning January 2003 5.42% $ 9,883 $ 101
December 2008 Quarterly beginning November 2001 4.72 5,000 --
March 2003 None 2.54 7,000 15
March 2004 None 3.57 7,000 21
March 2005 None 4.22 6,000 21
----------- --------
4.17% $ 34,883 $ 158
=========== ========
The securities transferred to the FHLB subject to these repurchase
agreements include U.S. Government and agency securities available for sale with
a carrying value of $17.1 million and mortgage-backed securities available for
sale with a carrying value of $18.9 million. Accrued interest receivable on
these securities totaled $245,000 at June 30, 2002.
An outstanding FHLB advance of $84,000 is included in borrowings in the
consolidated balance sheets at June 30, 2002 and March 31, 2002. This advance
bears interest at a fixed rate of 8.29% and matures in December 2002.
6. 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.
The Company's other comprehensive income (loss) is summarized as follows
for the three months ended June 30:
2002 2001
---- ----
(In thousands)
Net unrealized holding gain (loss) arising during the
period on securities available for sale.................. $ 1,023 $ (250)
Related deferred income tax effect............................ (396) 101
----- --------
Other comprehensive income (loss)............................. $ 627 $ (149)
==== =======
The Company's accumulated other comprehensive income, which is included in
stockholders' equity, is summarized as follows:
June 30, March 31,
2002 2002
--------- ---------
(In thousands)
Net unrealized holding gain on securities available for sale.. $ 2,985 $ 1,962
Additional minimum pension liability.......................... (170) (170)
Related deferred income taxes................................. (1,087) (691)
----------- ---------
Accumulated other comprehensive income...................... $ 1,728 $ 1,101
=========== =========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's results of operations depend primarily upon its net interest
income, which is the difference between income earned on interest-earning
assets, such as loans and securities, and the interest expense paid on deposits.
The Company's operations are affected to a much lesser degree 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.
The Company's principal operating expenses, aside from interest expense, are
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. The Company's results of operations
also are 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.
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 are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results and
those presently anticipated or projected. Among others, these risks and
uncertainties include changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area and competition. 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. The
Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Recent Developments
On June 13 2002, the Mutual Holding Company adopted a plan to convert to a
capital stock corporation. Upon conversion, shares of the Company's common stock
held by the public will be exchanged for shares of a Delaware holding company
which will become the Bank's parent company. In addition, shares of the Delaware
holding company will be offered for sale to the Bank's depositors and certain
borrowers in a subscription offering. The shares to be sold in the subscription
offering represent the ownership interest of the Mutual Holding Company.
Financial Condition
The Company's total assets amounted to $651.5 million at June 30, 2002 as
compared to $624.0 million at March 31, 2002. Net loans increased $19.0 million
or 4.6% to $437.4 million at June 30, 2002 as compared to $418.4 million at
March 31, 2002. Cash and cash equivalents increased $15.2 million to $42.0
million at June 30, 2002 as compared to $26.8 million at March 31, 2002. These
increases were funded principally by a $24.7 million increase in deposits and a
$6.4 million decrease in securities. Total deposits amounted to $544.6 million
at June 30, 2002, as compared to $519.9 million at March 31, 2002. Total
stockholders' equity increased $2.8 million to $63.8 million at June 30, 2002 as
compared to $61.0 million at March 31, 2002, primarily attributable to $2.2
million in net income and a $627,000 increase in accumulated other comprehensive
income.
Results of Operations
General. Net income amounted to $2.2 million or $0.46 per common share for
the quarter ended June 30, 2002, as compared to $1.2 million or $0.25 per common
share for the quarter ended June 30, 2001. The increase in net income for the
current quarter was due primarily to a $2.3 million increase in net interest
income, partially offset by increases of $509,000 in non-interest expense and
$688,000 in income tax expense.
Net Interest Income. Net interest income for the quarter ended June 30,
2002 amounted to $6.3 million, a $2.3 million increase from the same period in
the prior year. The interest rate spread was 4.02% and 2.90% for the quarters
ended June 30, 2002 and 2001, respectively. The net interest margin for those
periods was 4.19% and 3.13%, respectively. The increases in the interest rate
spread and net interest margin are the result of declining market interest rates
during calendar 2001. The decrease in market interest rates reduced the cost of
our interest-bearing liabilities faster than the rates on our interest-earning
assets such as loans or securities. However, if market interest rates decrease
further, interest rate spread and net interest margin may decrease since
competitive factors could prohibit lowering interest rates on deposit accounts
any further. In addition, as interest rates increase, the cost of
interest-bearing liabilities will increase faster than the rates on our
interest-earning assets, also causing decreases in net interest rate spread and
net interest margin.
Interest Income. Interest income totaled $9.8 million during the quarter
ended June 30, 2002 as compared to $9.4 million for the same period in the prior
year. This increase is due to an $85.4 million increase in average
interest-earning assets to $601.5 million during the quarter ended June 30, 2002
as compared to $516.1 million for the same quarter in the prior year, offset
partially by a 73 basis point decrease in the average yield on interest-earning
assets to 6.55% from 7.28%. The increase in the average balance of
interest-earning assets was due primarily to deposit growth, including deposits
from a branch that was opened in December 2001. The decrease in the average
yield on interest-earning assets reflects the origination of fixed-rate loans
and adjustable-rate repricings of our securities portfolio during periods of
declining interest rates (particularly the second half of calendar 2001).
Loans. Interest income on loans increased $1.8 million or 31.0% to $7.6
million for the quarter ended June 30, 2002 as compared to $5.8 million for the
same quarter in 2001. This increase is due to a $120.8 million increase in the
average balance of loans to $426.5 million from $305.7 million, partially offset
by a 47 basis point decrease in the yield earned to 7.16% from 7.63%.
The growth of the loan portfolio is principally a result of increased
originations as borrowers sought to take advantage of the lowest mortgage
interest rates in forty years. The low market interest rates created a robust
housing market and also compelled many consumers to refinance their existing
mortgage loans. The Company originated $57.7 million of loans during the quarter
ended June 30, 2002 as compared to $43.9 million for the same quarter in the
prior year. 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 fiscal 2002 and the first quarter of fiscal
2003. The yield on the loan portfolio may decrease further until market interest
rates begin to increase.
Mortgage-Backed Securities. Interest on mortgage-backed securities
decreased $970,000 to $1.5 million for the quarter ended June 30, 2002, due
primarily to a decrease of $40.9 million in the average balance to $97.5 million
and a decrease of 97 basis points in the average yield to 6.22% from 7.19%. The
lower average balances in the current year reflect principal repayments and
prepayments on mortgage-backed securities, which the Bank used to fund loan
growth.
Other Securities. Interest on other securities decreased $137,000 to
$528,000 for the quarter ended June 30, 2002, as compared to the same quarter in
2001, due to a 210 basis point decrease in the average yield to 4.78% from 6.88%
partially offset by a $5.5 million increase in the average balance to $44.3
million. The decrease in the average yield is the result of declining interest
rates during fiscal 2002.
Federal Funds Sold and Other Overnight Deposits. For the quarter ended June
30, 2002, interest on Federal funds sold and other overnight deposits decreased
$202,000 to $105,000, reflecting a 302 basis point decrease in the average yield
earned to 1.45%, partially offset by a $1.4 million increase in the average
balance to $29.0 million. The decrease in the average yield earned reflects the
declining interest rate environment during fiscal 2002.
Interest Expense. Interest expense for the quarter ended June 30, 2002
totaled $3.5 million, as compared to $5.3 million for the quarter ended June 30,
2001. The decrease in interest expense is due to a decrease in the average cost
of liabilities to 2.53% from 4.38% resulting from declining market interest
rates during fiscal 2002. The average balance of interest-bearing liabilities
increased $72.5 million to $561.8 million for the quarter ended June 30, 2002
from $489.3 million for the same quarter in the prior year.
Interest expense on time deposits totaled $2.6 million for the current
quarter as compared to $4.3 million for the same quarter in 2001. The decrease
is due primarily to a 263 basis point decrease in the average cost to 3.20% from
5.83%, offset partially by a $27.1 million increase in the average balance of
time deposits to $320.6 million from $293.5 million in the same quarter last
year. Interest on savings accounts amounted to $311,000 for the current quarter
as compared to $511,000 for the quarter ended June 30, 2001. The decrease is a
result of an 85 basis point decrease in the average cost of savings accounts to
1.05% from 1.90%, offset partially by a $10.9 million increase in the average
balance of savings accounts to $118.7 million. Interest expense on other
deposits (NOW and money market accounts) amounted to $234,000 for the quarter
ended June 30, 2002 as compared to $279,000 for the same quarter in the prior
year. The average cost of these accounts decreased 50 basis points to 1.13% and
the average balance increased $14.6 million to $83.2 million.
For the quarter ended June 30, 2002, interest expense on borrowings
amounted to $416,000 as compared to $269,000 in the prior year. The average
balance of borrowings for the current quarter was $34.9 million and the average
cost was 4.78%. For the quarter ended June 30, 2001, the average balance of
borrowings was $14.7 million and the average cost was 7.33%. The increase in
FHLB borrowings was used by the Company to fund loan originations during fiscal
2002.
Provision for Loan Losses. Management regularly reviews the Company's 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 known and inherent 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 represent 90.8% of total loans
at June 30, 2002, are generally evaluated on an aggregate or "pool" basis. The
Company's 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
historical loss experience, delinquency trends, volume and type of lending
conducted, and the impact of current economic conditions in the Company's market
area.
The provision for loan losses was $75,000 for the quarter ended June 30,
2002 as compared to $25,000 for the quarter ended June 30, 2001. Non-performing
loans amounted to $952,000 or 0.22% of total loans at June 30, 2002, as compared
to $1.1 million or 0.35% of total loans at June 30, 2001. The allowance for loan
losses amounted to $2.3 million or 0.52% of total loans at June 30, 2002 and
$2.2 million or 0.53% of total loans at March 31, 2002.
Non-Interest Income. Non-interest income totaled $170,000 and $196,000 for
the quarters ended June 30, 2002 and 2001, respectively. Non-interest income
consists principally of service charges on deposit accounts, late charges on
loans and various other service fees. Service fees amounted to $170,000 for the
quarter ended June 30, 2002 as compared to $139,000 for the same quarter in
2001. The quarter ended June 30, 2001 included a gain on the sale of real estate
owned of $57,000.
Non-Interest Expense. Non-interest expense totaled $2.8 million for the
quarter ended June 30, 2002 as compared to $2.3 million for the quarter ended
June 30, 2001. This increase is due primarily to increases of $203,000 in
compensation and benefits, $123,000 in occupancy and equipment and $154,000 in
other non-interest expenses. The increase in compensation and benefits is
primarily due to a new branch location opened in December 2001, increased costs
related to lending operations and overall internal growth. Occupancy and
equipment expense was higher in the current quarter as a result of a $125,000
refund of property taxes related to branch locations that reduced expenses for
the quarter ended June 30, 2001. Other non-interest expenses increased primarily
due to the new branch location and internal growth to support lending and branch
operations.
Income Taxes. Income tax expense amounted to $1.4 million and $688,000 for
the quarters ended June 30, 2002 and 2001, respectively. The effective tax rates
for those same periods were 38.9% and 36.9%, 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 and
adjustable rate mortgage-backed securities. These activities are funded
primarily by deposit growth and principal repayments on loans, mortgage-backed
securities and other investment securities. For the quarter ended June 30, 2002,
the Company originated loans totaling $57.7 million and purchased $13.3 million
of securities. These disbursements were funded in part by $20.8 million in
principal payments, maturities and calls of securities and $38.5 million in loan
principal repayments. For the year ended March 31, 2002, the Company originated
$220.4 million of loans and purchased $57.7 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 June 30, 2002, the Company had outstanding loan origination commitments
of $70.5 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 June 30, 2002, totaled $270.4 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 compute its risk-based assets by multiplying 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
June 30, 2002, 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 June
30, 2002 and March 31, 2002. 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.
OTS
Requirements
--------------------------------------------
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
----------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
June 30, 2002
Tangible capital.................... $ 42,113 6.6% $ 9,528 1.5%
Tier I (core) capital............... 42,113 6.6 25,405 4.0 $ 31,757 5.0%
Risk-based capital:
Tier I........................... 42,113 13.1 19,341 6.0
Total............................ 44,410 13.8 25,788 8.0 32,236 10.0
March 31, 2002
Tangible capital.................... $ 39,865 6.5% $ 9,139 1.5%
Tier I (core) capital............... 39,865 6.5 24,371 4.0 $ 30,464 5.0%
Risk-based capital:
Tier I........................... 39,865 12.7 18,776 6.0
Total............................ 42,087 3.5 25,035 8.0 31,294 10.0
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 June 30, 2002, 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 June 30, 2002, there were no significant changes
in the Company's assessment of market risk.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 - Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company filed a Report on Form 8-K on June 19, 2002 under Item 5,
"Other Events". The Form 8-K included the Company's press release
announcing the adoption of a Plan of Conversion and Reorganization.
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
----------------------------------
(Registrant)
By: /s/ Anthony J. Fabiano
-----------------------------------
Anthony J. Fabiano
Duly Authorized and Chief Financial
and Accounting Officer
August 12, 2002
Exhibit 99.1
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Richard P. McStravick, Chief Executive Officer and Anthony J. Fabiano,
Chief Financial Officer of Sound Federal Bancorp (the "Company") each certify in
his capacity as an officer of the Company that he has reviewed the quarterly
report on Form 10-Q for the quarter ended June 30, 2002 and that to his
knowledge:
(1) the report fully complies with the requirements of Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
August 12, 2002 /s/ Richard P. McStravick
- ------------------ -------------------------
Date Richard P. McStravick,
Chief Executive Officer
August 12, 2002 /s/ Anthony J. Fabiano
- ------------------ -------------------------
Date Anthony J. Fabiano,
Chief Financial Officer