SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
(Exact name of registrant as specified in its charter)
Delaware 22-3887679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1311 Mamaroneck Ave., White Plains, New York 10605
(Address of principal executive offices)
(Zip Code)
(914) 761-3636
(Registrant's telephone number including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Shares
Class Outstanding at
------------- August 5, 2004
Common Stock, --------------
par value, $0.01 12,549,541
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2004 and March 31, 2004..........................................1
Consolidated Statements of Income for the Three Months
Ended June 30, 2004 and 2003.............................................................................2
Consolidated Statement of Changes in Stockholders' Equity for the Three Months
Ended June 30, 2004......................................................................................3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2004 and 2003.............................................................................4
Notes to Unaudited Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................15
Item 4. Controls and Procedures.................................................................................16
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.......................................................................................17
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities........................17
Item 3. Defaults upon Senior Securities.........................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.....................................................17
Item 5. Other Information.......................................................................................17
Item 6. Exhibits and Reports on Form 8-K........................................................................17
Signatures..............................................................................................18
Part 1. - FINANCIAL INFORMATION
Item 1. Financial Statements
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands) June 30, March 31,
2004 2004
--------- ---------
Assets
Cash and due from banks $ 10,873 $ 10,455
Federal funds sold and other overnight deposits 13,763 20,756
--------- ---------
Total cash and cash equivalents 24,636 31,211
--------- ---------
Securities:
Available for sale, at fair value (including $38,300 and $38,000 pledged as collateral for
borrowings under repurchase agreements at June 30, 2004 and March 31, 2004, respectively) 332,277 337,730
Held to maturity, at amortized cost (fair value of $9,945) 9,953 --
--------- ---------
Total securities 342,230 337,730
--------- ---------
Loans, net:
Mortgage loans 502,235 477,771
Consumer loans 1,791 3,396
Allowance for loan losses (Note 5) (2,787) (2,712)
--------- ---------
Total loans, net 501,239 478,455
--------- ---------
Accrued interest receivable 3,600 3,623
Federal Home Loan Bank stock 5,738 5,303
Premises and equipment, net 5,608 5,630
Goodwill 13,970 13,970
Bank-owned life insurance 10,161 10,085
Prepaid pension costs 2,538 2,547
Deferred income taxes 3,018 --
Other assets 1,872 1,987
--------- ---------
Total assets $ 914,610 $ 890,541
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 746,160 $ 708,330
Borrowings (Note 6) 38,000 35,000
Mortgagors' escrow funds 3,953 4,522
Due to brokers for securities purchased -- 4,000
Accrued expenses and other liabilities 1,481 1,630
--------- ---------
Total liabilities 789,594 753,482
--------- ---------
Stockholders' equity:
Preferred stock ($0.01 par value; 1,000,000 shares authorized; none issued and outstanding) -- --
Common stock ($0.01 par value; 24,000,000 shares authorized; 13,636,170 shares issued) 136 136
Additional paid-in capital 102,793 102,637
Treasury stock, at cost (1,086,629 and 459,297 shares at June 30, 2004 and March 31, 2004,
respectively) (15,474) (7,150)
Common stock held by Employee Stock Ownership Plan ("ESOP") (6,430) (6,556)
Unearned stock awards (5,322) (5,618)
Retained earnings 53,650 52,908
Accumulated other comprehensive income (loss), net of taxes (Note 7) (4,337) 702
--------- ---------
Total stockholders' equity 125,016 137,059
--------- ---------
Total liabilities and stockholders' equity $ 914,610 $ 890,541
========= =========
See accompanying notes to unaudited consolidated financial statements.
1
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Three Months Ended
June 30,
--------------------------
2004 2003
---- ----
Interest and Dividend Income
Loans $6,897 $6,769
Mortgage-backed and other securities 2,792 2,837
Federal funds sold and other overnight deposits 59 128
Other earning assets 21 57
------ ------
Total interest and dividend income 9,769 9,791
------ ------
Interest Expense
Deposits 2,941 2,879
Borrowings 365 365
Other interest-bearing liabilities 5 17
------ ------
Total interest expense 3,311 3,261
------ ------
Net interest income 6,458 6,530
Provision for loan losses (Note 5) 75 50
------ ------
Net interest income after provision for loan losses 6,383 6,480
------ ------
Non-Interest Income
Service charges and fees 276 285
Increase in cash surrender value of bank-owned life insurance 76 --
------ ------
Total non-interest income 352 285
------ ------
Non-Interest Expense
Compensation and benefits 2,412 1,992
Occupancy and equipment 633 562
Data processing service fees 300 242
Advertising and promotion 251 414
Other 696 774
------ ------
Total non-interest expense 4,292 3,984
------ ------
Income before income tax expense 2,443 2,781
Income tax expense 946 1,064
------ ------
Net income $1,497 $1,717
====== ======
Earnings per share (Note 4):
Basic $ 0.13 $ 0.14
====== ======
Diluted $ 0.12 $ 0.14
====== ======
See accompanying notes to unaudited consolidated financial statements.
2
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended June 30, 2004
(Unaudited)
(Dollars in thousands, except per share data)
Common
Additional Stock
Common Paid-In Treasury Held By
Stock Capital Stock ESOP
-------- ---------- -------- ---------
Balance at March 31, 2004 $ 136 $102,637 $ (7,150) $ (6,556)
Net income -- -- -- --
Other comprehensive loss (Note 7) -- -- -- --
Total comprehensive loss -- -- -- --
Dividends paid ($0.06 per share) -- -- -- --
Purchases of treasury stock (627,332 shares) -- -- (8,324) --
Vesting of stock awards -- -- -- --
ESOP shares committed to be released for allocation -- 156 -- 126
-------- -------- -------- --------
Balance at June 30, 2004 $ 136 $102,793 $(15,474) $ (6,430)
======== ======== ======== ========
Accumulated
Unearned Other Total
Stock Retained Comprehensive Stockholders'
Awards Earnings Income (Loss) Equity
--------- --------- ------------- -------------
Balance at March 31, 2004 $ (5,618) $ 52,908 $ 702 $ 137,059
Net income -- 1,497 -- 1,497
Other comprehensive loss (Note 7) -- -- (5,039) (5,039)
---------
Total comprehensive loss -- -- -- (3,542)
Dividends paid ($0.06 per share) -- (755) -- (755)
Purchases of treasury stock (627,332 shares) -- -- -- (8,324)
Vesting of stock awards 296 -- -- 296
ESOP shares committed to be released for allocation -- -- -- 282
--------- --------- --------- ---------
Balance at June 30, 2004 $ (5,322) $ 53,650 $ (4,337) $ 125,016
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
3
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months Ended
June 30,
--------------------------
2004 2003
------------ ----------
OPERATING ACTIVITIES
Net income $ 1,497 $ 1,717
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 75 50
Depreciation, amortization and accretion 619 527
ESOP and stock award expense 578 233
Income taxes 3 (283)
Pension costs 9 (82)
Other adjustments, net 62 (120)
-------- --------
Net cash provided by operating activities 2,843 2,042
-------- --------
INVESTING ACTIVITIES
Purchases of securities:
Available for sale (30,015) (85,675)
Held to maturity (9,953) --
Proceeds from principal payments, maturities and calls of securities
available for sale 23,014 52,221
Net (disbursements) receipts for loan originations and principal repayments (23,017) 4,956
Purchases of Federal Home Loan Bank stock (435) (1,161)
Purchases of premises and equipment (194) (122)
-------- --------
Net cash used in investing activities (40,600) (29,781)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 37,830 29,005
Proceeds from borrowings 3,000 --
Net decrease in mortgagors' escrow funds (569) (957)
Purchases of treasury stock (8,324) --
Payment of cash dividends on common stock (755) (662)
-------- --------
Net cash provided by financing activities 31,182 27,386
-------- --------
Decrease in cash and cash equivalents (6,575) (353)
Cash and cash equivalents at beginning of period 31,211 44,897
-------- --------
Cash and cash equivalents at end of period $ 24,636 $ 44,544
======== ========
SUPPLEMENTAL INFORMATION
Interest paid $ 3,307 $ 3,361
Income taxes paid 870 1,261
(Decrease) increase in due to brokers for securities purchased (4,000) 10,404
See accompanying notes to unaudited consolidated financial statements.
4
Sound Federal Bancorp, Inc. and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization and Stock Offerings
On October 8, 1998, Sound Federal Bancorp issued shares of its common
stock in connection with a Plan of Reorganization ("the "Reorganization") and
related Subscription and Community Offering. In the Reorganization, Sound
Federal Savings and Loan Association converted from a federally chartered mutual
savings association to a federally chartered stock savings association. Sound
Federal Savings and Loan Association became the wholly-owned subsidiary of Sound
Federal Bancorp, which became the majority-owned subsidiary of Sound Federal,
MHC (the "Mutual Holding Company").
On June 13, 2002, the respective Boards of Directors of Sound Federal
Bancorp and the Mutual Holding Company adopted a plan to convert from the mutual
holding form of organization to a fully public holding company structure (the
"Conversion"). The Conversion was completed on January 6, 2003. At that time,
the Mutual Holding Company merged into Sound Federal Savings and Loan
Association, and no longer exists. Sound Federal Bancorp was succeeded by a new
Delaware corporation named Sound Federal Bancorp, Inc. Shares of common stock
representing the ownership interest of the Mutual Holding Company were sold in a
subscription offering and a community offering. Shares owned by public
shareholders (shareholders other than the Mutual Holding Company) were converted
into the right to receive new shares of Sound Federal Bancorp, Inc. common stock
determined pursuant to an exchange ratio. As part of these transactions, Sound
Federal Savings and Loan Association changed its name to Sound Federal Savings
(the "Bank"), which is now a wholly-owned subsidiary of Sound Federal Bancorp,
Inc. (the "Holding Company"). The Bank and the Holding Company are referred to
herein as "the Company".
2. Basis of Presentation
The consolidated financial statements included herein have been prepared
by the Company without audit. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for the periods presented. Certain information and
footnote disclosures normally included in conformity with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission; however, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The operating results for the periods presented are
not necessarily indicative of results to be expected for any other interim
period or for the entire fiscal year ending March 31, 2005.
The consolidated financial statements have been prepared in conformity
with U.S. generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, income and
expense. Actual results could differ significantly from these estimates. A
material estimate that is particularly susceptible to near-term change is the
allowance for loan losses, which is discussed in Note 5.
The unaudited interim consolidated financial statements presented herein
should be read in conjunction with the annual audited consolidated financial
statements of the Company for the fiscal year ended March 31, 2004, included in
the Company's 2004 Annual Report on Form 10-K.
3. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, encourages the use of a fair-value-based method of
accounting for employee stock
5
compensation plans, but permits the continued use of the intrinsic-value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Under SFAS No. 123, the grant-date fair value of options is recognized
as compensation expense over the vesting period. The Company has elected to
continue to apply APB Opinion No. 25 and disclose the pro forma information
required by SFAS No. 123.
Had stock-based compensation expense been recognized in accordance with
SFAS No. 123, the Company's net income and earnings per share would have been
adjusted to the following pro forma amounts:
Three Months Ended
June 30,
------------------------------------
2004 2003
------------ -----------
(In thousands, except per share data)
Net income, as reported $ 1,497 $ 1,717
Add stock award expense included in reported
net income, net of related tax effects 181 22
Deduct stock award and stock option expense determined
under the fair-value-based method, net of related
tax effects (313) (39)
-------- ---------
Pro forma net income $ 1,365 $ 1,700
======== =========
Earnings per share:
Basic, as reported $ 0.13 $ 0.14
======== =========
Basic, pro forma $ 0.12 $ 0.14
======== =========
Diluted, as reported $ 0.12 $ 0.14
======== =========
Diluted, pro forma $ 0.11 $ 0.13
======== =========
4. Earnings Per Share
Weighted average common shares used in calculating basic and diluted
earnings per share for the three months ended June 30, 2004 were 11,819,988 and
12,098,542, respectively. For the three months ended June 30, 2003, weighted
average common shares used in calculating basic and diluted earnings per share
were 12,383,041 and 12,716,898, respectively.
5. Allowance for Loan Losses
The allowance for loan losses is increased by provisions for loan losses
charged to income and by recoveries of prior charge-offs, and is decreased by
charge-offs. Losses are charged to the allowance when all or a portion of a loan
is deemed to be uncollectible. Recoveries of loans previously charged-off are
credited to the allowance for loan losses when realized. Management's periodic
determination of the allowance is based on continuing reviews of the portfolio,
using a consistently-applied methodology. The allowance for loan losses consists
of losses that are both probable and estimable at the date of the financial
statements. In determining the allowance for loan losses, management considers
factors such as the Company's past loan loss experience, known risks in the
portfolio, adverse situations affecting a borrower's ability to repay, the
estimated value of underlying collateral, and current economic conditions.
Determining the allowance for loan losses involves significant management
judgments utilizing the best information available. Those judgments are subject
to further review by various sources, including the
6
Company's regulators. Changes in the allowance may be necessary in the future
based on changes in economic and real estate market conditions, new information
obtained regarding known problem loans, the identification of additional problem
loans and other factors, certain of which are outside of management's control.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Three Months Ended Year Ended
June 30, March 31,
-------------------------- ----------
2004 2003 2004
-------------------------- ----------
(in thousands)
Balance at beginning of period $ 2,712 $ 2,442 $ 2,442
Provision for loan losses 75 50 275
Charge-offs -- -- (5)
----------------------- -------
Balance at end of period $ 2,787 $ 2,492 $ 2,712
======================= =======
6. Borrowings
The Company had the following outstanding borrowings under securities
repurchase agreements with the Federal Home Loan Bank of New York (the "FHLB")
at June 30, 2004:
Maturity Date Coupon Rate Borrowings
------------- ----------- ----------
(dollars in thousands)
January 2008(1) 5.42% $10,000
December 2008(1) 4.72 5,000
March 2005 4.22 7,000
June 2005 2.47 3,000
March 2006 2.27 6,000
March 2007 2.65 7,000
-------
$38,000
=======
Weighted average interest rate 3.87%
Accrued interest payable $ 147
(1) Callable Quarterly
The securities transferred to the FHLB subject to the repurchase
agreements include U.S. Government and agency securities available for sale with
a carrying value of $14.6 million and mortgage-backed securities available for
sale with a carrying value of $23.7 million. Accrued interest receivable on the
securities was $154,000 at June 30, 2004.
7. Comprehensive Income (Loss)
Comprehensive income or loss represents the sum of net income and items of
"other comprehensive income or loss" that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net unrealized
gain or loss on securities available for sale. The Company reports its total
comprehensive income (loss) in the consolidated statement of changes in
stockholders' equity.
7
The Company's other comprehensive income (loss) is summarized as follows:
Three Months Ended
June 30,
-------------------------
2004 2003
---- ----
(In thousands)
Net unrealized holding gain (loss) arising
during the period on securities available
for sale $(8,209) $ 369
Related deferred income tax effect 3,170 (156)
------- -------
Other comprehensive income (loss) $(5,039) $ 213
======= =======
The Company's accumulated other comprehensive income (loss), which is
included in stockholders' equity, is summarized as follows:
June 30, March 31,
2004 2004
---- ----
(In thousands)
Net unrealized holding gain (loss)
on securities available for sale $(7,066) $ 1,143
Related deferred income taxes 2,729 (441)
------- -------
Accumulated other comprehensive income (loss) $(4,337) $ 702
======= =======
8. Postretirement Plans
Pension Plans
The Company maintains two non-contributory defined benefit pension plans
that cover substantially all full-time employees who meet certain age and
service requirements. Benefits are based on the employee's years of accredited
service and average compensation for the three consecutive years that produce
the highest average. The Company's funding policy is to contribute the amounts
required by applicable regulations, although additional amounts may be
contributed from time to time. The Company expects to contribute $192,000 to the
plans in fiscal 2005. Contributions of $46,000 were made in the three months
ended June 30, 2004.
8
The components of the net periodic expense for the plans were as follows:
Three Months Ended
June 30,
--------------------
2004 2003
------ ----
(In thousands)
Service cost $ 91 $ 65
Interest cost 160 147
Expected return on plan assets (225) (150)
Recognized net actuarial loss -- 15
Amortization of prior service
cost and net transition obligations 28 3
----- -----
Net periodic pension expense $ 54 $ 79
===== =====
Director Retirement Plan
The Company maintains a non-qualified, unfunded Director Retirement Plan
which is an amendment and restatement of the former Director Emeritus Plan.
Under the Director Retirement Plan, any person who was a director on January 1,
2004, who retires or dies after age 70 and who completes 15 years of continuous
service as a director becomes entitled to an annual retirement benefit for the
longer of 20 years or his/her lifetime, equal to the amount of annual fees paid
for attendance at regular monthly board meetings during the preceding twelve
months, plus the amount of any annual stipend paid to such director in that
year. The Director Retirement Plan also provides for benefits in the event of
early retirement or disability. In the event of a change in control, directors
will be credited with years of service as if they had remained members of the
Board of Directors until age 70 and be entitled to benefits payable in a lump
sum, at the time of the change in control. A retired director will receive the
present value of the remaining benefit, paid in a lump sum at the time of a
change in control.
The components of the net periodic expense for the plan were as follows:
Three Months Ended
June 30,
------------------
2004 2003
---- ----
(In thousands)
Service cost $ 16 $ 3
Interest cost 24 12
Recognized net actuarial gain (4) --
Amortization of prior service cost 45 20
---- ----
Net periodic expense $ 81 $ 35
==== ====
Item 2. Management's Discussion and Analysis of Financial Consition and Results
of Operations
General
Our principal business has historically consisted of offering savings and
other deposits to the general public and using the funds from these deposits to
make loans secured by residential real estate. Our net income depends primarily
upon our net interest income, which is the difference between interest income
earned on interest-earning assets, such as loans and investments, and the
interest expense paid on deposits and borrowings. To a much lesser degree, our
net income is affected by non-interest income, such as banking service charges
and fees. Net income is also affected by, among other things, provisions for
loan losses and non-interest expenses. Our principal non-interest expenses
consist of compensation and benefits, occupancy and equipment, data processing
service fees, advertising and promotion and
9
other expenses, such as ATM expenses, professional fees and insurance premiums.
Our net income also is affected significantly by general economic and
competitive conditions, particularly changes in market interest rates;
government legislation and policies affecting fiscal affairs, housing and
financial institutions; monetary policies of the Federal Reserve System; and the
actions of bank regulatory authorities.
Forward-Looking Statements
When used in this report on Form 10-Q, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements reflect our current view with respect to future-looking
events and are subject to certain risks and uncertainties that could cause
actual results to differ materially from Management's current expectations.
Among others, these risks and uncertainties include changes in general economic
conditions, changes in policies by regulatory agencies, hostilities involving
the United States, fluctuations in interest rates, demand for loans in the
Company's market area, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines and other economic, competitive, governmental and technological
factors affecting our operations, markets and products. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company wishes to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from its forward-looking statements. We do not intend to
update these forward-looking statements.
Critical Accounting Policies
Accounting policies considered particularly critical to our financial
results include the allowance for loan losses, accounting for goodwill and the
recognition of interest income and interest expense. The methodology for
determining the allowance for loan losses is considered a critical accounting
policy by management due to the high degree of judgment involved, the
subjectivity of the assumptions utilized and the potential for changes in the
economic environment that could result in changes to the amount of the allowance
for loan losses considered necessary. Management considers accounting for
goodwill to be a critical policy because goodwill must be tested for impairment
at least annually using an approach that involves the estimation of fair values.
Estimating fair values involves a high degree of judgment and subjectivity in
the assumptions utilized. Interest income on loans, securities and other
interest-earning assets is accrued monthly unless management considers the
collection of interest to be doubtful. When loans are placed on nonaccrual
status (contractually past due 90 days or more), unpaid interest is reversed by
charging interest income and crediting an allowance for uncollected interest.
Interest payments received on nonaccrual loans (including impaired loans) are
recognized as income unless future collections are doubtful. Loans are returned
to accrual status when collectibility is no longer considered doubtful
(generally, when all payments have been brought current). Interest expense on
deposits, borrowings and other interest-bearing liabilities is accrued monthly.
Financial Condition
Assets. The Company's total assets amounted to $914.6 million at June 30,
2004 as compared to $890.5 million at March 31, 2004. The $24.1 million increase
in total assets primarily consists of a $22.8 million increase in net loans to
$501.2 million and a $4.5 million increase in securities to $342.2 million.
These increases were partially offset by a decrease in federal funds sold of
$7.0 million to $13.8 million. Our asset growth was funded principally by a
$37.9 million increase in deposits to $746.2 million at June 30, 2004 from
$708.3 million at March 31, 2004.
10
Liabilities. Total deposits were $746.2 million at June 30, 2004, an
increase of $37.9 million as compared to $708.3 million at March 31, 2004.
Certificates of deposit increased $20.0 million to $465.7 million from $445.7
million; savings and club accounts increased $4.4 million to $152.6 million from
$148.2 million; and money market, NOW and commercial checking accounts increased
$13.5 million to $127.9 million from $114.4 million. Borrowings totaled $38.0
million at June 30, 2004 and $35.0 million at March 31, 2004.
Stockholders' Equity. Total stockholders' equity decreased $12.1 million
to $125.0 million at June 30, 2004 as compared to $137.1 million at March 31,
2004. The decrease reflects the purchase of treasury shares at a cost of $8.3
million, dividends paid of $755,000 and a decrease of $5.0 million attributable
to accumulated other comprehensive income (loss), partially offset by net income
of $1.5 million.
The change in accumulated other comprehensive income (loss) reflects an
$8.2 million ($5.0 million after taxes) net unrealized loss on securities
available for sale. The Company invests primarily in mortgage-backed securities
guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac, as well as U.S. Government
and agency securities. The unrealized losses at June 30, 2004 were caused by
increases in market yields subsequent to purchase. There were no debt securities
past due or securities for which the Company currently believes it is not
probable that it will collect all amounts due according to the contractual terms
of the security. Because the Company has the ability to hold securities with
unrealized losses until a market price recovery (which, for debt securities may
be until maturity), the Company did not consider these securities to be
other-than-temporarily impaired at June 30, 2004.
Comparison of Results of Operations for the Three Months Ended June 30, 2004 and
2003
Net Income. Net income amounted to $1.5 million or diluted earnings per
share of $0.12 for the quarter ended June 30, 2004, as compared to $1.7 million
or diluted earnings per share of $0.14 for the quarter ended June 30, 2003. The
decrease in net income for the current quarter was due primarily to a $308,000
increase in non-interest expense and a $72,000 decrease in net interest income,
partially offset by a $118,000 decrease in income tax expense and a $67,000
increase in non-interest income.
Interest Income. Interest income decreased $22,000 to $9.8 million for the
quarter ended June 30, 2004, as compared to the same quarter in 2003. The
decrease reflects a 52 basis point decrease in the average yield on
interest-earning assets to 4.57%, substantially offset by an $86.0 million
increase in average interest-earning assets to $858.1 million during the quarter
ended June 30, 2004 as compared to $772.1 million for the same quarter in the
prior year. The increase in the average balance of interest-earning assets was
due primarily to a $59.1 million increase in net loans to $481.7 million and a
$44.0 million increase in the average balance of securities to $336.1 million,
partially offset by a $16.6 million decrease in average Federal funds sold and
other overnight deposits to $34.5 million. The increase in average
interest-earning assets was funded principally by deposit growth in the Bank's
branches. The decrease in the average yield on interest-earning assets reflects
the origination of loans at lower rates than the existing portfolio, the
purchase of securities at lower rates than the existing portfolio and the
downward repricing of adjustable-rate securities during recent periods of
declining interest rates.
Loans. Interest income on loans increased $128,000 or 1.9% to $6.9 million
for the current quarter as compared to $6.8 million for the same quarter in
2003. This increase is due to a $59.1 million increase in the average balance of
loans to $481.7 million, partially offset by a 68 basis point decrease in the
yield earned to 5.74%.
We originated $62.5 million of new loans during the quarter ended June 30,
2004. These loans were originated at rates lower than the average yield being
earned on the existing loan portfolio. As a result, the decline in average yield
earned on the loan portfolio continued during the quarter ended June 30, 2004.
The
11
yield on the loan portfolio may decrease further until market interest rates
begin to increase. However, as market interest rates increase, the volume of
loans originated may decrease which would result in slower growth or a decrease
in the loan portfolio.
Mortgage-Backed and Other Securities. Interest on mortgage-backed
securities totaled $2.2 million for the quarter ended June 30, 2004, virtually
unchanged from the same quarter in 2003. The average balance of mortgage-backed
securities increased $39.5 million to $251.6 million during the current quarter,
offset by a decrease of 62 basis points in the average yield to 3.44%. The
increase in the average balance of mortgage-backed securities is primarily a
result of investing funds from deposit growth. The decrease in the average yield
is a result of the downward repricing of adjustable rate mortgage-backed
securities and new purchases of mortgage-backed securities that are at lower
rates than the existing portfolio.
Interest on other securities decreased $55,000 to $634,000 for the quarter
ended June 30, 2004, as compared to $689,000 for the same quarter in 2003. The
decrease is due to a 45 basis point decrease in the average yield to 3.01%,
partially offset by a $4.5 million increase in the average balance of other
securities to $84.5 million.
Federal Funds Sold and Other Overnight Deposits. For the quarter ended
June 30, 2004, interest on Federal funds sold and other overnight deposits
decreased $69,000 to $59,000, reflecting a $16.6 million decrease in the average
balance to $34.5 million and a 32 basis point decrease in the average yield
earned to 0.69%. The decrease in the average yield is the result of the
continued low market interest rates.
Other Earning Assets. Other earning assets consist primarily of FHLB of
New York common stock. Dividends on FHLB of New York common stock amounted to
$21,000 for quarter ended June 30, 2004 as compared to $57,000 for the same
quarter in 2003.
Interest Expense. Interest expense was virtually unchanged at $3.3 million
for the quarters ended June 30, 2004 and 2003. The average balance of
interest-bearing liabilities increased $103.3 million to $752.3 million for the
quarter ended June 30, 2004 from $649.0 million for the same quarter in the
prior year, while the average cost of these liabilities decreased 25 basis
points to 1.77%. The increase in the average balance of interest-bearing
liabilities includes deposit growth in the Stamford branch, which opened in
September 2003, and the Brookfield branch, which opened in June 2004, as well as
growth in the existing branches. The decrease in the average cost of liabilities
is the result of declining market interest rates during recent periods.
Interest expense on certificates of deposit amounted to $2.6 million for
the current quarter as compared to $2.4 million for the same quarter in 2003.
The increase is due primarily to an $81.4 million increase in the average
balance of time deposits to $460.0 million from $378.6 million for the same
quarter last year, offset partially by a 26 basis point decrease in the average
cost to 2.29%. The increase in the average balance includes growth in the Bank's
new branch offices as well as in existing branches.
Interest on savings accounts amounted to $192,000 for the current quarter
as compared to $283,000 for the quarter ended June 30, 2003. This decrease is
the result of a 30 basis point decrease in the average cost of savings accounts
to 0.51% offset partially by a $10.3 million increase in the average balance of
savings accounts to $150.1 million for the quarter ended June 30, 2004 as
compared to $139.8 million for the same quarter in 2003.
Interest expense on NOW and money market accounts amounted to $121,000 for
quarter ended June 30, 2004 as compared to $188,000 for the same quarter in the
prior year. The average cost decreased 35 basis points to 0.47% and the average
balance of these accounts increased $11.3 million to $103.3 million.
For the quarters ended June 30, 2004 and 2003, interest expense on
borrowings amounted to $365,000. The average balance of borrowings for the
current quarter was $35.1 million and the average cost was 4.18%, virtually
unchanged from the same quarter last year.
12
Net Interest Income. Net interest income for the quarter ended June 30,
2004 amounted to $6.5 million, a $72,000 decrease from the same period in the
prior year. The interest rate spread was 2.80% and 3.07% for the quarters ended
June 30, 2004 and 2003, respectively. The net interest margin for those periods
was 3.02% and 3.39%, respectively. The decreases in interest rate spread and net
interest margin are primarily the result of the effect of mortgage refinancings
and lower returns on our investment portfolio as interest rates remained at
40-year lows. As interest rates increase, the cost of our interest-bearing
liabilities will increase faster than the yield on interest-earning assets. As a
result, our net interest rate spread and net interest margin may decrease. The
decrease in interest rate spread and net interest margin was also a result of
the decrease in the ratio of interest-earning assets to interest-bearing
liabilities to 1.14 for the quarter ended June 30, 2004 from 1.19 for the same
quarter in 2003, reflecting treasury stock purchases and an investment in
bank-owned life insurance ("BOLI").
In December 2003, the Company purchased a BOLI product for $10.0 million.
The BOLI purchase was funded from interest-earning assets; however, the BOLI
asset is classified separately from interest-earning assets on the consolidated
balance sheet, resulting in a decrease in the ratio of average interest-earning
assets to average interest-bearing liabilities. The changes in the cash
surrender value of the BOLI are recognized as non-interest income. The Company's
interest rate spread and net interest margin may decrease as a result of the
financial statement classification of the BOLI asset and related income. For the
quarter ended June 30, 2004, non-interest income related to the BOLI amounted to
$76,000.
Provision for Loan Losses. Management regularly reviews the loan portfolio
and makes provisions for loan losses in amounts required to maintain the
allowance for loan losses in accordance with generally accepted accounting
principles. The allowance consists of losses that are both probable and
estimable at the date of the financial statements. The allowance for loan losses
consists of amounts allocated to specific nonperforming loans and to loans in
each major portfolio category. Loan categories such as single-family residential
mortgage loans, which represented 86.1% of total loans at June 30, 2004, are
generally evaluated on an aggregate or "pool" basis. Our allowance for loan
losses is predominately determined on a pool basis by applying loss factors to
the current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of our historical loss
experience, delinquency trends, volume and type of lending conducted, and the
impact of current economic conditions in our market area.
The provision for loan losses was $75,000 for the quarter ended June 30,
2004 as compared to $50,000 for the quarter ended June 30, 2003. Non-performing
loans amounted to $1.7 million or 0.34% of total loans at June 30, 2004, as
compared to $889,000 or 0.21% of total loans at June 30, 2003. The increase in
non-performing loans is primarily the result of the delinquency of one
borrower's mortgage and home equity loans which total $805,000. The loans are
secured by a single family home with a loan-to-value ratio of less than 60%. The
allowance for loan losses amounted to $2.8 million and $2.7 million at June 30,
2004 and March 31, 2004, respectively. There were no charge-offs or recoveries
in the quarters ended June 30, 2004 and June 30, 2003. The increase in the
allowance for loan losses is primarily due to an increase in the origination of
adjustable rate mortgage loans, commercial mortgage loans and commercial loans
(not secured by real estate) as well as overall portfolio growth.
Non-Interest Income. Non-interest income consists principally of service
charges on deposit accounts, fees earned on the sale of investment products,
late charges on loans, various other service fees and changes in the cash
surrender value of the BOLI. Service charges and fees totaled $276,000 and
$285,000 for the quarters ended June 30, 2004 and 2003, respectively. The change
in the cash surrender value of the BOLI amounted to $76,000 for the quarter
ended June 30, 2004.
Non-Interest Expense. Non-interest expense totaled $4.3 million for the
quarter ended June 30, 2004 as compared to $4.0 million for the quarter ended
June 30, 2003. This increase is due primarily to a $420,000 increase in
compensation and benefits and a $71,000 increase in occupancy and equipment
expense, partially offset by decreases of $163,000 in advertising and promotion
and $78,000 in other non-interest expense.
13
The increase in compensation and benefits is due primarily to a $260,000
increase in expense related to stock awards made pursuant to the Company's 2004
Stock Incentive Plan and a $152,000 increase in compensation costs. The increase
in compensation costs is due primarily to additional staff to support the growth
in the Company's lending operations and the addition of the Stamford and
Brookfield branches, which opened in September 2003 and June 2004, respectively.
The increase in occupancy and equipment expense is primarily due to the
new branch locations (Stamford and Brookfield, Connecticut).
Income Taxes. Income tax expense amounted to $946,000 and $1.1 million for
the quarters ended June 30, 2004 and 2003, respectively. The effective tax rates
for those same periods were 38.7% and 38.3%, respectively.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and mortgage-backed securities, and the
proceeds from maturities of investments. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Company's primary investing activities are the origination of mortgage
loans, and the purchase of short-term investments, government agency bonds,
adjustable-rate mortgage-backed securities and fixed-rate collateralized
mortgage obligations. These activities are funded primarily by deposit growth
and principal repayments on loans, mortgage-backed securities and other
investment securities. For the quarter ended June 30, 2004, the Company
originated loans totaling $62.5 million and purchased $40.0 million of
securities. These disbursements were funded by $23.0 million in principal
payments, maturities and calls of securities and $40.0 million in loan principal
repayments. For the year ended March 31, 2004, the Company originated $186.7
million of loans and purchased $198.7 million of securities.
Liquidity management for the Company is both a daily and long-term process
which is part of the Company's overall management strategy. Excess funds are
generally invested in short-term investments such as Federal funds and
certificates of deposit. In the event that the Bank should require additional
sources of funds, it could borrow from the FHLB under an available line of
credit.
At June 30, 2004, the Company had outstanding loan commitments of $94.9
million. The Company anticipates that it will have sufficient funds available to
meet its current loan commitments. Time deposits scheduled to mature in one year
or less from June 30, 2004, totaled $262.3 million. Management believes that a
significant portion of such deposits will remain with the Company.
The Bank is subject to certain minimum leverage, tangible and risk-based
capital requirements established by regulations of the OTS. These regulations
require savings associations to meet three minimum capital standards: a tangible
capital ratio requirement of 1.5% of total assets as adjusted under the OTS
regulations; a leverage ratio requirement of 4.0% of core capital to such
adjusted total assets; and a risk-based capital ratio requirement of 8.0% of
core and supplementary capital to total risk-based assets. The OTS prompt
corrective action regulations impose a 4.0% core capital requirement for
categorization as an "adequately capitalized" thrift and a 5.0% core capital
requirement for categorization as a "well capitalized" thrift. Goodwill and most
other intangible assets are deducted in determining regulatory capital for
purposes of all capital ratios. In determining the amount of risk-weighted
assets for purposes of the risk-based capital requirement, a savings association
must compute its risk-based assets by multiplying its assets and certain
off-balance sheet items by risk-weights, which range from 0% for cash and
obligations issued by the United States Government or its agencies to 100% for
consumer and commercial loans, as assigned by the OTS capital regulations. At
June 30, 2004, the
14
Bank exceeded all of the OTS minimum regulatory capital requirements, and was
classified as a well-capitalized institution for regulatory purposes.
The following table sets forth the capital position of the Bank as of June
30, 2004 and March 31, 2004. The actual capital amounts and ratios set forth
below are for the Bank only and, accordingly, do not include additional capital
retained by the Holding Company.
OTS Requirements
------------------------ -----------------------
Classification as Well
Bank Actual Minimum Capital Adequacy Capitalized
--------------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------- ------------------------ -----------------------
(Dollars in thousands)
June 30, 2004
Tangible capital $96,860 10.7% $13,570 1.5% $45,232 5.0%
Tier I (core) capital 96,860 10.7 36,187 4.0 54,278 6.0
Risk-based capital:
Tier I 96,860 24.1
Total 99,647 24.8 32,108 8.0 40,136 10.0
March 31, 2004
Tangible capital $95,143 10.9% $13,071 1.5% $43,571 5.0%
Tier I (core) capital 95,143 10.9 34,858 4.0 52,285 6.0
Risk-based capital:
Tier I 95,143 24.3
Total 97,855 25.0 31,377 8.0 39,221 10.0
Proposed Accounting Standard
In March 2004, the Financial Accounting Standards Board ("FASB") issued an
Exposure Draft, "Share-Based Payment, an amendment of FASB Statements No. 123
and 95." The Exposure Draft proposes changes in accounting that would replace
existing requirements under FASB Statement No. 123 and Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the
proposal, all forms of share-based payments to employees, including employee
stock options, would be treated the same as other forms of compensation by
recognizing the related cost in the income statement. The expense of the award
would generally be measured at fair value at the grant date. Current accounting
literature relating to so-called fixed plan employee stock options permits an
election to disclose the associated expense in the notes to the financial
statements without recognition in the income statement. The proposal would be
applied to public entities prospectively for fiscal years beginning after
December 15, 2004.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate risk,
as the majority of the Company's assets and liabilities are sensitive to changes
in interest rates. The Company's assets consist primarily of fixed rate mortgage
loans, which have longer maturities than the Company's liabilities which consist
primarily of deposits. The Company's mortgage loan portfolio, consisting
primarily of loans secured by residential real property located in Westchester
County, New York and Fairfield County, Connecticut, is also subject to risks
associated with the local economy. The Company does not own any trading assets.
At June 30, 2004, the Company did not have any hedging transactions in place,
such as interest rate swaps and caps. The Company's interest rate risk
management program focuses primarily on evaluating and managing the composition
of the Company's assets and liabilities in the context of various interest rate
scenarios. Factors beyond management's control, such as market interest rates
and competition, also have an impact on interest income and interest expense.
During the quarter ended June 30, 2004, there were no significant changes
in the Company's assessment of market risk.
15
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
of June 30, 2004 (the "Evaluation Date"). Based upon that evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective in timely alerting them to any material
information relating to the Company and its subsidiaries required to be included
in the Company's Exchange Act filings.
There were no significant changes made in the Company's internal controls
or in other factors that could significantly affect these internal controls
during the period covered by this report.
16
Part II--OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Issuer purchases of equity securities during the quarter ended June 30,
2004 are as follows:
Total number of shares Maximum number of
purchased under a shares that may yet
Total number of Average price paid publicly announced be purchased under
shares purchased per share repurchase plan (1) repurchase plan (1)
---------------- --------- ------------------- -------------------
April 1-April 30 -- -- -- 627,332
May 1-May 31 270,000 $13.22 280,000 357,332
June 1-June 30 357,332 $13.26 637,332 --
(1) The Company announced a program to repurchase up to 637,332 shares of its
common stock on March 12, 2004 and purchased 10,000 shares prior to March 31,
2004. This program was completed on June 7, 2004. On June 11, 2004, the Company
announced a program to repurchase up to 658,844 shares of its common stock. This
program has no expiration date. There were no purchases under this program at
June 30, 2004.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(b) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(c) Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(d) Reports on Form 8-K
The Company filed a Form 8-K on April 29, 2004 that contained the
Company's news release announcing earnings for the quarter and fiscal
year ended March 31, 2004.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sound Federal Bancorp, Inc.
-------------------------------------------
(Registrant)
By: /s/ Anthony J. Fabiano
-------------------------------------------
Anthony J. Fabiano
Duly Authorized and Chief Financial and
Accounting Officer
August 6, 2004
18