SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended March 31, 2004 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.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3887679
- --------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1311 Mamaroneck Avenue, White Plains, New York 10605
- ---------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(914) 761-3636
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
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
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |X| NO |_|
As of September 30, 2003, there were issued and outstanding 13,170,133
shares of the Registrant's Common Stock. The aggregate value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the average
bid and asked prices of the Common Stock as of September 30, 2003 ($14.96) was
$169,064,000.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended March
31, 2004 (Parts II and IV).
2. Proxy Statement for the 2004 Annual Meeting of Stockholders (Parts I and
III).
PART I
ITEM 1. BUSINESS
General
Sound Federal Bancorp, Inc. Sound Federal Bancorp, Inc. is a Delaware
corporation which was organized in 2002 and is the successor to Sound Federal
Bancorp, a federal corporation. In January 2003, Sound Federal Bancorp, Inc.
became the holding company parent of Sound Federal Savings following the
completion of the "second step" mutual-to-stock conversion of Sound Federal
Bancorp, MHC. References to the Company include both Sound Federal Bancorp, Inc.
and Sound Federal Bancorp. The principal asset of the Company is its investment
in Sound Federal Savings (the "Bank"). The Company raised $70.1 million in net
proceeds in the second step conversion, of which $31.8 million was retained by
the Company and $38.3 million was invested in the Bank. At March 31, 2004, the
Company had total consolidated assets of $890.5 million, total deposits of
$708.3 million, total stockholders' equity of $137.1 million and 13,176,873
shares outstanding.
The second step conversion was accounted for as a change in corporate form
with no subsequent change in the historical carrying amounts of the Company's
assets and liabilities. Consolidated stockholders' equity increased by the net
cash proceeds from the offering. All references in the consolidated financial
statements and notes thereto to share data (including the number of shares and
per share amounts) have been adjusted to reflect the additional shares
outstanding as a result of the offering and the share exchange.
Sound Federal Savings. The Bank is a federally chartered savings
association headquartered in White Plains, New York. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was
organized as a New York chartered savings bank in 1891 and became a federally
chartered savings association in 1934. In October 1998, the Bank reorganized
into the mutual holding company form of organization. In July 2000, the Company
and the Bank completed the acquisition of Peekskill Financial Corporation and
its wholly owned subsidiary, First Federal Savings Bank ("Peekskill"). At March
31, 2004, the Bank operated from 11 locations in New York and Connecticut.
The Company's principal executive office is located at 1311 Mamaroneck
Avenue, White Plains, New York 10605, and its telephone number at that address
is (914) 761-3636.
The Company's Form 10-K and Annual Report are available on the Company's
website at www.soundfed.com.
Market Area
The Bank is a community-oriented financial institution that offers a
variety of financial products and services from its main office and branch
offices. The Bank's primary lending areas are the New York counties of
Westchester and Rockland, and Fairfield County, Connecticut. Most of the Bank's
deposit customers are residents of Westchester County. The Bank also obtains
deposits from persons in Rockland County and Putnam County in New York and
Fairfield County, Connecticut. The Bank's market area consists of middle income
and upper income communities. The local economy is not dependent upon any single
employer, but rather is affected by the general economy of the New York City
metropolitan area.
1
Lending Activities
Historically, the Bank's principal lending activity has been the
origination of fixed-rate first mortgage loans for the purchase or refinancing
of one-to-four family residential real property. In fiscal 2002, the Bank began
to originate adjustable-rate mortgage loans with fixed-rates for initial terms
of three, five, seven and ten years. After the initial terms, the interest rate
on the loans adjusts annually. The Bank has thus far retained all loans that it
has originated. One-to-four family residential mortgage loans represented $375.7
million, or 78.3 %, of the Bank's loan portfolio at March 31, 2004. Home equity
lines of credit represented $35.2 million, or 7.3 %, of the Bank's loan
portfolio at March 31, 2004. The Bank also offers multi-family mortgage loans,
commercial mortgage loans and construction loans. Multi-family mortgage loans
totaled $8.5 million, or 1.8% of the loan portfolio, at March 31, 2004.
Commercial mortgage loans totaled $43.2 million, or 9.0% of the loan portfolio,
at March 31, 2004. Construction loans totaled $13.7 million, or 2.9% of the loan
portfolio, at March 31, 2004. The Bank also makes consumer loans, which
primarily consist of secured personal loans and automobile loans. Consumer loans
totaled $2.6 million, or 0.5% of the loan portfolio, at March 31, 2004.
Commercial loans amounted to $798,000, or 0.2% of the loan portfolio, at March
31, 2004.
2
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated.
At March 31,
-----------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Mortgage loans:
One-to four-family ............. $375,714 78.3% $343,608 80.2% $334,683 79.7% $221,617 75.1% $138,375 76.1%
Home equity lines of credit .... 35,185 7.3 44,364 10.4 47,889 11.4 47,315 16.0 24,337 13.4
Multi-family ................... 8,472 1.8 7,118 1.7 8,347 2.0 3,959 1.3 4,621 2.5
Commercial ..................... 43,153 9.0 27,866 6.5 23,701 5.6 16,771 5.7 10,795 5.9
Construction ................... 13,723 2.9 4,117 0.9 3,733 0.9 3,659 1.2 2,922 1.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans ............. 476,247 99.3 427,073 99.7 418,353 99.6 293,321 99.3 181,050 99.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans ................... 2,598 0.5 1,551 0.3 1,469 0.4 1,900 0.7 820 0.5
Commercial loans ................. 798 0.2 -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans .................. 479,643 100.0% 428,624 100.0% 419,822 100.0% 295,221 100.0% 181,870 100.0%
===== ===== ===== ===== =====
Allowance for loan losses ........ (2,712) (2,442) (2,221) (2,047) (1,188)
Deferred loan origination
costs, net ...................... 1,524 1,502 767 633 250
-------- -------- -------- -------- --------
Total loans, net ............... $478,455 $427,684 $418,368 $293,807 $180,932
======== ======== ======== ======== ========
3
The following table sets forth the composition of the Bank's loan
portfolio by fixed and adjustable rates at the dates indicated.
At March 31,
-----------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed rate loans
Mortgage loans:
One-to four-family ............ $251,916 52.5% $259,870 60.7% $272,203 64.8% $215,202 72.9% $135,912 74.7%
Home equity lines of credit ... 30,922 6.4 44,229 10.3 47,724 11.4 46,908 15.9 23,940 13.2
Multi-family .................. 8,472 1.8 7,118 1.7 8,347 2.0 3,959 1.3 4,621 2.5
Commercial .................... 41,086 8.6 27,109 6.3 23,296 5.6 16,771 5.7 10,740 5.9
Construction .................. 13,723 2.9 4,117 0.9 3,733 0.9 3,659 1.2 2,922 1.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans ........ 346,119 72.2 342,443 79.9 355,303 84.7 286,499 97.0 178,135 97.9
Consumer loans .................. 2,598 0.5 1,551 0.4 1,469 0.3 1,900 0.7 820 0.5
Commercial loans ................ 798 0.2 -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed rate loans .......... 349,515 72.9 343,994 80.3 356,772 85.0 288,399 97.7 178,955 98.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable rate loans
Mortgage loans:
One-to four-family(1) ......... 123,798 25.8 83,738 19.5 62,480 14.9 6,415 2.2 2,463 1.4
Home equity lines of credit ... 4,263 0.9 135 -- 165 -- 407 0.1 397 0.2
Commercial .................... 2,067 0.4 757 0.2 405 0.1 -- -- 55 --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable rate loans.. 130,128 27.1 84,630 19.7 63,050 15.0 6,822 2.3 2,915 1.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans ................... 479,643 100.0% 428,624 100.0% 419,822 100.0% 295,221 100.0% 181,870 100.0%
===== ===== ===== ===== =====
Allowance for loan losses ....... (2,712) (2,442) (2,221) (2,047) (1,188)
Deferred loan origination
costs, net ..................... 1,524 1,502 767 633 250
-------- -------- -------- -------- --------
Total loans, net .............. $478,455 $427,684 $418,368 $293,807 $180,932
======== ======== ======== ======== ========
- ----------
(1) These loans have fixed rates for initial terms of three, five, seven and
ten years and then subsequent one year rate adjustment periods.
4
Loan Maturity Schedule. The following table summarizes the contractual
maturities of the Bank's loan portfolio at March 31, 2004. Loans with adjustable
or renegotiable interest rates are shown as maturing in the period during which
the interest rate adjusts. The table reflects the entire unpaid principal
balance of a loan in the maturity period that includes the final payment date,
and accordingly, does not reflect the effects of scheduled payments, possible
prepayments or enforcement of due-on-sale clauses.
Multi-family,
Commercial Consumer and
One-to-Four Family(1) Mortgage Construction Commercial Total
-------------------- ----------------- ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During the Years
Ending March 31,
2005(2) $ 7,221 4.54% $ 3,015 5.64% $ 12,715 6.24% $ 1,067 6.42% $ 24,018 5.66%
2006 3,355 5.40 1,230 6.57 1,008 7.00 122 7.46 5,715 5.98
2007 23,407 4.90 15 7.00 -- -- 1,696 7.02 25,118 5.05
2008 to 2010 76,231 5.18 1,030 6.56 -- -- 1,160 6.23 78,421 5.21
2011 to 2014 54,978 5.62 6,007 7.11 -- -- 5,384 7.44 66,369 5.90
2015 to 2019 121,493 5.44 10,359 7.13 -- -- 584 5.84 132,436 5.57
2020 and following 124,214 6.79 21,497 7.00 -- -- 1,855 7.20 147,566 6.82
-------- -------- -------- -------- --------
Total $410,899 5.78% $ 43,153 6.93% $ 13,723 6.30% $ 11,868 7.05% $479,643 5.93%
======== ======== ======== ======== ========
- ----------
(1) Includes home equity lines of credit.
(2) Includes demand loans having no stated maturity.
The following table sets forth the dollar amount of all fixed rate and
adjustable rate loans at March 31, 2004 that are contractually due after March
31, 2005.
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
One-to-four family ......................... $282,629 $121,049 $403,678
Commercial mortgage ........................ 40,138 -- 40,138
Construction ............................... 1,008 -- 1,008
Multi-family, consumer and commercial ...... 10,801 -- 10,801
-------- -------- --------
Total ................................... $334,576 $121,049 $455,625
======== ======== ========
One-to-Four Family Residential Loans. The Bank's primary lending activity
is the origination of one-to-four family residential mortgage loans secured by
property located in the Bank's primary lending area. Generally, one-to-four
family residential mortgage loans are made in amounts up to 95% of the lesser of
the appraised value or purchase price of the property, with private mortgage
insurance required for loans with a loan-to-value ratio over 80%. Generally,
fixed-rate loans are originated for terms of up to 30 years. One-to-four family
loans are offered with a monthly or bi-weekly payment feature. The Bank has not
historically sold loans that it originates.
The Bank originates fixed-rate loans, and also offers adjustable-rate
mortgage loans with a fixed rate for initial terms of three, five, seven and ten
years and then subsequent one year rate adjustment periods. At March 31, 2004,
67.1% of the Bank's one-to-four family residential loans were fixed-rate loans,
compared to 75.6% at March 31, 2003. The interest rate on adjustable-rate
mortgage loans is indexed to the one year constant maturity Treasury bill. The
Bank's adjustable-rate mortgage loans currently provide for maximum rate
adjustments of 2.00% per year and 5.00% over the term of the loan. The Bank does
not offer adjustable-rate mortgage loans with initial interest rates that are
below market, referred to as "teaser rates." Residential adjustable-rate
mortgage loans amortize over terms of up to 30 years.
5
Adjustable-rate mortgage loans decrease the risk associated with changes
in market interest rates by periodically repricing, but involve other risks
because as interest rates increase, the underlying payments by the borrower
increase, thus increasing the potential for default by the borrower. At the same
time, the marketability of the underlying collateral may be adversely affected
by higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the maximum periodic and lifetime interest rate adjustment
permitted by the terms of the adjustable-rate mortgage loans, and, therefore, is
potentially limited in effectiveness during periods of rapidly rising interest
rates. At March 31, 2004, 32.9% of the Bank's one-to-four family residential
loans had adjustable interest rates.
All one-to-four family residential mortgage loans originated by the Bank
include "due-on-sale" clauses, which give the Bank the right to declare a loan
immediately due and payable in the event that, among other things, the borrower,
without the consent of the Bank, sells or otherwise disposes of the real
property subject to the mortgage and the loan is not repaid.
All one-to-four family residential mortgage borrowers are required to
obtain title insurance. We also require homeowner's insurance, fire and casualty
insurance and, where appropriate, flood insurance.
At March 31, 2004, $375.7 million, or 78.3% of the Bank's loan portfolio,
consisted of one-to-four family residential loans. Approximately $1.4 million of
such loans (representing 6 loans) were nonperforming loans at that date. See
"Nonperforming and Problem Assets."
Home Equity Lines of Credit. The Bank offers home equity lines of credit
that are secured by the borrower's primary residence. The borrower is permitted
to draw on the home equity line of credit for a limited period of time (up to
nine years) after it is originated and may repay the outstanding balance over a
term not to exceed 24 years from the date the line of credit is originated. Home
equity lines of credit are generally underwritten under the same criteria that
the Bank uses to underwrite one-to-four family fixed rate loans. Home equity
lines of credit may be underwritten with a loan to value ratio of 80% when
combined with the principal balance of the existing mortgage loan, however, the
maximum principal amount of a home equity line of credit may not exceed $500,000
unless approved by the Board of Directors. The Bank appraises the property
securing the loan at the time of the loan application in order to determine the
value of the property securing the home equity line of credit. At the time we
close a home equity line of credit, we file a mortgage to protect our security
interest in the underlying collateral. At March 31, 2004, the outstanding
balances of home equity lines of credit totaled $35.2 million, or 7.3% of the
Bank's loan portfolio. Non-performing home equity lines of credit were $617,000
at March 31, 2004.
Commercial Mortgage Loans. At March 31, 2004, $43.2 million, or 9.0%, of
the total loan portfolio consisted of commercial mortgage loans. Commercial
mortgage loans are secured by office buildings, religious facilities and other
commercial properties. The Bank generally originates fixed-rate commercial
mortgage loans with maximum terms of up to 20 years. The maximum loan-to-value
ratio of commercial mortgage loans is 75%. At March 31, 2004, the largest
commercial mortgage loan had a principal balance of $2.8 million and was secured
by a combination of retail stores, professional offices and residential units.
As of March 31, 2004, there were no nonperforming commercial mortgage loans.
In underwriting commercial mortgage loans, the Bank reviews a number of
factors, such as the expected net operating income generated by the real estate
to ensure that it is at least 125% of the amount of the monthly debt service;
the age and condition of the collateral; the financial resources and income
level of the borrower; and the borrower's business experience. Personal
guarantees are obtained in most cases from commercial mortgage borrowers.
6
Loans secured by commercial real estate generally are larger than
one-to-four family residential loans and involve a greater degree of risk.
Commercial mortgage loans can involve large loan balances to single borrowers or
groups of related borrowers. Payments on these loans depend to a large degree on
the results of operations and management of the properties or underlying
businesses, and may be affected to a greater extent by adverse conditions in the
real estate market or in the economy in general. Accordingly, the nature of
commercial real estate loans makes them more difficult for Bank management to
monitor and evaluate.
Multi-Family Mortgage Loans. Loans secured by multi-family real estate
totaled $8.5 million, or 1.8% of the total loan portfolio at March 31, 2004.
Multi-family mortgage loans generally are secured by multi-family rental
properties (including mixed-use buildings and walk-up apartments). At March 31,
2004, the Bank had 21 multi-family mortgage loans, the largest of which had a
principal balance of $1.5 million. Multi-family mortgage loans generally are
offered with both fixed and adjustable interest rates, although in the current
interest rate environment the Bank has not recently originated adjustable rate
multi-family loans. Multi-family loans are originated for terms of up to 30
years. There were no non-performing multi-family mortgage loans at March 31,
2004.
In underwriting multi-family mortgage loans, the Bank considers a number
of factors, which include the net operating income projected to be generated by
the real estate to ensure that it is at least 125% of the amount of the monthly
debt service; the age and condition of the collateral; the financial resources
and income level of the borrower; and the borrower's experience in owning or
managing similar properties. Multi-family mortgage loans are originated in
amounts up to 75% of the appraised value of the property securing the loan.
Personal guarantees are obtained in most cases from multi-family mortgage
borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate typically depends upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Construction Lending. The Bank originates construction loans to local
builders, generally with whom it has an established relationship, and to
individuals who have a contract with a builder for the construction of their
residence. Construction loans are disbursed as certain portions of the project
are completed. The Bank's construction loans are secured by residential and
commercial properties located in the Bank's market area. At March 31, 2004, the
Bank had construction loans totaling $13.7 million, or 2.9% of total loans.
There were no non-performing construction loans at March 31, 2004.
The Bank's construction loans to home builders generally have fixed
interest rates, are typically for a term of 12 months and have a maximum loan to
value ratio of 80%. Loans to builders are made on either a pre-sold or
speculative (unsold) basis. Construction loans to individuals are generally
originated pursuant to the same policy guidelines regarding loan to value ratios
and interest rates that are used in connection with loans secured by one-to-four
family residential real estate. Construction loans to individuals who intend to
occupy the completed dwelling may be converted to permanent financing after the
construction phase is completed.
The Bank generally limits the number of outstanding loans on unsold homes
under construction to individual builders, with the amount dependent on the
financial strength, including existing
7
borrowings, of the builder and prior sales of homes in the development. Prior to
making a commitment to fund a construction loan, the Bank requires an appraisal
of the property from a qualified appraiser approved by the Bank, and all
appraisals are reviewed by management. Loan proceeds are disbursed after an
inspection of the property based on a percentage of completion. Monthly payment
of accrued interest is required.
Construction loans are generally considered to involve a higher degree of
risk than permanent mortgage loans because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. If the estimate of construction costs is
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion is inaccurate, the value of the property may be
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct residential properties for
which no purchaser has been identified carry more risk because the repayment of
the loan depends on the builder's ability to sell the property prior to the time
that the construction loan is due. The Bank has attempted to minimize the
foregoing risks by, among other things, limiting its construction lending
primarily to residential properties and generally requiring personal guarantees
from the principals of its corporate borrowers.
Consumer Lending. The Bank's consumer loans primarily consist of secured
personal loans, passbook loans and home improvement loans. At March 31, 2004,
consumer loans totaled $2.6 million, or 0.5% of the total loan portfolio.
Non-performing consumer loans totaled $5,000 at that date.
Consumer loans generally have shorter terms and higher interest rates than
one-to-four family mortgage loans. While consumer loans expand the products and
services offered by the Bank, these loans generally involve greater credit risk
than residential mortgage loans because of the difference in the underlying
collateral. Repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance because of the
greater likelihood of damage to, loss of or depreciation in the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a deficiency judgment.
In addition, consumer loan collections depend on the borrower's personal
financial stability. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
The Bank's underwriting procedures for consumer loans include an
assessment of the applicant's credit history and the ability to meet existing
and proposed debt obligations. Although the applicant's creditworthiness is the
primary consideration, the underwriting process also includes a comparison of
the value of the security, to the proposed loan amount.
Commercial Loans. The Bank began originating commercial loans in fiscal
2004. These loans are generally secured by equipment, fixed assets or collateral
other than real estate. Commercial loans are originated in amounts up to $2.0
million with terms of up to 10 years.
Commercial loans generally have shorter terms and higher interest rates
than mortgage loans, but involve greater credit risk than mortgage loans
because of the nature of the underlying collateral. Commercial loans amounted to
$798,000 or 0.2% at the total loan portfolio at March 31, 2004. There were no
non-performing commercial loans at that date.
Loan Approval Procedures and Authority. The loan approval process is
intended to assess the borrower's ability to repay the loan, the viability of
the loan, and the adequacy of the value of the property that will secure the
loan. To assess the borrower's ability to repay, the Bank reviews the
8
employment and credit history and information on the historical and projected
income and expenses of borrowers. Loans of up to $3.0 million may be approved by
two of three designated lending officers acting together. All loans (including
aggregate loans to one borrower) in excess of $3.0 million must be approved by
the Company's Loan Committee. In addition, the Board of Directors reviews and
confirms all loan commitments. The Loan Committee is comprised of two lending
officers, the Chief Executive Officer and the Chief Financial Officer. The Bank
will generally not originate a loan with a principal balance in excess of $3.0
million.
The Bank generally requires appraisals of real property securing loans.
Appraisals are performed by independent appraisers who are licensed by the
state, and who are approved by the Board of Directors annually. The Bank
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan. Where appropriate, flood insurance is also
required. Private mortgage insurance is required for all residential mortgage
loans with loan-to-value ratios greater than 80%.
Origination of Loans. Generally, the Bank originates mortgage loans
pursuant to underwriting standards that generally conform with the Fannie Mae
guidelines. Loan origination activities are primarily concentrated in
Westchester County, New York and Fairfield County, Connecticut. New loans are
generated primarily from mortgage brokers, customer referrals, local real estate
agents, local attorneys and other parties with whom the Bank does business, and
from the efforts of employees and advertising.
9
The following table sets forth the Bank's loan originations, principal
repayments and other portfolio activity for the periods indicated. The Bank did
not purchase or sell any loans during the periods indicated.
For the Year Ended March 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
(In Thousands)
Unpaid principal balances at
beginning of year ...................... $ 428,624 $ 419,822 $ 295,221
--------- --------- ---------
Loans originated by type:
Fixed rate:
Mortgage loans:
One-to four-family ................ 50,853 100,044 107,782
Advances under home equity lines
of credit ........................ 20,455 26,444 27,214
Multi-family ...................... 1,500 490 4,823
Commercial ........................ 18,456 10,927 15,288
Construction ...................... 17,415 10,606 4,892
Consumer loans ....................... 2,474 1,585 1,244
Commercial loans ..................... 800 -- --
--------- --------- ---------
Total fixed rate ................ 111,953 150,096 161,243
Adjustable rate mortgage loans:
One-to four-family ................... 69,057 65,340 58,609
Advances under home equity lines
of credit ........................... 4,263 -- --
Commercial ........................... 1,380 855 --
--------- --------- ---------
Total loans originated ............ 186,653 216,291 219,852
--------- --------- ---------
Principal repayments:
Mortgage loans ....................... (134,205) (205,761) (93,308)
Consumer and commercial loans ........ (1,424) (1,503) (1,675)
--------- --------- ---------
Total principal repayments ......... (135,629) (207,264) (94,983)
--------- --------- ---------
Charge-offs ............................. (5) (54) (15)
Transfers to real estate owned .......... -- (171) (253)
--------- --------- ---------
Unpaid principal balances at
end of year ............................ 479,643 428,624 419,822
Allowance for loan losses ............... (2,712) (2,442) (2,221)
Deferred loan origination
costs, net ............................. 1,524 1,502 767
--------- --------- ---------
Net loans at end of year ................ $ 478,455 $ 427,684 $ 418,368
========= ========= =========
Nonperforming and Problem Assets
After a mortgage loan becomes fifteen days past due, the Bank delivers a
computer generated delinquency notice to the borrower. When loans become 30 days
past due, the Bank sends additional delinquency notices and attempts to make
personal contact by letter or telephone with the borrower to establish
acceptable repayment schedules. The Board of Directors is advised of all loans
delinquent 60 days or more. The Board will consider the borrower's willingness
to comply with the loan terms, the Bank's actions to date, and the value of the
loan collateral in determining what actions, if any, are to be taken. Generally,
when a mortgage loan is 90 days delinquent and no acceptable resolution has been
reached, the Bank will send the borrower a demand letter. If the delinquency is
not cured within 120 days, the Bank will generally refer the matter to its
attorney. Generally, management will begin foreclosure proceedings on any loan
after it is delinquent over 120 days unless management is engaged in active
discussions with the borrower.
Mortgage loans are reviewed on a regular basis and such loans are placed
on nonaccrual status when they become 90 days delinquent. When loans are placed
on nonaccrual status, unpaid accrued
10
interest is fully reserved, and further income is recognized only to the extent
of interest payments actually received.
Nonperforming Assets. The table below sets forth the amounts and
categories of the Bank's nonperforming assets at the dates indicated. At each
date presented, the Bank had no troubled debt restructurings (which involve
forgiving a portion of interest or principal or making loans at rates
significantly less than current market rates).
At March 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars In Thousands)
Nonaccrual loans:
Mortgage loans:
One-to-four family(1) ................................ $1,976 $ 467 $ 755 $ 933 $ 969
Consumer loans ........................................ 5 10 -- -- --
------ ------ ------ ------ ------
Total ................................................ 1,981 477 755 933 969
Real estate owned:
One-to-four family properties ......................... -- -- 114 197 55
------ ------ ------ ------ ------
Total nonperforming assets ............................ $1,981 $ 477 $ 869 $1,130 $1,024
====== ====== ====== ====== ======
Ratios:
Nonperforming loans to total loans ...................... 0.41% 0.11% 0.18% 0.31% 0.53%
Nonperforming assets to total assets .................... 0.22% 0.06% 0.14% 0.20% 0.31%
- ----------
(1) Includes home equity lines of credit.
For the year ended March 31, 2004, gross interest income that would have
been recorded had the nonaccrual loans been current in accordance with their
original terms amounted to $124,000. Interest amounts on such loans that were
included in interest income totaled $71,000 for the year ended March 31, 2004.
11
The following table sets forth certain information with respect to the Bank's
loan portfolio delinquencies at the dates indicated.
Loans Delinquent For:
-----------------------------------------------
60-89 Days 90 Days and Over Total
------------------- ------------------ ------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
At March 31, 2004
Mortgage loans:
One-to four-family ........................ 8 $1,412 6 $1,359 14 $2,771
Home equity lines of credit ............... -- -- 6 617 6 617
Consumer loans .............................. -- -- 7 5 7 5
--- ------ --- ------ --- ------
Total ..................................... 8 $1,412 19 $1,981 27 $3,393
=== ====== === ====== === ======
At March 31, 2003
Mortgage loans:
One-to four-family ........................ 10 $ 917 5 $ 449 15 $1,366
Home equity lines of credit ............... 2 228 1 18 3 246
Consumer loans .............................. 2 1 5 10 7 11
--- ------ --- ------ --- ------
Total ..................................... 14 $1,146 11 $ 477 25 $1,623
=== ====== === ====== === ======
At March 31, 2002
Mortgage loans:
One-to four-family ........................ 9 $1,040 9 $ 690 18 $1,730
Home equity lines of credit ............... 1 75 2 65 3 140
Consumer loans .............................. -- -- -- -- -- --
--- ------ --- ------ --- ------
Total ..................................... 10 $1,115 11 $ 755 21 $1,870
=== ====== === ====== === ======
Classified Assets. Federal regulations and the Bank's Asset Classification
Policy provide for the classification of loans and other assets, such as debt
and equity securities, considered by the Office of Thrift Supervision to be of
lesser quality as "substandard," "doubtful" or "loss" assets. An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectable"
and of such little value that their continuance as assets is not warranted.
In addition to the adverse classifications described above, the Bank
separately classifies loans that are delinquent for between 60 and 89 days as
"special mention." At March 31, 2004, $1.4 million of loans were classified as
special mention.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the Office of Thrift Supervision, which can
order the establishment of additional general or specific loss allowances.
12
The table below sets forth the amount and categories of adversely
classified assets at the dates indicated. No assets were classified as loss at
the dates indicated.
At March 31,
----------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In Thousands)
Substandard loans:
One-to-four family(1) ........... $1,976 $ 467 $ 755 $ 933 $ 790
Consumer ........................ -- 10 -- -- --
Doubtful loans:
One-to-four family .............. -- -- -- -- 179
Consumer ........................ 5 -- -- -- --
------ ------ ------ ------ ------
Total classified loans ............ 1,981 477 755 933 969
Real estate owned:
Substandard ..................... -- -- 114 197 --
Doubtful ........................ -- -- -- -- 55
------ ------ ------ ------ ------
Total classified assets ......... $1,981 $ 477 $ 865 $1,130 $1,024
====== ====== ====== ====== ======
- ----------
(1) Includes home equity lines of credit.
Allowance for Loan Losses
Management regularly reviews the Bank'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. All
loan losses are charged to the allowance and all recoveries are credited to it.
Additions to the allowance for loan losses are provided by charges to income
based on various factors which, in management's judgment, deserve current
recognition in estimating losses in the loan portfolio and that are both
probable and estimable. The allowance for loan losses consists of amounts
specifically allocated to nonperforming loans and potential problem loans (if
any) as well as allowances determined for each major loan category. Loan
categories, such as one-to-four family residential mortgages and home equity
lines of credit (which represent a combined 85.6% of our total loans at March
31, 2004) are generally evaluated on an aggregate or "pool" basis. The Bank's
allowance for loan losses is predominantly determined on a pool basis by
applying loss factors to the current balances of the various loan categories.
The loss factors are determined by management based on an evaluation of our
historical loss experience, delinquency trends, volume and type of lending
conducted, and the impact of current economic conditions in our market area. The
carrying values of loans are periodically evaluated and the allowance is
adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
13
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
For the Years Ended March 31,
-------------------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
(Dollars In Thousands)
Balance at beginning of year ........... $ 2,442 $ 2,221 $ 2,047 $ 1,188 $ 1,094
------- ------- ------- ------- -------
Provision for loan losses .............. 275 275 175 208 100
Allowance transferred in acquisition
of Peekskill ......................... -- -- -- 784 --
Charge-offs:
One-to-four family mortgage loans .... -- (54) (15) (162) (6)
Consumer loans ....................... (5) -- -- -- --
Recoveries:
One-to-four family mortgage loans .... -- -- 14 29 --
------- ------- ------- ------- -------
Net charge-offs ...................... (5) (54) (1) (133) (6)
------- ------- ------- ------- -------
Balance at end of year ............... $ 2,712 $ 2,442 $ 2,221 $ 2,047 $ 1,188
======= ======= ======= ======= =======
Ratios:
Allowance for loan losses to
nonperforming loans .................. 136.90% 511.95% 294.17% 219.40% 122.60%
Allowance for loan losses to
total loans .......................... 0.57% 0.57% 0.53% 0.69% 0.65%
14
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of the allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.
At March 31,
----------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------------- ----------------------------------- --------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Loan Category Loan Category Loan Category
Loan Loss Balances to Total Loan Loss Balances to Total Loan Loss Balances to Total
Allowance by Category Loans Allowance by Category Loans Allowance by Category Loans
--------- ----------- -------- --------- ----------- -------- --------- ----------- --------
(Dollars in Thousands)
Mortgage loans:
One-to-four family(1) $ 1,327 $410,899 85.6% $ 1,224 $387,972 90.6% $ 1,090 $382,572 91.1%
Multi-family ........ 150 8,472 1.8 150 7,118 1.7 150 8,347 2.0
Commercial .......... 935 43,153 9.0 828 27,866 6.5 741 23,701 5.6
Construction ........ 100 13,723 2.9 90 4,117 0.9 90 3,733 0.9
Consumer loans ........ 150 2,598 0.5 150 1,551 0.3 150 1,469 0.4
Commercial loans ...... 50 798 0.2 -- -- -- -- -- --
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total ............ $ 2,712 $479,643 100.0% $ 2,442 $428,624 100.0% $ 2,221 $419,822 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
At March 31,
-----------------------------------------------------------------------
2001 2000
--------------------------------- -----------------------------------
Percent Percent
of Loans of Loans
in Each in Each
Loan Category Loan Category
Loan Loss Balances to Total Loan Loss Balances to Total
Allowance by Category Loans Allowance by Category Loans
--------- ----------- -------- --------- ----------- --------
(Dollars in Thousands)
Mortgage loans:
One-to-four family(1) $ 1,009 $268,932 91.1% $ 633 $162,712 89.5%
Multi-family ........ 150 3,959 1.3 125 4,621 2.5
Commercial........... 600 16,771 5.7 300 10,795 5.9
Construction ........ 90 3,659 1.2 70 2,922 1.6
Consumer loans ........ 198 1,900 0.7 60 820 0.5
-------- -------- ----- -------- -------- -----
Total ............ $ 2,047 $295,221 100.0% $ 1,188 $181,870 100.0%
======== ======== ===== ======== ======== =====
- ----------
(1) Includes home equity lines of credit.
Investment Activities
The Bank's investments include mortgage-backed securities, collateralized
mortgage obligations, U.S. Government and agency securities, federal funds sold,
mutual funds, securities issued by government sponsored enterprises ("GSEs") and
FHLB stock. Management invests a significant portion of the Bank's assets in
short-term investments and adjustable rate mortgage-backed securities in order
to increase the Bank's ability to reinvest assets in higher yielding securities
in a rising interest rate environment. Under Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, entities were permitted to reclassify securities from the
held-to-maturity category to the available-for-sale category at the adoption
date. The Company adopted SFAS No. 133 on April 1, 2002 and reclassified all of
its held-to-maturity securities to the available-for-sale portfolio. The Company
has not engaged in derivative or hedging activities covered by SFAS No. 133, and
does not expect to do so in the foreseeable future.
The Bank's mortgage-backed securities portfolio (including collateralized
mortgage obligations) had a carrying value of $255.9 million, or 28.7% of total
assets at March 31, 2004. Of this amount, $141.6 million of mortgage-backed
securities had adjustable rates of interest and $114.3 million had fixed rates
of interest.
15
Mortgage-backed securities are created by the pooling of mortgages and the
issuance of a security with an interest rate that is less than the interest rate
on the underlying mortgages. The Bank's mortgage-backed securities are issued by
Fannie Mae, Ginnie Mae or Freddie Mac. The Bank has not invested in privately
issued mortgage-backed securities.
Collateralized mortgage obligations ("CMOs") are typically issued by a
special-purpose entity, which may be organized in a variety of legal forms, such
as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities, which are used to collateralize the CMO. Once combined,
the cash flows are divided into "tranches" or "classes" of individual bonds,
thereby creating more predictable average duration for each bond than the
underlying pass-through pools. Accordingly, under the CMO structure, all
principal pay-downs from the various mortgage pools are allocated to a CMO's
first class until it has been paid off, then to a second class until such class
has been paid off and then to the next classes. The loans underlying the Bank's
CMOs are either guaranteed by Freddie Mac or Fannie Mae.
We invest in CMOs as part of our overall investment and interest-rate risk
management policies. The CMOs in our portfolio at March 31, 2004 were fixed-rate
securities and, as a result, their fair value may decrease as interest rates
increase. In addition, they are susceptible to faster than anticipated repayment
speeds if the borrowers on the underlying mortgage loans prepay those loans.
However, the CMO structure provides for more stability than the underlying
pass-through mortgage pools in forecasting cash flows. As a result, they are a
component of our cash management strategies.
At March 31, 2004, the carrying value of the Bank's investment securities
other than mortgage-backed securities included $59.8 million in U.S. Government
and agency securities and GSE's, which consisted of fixed rate Federal Home Loan
Bank, Federal Farm Credit and Fannie Mae issues with maturities of 20 years or
less, as well as adjustable rate Small Business Administration participation
certificates with contractual terms of up to 30 years. These securities
typically have call dates of six months to three years.
At March 31, 2004, the Bank had also invested $21.1 million in two mutual
funds that provide a rate of return that adjusts daily. The first mutual fund,
in which the Bank has a $15.9 million investment, is an adjustable rate mortgage
fund that invests primarily in securities backed by or representing an interest
in mortgages on residential properties meeting the definition of such assets for
purposes of the qualified thrift lender test under Office of Thrift Supervision
regulations. This fund is called the Asset Management Fund issued by Shay Asset
Management. The second mutual fund, the CRA Fund, in which the Bank has a $5.2
million investment, invests in mortgage-backed securities, which are
collateralized by mortgages on properties located in our primary lending area.
These mutual fund investments are permissible investments as set forth in our
investment policy. The securities were purchased, as part of the Bank's ongoing
interest rate risk management process, to provide interest earning liquid funds
and an adjustable interest rate. In addition, the CRA Fund enables management to
invest in mortgage-backed securities that are collateralized by mortgage loans
in low- to moderate-income census tracts within our market area. These mutual
funds were selected because the underlying securities bear similar risk
characteristics to investments that the Bank purchases directly. These mutual
funds provide the Bank with increased liquidity since the Bank can redeem shares
within several days and also provides the Bank with a higher yield than other
short-term earning assets such as federal funds. The securities underlying these
funds are affected by changes in interest rates. In addition, the underlying
securities in the CRA Fund and the Asset Management Fund are mortgage-related
securities. Accordingly, these mutual funds are subject to many of the same
risks that the Bank's mortgage loans have, such as the risk that borrowers
prepay their mortgage loans or default on the terms of their mortgage note.
16
A portion of the Bank's assets is also invested in federal funds sold and
an interest-earning checking account at the Federal Home Loan Bank of New York.
At March 31, 2004, $20.8 million, or 2.3% of total assets, was invested in such
instruments.
The following table sets forth the composition of the Company's securities
classified as available for sale and other earning assets at the dates
indicated. The Company did not hold any securities classified as held to
maturity at the dates indicated.
At March 31,
------------------------------------------------------------------------------
2004 2003 2002
---------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
(In Thousands)
Mortgage-backed securities
Adjustable rate:
Pass-through securities:
Ginnie Mae ................................ $ 87,849 $ 87,907 $101,250 $102,548 $ 45,867 $ 46,496
Fannie Mae ................................ 38,085 38,362 30,424 30,720 17,154 17,285
Freddie Mac ............................... 15,121 15,261 18,659 18,934 10,789 10,892
Fixed rate:
Collateralized mortgage obligations ......... 102,989 103,034 52,336 52,832 13,238 14,259
Pass-through securities:
Ginnie Mae ................................ 1,364 1,421 760 814 1,246 1,298
Fannie Mae ................................ 6,274 6,290 2,078 2,277 3,518 3,731
Freddie Mac ............................... 3,505 3,578 4,122 4,359 9,824 10,173
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ............... 255,187 255,853 209,629 212,484 101,636 104,134
U.S. Government agency securities .............. 59,546 59,781 59,075 59,409 29,788 29,229
Mutual fund investments ........................ 21,000 21,094 22,000 22,180 16,000 15,946
Municipal securities ........................... 854 1,002 849 975 845 922
-------- -------- -------- -------- -------- --------
Total securities available for sale ......... 336,587 $337,730 291,553 $295,048 148,269 $150,321
======== ======== ========
Other earning assets:
Federal funds sold .......................... 1,000 7,000 3,000
Other overnight deposits .................... 19,756 29,121 16,847
FHLB stock .................................. 5,303 4,141 4,141
-------- -------- --------
Total ..................................... $362,646 $331,815 $172,257
======== ======== ========
17
The composition and contractual maturities of mortgage-backed securities
and other debt securities at March 31, 2004 are indicated in the following
table. There were no securities classified as held to maturity at March 31,
2004. The table does not reflect the impact of prepayments or redemptions which
may occur.
More than
More than One Year Five Years More than
One Year or Less through Five Years through Ten Years Ten Years Total Securities
------------------ ------------------ ------------------ ------------------ --------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
--------- ------- --------- ------- --------- ------- --------- ------- --------- ----- -------
(Dollars in Thousands)
Mortgage-backed securities:
Collateralized mortgage
obligations ............... $ -- --% $ -- --% $ 1,237 3.31% $101,752 4.06% $102,989 $103,034 4.06%
Pass-through securities:
Ginnie Mae ............... 6,214 2.64 148 8.22 8 11.37 82,843 2.81 89,213 89,328 2.81
Fannie Mae ............... 75 6.48 104 6.38 612 6.97 43,568 3.23 44,359 44,652 3.29
Freddie Mac .............. 201 7.34 732 6.96 2,127 4.12 15,566 3.41 18,626 18,839 3.67
------- ---- -------- ---- -------- ---- -------- ---- -------- -------- ----
Total mortgage-backed
securities ........... 6,490 2.83 984 7.09 3,984 4.32 243,729 3.45 255,187 255,853 3.46
Other debt securities:
U.S. Government and agency
securities ............. -- -- 42,491 3.06 6,157 3.65 10,898 3.16 59,546 59,781 3.14
Municipal securities ..... -- -- -- -- 118 5.74 736 5.86 854 1,002 5.84
------- ---- -------- ---- -------- ---- -------- ---- -------- -------- ----
Total debt securities
available for sale ... $ 6,490 2.83% $ 43,475 3.15% $ 10,259 3.94% $255,363 3.44% $315,587 $316,636 3.41%
======= ==== ======== ==== ======== ==== ======== ==== ======== ======== ====
18
The following table sets forth the activity in the Bank's mortgage-backed
securities portfolios for the periods indicated.
Years Ended March 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
(In Thousands)
Amortized cost at beginning of year ..... $ 209,629 $ 101,636 $ 137,247
Purchases of mortgage-backed securities . 135,683 160,353 28,944
Principal repayments .................... (89,494) (52,345) (65,392)
Premium amortization and
discount accretion, net ............... (631) (15) 837
--------- --------- ---------
Amortized cost at end of year ........... $ 255,187 $ 209,629 $ 101,636
========= ========= =========
Sources of Funds
General. Deposits have traditionally been the primary source of funds for
the Bank's lending and investment activities. In addition to deposits, funds are
derived from a variety of sources including scheduled loan payments, investment
maturities, loan prepayments and income on earning assets. While scheduled loan
payments and income on earning assets are relatively stable sources of funds,
deposit inflows and outflows can vary widely and are influenced by prevailing
interest rates, market conditions and levels of competition. In addition,
borrowings from the FHLB of New York may be used in the short-term to compensate
for reductions in deposits and to fund growth. In addition, the Bank assumed
certain of Peekskill's borrowings at the time it was acquired. At March 31, 2004
such borrowings had a remaining balance of $15.0 million.
Deposits. Deposits are obtained primarily from customers who live or work
in the New York counties of Westchester and Rockland and Fairfield County,
Connecticut. The Bank offers a selection of deposit instruments, including
savings and club accounts, money market accounts, NOW accounts, commercial
checking and fixed-term certificate of deposit accounts. Deposits are not
actively solicited outside of the Bank's market area. Deposit account terms
vary, with the principal differences being the minimum balance required, the
amount of time the funds must remain on deposit and the interest rate. The Bank
does not pay broker fees for any deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established on a periodic basis. Deposit rates and terms are based primarily
on current operating strategies and market rates, liquidity requirements, rates
paid by competitors and growth goals. Personalized customer service and
long-standing relationships with customers are relied upon to attract and retain
deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money markets and other prevailing interest rates and
competition. The variety of deposit accounts offered allows the Bank to be
competitive in obtaining funds and responding to changes in consumer demand. In
recent years, the Bank has become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. Deposits
are priced to reflect the Bank's interest rate risk management and profitability
objectives. Based on experience, management believes that passbook accounts and
money market accounts are relatively stable sources of deposits. However, the
ability to attract and maintain certificates of deposit, and the rates paid on
these deposits, have been and will continue to be significantly affected by
market conditions. At March 31, 2004, $445.7 million, or 62.9% of the Bank's
deposit accounts were certificates of deposit, of which $321.5 million have
maturities of one year or less.
19
The following table sets forth the distribution of the Bank's deposit
accounts by account type at the dates indicated.
At March 31,
------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------ ------- -------- ------ ------- -------- ------ ------- --------
(Dollars in Thousands)
Transaction accounts and
savings deposits:
Savings and club accounts ........... $148,231 20.9% 0.51% $136,846 22.7% 0.81% $118,578 22.8% 1.00%
Money market accounts ............... 47,338 6.7 0.73 45,331 7.5 1.09 36,012 6.9 1.43
NOW accounts......................... 54,616 7.7 0.24 50,912 8.4 0.46 47,578 9.2 0.76
Commercial checking ................. 12,404 1.8 -- 7,457 1.2 -- 5,436 1.0 --
-------- ----- -------- ----- -------- -----
Total ............................. 262,589 37.1 0.47 240,546 39.8 0.76 207,604 39.9 0.99
-------- ----- -------- ----- -------- -----
Certificates of deposit
maturing:
Within one year ..................... 321,473 45.4 1.87 264,353 43.7 2.33 268,116 51.6 3.24
After one but within three years .... 97,270 13.7 2.91 74,772 12.4 2.80 37,622 7.2 3.66
After three years ................... 26,998 3.8 4.24 24,589 4.1 4.49 6,563 1.3 4.62
-------- ----- -------- ----- -------- -----
Total ............................. 445,741 62.9 2.24 363,714 60.2 2.57 312,301 60.1 3.32
-------- ----- -------- ----- -------- -----
Total deposits ......................... $708,330 100.0% 1.58% $604,260 100.0% 1.85% $519,905 100.0% 2.39%
======== ===== ======== ===== ======== =====
The following table sets forth the deposit activity of the Bank for the
periods indicated.
Years Ended March 31,
----------------------------------------
2004 2003 2002
---------- ----------- ---------
(Dollars in Thousands)
Balance at beginning of year ..... $ 604,260 $ 519,905 $ 473,546
Deposits ......................... 1,033,069 1,151,713 761,735
Withdrawals ...................... (940,150) (1,079,310) (732,730)
Interest credited ................ 11,151 11,952 17,354
---------- ----------- ---------
Balance at end of year ........... $ 708,330 $ 604,260 $ 519,905
========== =========== =========
Net increase during the year:
Amount ........................ $ 104,070 $ 84,355 $ 46,359
Percent ....................... 17.2% 16.2% 9.8%
The following table indicates the amount of the Bank's certificates of
deposits by time remaining until maturity as of March 31, 2004.
Maturity
----------------------------------------------------
3 Months Over 3 to Over 6 to Over 12
or Less 6 Months 12 Months Months Total
-------- --------- --------- -------- --------
(In Thousands)
Certificates of deposit less than $100,000 ............... $ 96,970 $58,295 $ 88,823 $ 92,839 $336,927
Certificates of deposit of $100,000 or more(1) ........... 29,331 14,840 33,214 31,429 108,814
-------- ------- -------- -------- --------
Total of certificates of deposit ......................... $126,301 $73,135 $122,037 $124,268 $445,741
======== ======= ======== ======== ========
- ----------
(1) The weighted average interest rates for these accounts, by maturity
period, are 2.03% for 3 months or less; 1.58% for 3 to 6 months; 2.13% for
6 to 12 months; and 3.36% for over 12 months. The overall weighted average
rate for accounts of $100,000 or more was 2.38%.
20
Borrowed Funds. The Bank has entered into securities repurchase agreements
with the Federal Home Loan Bank of New York. Proceeds from the securities
repurchase agreements are used to fund loan originations and to provide cash
during periods of reduced deposits. Under the repurchase agreements, the Bank
transfers U.S. Government and agency securities and mortgage-backed securities
and agrees to repurchase the identical securities from the Federal Home Loan
Bank at a fixed price in the future. The underlying securities are included in
the securities portfolio.
The following table sets forth certain information regarding the Bank's
borrowings from the Federal Home Loan Bank under securities repurchase
agreements at the dates and for the periods indicated:
At or for the
Years Ended March 31,
--------------------------------
2004 2003 2002
------- ------- -------
(Dollars in Thousands)
Average principal balance outstanding ...... $39,208 $34,977 $16,348
Maximum principal balance outstanding
at any month end during the period ....... 55,000 35,082 35,084
Principal balance outstanding at
end of period ............................ 35,000 35,000 35,084
Weighted average interest rate
during the period ........................ 3.81% 4.66% 4.17%
Weighted average interest rate at
end of period ............................ 3.93% 4.11% 4.17%
The following table sets forth the maturity dates of the Bank's borrowings under
securities repurchase agreements at the dates indicated.
At March 31,
- -------------------------------------------------------------------------------------------
2004 2003 2002
- ----------------------------- ----------------------------- -----------------------------
Maturity Date Amortized Cost Maturity Date Amortized Cost Maturity Date Amortized Cost
- ------------- -------------- ------------- -------------- ------------- --------------
(Dollars in Thousands)
1/08(1) $10,000 1/08 $10,000 1/08 $9,838
12/08(1) 5,000 12/08 5,000 12/08 5,000
3/05 6,000 3/04 7,000 03/03 7,000
3/06 7,000 3/05 6,000 03/04 7,000
3/07 7,000 3/06 7,000 03/05 6,000
- ----------
(1) Callable quarterly.
Competition
The Bank has significant competition in originating loans from savings and
loan associations, savings banks, mortgage banking companies, insurance
companies and commercial banks, many of which have greater financial and
marketing resources than the Bank. The Bank also faces significant competition
in attracting deposits from savings and loan associations, savings banks,
commercial banks and credit unions. The Bank faces additional competition for
deposits from common stock mutual funds, money market funds and other corporate
and government securities funds, and from other financial service providers such
as brokerage firms and insurance companies.
The Bank attracts and retains deposits by offering personalized service,
convenient office locations and competitive interest rates. Loan originations
are obtained primarily through (i) direct contacts by employees with
individuals, businesses and attorneys in the Bank's community, (ii) mortgage
brokers, (iii) personalized service that the Bank provides borrowers and (iv)
competitive pricing. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that management cannot readily predict.
21
Service Corporation Subsidiaries
Sound Federal Savings has three active subsidiaries, Sound REIT, Inc.,
First Federal REIT, Inc. and Mamaroneck Advisors, Inc. In April 1999, Sound
REIT, Inc. was incorporated as a special purpose real estate investment trust
under New York law. First Federal REIT, Inc. was also formed as a real estate
investment trust by Peekskill prior to the acquisition. Sound REIT, Inc. and
First Federal REIT, Inc. hold a portion of our mortgage-related assets.
In February 2001, Mamaroneck Advisors, Inc. was incorporated as a New York
corporation for the purpose of providing investment and insurance products to
Sound Federal Savings' customers. Beginning in December 2003, these services are
provided to customers directly by the Bank. For the years ended March 31, 2004,
2003 and 2002, Mamaroneck Advisors, Inc. had net income of $23,000, $43,000 and
$47,000, respectively.
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations.
Personnel
As of March 31, 2004, the Bank employed 113 persons on a full-time basis
and 12 persons on a part-time basis. None of the Bank's employees is represented
by a collective bargaining group and management considers employee relations to
be good.
SUPERVISION AND REGULATION
General
Sound Federal Savings is examined and supervised by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution may engage and is intended primarily for the protection of the
Federal Deposit Insurance Corporation's deposit insurance funds and depositors.
Under this system of federal regulation, financial institutions are periodically
examined to ensure that they satisfy applicable standards with respect to their
capital adequacy, assets, management, earnings, liquidity and sensitivity to
market interest rates. Following completion of its examination, the federal
agency critiques the institution's operations and assigns its rating (known as
an institution's CAMELS rating). Under federal law, an institution may not
disclose its CAMELS rating to the public. Sound Federal Savings also is a member
of and owns stock in the Federal Home Loan Bank of New York, which is one of the
twelve regional banks in the Federal Home Loan Bank System. Sound Federal
Savings also is regulated to a lesser extent by the Board of Governors of the
Federal Reserve System, governing reserves to be maintained against deposits and
other matters. The Office of Thrift Supervision examines Sound Federal Savings
and prepares reports for the consideration of its board of directors on any
operating deficiencies. Sound Federal Savings' relationship with its depositors
and borrowers also is regulated to a great extent by both federal and state
laws, especially in matters concerning the ownership of deposit accounts and the
form and content of Sound Federal Savings' mortgage documents.
22
Any change in these laws or regulations, whether by the Federal Deposit
Insurance Corporation, Office of Thrift Supervision or Congress, could have a
material adverse impact on Sound Federal Bancorp, Inc. and Sound Federal Savings
and their operations.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and
investment powers from the Home Owners' Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, Sound Federal Savings may invest in mortgage loans secured by
residential and commercial real estate, commercial business and consumer loans,
certain types of debt securities and certain other assets. Sound Federal Savings
also may establish subsidiaries that may engage in activities not otherwise
permissible for Sound Federal Savings, including real estate investment and
securities and insurance brokerage.
Capital Requirements. Office of Thrift Supervision regulations require
savings associations to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 4% leverage ratio (3% for associations receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital ratio. The
prompt corrective action standards discussed below, in effect, establish a
minimum 2% tangible capital standard.
The risk-based capital standard for savings associations requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision based on the
risks believed inherent in the type of asset. Core capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
At March 31, 2004, Sound Federal Savings' capital exceeded all applicable
requirements.
Loans-to-One Borrower. A federal savings association generally may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of unimpaired capital and surplus. An additional amount may be loaned,
equal to 10% of unimpaired capital and surplus, if the loan is secured by
readily marketable collateral, which generally does not include real estate. As
of March 31, 2004, Sound Federal Savings was in compliance with the loans-to-one
borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, Sound
Federal Savings is subject to a qualified thrift lender, or "QTL," test. Under
the QTL test, Sound Federal Savings must maintain at least 65% of its "portfolio
assets" in "qualified thrift investments" in at least nine months of the most
recent 12 month period. "Portfolio assets" generally means total assets of a
savings institution, less the sum of specified liquid assets up to 20% of total
assets, goodwill and other intangible assets, and the value of property used in
the conduct of the savings association's business.
23
"Qualified thrift investments" includes various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans. Sound
Federal Savings also may satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code.
A savings association that fails the qualified thrift lender test must
either convert to a bank charter or operate under specified restrictions. At
March 31, 2004, Sound Federal Savings maintained approximately 91.3% of its
portfolio assets in qualified thrift investments.
Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the capital
account. A savings association must file an application for approval of a
capital distribution if:
o the total capital distributions for the applicable calendar year
exceed the sum of the association's net income for that year to date
plus the association's retained net income for the preceding two
years;
o the association would not be at least adequately capitalized
following the distribution;
o the distribution would violate any applicable statute, regulation,
agreement or Office of Thrift Supervision-imposed condition; or
o the association is not eligible for expedited treatment of its
filings.
Even if an application is not otherwise required, every savings
association that is a subsidiary of a holding company must still file a notice
with the Office of Thrift Supervision at least 30 days before the board of
directors declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application
if:
o the association would be undercapitalized following the
distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in
any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured
depository institution shall not make any capital distribution, if after making
such distribution the institution would be undercapitalized.
Liquidity. A federal savings association is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
Community Reinvestment Act and Fair Lending Laws. All savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income
24
neighborhoods. In connection with its examination of a federal savings
association, the Office of Thrift Supervision is required to assess the
association's record of compliance with the Community Reinvestment Act. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An association's failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities. The failure to comply with
the Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the Office of Thrift Supervision, as well as other
federal regulatory agencies and the Department of Justice. Sound Federal Savings
received a satisfactory Community Reinvestment Act rating in its most recent
federal examination.
Transactions with Related Parties. A federal savings association's
authority to engage in transactions with its "affiliates" is limited by Office
of Thrift Supervision regulations and by Sections 23A and 23B of the Federal
Reserve Act (the "FRA"). The term "affiliates" for these purposes generally
means any company that controls or is under common control with an institution.
Sound Federal Bancorp, Inc. is an affiliate of Sound Federal Savings. In
general, transactions with affiliates must be on terms that are as favorable to
the association as comparable transactions with non-affiliates. In addition,
certain types of these transactions are restricted to an aggregate percentage of
the association's capital. Collateral in specified amounts must usually be
provided by affiliates in order to receive loans from the association. In
addition, Office of Thrift Supervision regulations prohibit a savings
association from lending to any of its affiliates that are engaged in activities
that are not permissible for bank holding companies and from purchasing the
securities of any affiliate, other than a subsidiary.
Sound Federal Savings' authority to extend credit to its directors,
executive officers and 10% shareholders, as well as to entities controlled by
such persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other
things, these provisions require that extensions of credit to insiders (i) be
made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features, and (ii) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of Sound Federal Savings' capital. In addition, extensions of credit in
excess of certain limits must be approved by Sound Federal Savings' board of
directors.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over federal savings institutions and has the authority to bring
enforcement action against all "institution-affiliated parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institution, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as
25
the agency deems appropriate. The federal banking agencies adopted Interagency
Guidelines Prescribing Standards for Safety and Soundness to implement the
safety and soundness standards required under federal law. The guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The guidelines address internal controls and
information systems, internal audit systems, credit underwriting, loan
documentation, interest rate risk exposure, asset growth, compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.
Prompt Corrective Action Regulations. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five categories
based on the association's capital:
o well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based
capital and 10% total risk-based capital);
o adequately capitalized (at least 4% leverage capital, 4% Tier 1
risk-based capital and 8% total risk-based capital);
o undercapitalized (less than 8% total risk-based capital, 4% Tier 1
risk-based capital or 3% leverage capital);
o significantly undercapitalized (less than 6% total risk-based
capital, 3% Tier 1 risk-based capital or 3% leverage capital); and
o critically undercapitalized (less than 2% tangible capital).
Generally, the banking regulator is required to appoint a receiver or
conservator for an association that is "critically undercapitalized." The
regulations also provide that a capital restoration plan must be filed with the
Office of Thrift Supervision within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, numerous mandatory supervisory
actions become immediately applicable to the association, including, but not
limited to, restrictions on growth, investment activities, capital distributions
and affiliate transactions. The Office of Thrift Supervision may also take any
one of a number of discretionary supervisory actions against undercapitalized
associations, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
At March 31, 2004, Sound Federal Savings met the criteria for being
considered "well-capitalized."
Insurance of Deposit Accounts. Deposit accounts in Sound Federal Savings
are insured by the Federal Deposit Insurance Corporation, generally up to a
maximum of $100,000 per separately insured depositor. Sound Federal Savings'
deposits therefore are subject to Federal Deposit Insurance Corporation deposit
insurance assessments. The Federal Deposit Insurance Corporation has adopted a
risk-based system for determining deposit insurance assessments. The Federal
Deposit Insurance Corporation is authorized to raise the assessment rates as
necessary to maintain the required ratio of reserves to insured deposits of
1.25%. In addition, all Federal Deposit Insurance Corporation-insured
26
institutions must pay assessments to the Federal Deposit Insurance Corporation
at an annual rate of approximately .02% of insured deposits to fund interest
payments on bonds maturing in 2017 issued by a federal agency to recapitalize
the predecessor to the Savings Association Insurance Fund.
Prohibitions Against Tying Arrangements. Federal savings associations are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
Federal Home Loan Bank System. Sound Federal Savings is a member of the
Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. As a member of the Federal Home Loan Bank of
New York, Sound Federal Savings is required to acquire and hold shares of
capital stock in the Federal Home Loan Bank in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its borrowings
from the Federal Home Loan Bank, whichever is greater. As of March 31, 2004,
Sound Federal Savings was in compliance with this requirement.
Federal Reserve System
The Federal Reserve Board regulations require savings associations to
maintain non-interest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At March 31,
2004, Sound Federal Savings was in compliance with these reserve requirements.
Holding Company Regulation
Sound Federal Bancorp, Inc. is a unitary savings and loan holding company,
subject to regulation and supervision by the Office of Thrift Supervision. The
Office of Thrift Supervision has enforcement authority over Sound Federal
Bancorp, Inc. and its non-savings institution subsidiaries. Among other things,
this authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a risk to Sound Federal Savings.
Under prior law, a unitary savings and loan holding company generally had
no regulatory restrictions on the types of business activities in which it may
engage, provided that its subsidiary savings bank was a qualified thrift lender.
The Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings and loan
holding companies not existing or applied for before May 4, 1999 to those
activities permissible for financial holding companies or for multiple savings
and loan holding companies. Sound Federal Bancorp, Inc. is not a grandfathered
unitary savings and loan holding company and, therefore, is limited to the
activities permissible for financial holding companies or for multiple savings
and loan holding companies. A financial holding company may engage in activities
that are financial in nature, including underwriting equity securities and
insurance, incidental to financial activities or complementary to a financial
activity. A multiple savings and loan holding company is generally limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the Office of Thrift
Supervision, and certain additional activities authorized by Office of Thrift
Supervision regulations.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the acquisition
or
27
retention of, with specified exceptions, more than 5% of the equity securities
of a company engaged in activities that are not closely related to banking or
financial in nature or acquiring or retaining control of an institution that is
not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the Office of Thrift Supervision must consider the
financial and managerial resources, future prospects of the savings institution
involved, the effect of the acquisition on the risk to the insurance fund, the
convenience and needs of the community and competitive factors.
The USA PATRIOT Act
In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i)
internal policies, procedures, and controls; (ii) specific
designation of an anti-money laundering compliance officer; (iii)
ongoing employee training programs; and (iv) an independent audit
function to test the anti-money laundering program.
o Section 326 authorized the Secretary of the Department of Treasury,
in conjunction with other bank regulators, to issue regulations that
provide for minimum standards with respect to customer
identification at the time new accounts are opened. On July 23,
2002, the Office of Thrift Supervision and the other federal bank
regulators jointly issued proposed rules to implement Section 326.
The proposed rules require financial institutions to establish a
program specifying procedures for obtaining identifying information
from customers seeking to open new accounts. This identifying
information would be essentially the same information currently
obtained by most financial institutions for individual customers.
o Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering.
o Financial institutions are prohibited from establishing,
maintaining, administering or managing correspondent accounts for
foreign shell banks (foreign banks that do not have a physical
presence in any country), and will be subject to certain record
keeping obligations with respect to correspondent accounts of
foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
28
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 ("Sarbanes-Oxley"), which implemented legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board that enforces auditing, quality control and
independence standards and is funded by fees from all publicly traded companies,
Sarbanes-Oxley places certain restrictions on the scope of services that may be
provided by accounting firms to their public company audit clients. Any
non-audit services provided to a public company audit client require preapproval
by the company's audit committee. In addition, Sarbanes-Oxley makes certain
changes to the requirements for audit partner rotation after a period of time.
Sarbanes-Oxley requires chief executive officers and chief financial officers,
or their equivalent, to certify to the accuracy of periodic reports filed with
the Securities and Exchange Commission, subject to civil and criminal penalties
if they knowingly or willingly violate this certification requirement. The
Company's Chief Executive Officer and Chief Financial Officer have signed
certifications to this Form 10-K as required by Sarbanes-Oxley. In addition,
under Sarbanes-Oxley, counsel is required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
Under Sarbanes-Oxley, longer prison terms apply to corporate executives
who violate federal securities laws; the period during which certain types of
suits can be brought against a company or its officers is extended; and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the company's
securities during retirement plan "blackout" periods, and loans to company
executives (other than loans by financial institutions permitted by federal
rules and regulations) are restricted. In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under Sarbanes-Oxley be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates. The legislation accelerates the
time frame for disclosures by public companies, as they must immediately
disclose any material changes in their financial condition or operations.
Directors and executive officers must also provide information for most changes
in ownership in a company's securities within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is an "audit committee
financial expert" (as such term is defined by the Securities and Exchange
Commission) and if not, why not. Under Sarbanes-Oxley, a company's registered
public accounting firm is prohibited from performing statutorily mandated audit
services for a company if such company's chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions had been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. Sarbanes-Oxley also prohibits any officer or director of a company or any
other person acting under their direction from
29
taking any action to fraudulently influence, coerce, manipulate or mislead any
independent accountant engaged in the audit of the company's financial
statements for the purpose of rendering the financial statements materially
misleading. Sarbanes-Oxley also requires the Securities and Exchange Commission
to prescribe rules requiring inclusion of any internal control report and
assessment by management in the annual report to shareholders. Sarbanes-Oxley
requires the company's registered public accounting firm that issues the audit
report to attest to and report on management's assessment of the company's
internal controls. These requirements for internal control reporting will first
apply to the Company's March 31, 2005 annual report.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
Executive Officers of the Company
Listed below is information, as of March 31, 2004, concerning the
Company's executive officers. There are no arrangements or understandings
between the Company and any of the persons named below with respect to which he
was or is to be selected as an officer.
Name Age Position
- ---- --- --------
Bruno J. Gioffre 69 Chairman of the Board.
Richard P. McStravick 55 President and Chief Executive Officer.
Anthony J. Fabiano 43 Chief Financial Officer and Accounting Officer.
30
ITEM 2. PROPERTIES
Properties
The following table provides certain information with respect to the
Bank's offices at March 31, 2004.
Leased or Owned, Net Book Value of Real
Location Lease Expiration Date Year Acquired or Leased Property
- ---------------------------------------------------------------------------------------------------------------
(In Thousands)
Corporate Office Leased 2003 $ 80(1)
1311 Mamaroneck Avenue 4/1/10
White Plains, New York 10605
Branch Office Owned 1954 529
300 Mamaroneck Avenue
Mamaroneck, New York 10543
Branch Office Owned 1961 738
389 Halstead Avenue
Harrison, New York 10528
Branch Office Owned 1972 1,094
115 South Ridge Street
Rye Brook, New York 10573
Leased (2)
Branch Office 1998 124(1)
180 South Main Street
New City, New York 10956
Branch Office Leased 1998 236(1)
East Putnam Avenue 11/30/08
Cos Cob, Connecticut 06807
Branch Office Owned 2000 436
1019 Park Street
Peekskill, New York 10566
Branch Office Leased 2000 42(1)
1961 Commerce Street 12/31/12
Yorktown Heights, New York 10598
Branch Office Leased 2000 703(1)
Cortland Town Center 10/14/17
Mohegan Lake, New York
Branch Office Leased 2001 13(1)
88 Fourth Street 2/8/09
New Rochelle, New York 10801
Branch Office Leased 2001 253(1)
Somers Commons 12/31/2021
Baldwin Place, New York 10589
Stamford Leased 2004 352(1)
599 Newfield Avenue 4/19/09
Stamford, Connecticut 06905
- ----------
(1) Net book value represents the amortized cost of leasehold improvements.
(2) This branch, which is located in a supermarket, is a month-to-month
rental.
The total net book value of the Bank's premises, land and equipment was
approximately $5.6 million at March 31, 2004.
31
ITEM 3. LEGAL PROCEEDINGS
Although the Company is involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Company presently is a party or to which any of its
property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 4, 2004, the Company held a special meeting of stockholders
for the purpose of considering the approval of the Sound Federal Bancorp, Inc.
2004 Incentive Stock Benefit Plan. The vote with respect to the proposal was as
follows: 6,755,409 For, 1,042,504 Against, 94,077 Abstain.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) and (b) Information relating to the market for the Company's common
stock is set forth in the Company's Annual Report to Stockholders which is
incorporated herein by reference.
(c) Issuer purchases of equity securities during the quarter ended March
31, 2004 are as follows:
Total number of Maximum number of
shares purchased under shares that may be
Total number of Average price paid a publicly announced purchased under
shares purchased per share repurchase plan(1) repurchase plan(1)
---------------- ------------------ ---------------------- -------------------
January 1-January 31 -- -- 474,000 530,482
February 1-February 29 56,482 $15.41 530,482 530,482
March 1-March 31 10,000 $14.75 10,000 637,332
(1) The Company announced a program to repurchase up to 530,482 shares of its
common stock on July 28, 2003. This repurchase program was completed on
February 25, 2004. The Company announced a second program to repurchase up
to 637,332 shares of its common stock on March 12, 2004. This program has
no expiration date.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Information" section of the Company's
Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders,
which is incorporated herein by reference, includes the information required by
this item.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements identified in Item 15(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation and concluded that the Company's disclosure controls and
procedures (as defined by the Securities Exchange Act Rules 13a-14(c) and
15d-14(c)) as of March 31, 2004 are effective to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported as and when required by the Securities and Exchange Commission's rules
and forms.
There were no significant changes made in the Company's internal controls
over financial reporting during the period covered by this report or, to our
knowledge, in other factors that could significantly affect these controls.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement dated July 8, 2004 (the
"Proxy Statement"), specifically the section captioned "Proposal I--Election of
Directors." In addition, see "Executive Officers of the Company" in Item 1 for
information concerning the Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's Proxy Statement, specifically the section captioned
"Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement,
specifically the section captioned "Voting Securities and Principal Holders
Thereof."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement, specifically the section
captioned "Transactions with Certain Related Persons."
33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning fees paid to the Company's principal accountant is
incorporated by reference from the Company's proxy statement under the section
captioned "Proposal II-Ratification of Appointment of Auditors."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) Financial Statements
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheets at March 31, 2004 and 2003
o Consolidated Statements of Income for the Years Ended
March 31, 2004, 2003 and 2002
o Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended March 31, 2004, 2003 and 2002
o Consolidated Statements of Cash Flows for the Years Ended
March 31, 2004, 2003 and 2002
o Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated
financial statements or related notes.
(a)(3) Exhibits
3.1 Federal Charter of Sound Federal Bancorp, Inc. (Incorporated
by reference to the Company's Registration Statement on Form
S-1 (file No. 333-57377) Exhibit 3.1 (filed on June 22,
1998))
3.2 Bylaws of Sound Federal Bancorp, Inc. (Incorporated by
reference to the Company's Registration Statement on Form
S-1 (file No. 333-57377) Exhibit 3.2 (filed on June 22,
1998))
34
10.1 Sound Federal Bancorp 1999 Stock Option Plan (Incorporated
by reference to the Company's Registration Statement on Form
S-8 (File No. 333-93215 filed on December 21, 1999))
10.2 Sound Federal Bancorp 1999 Recognition and Retention Plan
(Incorporated by reference to the Company's Registration
Statement on Form S-8 (File No. 333-93215))
10.3a Employment Agreement with Richard McStravick
10.3b Employment Agreement with Anthony J. Fabiano
10.4 Sound Federal Bancorp 2004 Incentive Stock Benefit Plan
(Incorporated by reference to the Company's Registration
Statement on Form S-8 (File No. 333-112816 filed on February
13, 2004))
10.5 Supplemental Executive Agreement for Richard P. McStravick
(Incorporated by reference to the Company's Form 10-Q for
the quarter ended December 31, 2003)
10.6 Supplemental Executive Agreement for Anthony J. Fabiano
(Incorporated by reference to the Company's Form 10-Q for
the quarter ended December 31, 2003)
10.7 Non-qualified Supplemental Executive Retirement Agreement
for Richard P. McStravick
10.8 Non-qualified Supplemental Executive Retirement Agreement
for Anthony J. Fabiano
13 2004 Annual Report to Stockholders
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 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
On March 12, 2004, the Company announced, pursuant to Item 5. Other
Events and Regulation FD Disclosure, the commencement of a stock
repurchase program.
On January 28, 2004, the Company announced, pursuant to Item 12.
Results of Operations and Financial Condition, its December 31,
2003 financial results.
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 10, 2004 /s/ Richard P. McStravick
-----------------------------------------
Richard P. McStravick
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Richard P. McStravick By: /s/ Bruno J. Gioffre
--------------------------------- ------------------------------
Richard P. McStravick, President, Bruno J. Gioffre, Chairman of
Chief Executive Officer and the Board
Director (Principal Executive
Officer)
Date: June 10, 2004 Date: June 10, 2004
By: /s/ Anthony J. Fabiano By: /s/ Robert I. Bernhardt
--------------------------------- ------------------------------
Anthony J. Fabiano, Chief Financial Robert I. Bernhardt, Director
Officer and Accounting Officer
Date: June 10, 2004 Date: June 10, 2004
By: /s/ Joseph Dinolfo By: /s/ Donald H. Heithaus
--------------------------------- ------------------------------
Joseph Dinolfo, Director Donald H. Heithaus, Director
Date: June 10, 2004 Date: June 10, 2004
By: /s/ Joseph A. Lanza By: /s/ Eldorus Maynard
--------------------------------- ------------------------------
Joseph A. Lanza, Director Eldorus Maynard, Director
Date: June 10, 2004 Date: June 10, 2004
By: /s/ James Staudt By: /s/ Samuel T. Telerico
--------------------------------- ------------------------------
James Staudt, Director Samuel T. Telerico, Director
Date: June 10, 2004 Date: June 10, 2004