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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 December 31, 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, 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.)
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 by check mark whether the registrant is an accelerated filer
pursuant to Rule 12(b)-2 of the Securities Exchange Act of 1934.
Yes _____ No X
------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Shares
Outstanding at
Class February 12, 2003
-------------- -------------------
Common Stock, 13,225,000
par value, $0.10
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 2002 and March 31, 2002..........1
Consolidated Statements of Income for the Quarter and Nine Months
Ended December 31, 2002 and 2001.............................................2
Consolidated Statement of Changes in Stockholders' Equity for the Nine Months
Ended December 31, 2002......................................................3
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 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...........16
Item 4. Controls and Procedures.............................................16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings....................................................17
Item 2. Changes in Securities and Use of Proceeds............................17
Item 3. Defaults upon Senior Securities......................................17
Item 4. Submission of Matters to a Vote of Security Holders..................17
Item 5. Other Information....................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................17
Signatures...........................................................18
Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002................................19
Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002................................20
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands) December 31, March 31,
--------------------------------------------
2002 2002
--------------------------------------------
Assets
Cash and due from banks $ 9,801 $ 6,931
Federal funds sold and other overnight deposits 85,058 19,847
--------- ---------
Total cash and cash equivalents 94,859 26,778
--------- ---------
Securities available for sale, at fair value (including $37,079 and $35,779
pledged as collateral for borrowings under repurchase agreements at
December 31, 2002 and March 31, 2002, respectively) 221,815 150,231
Loans, net:
Mortgage loans 434,988 419,120
Consumer loans 1,574 1,469
Allowance for loan losses (Note 4) (2,396) (2,221)
--------- ---------
Total loans, net 434,166 418,368
--------- ---------
Accrued interest receivable 3,505 3,241
Federal Home Loan Bank stock 4,141 4,141
Premises and equipment, net 5,468 5,459
Goodwill 13,970 13,970
Other assets 1,541 1,797
--------- ---------
Total assets $ 779,465 $ 623,985
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 592,417 $ 519,905
Borrowings (Note 5) 34,973 34,922
Mortgagors' escrow funds 5,574 5,021
Stock subcription proceeds 68,134 -
Due to brokers for securities purchased 6,195 -
Accrued expenses and other liabilities 3,926 3,122
-------- --------
Total liabilities 711,219 562,970
-------- --------
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 December 31, 2002 and March 31, 2002,
respectively) 522 522
Additional paid-in capital 22,756 22,525
Treasury stock, at cost (444,926 shares) (4,350) (4,350)
Common stock held by Employee Stock Ownership Plan ("ESOP") (961) (1,105)
Common stock awards under the Recognition and Retention Plan ("RRP") (136) (244)
Retained earnings 48,292 42,566
Accumulated other comprehensive income, net of taxes (Note 6) 2,123 1,101
-------- -------
Total stockholders' equity 68,246 61,015
-------- -------
Total liabilities and stockholders' equity $779,465 $623,985
======== ========
See accompanying notes to unaudited consolidated financial statements.
1
Sound Federal Bancorp 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,
----------------------- -----------------------------
2002 2001 2002 2001
------- ------- ------- -------
Interest and Dividend Income
Loans $ 7,527 $ 6,544 $ 22,767 $ 18,627
Mortgage-backed and other securities 2,130 2,651 6,177 8,747
Federal funds sold and other overnight deposits 158 234 390 728
Other earning assets 55 16 139 172
------- ------- -------- --------
Total interest and dividend income 9,870 9,445 29,473 28,274
------- ------- -------- --------
Interest Expense
Deposits 3,025 4,393 9,211 14,130
Borrowings 409 241 1,236 767
Other interest-bearing liabilities 38 16 75 53
------- ------- -------- --------
Total interest expense 3,472 4,650 10,522 14,950
------- ------- -------- --------
Net interest income 6,398 4,795 18,951 13,324
Provision for loan losses (Note 4) 50 75 175 125
------- ------- -------- --------
Net interest income after provision for loan losses 6,348 4,720 18,776 13,199
------- ------- -------- --------
Non-Interest Income
Service charges and fees 229 167 610 475
Gain on sale of real estate owned - 27 13 84
------- ------- -------- --------
Total non-interest income 229 194 623 559
------- ------- -------- --------
Non-Interest Expense
Compensation and benefits 1,650 1,205 4,701 3,681
Occupancy and equipment 495 441 1,324 1,134
Data processing service fees 237 273 724 680
Advertising and promotion 328 109 754 418
Other 620 507 1,879 1,377
------- ------- -------- --------
Total non-interest expense 3,330 2,535 9,382 7,290
------- ------- -------- --------
Income before income tax expense 3,247 2,379 10,017 6,468
Income tax expense 1,220 914 3,799 2,456
------- ------- -------- --------
Net income $ 2,027 $ 1,465 $ 6,218 $ 4,012
======= ======= ======== ========
Basic earnings per share (Note 3) $ 0.43 $ 0.32 $ 1.33 $ 0.87
======= ======= ======== ========
Diluted earnings per share (Note 3) $ 0.42 $ 0.31 $ 1.30 $ 0.86
======= ======= ======== ========
See accompanying notes to unaudited consolidated financial statements.
2
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended December 31, 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 - - - - - 6,218
Other comprehensive income (Note 6) - - - - - -
Total comprehensive income
Dividends paid ($0.25 per share) - - - - - (492)
Issuance of stock pursuant to stock option plan - 27 - - - -
Vesting of RRP shares - - - - 108 -
ESOP shares committed to be released for
allocation - 204 - 144 - -
------------ ------------ ----------- ------------- ------------- -----------
Balance at December 31, 2002 $ 522 $ 22,756 $ (4,350) $ (961) $ (136) $ 48,292
============ ============ =========== ============= ============= ===========
See accompanying notes to unaudited consolidated financial statements.
Accumulated
Other Total
Comprehensive Stockholders'
Income Equity
Balance at March 31, 2002 $ 1,101 $ 61,015
Net income - 6,218
Other comprehensive income (Note 6) 1,022 1,022
-----------
Total comprehensive income 7,240
Dividends paid ($0.25 per share) - (492)
Issuance of stock pursuant to stock option plan - 27
Vesting of RRP shares - 108
ESOP shares committed to be released for
allocation - 348
---------- ------------
Balance at December 31, 2002 $ 2,123 $ 68,246
========== ============
3
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Nine Months Ended
(In thousands) December 31,
------------------------------
2002 2001
------------ ----------
OPERATING ACTIVITIES
Net income $ 6,218 $ 4,012
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 175 125
Depreciation, amortization and accretion 1,035 (613)
ESOP and RRP expense 394 287
Income taxes 19 2,331
Gain on sale of real estate owned (13) (84)
Other adjustments, net 467 213
---------- ---------
Net cash provided by operating activities 8,295 6,271
---------- ---------
INVESTING ACTIVITIES
Purchases of securities available for sale (127,045) (37,879)
Proceeds from principal payments, maturities and calls of
securities available for sale 63,229 69,703
Disbursements for loan originations, net of principal repayments (16,639) (63,640)
Net decrease in certificates of deposit - 2,491
Proceeds from sales of real estate owned 127 400
Purchases of premises and equipment (538) (111)
---------- ---------
Net cash used in investing activities (80,866) (29,036)
---------- ---------
FINANCING ACTIVITIES
Net increase in deposits 72,512 35,261
Net increase in mortgagors' escrow funds 553 542
Repayment of borrowings (82) -
Increase in stock subscription proceeds 68,134 -
Issuance of stock pursuant to stock option plan 27 -
Purchases of treasury stock - (483)
Dividends paid on common stock (492) (377)
---------- ---------
Net cash provided by financing activities 140,652 34,943
---------- ---------
Increase in cash and cash equivalents 68,081 12,178
Cash and cash equivalents at beginning of period 26,778 40,849
---------- ---------
Cash and cash equivalents at end of period $ 94,859 $ 53,027
========== =========
SUPPLEMENTAL INFORMATION
Interest paid $ 10,459 $ 14,918
Income taxes paid (received) 2,316 (63)
Non-cash investing activities:
Loans transferred to real estate owned 171 253
Increase in due to brokers for securities purchased 6,195 -
========== =========
See accompanying notes to unaudited consolidated financial statements.
4
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 converted from a federally chartered
mutual savings association to a federally chartered stock savings association
(the "Conversion"). 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 in the Reorganization and Offering, 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. 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. The conversion was completed on January 6, 2003. Upon
conversion, shares of Sound Federal Bancorp common stock held by the public were
exchanged for shares of Sound Federal Bancorp, Inc., a Delaware holding company,
which became the parent company of Sound Federal Savings (the "Bank") (as part
of the transaction, Sound Federal Savings and Loan Association changed its name
to Sound Federal Savings). In addition, shares of Sound Federal Bancorp, Inc.
were offered for sale to the Bank's depositors and certain borrowers in a
subscription offering. The shares sold in the subscription offering represent
the ownership interest of the Mutual Holding Company.
Sound Federal Bancorp, Inc. sold 7,780,737 shares of common stock at $10.00
per share in the offering completed on January 6, 2003. In addition, each
outstanding share of common stock of Sound Federal Bancorp was converted into
2.7667 shares of the new corporation resulting in the issuance of 5,444,263
shares. A total of 13,225,000 shares are now outstanding as a result of the
offering and share exchange. Net cash proceeds from the offering amounted to
$70.1 million, including $5.1 million withdrawn from deposit accounts to fill
subscriptions.
2. Basis of Presentation
The presentation contained in this Form 10-Q reflects the financial
statements of Sound Federal Bancorp, the federal mid-tier corporation
predecessor to Sound Federal Bancorp, Inc. References to the Company, unless the
context indicates otherwise, refer to Sound Federal Bancorp and its consolidated
subsidiary, the Bank.
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.
5
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 on Form 10-K.
3. Earnings Per Share
Weighted average common shares used in calculating basic and diluted
earnings per share for the three months ended December 31, 2002 were 4,667,902
and 4,787,104, respectively. For the nine months ended December 31, 2002,
weighted average shares for calculating basic and diluted earnings per share
were 4,667,357 and 4,777,363, respectively.
For the three months ended December 31, 2001, weighted average common
shares used in calculating basic and diluted earnings per share were 4,622,016
and 4,677,645, respectively. For the nine months ended December 31, 2001,
weighted average shares for calculating basic and diluted earnings per share
were 4,631,398 and 4,679,120, respectively.
Diluted earnings per share 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 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.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Three Months Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
------------------------------ --------------------------- ---------
2002 2001 2002 2001 2002
------------- ------------- ------------- ------------ ---------
(in thousands)
Balance at beginning of period.... $ 2,346 $ 2,097 $ 2,221 $ 2,047 $ 2,047
Provision for loan losses......... 50 75 175 125 175
Mortgage loans charged off........ -- (13) -- (13) (15)
Recoveries........................ -- 12 -- 12 14
--------- ---------- --------- ---------- ----------
Balance at end of period.......... $ 2,396 $ 2,171 $ 2,396 $ 2,171 $ 2,221
========= ========= ========= ========= ==========
6
5. Borrowings
The Company had the following outstanding borrowings under securities
repurchase agreements with the Federal Home Loan Bank (the "FHLB") at December
31, 2002:
Coupon
------ Accrued
Maturity Date Rate Borrowings Interest Payable
------------- ---- ---------- ----------------
(dollars in thousands)
January 2008 (1) 5.42% $ 9,973 $ 94
December 2008(2) 4.72 5,000 --
March 2003 2.54 7,000 15
March 2004 3.57 7,000 21
March 2005 4.22 6,000
--------------
21
4.17% $ 34,973 $ 151
=========== =========
(1) Callable quarterly beginning January 2003
(2) Callable quarterly since November 2001
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 $13.7 million and mortgage-backed securities available for
sale with a carrying value of $23.4 million at December 31, 2002. Accrued
interest receivable on these securities totaled $316,000 at December 31, 2002.
6. Comprehensive Income (Loss)
Comprehensive income represents the sum of net income and items of "other
comprehensive income or loss" that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net unrealized
gain or loss on securities available for sale.
The Company's other comprehensive income (loss) represents net unrealized
holding gains and losses arising during the period on securities available for
sale, net of related income taxes, as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------- -------------------------
2002 2001 2002 2001
------------- ------------- ------------- ---------
(in thousands)
Net unrealized holding gain (loss) arising during
the period on securities available for sale.........$ 68 $ (1,153) $ 1,671 $ (642)
Related deferred income tax effect.................. (29) 438 (649) 337
----------- ------------- --------- ----------
Other comprehensive income (loss)................. $ 39 $ (715) $ 1,022 $ (305)
========= ========== ========= ==========
The Company's accumulated other comprehensive income, which is included in
stockholders' equity, is summarized as follows:
December 31, March 31,
2002 2002
---- ----
(In thousands)
Net unrealized holding gain on securities available for sale...... $ 3,633 $ 1,962
Additional minimum pension liability.............................. (170) (170)
Related deferred income taxes...................... (1,340) (691)
----------- --------
Accumulated other comprehensive income...................... $ 2,123 $ 1,101
=========== ========
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The presentation contained in this Form 10-Q reflects the financial
statements of Sound Federal Bancorp, the federal mid-tier corporation
predecessor to Sound Federal Bancorp, Inc. References to the Company, unless the
context indicates otherwise, refer to Sound Federal Bancorp and its consolidated
subsidiary, the Bank.
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. The conversion was completed on January 6, 2003. Upon
conversion, shares of Sound Federal Bancorp common stock held by the public were
exchanged for shares of Sound Federal Bancorp, Inc., a Delaware holding company,
which became the parent company of Sound Federal Savings (the "Bank") (as part
of the transaction, Sound Federal Savings and Loan Association changed its name
to Sound Federal Savings). In addition, shares of Sound Federal Bancorp, Inc.
were offered for sale to the Bank's depositors and certain borrowers in a
subscription offering. The shares sold in the subscription offering represent
the ownership interest of the Mutual Holding Company.
Sound Federal Bancorp, Inc. sold 7,780,737 shares of common stock at $10.00
per share in the offering completed on January 6, 2003. In addition, each
outstanding share of common stock of Sound Federal Bancorp was converted into
2.7667 shares of the new corporation resulting in the issuance of 5,444,263
shares. A total of 13,225,000 shares are now outstanding as a result of the
offering and share exchange. Net cash proceeds from the offering amounted to
$70.1 million, including $5.1 million withdrawn from deposit accounts to fill
subscriptions.
8
Financial Condition
Assets. Assets totaled $779.5 million at December 31, 2002 as compared to
$624.0 million at March 31, 2002. The $155.5 million increase in total assets is
primarily due to subscription proceeds received in the offering of $68.1 million
and a $72.5 million increase in deposits. Federal funds sold and other overnight
deposits increased $65.2 million to $85.1 million at December 31, 2002 as
compared to $19.8 million at March 31, 2002. The increase in Federal funds
reflects the subscription proceeds received in December 2002. These proceeds are
expected to be redeployed into higher yielding assets as market conditions
allow. Securities increased $71.6 million or 47.6% to $221.8 million at December
31, 2002 as compared to $150.2 million at March 31, 2002. Net loans increased
$15.8 million or 3.8% to $434.2 million at December 31, 2002 as compared to
$418.4 million at March 31, 2002.
Liabilities. Deposits totaled $592.4 million at December 31, 2002, as
compared to $519.9 million at March 31, 2002. Certificates of deposit increased
$51.0 million to $363.3 million from $312.3 million, savings and club accounts
increased $9.9 million to $128.5 million from $118.6 million and money market
and NOW accounts increased $11.6 million to $100.6 million from $89.0 million.
Borrowings totaled $35.0 million at December 31, 2002, as compared to $34.9
million at March 31, 2002. Borrowings at December 31, 2002 consisted of Federal
Home Loan Bank borrowings.
Subscription offering proceeds of $68.1 million at December 31, 2002
represents proceeds received in the Company's mutual-to-stock conversion. Such
funds were held in a special interest-bearing escrow account pending completion
of the conversion. This amount does not include amounts withdrawn from depositor
accounts to fill subscription orders, stock acquired by the Company's Employee
Stock Ownership Plan and offering expenses. The conversion was completed in
January 2003 and, at that time, net proceeds from the offering of $70.1 million
were recorded as additional stockholders' equity.
Amounts that were due to brokers for securities purchased amounted to $6.2
million at December 31, 2002 (none at March 31, 2002). This amount represents
securities purchased prior to December 31, 2002 with transaction settlement
dates in January 2003.
Stockholders' Equity. Total stockholders' equity increased $7.2 million or
11.7% to $68.2 million at December 31, 2002, as compared to $61.0 million at
March 31, 2002. The increase in stockholders' equity reflects $6.2 million in
net income and an increase of $1.0 million in accumulated other comprehensive
income, partially offset by dividends paid of $492,000. The December 31, 2002
balance does not include the net proceeds from the offering which were added to
stockholders' equity as of the close of the second-step conversion in January
2003. The Company's equity to assets ratio was 8.75% at December 31, 2002, as
compared to 9.78% at March 31, 2002.
Comparison of Results of Operations for the Three Months Ended
December 31, 2002 and 2001
Net income. Net income amounted to $2.0 million or diluted earnings per
share of $0.42 for the quarter ended December 31, 2002, as compared to $1.5
million, or $0.31 per diluted share for the quarter ended December 31, 2001. The
increase in net income for the quarter ended December 31, 2002 as compared to
the same quarter in the prior year is primarily attributable to a $1.6 million
increase in net interest income, partially offset by increases of $818,000 in
non-interest expense and $306,000 in income tax expense.
Interest Income. Interest income totaled $9.9 million during the quarter
ended December 31, 2002, as compared to $9.4 million for the same period in the
prior year. This increase was due to an increase of $123.6 million in average
interest-earning assets to $666.2 million during the quarter ended December 31,
2002, as compared to $542.6 million for the same quarter in the prior year,
offset partially by a 103 basis point decrease in the average yield on
interest-earning assets to 5.88% from 6.91%. The increase in the average balance
of interest-earning assets was due primarily to increases in loans and in
9
federal funds sold and other overnight deposits. The decrease in the average
yield on interest-earning assets reflects the origination of fixed-rate loans
and the repricing of adjustable-rate securities during recent periods of
declining interest rates. In addition, federal funds sold and other overnight
deposits, which earn less interest than longer-term interest-earning assets,
represent a larger portion of interest-earning assets. Federal funds sold and
other overnight deposits represented 8.6% of average interest-earning assets for
the quarter ended December 31, 2002, as compared to 6.9% for the same period in
the prior year. This increase is a result of the subscription proceeds received
in December 2002, as well as an increase in the prepayment of mortgage loans and
mortgage-backed securities as a result of the low interest rates.
Loans. Interest income on loans increased $1.0 million to $7.5 million
for the quarter ended December 31, 2002, as compared to $6.5 million for the
same quarter in 2001. This increase is due to an increase of $92.9 million in
the average balance of loans to $438.2 million from $345.3 million, partially
offset by a 71 basis point decrease in the yield earned to 6.81% from 7.52%.
The growth of the loan portfolio was principally a result of increased
originations as borrowers sought to take advantage of the lowest mortgage
interest rates in 40 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 $59.4 million of loans during the three
months ended December 31, 2002, including $19.0 million of adjustable rate
mortgage loans. 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 has continued in fiscal 2003. The yield on the loan
portfolio may decrease further until market interest rates begin to increase.
The Company has not historically sold mortgage loans it originates.
Mortgage-Backed Securities. Interest on mortgage-backed securities
decreased $474,000 to $1.6 million for the quarter ended December 31, 2002, as
compared to $2.1 million for the quarter ended December 31, 2001. This decrease
was due primarily to a decrease of 190 basis points in the average yield to
5.43% from 7.33%, partially offset by an increase of $5.4 million in the average
balance to $120.0 million from $114.6 million for the quarter ended December 31,
2001.
Other Securities. Interest on other securities decreased $47,000 to
$486,000 for the quarter ended December 31, 2002, as compared to $533,000 for
the same quarter in 2001, due to a 95 basis point decrease in the average yield
to 4.16% from 5.11%, which was partially offset by an increase of $5.0 million
in the average balance to $46.4 million. The decrease in the average yield
reflects the decrease in market interest rates during fiscal years 2002 and
2003.
Federal Funds Sold and Other Overnight Deposits. For the quarter ended
December 31, 2002, interest on Federal funds sold and other overnight deposits
decreased $76,000 to $158,000, reflecting a 140 basis point decrease in the
average yield earned to 1.10%, partially offset by an increase of $19.5 million
in the average balance to $57.0 million. The increase in the average balance is
due primarily to the subscription proceeds received in December and an
increase in the prepayment of mortgage loans and mortgage-backed securities. The
decrease in the average yield reflects the decrease in market interest rates
during fiscal 2003.
Interest Expense. Interest expense for the quarter ended December 31, 2002
totaled $3.5 million as compared to $4.7 million for the quarter ended December
31, 2001. The decrease in interest expense was due to a decrease in the average
cost of liabilities to 2.22% from 3.66%, resulting from declining market
interest rates during fiscal 2003. The average balance of interest-bearing
liabilities increased $111.6 million to $621.3 million for the quarter ended
December 31, 2002 from $509.7 million for the same quarter in the prior year.
Interest expense on certificates of deposit totaled $2.6 million for the
quarter ended December 31, 2002 as compared to $3.8 million for the same quarter
in 2001. The decrease was due primarily to a 200 basis point decrease in the
average cost to 2.86% from 4.86%, offset partially by an increase of $46.0
million in the average balance of certificates of deposit to $355.1 million from
$309.1 million in the same quarter last year. The decrease in the average cost
of certificates of deposit was the result of the decrease in interest rates
during fiscal years 2002 and 2003.
10
Interest expense on savings accounts amounted to $296,000 for the quarter
ended December 31, 2002, as compared to $352,000 for the quarter ended December
31, 2001. The decrease was the result of a 38 basis point decrease in the
average cost of savings accounts to 0.93% from 1.31%, offset partially by an
increase of $19.2 million in the average balance of savings accounts to $126.1
million.
Interest expense on other deposits (NOW and money market accounts) amounted
to $165,000 for the quarter ended December 31, 2002 as compared to $256,000 for
the same quarter in the prior year. The average cost of these accounts decreased
64 basis points to 0.74% from 1.38%, offset partially by an increase of $14.9
million in the average balance of these accounts.
For the quarter ended December 31, 2002, interest expense on borrowings
amounted to $409,000 as compared to $241,000 in the prior year. The average
balance of borrowings for the current quarter was $35.0 million and the average
cost was 4.64%. For the quarter ended December 31, 2001, the average balance of
borrowings was $14.8 million and the average cost was 6.44%. The increase in
Federal Home Loan Bank borrowings was used to fund loan originations.
Net Interest Income. Net interest income for the quarter ended December 31,
2002 amounted to $6.4 million, an increase of $1.6 million, or 33.9%, from $4.8
million for the same quarter in the prior year. The interest rate spread was
3.66% and 3.25% for the quarters ended December 31, 2002 and 2001, respectively.
The net interest margin for those periods was 3.81% and 3.51%, respectively.
The increases in interest rate spread and net interest margin are a result
of the cost of our interest-bearing liabilities decreasing faster than the rates
on our interest-earning assets such as loans or securities during the recent
period of declining interest rates. However, if market interest rates decrease
further, interest rate spread and net interest margin may decrease since
competitive factors could inhibit our ability to lower interest rates on deposit
accounts any further. The interest rate spread and net interest margin may also
come under pressure as the full effect of recent mortgage refinancings is
reflected in asset yields. In addition, if interest rates increase, the cost of
interest-bearing liabilities will increase faster than the rates on
interest-earning assets, also causing decreases in net interest rate spread and
net interest margin.
Provision for Loan Losses. Management regularly reviews the loan portfolio
and makes provisions for loan losses in amounts required to maintain the
allowance for loan losses in accordance with generally accepted accounting
principles. The allowance consists of losses that are both probable and
estimable at the date of the financial statements. The allowance for loan losses
consists of amounts allocated to specific nonperforming loans and to loans in
each major portfolio category. Loan categories such as single-family residential
mortgage loans, which represented 90.6% of total loans at December 31, 2002, are
generally evaluated on an aggregate or "pool" basis. The 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 $50,000 for the quarter ended December
31, 2002 as compared to $75,000 for the quarter ended December 31, 2001.
Non-performing loans amounted to $795,000, or 0.18% of total loans at December
31, 2002, as compared to $771,000, or 0.21% of total loans at December 31, 2001.
The allowance for loan losses amounted to $2.4 million, or 0.55% of total loans
at December 31, 2002 and $2.2 million, or 0.53% of total loans at March 31,
2002. There were no charge-offs for the quarter ended December 31, 2002 as
compared to $13,000 for the same period in the prior year. The increase in the
allowance for loan losses reflects our continued substantial origination of
adjustable-rate mortgage loans in the portfolio and overall portfolio growth.
Adjustable rate mortgage loans can involve greater credit risk than fixed rate
loans because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the risk of default by the borrower. At the
same time, the marketability of the underlying collateral may be adversely
affected by higher interest rates. At December 31, 2002, adjustable rate loans
accounted for 18.2% of total loans as compared to 15.0% at March 31, 2002 and
9.4% at December 31, 2001.
11
Non-Interest Income. Non-interest income consists principally of service
charges on deposit accounts, fees earned on the sale of investment products,
late charges on loans and various other service fees. Non-interest income
totaled $229,000 and $194,000 for the quarters ended December 31, 2002 and 2001,
respectively, and included service fees of $229,000 and $167,000 for the same
respective quarters. Service fees include fees of $32,000 and $53,000 generated
by Mamaroneck Advisors, Inc. during the quarters ended December 31, 2002 and
2001, respectively. Mamaroneck Advisors, Inc. is a subsidiary that sells
investment and insurance products.
Non-Interest Expense. Non-interest expense totaled $3.3 million for the
quarter ended December 31, 2002, as compared to $2.5 million for the quarter
ended December 31, 2001. This increase was due primarily to increases of
$445,000 in compensation expense, $219,000 in advertising and promotion expense
and $113,000 in other non-interest expense. The increases in non-interest
expense include operating expenses for the New Rochelle and Somers branches,
which were opened in December 2001 and July 2002, respectively, as well as
expenses related to internal growth to support lending and branch operations.
Income Taxes. Income tax expense amounted to $1.2 million and $914,000 for
the quarters ended December 31, 2002 and 2001, respectively. The effective tax
rates for those same periods were 37.6% and 38.4%, respectively.
Comparison of Results of Operations for the Nine Months Ended
December 31, 2002 and 2001
Net Income. For the nine months ended December 31, 2002, net income
amounted to $6.2 million or diluted earnings per share of $1.30 as compared to
$4.0 million, or $0.86 per diluted share for the same period in the prior year.
The increase in net income for the nine months ended December 31, 2002 is
primarily due to a $5.7 million increase in net interest income, partially
offset by increases of $2.1 million in non-interest expense and $1.3 million in
income tax expense.
Interest Income. Interest income totaled $29.5 million for the nine months
ended December 31, 2002, as compared to $28.3 million for the same period in the
prior year. The increase in interest income reflects an increase of $103.9
million in average interest-earning assets to $633.3 million as compared to
$529.4 million for the same period in the prior year, partially offset by a 91
basis point decrease in the average yield on interest-earning assets to 6.18%
from 7.09%. The increase in the average balance of interest-earning assets was
due primarily to increases in loans and in federal funds sold and other
overnight deposits, partially offset by a decrease in mortgage-backed
securities. The decrease in the average yield on interest-earning assets
reflects the origination of fixed-rate loans and the repricing of
adjustable-rate securities during recent periods of declining interest rates. In
addition, federal funds sold and other overnight deposits, which earn less
interest than longer-term interest-earning assets, represent a larger portion of
interest-earning assets. Federal funds sold and other overnight deposits
represented 6.5% of interest-earning assets for the nine months ended December
31, 2002, as compared to 5.7% for the same period in the prior year. This
increase is a result of the subscription proceeds received in December 2002, as
well as an increase in the prepayment of mortgage loans and mortgage-backed
securities as a result of the low interest rates.
Loans. For the nine months ended December 31, 2002, interest income on
loans amounted to $22.8 million as compared to $18.6 million for the same period
in the prior year. This increase was due to an increase of $106.3 million in the
average balance of loans, partially offset by a 57 basis point decrease in the
yield earned to 6.95% from 7.52%.
12
The growth of the loan portfolio was principally a result of increased
originations, discussed above. We originated $149.7 million of loans during the
nine months ended December 31, 2002. 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 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 for the
nine months ended December 31, 2002 decreased $2.2 million to $4.7 million as
compared to $6.9 million for the same period in the prior year. The decrease was
due to a decrease of $18.1 million in the average balance to $107.5 million and
a decrease of 151 basis points in the average yield to 5.76% from 7.27%. The
lower average balances in the current year reflect principal repayments and
prepayments on mortgage-backed securities, which were used to fund loan growth.
Other Securities. For the nine months ended December 31, 2002, interest on
other securities decreased $356,000 to $1.5 million as compared to $1.9 million
for the same period in the prior year. The decrease was due to a decrease in the
average yield of 154 basis points to 4.49% from 6.03%, partially offset by an
increase of $3.6 million in the average balance to $44.6 million for the nine
months ended December 31, 2002.
Federal Funds Sold and Other Overnight Deposits. For the nine months ended
December 31, 2002, interest on federal funds sold and other overnight deposits
decreased $338,000 to $390,000, reflecting a 193 basis point decrease in the
average yield to 1.25%, partially offset by an increase of $10.9 million in the
average balance to $41.3 million. The decrease in the average yield reflects the
decrease in market interest rates during fiscal 2003.
Interest Expense. For the nine months ended December 31, 2002, interest
expense on interest-bearing liabilities decreased $4.5 million to $10.5 million,
as compared to $15.0 million for the nine months ended December 31, 2001. The
decrease in interest expense was due to a 160 basis point decrease in the
average cost to 2.37% from 3.97%, partially offset by an increase of $90.2
million in the average balance of interest-bearing liabilities to $589.6
million.
For the nine months ended December 31, 2002, interest expense on
certificates of deposit amounted to $7.7 million as compared to $12.0 million
for the same period in the prior year. The decrease was due to a 226 basis point
decrease in the average cost to 3.04%, partially offset by a $35.4 million
increase in the average balance of certificates of deposit to $336.0 million as
compared to $300.6 million for the same period in the prior year.
For the nine months ended December 31, 2002, interest expense on savings
accounts decreased $383,000 to $936,000 as compared to the same period in the
prior year. The average cost of savings accounts decreased 62 basis points to
1.01%, partially offset by an increase of $15.7 million in the average balance
of savings accounts to $123.3 million for the same periods.
For the nine months ended December 31, 2002, interest expense on other
deposits amounted to $568,000 as compared to $805,000 for the same period in the
prior year. The average cost of these accounts decreased 62 basis points,
partially offset by an increase of $15.0 million in the average balance of these
accounts.
For the nine months ended December 31, 2002, interest expense on borrowings
was $1.2 million as compared to $767,000 for the same period in the prior year.
The increase in interest expense was due to an increase of $20.2 million in the
average balance of borrowings to $35.0 million, partially offset by a decrease
of 219 basis points in the average cost of borrowings to 4.69%. The increase in
borrowings was used to fund loan originations.
Net Interest Income. For the nine months ended December 31, 2002, net
interest income amounted to $19.0 million as compared to $13.3 million for the
same period in the prior year. The interest rate spread was 3.81% and 3.12% and
the net interest margin was 3.97% and 3.34% for the respective periods. The
increases in interest rate spread and net interest margin were the result of the
cost of our interest-bearing liabilities decreasing faster than the rates on our
interest-earning assets such as loans or securities during a period of declining
interest rates.
13
Provision for Loan Losses. The provision for loan losses was $175,000 for
the nine months ended December 31, 2002 as compared to $125,000 for the same
period in the prior year. Non-performing loans amounted to $795,000 or 0.18% of
total loans at December 31, 2002, as compared to $771,000 or 0.21% of total
loans at December 31, 2001. The allowance for loan losses amounted to $2.4
million or 0.55% of total loans at December 31, 2002 and $2.2 million or 0.53%
of total loans at March 31, 2002. There were no charge-offs during the nine
months ended December 31, 2002 as compared to $13,000 for the same period in the
prior year. The increase in the provision and allowance for loan losses reflects
our continued substantial origination of adjustable-rate mortgage loans and
overall portfolio growth. Adjustable-rate mortgage loans can involve greater
credit risk than fixed-rate loans because as interest rates increase, the
underlying payments by the borrower increase, thus increasing the risk of
default by the borrower. At the same time, the marketability of the underlying
collateral may be adversely affected by higher interest rates. At December 31,
2002, adjustable rate loans accounted for 18.2% of total loans as compared to
15.0% at March 31, 2002 and 9.4% at December 31, 2001.
Non-Interest Income. Non-interest income for the nine months ended December
31, 2002 totaled $623,000 as compared to $559,000 for the nine months ended
December 31, 2001, and included service fees of $610,000 and $475,000 for the
respective periods. The increase in service fees was due primarily to fees of
$139,000 and $101,000 from the sale of investment products for the respective
nine-month periods. Non-interest income for the nine months ended December 31,
2002 included a gain on the sale of real estate owned of $13,000 as compared to
$84,000 for the same period in 2001.
Non-Interest Expense. For the nine months ended December 31, 2002,
non-interest expense increased $2.1 million to $9.4 million as compared to $7.3
million for the same period in the prior year. This increase was due primarily
to increases of $1.0 million in compensation and benefits, $190,000 in occupancy
and equipment expense, $336,000 in advertising and promotion expense and
$502,000 in other non-interest expense. The increases in non-interest expense
include operating expenses for the New Rochelle and Somers branches, which were
opened in December 2001 and July 2002, respectively, as well as expenses related
to internal growth to support lending and branch operations. Occupancy and
equipment for the nine months ended December 31, 2001 includes $170,000 of
pre-tax refunds of real estate taxes related to branch locations.
Income Taxes. For the nine months ended December 31, 2002 and 2001, income
tax expense amounted to $3.8 million and $2.5 million, respectively. The
effective tax rates for those same periods were 37.9% and 38.0%, 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 nine months ended December
31, 2002, the Company originated loans totaling $149.7 million and purchased
$127.0 million of securities. These disbursements were funded in part by $63.2
million in principal payments, maturities and calls of securities, $132.1
million in loan principal repayments, an increase of $72.5 million in deposits
and subscriptions of $68.1 million received from the stock conversion. For the
year ended March 31, 2002, the Company originated $220.4 million of loans and
purchased $57.7 million of securities.
14
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, 2002, the Company had outstanding loan commitments of $62.9
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, 2002, totaled $285.7 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
December 31, 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
December 31, 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)
December 31, 2002
Tangible capital.................... $ 46,395 6.1% $ 11,338 1.5%
Tier I (core) capital............... 46,395 6.1 30,235 4.0 $ 37,793 5.0%
Risk-based capital:
Tier I........................... 46,395 13.3 20,959 6.0
Total............................ 48,791 14.0 27,945 8.0 34,931 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 13.5 25,035 8.0 31,294 10.0
Impact of Recent Accounting Pronouncements
Statement of Financial Accounting Standards (`SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," was issued in
December 2002 and amends SFAS No. 123, "Accounting for Stock-Based Compensation"
to provide alternative methods of transition for an entity that voluntarily
changes to the fair-value-based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 for fiscal years ending after December 31, 2002. Management does not expect
that the provisions of SFAS No. 148 will impact the Company's results of
operations or financial condition, although additional disclosures will be
provided in the March 31, 2003 consolidated financial statements.
15
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was issued in November 2002. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
interpretation also requires a guarantor to recognize, at fair value, a
liability for the obligation at inception of the guarantee (effective for
guarantees issued or modified after December 31, 2002). Management does not
expect that the provisions of FIN No. 45 will impact the Company's results of
operations or financial condition.
FIN No. 46, "Consolidation of Variable Interest Entities," was issued in
January 2003 and is an interpretation of Accounting Research Bulletin No. 51.
This interpretation specifies how a business enterprise should evaluate its
interests in a variable interest entity to determine whether to consolidate that
entity. A variable interest entity must be consolidated by its primary
beneficiary if the entity does not effectively disperse the risks involved.
Management does not expect that the provisions of FIN No. 46 will impact the
Company's results of operations or financial condition.
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, 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 December 31, 2002, 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 a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. 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
subsequent to the date of the evaluation performed by the Company's Chief
Executive Officer and Chief Financial Officer.
16
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
On December 30, 2002, the Company's stockholders voted on a Plan of
Conversion of the Mutual Holding Company from mutual to stock form. The vote on
the proposal was as follows: 4,012,397 for; 39,740 against; 3,174 abstain.
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) Reports on Form 8-K
None
17
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 13, 2003
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard P. McStravick, President and Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Sound Federal
Bancorp;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
February 13, 2003 /s/ Richard P. McStravick
- --------------------- -----------------------------------
Date President and Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Anthony J. Fabiano, Senior Vice President and Chief Financial Officer,
certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Sound Federal
Bancorp;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have: a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared; b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
"Evaluation Date"); and c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date; (5) The
registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
February 13, 2003 /s/ Anthony J. Fabiano
- --------------------- ----------------------------------
Date Senior Vice President
and Chief Financial Officer
Exhibit 99.1
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Richard P. McStravick, President and Chief Executive Officer, and Anthony
J. Fabiano, Senior Vice President and 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 of the Company on Form 10-Q
for the quarter ended December 31, 2002 and that to the best of his knowledge:
(1) the report fully complies with the requirements of Sections 13(a) and
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.
The purpose of this statement is solely to comply with Title 18, Chapter
63, Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
February 13, 2003 /s/ Richard P. McStravick
- --------------------- -----------------------------------
Date President and Chief Executive Officer
February 13, 2003 /s/ Anthony J. Fabiano
- --------------------- -----------------------------------
Date Senior Vice President and
Chief Financial Officer