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, 2005
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1311 Mamaroneck Avenue, White Plains, New York 10605
(Address of Principal Executive Offices) (Zip Code)
(914) 761-3636
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
--------------------------------------
(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, 2004, there were issued and outstanding 12,577,841 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, 2004 ($14.71) was
$149,799,712.
The number of shares of the registrant's common stock outstanding as of June 6,
2005 was 12,298,206 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended March
31, 2005 (Parts II and IV).
2. Proxy Statement for the 2005 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"). At March 31, 2005, the Company had total
consolidated assets of $1.0 billion, total deposits of $831.8 million, total
stockholders' equity of $127.2 million and 12,377,206 shares outstanding.
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. At March 31, 2005, the
Bank operated from 14 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, Putnam 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.
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 these loans adjust annually. Until fiscal year 2005, the Bank retained all
loans that it originated. During fiscal 2005, the Bank sold one-to-four family
mortgage loans with principal balances of $1.1 million. One-to-four family
residential mortgage loans represented $441.7 million, or 78.6%, of the Bank's
loan portfolio at March 31, 2005. Home equity lines of credit represented $42.1
million, or 7.5%, of the Bank's loan portfolio at March 31, 2005. The Bank also
offers multi-family mortgage loans, commercial mortgage loans and construction
1
loans. At March 31, 2005, multi-family mortgage loans totaled $9.8 million, or
1.7% of the loan portfolio, commercial mortgage loans totaled $45.6 million, or
8.2% of the loan portfolio, construction loans totaled $17.4 million, or 3.1% of
the loan portfolio, consumer loans totaled $2.2 million, or 0.4% of the loan
portfolio and commercial loans amounted to $2.9 million, or 0.5% of the loan
portfolio.
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,
-----------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------ ------------------ ----------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage Loans:
One-to-four family $441,655 78.6% $375,714 78.3% $343,608 80.2% $334,683 79.7% $221,617 75.1%
Home equity lines
of credit 42,052 7.5 35,185 7.3 44,364 10.4 47,889 11.4 47,315 16.0
Multi-family 9,807 1.7 8,472 1.8 7,118 1.7 8,347 2.0 3,959 1.3
Commercial 45,645 8.2 43,153 9.0 27,866 6.5 23,701 5.6 16,771 5.7
Construction 17,416 3.1 13,723 2.9 4,117 0.9 3,733 0.9 3,659 1.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans 556,575 99.1 476,247 99.3 427,073 99.7 418,353 99.6 293,321 99.3
Consumer loans 2,168 0.4 2,598 0.5 1,551 0.3 1,469 0.4 1,900 0.7
Commercial loans 2,932 0.5 798 0.2 -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans 561,675 100.0% 479,643 100.0% 428,624 100.0% 419,822 100.0% 295,221 100.0%
===== ===== ===== ===== =====
Deferred loan
origination
costs, net 2,087 1,524 1,502 767 633
Allowance for
loan losses (3,011) (2,712) (2,442) (2,221) (2,047)
-------- -------- -------- -------- --------
Total loans, net $560,751 $478,455 $427,684 $418,368 $293,807
======== ======== ======== ======== ========
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,
-----------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------ ------------------ ----------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Fixed rate loans
Mortgage loans:
One-to-four family $252,140 44.9% $251,916 52.5% $259,870 60.7% $272,203 64.8% $215,202 72.9%
Home equity lines
of credit 20,260 3.6 30,922 6.4 44,229 10.3 47,724 11.4 46,908 15.9
Multi-family 9,727 1.7 8,472 1.8 7,118 1.7 8,347 2.0 3,959 1.3
Commercial 44,764 8.0 41,086 8.6 27,109 6.3 23,296 5.6 16,771 5.7
Construction 17,416 3.1 13,723 2.9 4,117 0.9 3,733 0.9 3,659 1.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed-rate
mortgage loans 344,307 61.3 346,119 72.2 342,443 79.9 355,303 84.7 286,499 97.0
Consumer loans 2,168 0.4 2,598 0.5 1,551 0.4 1,469 0.3 1,900 0.7
Commercial loans 2,663 0.5 798 0.2 -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed
rate loans 349,138 62.2 349,515 72.9 343,994 80.3 356,772 85.0 288,399 97.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable rate
loans
Mortgage loans:
One-to-four
family (1) 189,515 33.7 123,798 25.8 83,738 19.5 62,480 14.9 6,415 2.2
Home equity lines
of credit 21,792 3.9 4,263 0.9 135 -- 165 -- 407 0.1
Multi-family 80 -- -- -- -- -- -- -- -- --
Commercial 881 0.2 2,067 0.4 757 0.2 405 0.1 -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable
rate mortgage 212,268 37.8 130,128 27.1 84,630 19.7 63,050 15.0 6,822 2.3
Commercial loans 269 -- -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable
rate loans 212,537 37.8 130,128 27.1 84,630 19.7 63,050 15.0 6,822 2.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
----- ----- ----- ----- -----
Total loans 561,675 100.0% 479,643 100.0% 428,624 100.0% 419,822 100.0% 295,221 100.0%
===== ===== ===== ===== =====
Deferred loan
origination
costs, net 2,087 1,524 1,502 767 633
Allowance for
loan losses (3,011) (2,712) (2,442) (2,221) (2,047)
-------- -------- -------- -------- --------
Total loans, net $560,751 $478,455 $427,684 $418,368 $293,807
======== ======== ======== ======== ========
- ----------
(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, 2005. Loans with adjustable
or renegotiable interest rates are shown as maturing in the period of the next
regularly scheduled interest rate adjustment. 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,
One-to-Four Commercial Consumer and
Family (1) Mortgages 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,
2006 (2) $ 25,140 5.67% $ 1,473 6.24% $17,066 6.10% $ 1,709 6.56% $ 45,388 5.88%
2007 18,621 4.77 5 7.00 350 6.14 207 8.90 19,183 4.84
2008 29,755 4.69 26 9.75 -- -- 213 8.16 29,994 4.72
2009 to 2011 90,557 5.04 1,014 6.12 -- -- 65 7.60 91,636 5.05
2012 to 2015 84,027 5.45 4,427 7.17 -- -- 3,257 6.13 91,711 5.56
2016 to 2020 123,473 5.33 12,435 6.96 -- -- 1,307 6.04 137,215 5.48
2021 and following 112,134 6.52 26,265 6.82 -- -- 8,149 7.30 146,548 6.61
-------- ------- ------- ------- --------
Total $483,707 5.53% $45,645 6.86% $17,416 6.10% $14,907 6.88% $561,675 5.69%
======== ======= ======= ======= ========
(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, 2005 that are contractually due after March
31, 2006.
Fixed Adjustable Total
-------- ---------- --------
(In Thousands)
One-to-four family $271,686 $186,881 $458,567
Commercial mortgages 44,172 -- 44,172
Construction 350 -- 350
Multi-family, consumer
and commercial 13,198 -- 13,198
-------- -------- --------
Total $329,406 $186,881 $516,287
======== ======== ========
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 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. The ten year loan is
also offered as an interest-only loan during the initial ten year period. At
March 31, 2005, 57.1% of the Bank's one-to-four family residential loans were
fixed-rate loans, compared to 67.1% at March 31, 2004. The interest rate on
adjustable-rate mortgage loans is indexed to
5
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.
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, 2005, 42.9% 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, 2005, $441.7 million, or 78.6% of the Bank's loan portfolio,
consisted of one-to-four family residential loans. Loans totaling $510,000
(representing 4 loans) were nonperforming 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. 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, 2005,
the outstanding balances of home equity lines of credit totaled $42.1 million,
or 7.5% of the Bank's loan portfolio. Nonperforming home equity lines of credit
totaled $70,000 at March 31, 2005.
Commercial Mortgage Loans. At March 31, 2005, $45.6 million, or 8.2%, 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, 2005, the largest
commercial mortgage loan had a principal balance of $3.2 million and was secured
by a storage unit facility. As of March 31, 2005, 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
6
level of the borrower; and the borrower's business experience. Personal
guarantees are obtained in most cases from commercial mortgage borrowers.
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 $9.8 million, or 1.7% of the total loan portfolio at March 31, 2005.
Multi-family mortgage loans generally are secured by multi-family rental
properties (including mixed-use buildings and walk-up apartments). At March 31,
2005, the Bank had 18 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,
2005.
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, 2005, the
Bank had construction loans totaling $17.4 million, or 3.1% of total loans.
There were no nonperforming construction loans at March 31, 2005.
The Bank's construction loans to home builders generally have fixed
interest rates, are typically for a term of up to 18 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.
7
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 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, 2005,
consumer loans totaled $2.2 million, or 0.4% of the total loan portfolio. There
were no non-performing consumer loans 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 $2.9
million or 0.5% at the total loan portfolio at March 31, 2005. There were no
nonperforming commercial loans at that date.
8
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 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 the Chief
Executive Officer, the Chief Financial Officer and two lending officers. The
Bank will generally not originate a loan with a principal balance in excess of
$6.0 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 any loans during the periods indicated.
For the Year Ended March 31,
---------------------------------------
2005 2004 2003
--------- --------- ---------
(In Thousands)
Unpaid principal balances
at beginning of year $ 479,643 $ 428,624 $ 419,822
--------- --------- ---------
Loans originated by type:
One-to-four family 132,349 119,910 165,384
Advances under home
equity lines of credit 34,352 24,718 26,444
Multi-family 3,196 1,500 490
Commercial 12,488 19,836 11,782
Construction 19,716 17,415 10,606
Consumer loans 4,459 2,474 1,585
Commercial loans 1,370 800 --
--------- --------- ---------
Total loans originated 207,930 186,653 216,291
--------- --------- ---------
Principal repayments:
Mortgage loans (118,406) (134,205) (205,761)
Consumer and commercial
loans (6,425) (1,424) (1,503)
--------- --------- ---------
Total principal
repayments (124,831) (135,629) (207,264)
--------- --------- ---------
Loan sales:
One-to-four family (1,066) -- --
Charge-offs (1) (5) (54)
Transfers to real estate
owned -- -- (171)
--------- --------- ---------
Unpaid principal balances
at end of year 561,675 479,643 428,624
Deferred loan origination
costs, net 2,087 1,524 1,502
Allowance for loan losses (3,011) (2,712) (2,442)
--------- --------- ---------
Net loans at end of year $ 560,751 $ 478,455 $ 427,684
========= ========= =========
10
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 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,
------------------------------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(Dollars in Thousands)
Nonaccrual loans:
Mortgage loans:
One-to-four family $ 510 $1,359 $ 449 $ 690 $ 855
Home equity lines of credit 70 617 18 65 78
Consumer loans -- 5 10 -- --
------ ------ ------ ------ ------
Total 580 1,981 477 755 933
Real estate owned:
One-to-four family properties -- -- -- 114 197
------ ------ ------ ------ ------
Total non-performing assets 580 $1,981 477 869 1,130
====== ====== ====== ====== ======
Ratios:
Nonperforming loans to total loans 0.10% 0.41% 0.11% 0.18% 0.31%
Nonperforming assets to total assets 0.06% 0.22% 0.06% 0.14% 0.20%
For the year ended March 31, 2005, gross interest income that would have
been recorded had the nonaccrual loans been current in accordance with their
original terms amounted to $40,000. Interest amounts on such loans that were
included in interest income totaled $16,000 for the year ended March 31, 2005.
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, 2005
Mortgage loans:
One-to-four-family 6 $1,278 4 $ 510 10 $1,788
Home equity lines of credit 2 51 1 70 3 121
Consumer loans 4 2 -- -- 4 2
---- ------ ---- ------ ---- ------
Total 12 $1,331 5 $ 580 17 $1,911
==== ====== ==== ====== ==== ======
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
==== ====== ==== ====== ==== ======
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 as "special mention" loans that are delinquent for between
60 and 89 days or for which the borrower has not submitted updated financial
information which the Bank uses to complete its annual review of the loan. At
March 31, 2005, loans classified as special mention consisted of $1.3 million of
loans that were between 60 and 89 days past due and $8.7 million of loans for
which the Bank has not received updated financial information (all of which were
current as of March 31, 2005).
12
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.
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,
----------------------------------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(In Thousands)
Substandard loans:
One-to-four family (1) $ 580 $1,976 $ 467 $ 755 $ 933
Consumer -- -- 10 -- --
Doubtful loans:
Consumer -- 5 -- -- --
------ ------ ------ ------ ------
Total classified loans 580 1,981 477 755 933
Real estate owned:
Substandard -- -- -- 114 197
------ ------ ------ ------ ------
Total classified assets $ 580 $1,981 $ 477 $ 869 $1,130
====== ====== ====== ====== ======
- ----------
(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 86.1% of our total loans at March
31, 2005) 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
13
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.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
For the Years Ended March 31,
-------------------------------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
(Dollars in Thousands)
Balance at beginning of year $ 2,712 $ 2,442 $ 2,221 $ 2,047 $ 1,188
------- ------- ------- ------- -------
Provision for loan losses 300 275 275 175 208
Allowance recorded in purchase acquisition -- -- -- -- 784
Charge-offs:
One-to-four family mortgage loans -- -- (54) (15) (162)
Consumer loans (1) (5) -- -- --
Recoveries:
One-to-four family mortgage loans -- -- -- 14 29
------- ------- ------- ------- -------
Net charge-offs (1) (5) (54) (1) (133)
------- ------- ------- ------- -------
Balance at end of year $ 3,011 $ 2,712 $ 2,442 $ 2,221 $ 2,047
======= ======= ======= ======= =======
Ratios:
Allowance for loan losses to nonperforming loans 519.14% 136.90% 511.95% 294.17% 219.40%
Allowance for loan losses to total loans 0.54% 0.57% 0.57% 0.53% 0.69%
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.
------------------------------- -------------------------------- -------------------------------
2005 2004 2003
------------------------------- -------------------------------- -------------------------------
Percent of Percent of Percent of
Loan in Loan in Loan in
Each Each Each
Loan Category Loan Category Loan Category
Loan Balances to Loan Balances to Loan Balances to
Loss by Total Loss by Total Loss by Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ---------- --------- -------- ---------- --------- -------- ----------
(Dollars in Thousands)
Mortgage loans:
One-to-four
family (1) $ 1,519 $483,707 86.1% $ 1,327 $410,899 85.6% $ 1,224 $387,972 90.6%
Multi-family 175 9,807 1.7 150 8,472 1.8 150 7,118 1.7
Commercial 960 45,645 8.2 935 43,153 9.0 828 27,866 6.5
Construction 150 17,416 3.1 100 13,723 2.9 90 4,117 0.9
Consumer 125 2,168 0.4 150 2,598 0.5 150 1,551 0.3
Commercial 82 2,932 0.5 50 798 0.2 -- -- --
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total $ 3,011 $561,675 100.0% $ 2,712 $479,643 100.0% $ 2,442 $428,624 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
------------------------------- --------------------------------
2002 2001
------------------------------- --------------------------------
Percent of Percent of
Loan in Loan in
Each Each
Loan Category Loan Category
Loan Balances to Loan Balances to
Loss by Total Loss by Total
Allowance Category Loans Allowance Category Loans
--------- -------- ---------- --------- -------- ----------
(Dollars in Thousands)
Mortgage loans:
One-to-four
family (1) $ 1,090 $382,572 91.1% $ 1,009 $268,932 91.1%
Multi-family 150 8,347 2.0 150 3,959 1.3
Commercial 741 23,701 5.6 600 16,771 5.7
Construction 90 3,733 0.9 90 3,659 1.2
Consumer 150 1,469 0.4 198 1,900 0.7
Commercial -- -- -- -- -- --
-------- -------- ----- -------- -------- -----
Total $ 2,221 $419,822 100.0% $ 2,047 $295,221 100.0%
======== ======== ===== ======== ======== =====
- ----------
(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. The Company has not engaged in derivative
or hedging activities covered by Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
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 $259.5 million, or 25.8% of total
assets at March 31, 2005. Of this amount, $147.0 million of mortgage-backed
securities had adjustable rates of interest and $112.5 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 a 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 Bank's CMOs are issued by
Ginnie Mae, Freddie Mac and 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, 2005 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, 2005, the carrying value of the Bank's investment securities
other than mortgage-backed securities included $73.4 million in U.S. Government
and agency securities and GSE securities, 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, 2005, the Bank had invested $21.8 million in two mutual funds
that provide a rate of return that adjusts daily. The first mutual fund, in
which the Bank has a $15.8 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 $6.0
million investment, invests in mortgage-backed securities, which are
collateralized by mortgages on properties located in our primary lending area.
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 as
investments that the Bank purchases directly. These mutual funds provide the
Bank with increased liquidity and also provide 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 exist with the Bank's mortgage loans.
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, 2005, $31.1 million, or 3.1% of total assets, was invested in such
instruments.
16
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.
At March 31,
------------------------------------------------------------------------------
2005 2004 2003
---------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(In Thousands)
Mortgage-backed securities
Adjustable rate:
Pass-through securities
Ginnie Mae $ 68,750 $ 68,788 $ 87,849 $ 87,907 $101,250 $102,548
Fannie Mae 28,653 28,324 38,085 38,362 30,424 30,720
Freddie Mac 10,816 10,769 15,121 15,261 18,659 18,934
Fixed rate:
Collateralized mortgage obligations 86,076 83,594 102,989 103,034 52,336 52,832
Pass-through securities
Ginnie Mae 1,009 1,017 1,364 1,421 760 814
Fannie Mae 5,243 5,060 6,274 6,290 2,078 2,277
Freddie Mac 2,216 2,193 3,505 3,578 4,122 4,359
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities 202,763 199,745 255,187 255,853 209,629 212,484
U.S. Government agency securities 55,058 53,644 59,546 59,781 59,075 59,409
Mutual fund investments 22,007 21,785 21,000 21,094 22,000 22,180
Municipal securities 860 980 854 1,002 849 975
-------- -------- -------- -------- -------- --------
Total securities available for sale 280,688 $276,154 336,587 $337,730 291,553 $295,048
======== ======== ========
Other earning assets
Federal funds sold 1,000 1,000 7,000
Other overnight deposits 30,095 19,756 29,121
FHLB stock 5,738 5,303 4,141
-------- -------- --------
Total $317,521 $362,646 $331,815
======== ======== ========
The following table sets forth the composition of the Company's securities
classified as held to maturity at March 31, 2005. The Company had no securities
classified as held to maturity at March 31, 2004 and 2003.
Amortized Fair
Cost Value
--------- -------
(In Thousands)
Adjustable rate mortgage-backed securities:
Ginnie Mae $35,268 $35,080
Fannie Mae 2,339 2,344
Freddie Mac 1,577 1,556
Fixed rate collateralized mortgage
obligations 20,593 20,257
------- -------
Total mortgage-backed securities 59,777 59,237
U.S. Government and agency securities 19,712 19,491
------- -------
Total securities
held to maturity $79,489 $78,728
======= =======
17
The composition and contractual maturities of mortgage-backed securities
and other debt securities at March 31, 2005 are indicated in the following
table. The table does not reflect the impact of prepayments or redemptions which
may occur.
More than Five
More than One Year Years through
One Year or Less through Five Years Ten Years More than 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)
Available for sale:
Collateralized mortgage
obligations $ -- --% $ -- --% $ 4,783 3.48% $ 81,293 4.09% $ 86,076 $ 83,594 4.06%
Mortgage-backed securities:
Ginnie Mae 6 8.28 50 8.43 2 11.50 69,701 4.17 69,759 69,805 4.18
Fannie Mae 30 5.72 175 6.86 263 7.11 33,428 4.52 33,896 33,384 4.56
Freddie Mac 85 6.82 249 7.16 2,125 4.05 10,573 5.01 13,032 12,962 4.90
------ ----- ------- ----- ------- ----- -------- ----- -------- -------- -----
Total mortgage-backed
securities 121 6.63 474 7.18 7,173 3.79 194,995 4.24 202,763 199,745 4.24
Other debt securities:
U.S. Government and agency
securities 1,000 2.03 42,369 3.09 4,626 2.95 7,063 3.05 55,058 53,644 3.05
Municipal securities -- -- -- -- 210 5.80 650 5.88 860 980 5.86
------ ----- ------- ----- ------- ----- -------- ----- -------- -------- -----
Total securities
available for sale $1,121 2.53% $42,843 3.13% $12,009 3.50% $202,708 4.21% $258,681 $254,369 3.99%
====== ===== ======= ===== ======= ===== ======== ===== ======== ======== =====
Held to maturity:
Collateralized mortgage
obligations $ -- --% $ -- --% $ 5,651 4.30% $ 14,942 4.21% $ 20,593 $ 20,257 4.23%
Mortgage-backed securities:
Ginnie Mae -- -- -- -- -- -- 35,268 4.59 35,268 35,080 4.59
Fannie Mae -- -- -- -- -- -- 2,339 4.66 2,339 2,344 4.66
Freddie Mac -- -- -- -- -- -- 1,577 5.57 1,577 1,556 5.57
------ ----- ------- ----- ------- ----- -------- ----- -------- -------- -----
Total mortgage-backed
securities -- -- -- 5,651 4.30 54,126 4.52 59,777 59,237 4.50
Other debt securities:
U.S. Government and agency
securities -- -- 16,850 3.49 999 2.42 1,863 3.91 19,712 19,491 3.47
------ ----- ------- ----- ------- ----- -------- ----- -------- -------- -----
Total securities held
to maturity $ -- --% $16,850 3.49% $ 6,650 4.02% $ 55,989 4.50% $ 79,489 $ 78,728 4.24%
====== ===== ======= ===== ======= ===== ======== ===== ======== ======== =====
18
The following table sets forth the activity in the Bank's mortgage-backed
securities portfolios classified as available for sale for the periods
indicated.
Years Ended March 31,
-----------------------------------
2005 2004 2003
--------- --------- ---------
(In Thousands)
Amortized cost at beginning of year $ 255,187 $ 209,629 $ 101,636
Purchases of mortgage-backed securities 20,639 135,683 160,353
Principal repayments (72,035) (89,494) (52,345)
Premium amortization and
discount accretion, net (1,028) (631) (15)
--------- --------- ---------
Amortized cost at end of year $ 202,763 $ 255,187 $ 209,629
========= ========= =========
The following table sets forth the activity in the Bank's mortgage-backed
securities portfolios classified as held to maturity for the year ended March
31, 2005. The Bank did not have any mortgage-backed securities classified as
held to maturity at March 31, 2004 and 2003 and there was no activity for such
securities during those fiscal years.
Year Ended
March 31, 2005
--------------
(In Thousands)
Amortized cost at beginning of year $ --
Purchases of mortgage-backed securities 64,212
Principal repayments (4,384)
Premium amortization and discount accretion, net (51)
--------
Amortized cost at end of year $ 59,777
========
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.
Deposits. Deposits are obtained primarily from customers who live or work
in the New York counties of Westchester, Putnam 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
19
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, 2005, $552.9 million, or 66.4% of the Bank's
deposit accounts were certificates of deposit, of which $260.7 million have
maturities of one year or less. The Bank anticipates that most of these
certificates of deposit maturing within one year will remain with the Bank.
However, should market interest rates continue to increase, the Bank's cost of
funds may significantly increase or we may experience a significant loss of
deposits.
The following table sets forth the distribution of the Bank's deposit
accounts by account type at the dates indicated.
At March 31,
----------------------------------------------------------------------------------
2005 2004 2003
-------------------------- ------------------------- --------------------------
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 $150,455 18.1% 0.51% $148,231 20.9% 0.51% $136,846 22.7% 0.81%
Money market accounts 52,881 6.4 0.97 47,338 6.7 0.73 45,331 7.5 1.09
NOW accounts 61,357 7.4 0.35 54,616 7.7 0.24 50,912 8.4 0.46
Commercial checking 14,201 1.7 -- 12,404 1.8 -- 7,457 1.2 --
-------- ----- -------- ----- -------- -----
Total 278,894 33.6 0.54 262,589 37.1 0.47 240,546 39.8 0.76
-------- ----- -------- ----- -------- -----
Certificates of deposit maturing:
Within one year 260,659 31.3 2.30 321,473 45.4 1.87 264,353 43.7 2.33
After one but within two years 199,952 24.0 3.15 40,517 5.7 2.66 58,309 9.7 2.62
After two but within three years 59,822 7.2 3.60 56,753 8.0 3.09 16,463 2.7 3.46
After three years 32,441 3.9 4.23 26,998 3.8 4.24 24,589 4.1 4.49
-------- ----- -------- ----- -------- -----
Total 552,874 66.4 2.86 445,741 62.9 2.24 363,714 60.2 2.57
-------- ----- -------- ----- -------- -----
Total deposits $831,768 100.0% 1.90% $708,330 100.0% 1.58% $604,260 100.0% 1.85%
======== ===== ======== ===== ======== =====
20
The following table sets forth the deposit activity of the Bank for the
periods indicated.
Years Ended March 31,
-------------------------------------------
2005 2004 2003
----------- ----------- -----------
(Dollars in Thousands)
Balance at beginning of year $ 708,330 $ 604,260 $ 519,905
Deposits 1,185,147 1,033,069 1,151,713
Withdrawals (1,075,648) (940,150) (1,079,310)
Interest credited 13,939 11,151 11,952
----------- ----------- -----------
Balance at end of year $ 831,768 $ 708,330 $ 604,260
=========== =========== ===========
Net increase during the year
Amount $ 123,438 $ 104,070 $ 84,355
Percent 17.4% 17.2% 16.2%
The following table indicates the amount of the Bank's certificates of
deposits by time remaining until maturity as of March 31, 2005.
Maturity
------------------------------------------------
3 Months Over 3 to 6 Over 6 to Over 12
or Less Months 12 Months Months Total
-------- ----------- --------- ------- -----
(In Thousands)
Certificates of deposit less than $100,000 $40,238 $ 98,096 $62,106 $213,780 $414,220
Certificates of deposit of $100,000 or more (1) 12,740 28,666 18,813 78,435 138,654
------- -------- ------- -------- --------
Total of certificates of deposit $52,978 $126,762 $80,919 $292,215 $552,874
======= ======== ======= ======== ========
- ----------
(1) The weighted average interest rates for these accounts, by maturity
period, are 2.10% for 3 months or less; 2.35% for 3 to 6 months; 2.69% for
6 to 12 months; and 3.49% for over 12 months. The overall weighted average
rate for accounts of $100,000 or more was 3.02%.
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.
21
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,
-----------------------------------
2005 2004 2003
------- ------- -------
(Dollars in Thousands)
Average principal balance outstanding $37,268 $39,208 $34,977
Maximum principal balance outstanding at any
month end during the period 44,000 55,000 35,082
Principal balance outstanding at end of period 38,000 35,000 35,000
Weighted average interest rate during the period 4.00% 3.81% 4.66%
Weighted average interest rate at end of the period 3.80% 3.93% 4.11%
The following table sets forth the maturity dates of the Bank's borrowings
under securities repurchase agreements at the dates indicated.
At March 31,
- ------------------------------------------------------------------------------
2005 2004 2003
- ---------------------- ------------------------ -----------------------
Maturity Maturity Maturity
Date Amount Date Amount Date Amount
- -------- ------ -------- ------ -------- ------
(Dollars in Thousands)
1/08 (1) $10,000 1/08 (1) $10,000 1/08 (1) $10,000
12/08 (1) 5,000 12/08 (1) 5,000 12/08 (1) 5,000
6/05 3,000 3/05 6,000 3/04 7,000
3/06 7,000 3/06 7,000 3/05 6,000
3/07 7,000 3/07 7,000 3/06 7,000
3/08 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.
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
22
real estate investment trust under New York law. First Federal REIT, Inc. was
also formed as a real estate investment trust by Peekskill Financial Corporation
("Peekskill") prior to the acquisition of Peekskill in July 2000. 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
and 2003, Mamaroneck Advisors, Inc. had net income of $23,000 and $43,000,
respectively. Net income for fiscal 2005 was not significant.
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, 2005, the Bank employed 130 persons on a full-time basis
and 16 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.
23
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 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, 2005, Sound Federal Savings' capital exceeded all applicable
requirements, and met the criteria for being considered "well-capitalized".
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, 2005, 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.
24
"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, 2005, Sound Federal Savings maintained approximately 88.8% of its
portfolio assets in qualified thrift investments.
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 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
25
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 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.
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
institutions must pay assessments to the Federal Deposit Insurance Corporation
at an annual rate of approximately 0.02% 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, 2005,
Sound Federal Savings was in compliance with this requirement.
26
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,
2005, 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 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.
27
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. The 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
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 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
29
by management in the annual report to shareholders. Sarbanes-Oxley requires the
company's independent registered public accounting firm that issues the audit
report to attest to and report on management's assessment of the company's
internal controls over financial reporting. The Company has included
management's report on internal control over financial reporting and the report
of the Company's independent registered public accounting firm in the March 31,
2005 Annual Report to Stockholders.
Executive Officers of the Company
Listed below is information, as of March 31, 2005, 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 70 Chairman of the Board.
Richard P. McStravick 56 President and Chief Executive Officer.
Anthony J. Fabiano 44 Chief Financial Officer and Accounting
Officer.
30
ITEM 2. PROPERTIES
The following table provides certain information with respect to the
Bank's offices at March 31, 2005. The net book value for leased properties
represents the amortized cost of leasehold improvements.
Leased or
Owned, Lease Year Acquired Net Book Value
Location Expiration Date or Leased of Real Property
- --------------------------------------------------------------------------------
(In Thousands)
Corporate Office Leased
1311 Mamaroneck Avenue 4/1/2010 2003 $ 67
White Plains, New York 10605
Branch Office Owned 1954 493
300 Mamaroneck Avenue
Mamaroneck, New York 10543
Branch Office Owned 1961 612
389 Halstead Avenue
Harrison, New York 10528
Branch Office Owned 1972 980
115 South Ridge Street
Rye Brook, New York 10573
Branch Office Leased 1998 111
180 South Main Street 12/31/2006
New City, New York 10956
Branch Office Leased 1998 191
100 East Putnam Avenue 11/30/2008
Cos Cob, Connecticut 06807
Branch Office Owned 2000 420
1019 Park Street
Peekskill, New York 10566
Branch Office Leased 2000 41
1961 Commerce Street 12/31/2012
Yorktown Heights, New York 10598
Branch Office Leased 2000 649
Cortland Town Center 10/14/2017
Mohegan Lake, New York 10547
Branch Office Leased
88 Fourth Street 2/8/2009 2001 13
New Rochelle, New York 10801
Branch Office Leased
Somers Commons 5/31/2022 2001 222
Baldwin Place, New York 10589
Branch Office Leased 2003 315
599 Newfield Avenue 6/30/2008
Stamford, Connecticut 06905
Branch Office Leased 2004 46
247 Federal Road 4/19/2009
Brookfield, Connecticut 06804
Branch Office Leased 2004 497
Shoprite Shopping Center 8/12/2014
Carmel, New York 10512
Branch Office Leased 2004 295
146 Greenwood Avenue 10/15/2014
Bethel, Connecticut 06801
The total net book value of the Bank's premises, land and equipment was
approximately $6.2 million at March 31, 2005.
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.
31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(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.
Issuer purchases of equity securities during the quarter ended March 31,
2005 are as follows:
Maximum
Total number number of
of shares shares
purchased that may
under a yet be
Average publicly purchased
Total number price announced under
of shares paid repurchase repurchase
purchased per share plan(1) plan(1)
--------- --------- ------------ ----------
January 1 - January 31 -- -- -- 658,844
February 1 - February 28 250,000 15.05 250,000 408,844
March 1 - March 31 -- -- -- 408,844
(1) 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.
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.
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.
32
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, 2005 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 three months ended March 31, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
The Management Report on Internal Control Over Financial Reporting and the
related Report of Independent Registered Public Accounting Firm are incorporated
herein by reference to the Company's Annual Report to Stockholders.
ITEM 9B. Other Information
None.
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 7, 2005 (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, specifically the
section captioned "Proposal II-Ratification of Appointment of the Independent
Registered Public Accounting Firm."
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statements, financial statement schedules and exhibits 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, 2005 and 2004
o Consolidated Statements of Income for the Years Ended
March 31, 2005, 2004 and 2003
o Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended March 31, 2005, 2004 and 2003
o Consolidated Statements of Cash Flows for the Years
Ended March 31, 2005, 2004 and 2003
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)) 36
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))
34
10.3a Employment Agreement with Richard McStravick
(Incorporated by reference to the Company's Form 10-K
for the year ended March 31, 2004)
10.3b Employment Agreement with Anthony J. Fabiano
(Incorporated by reference to the Company's Form 10-K
for the year ended March 31, 2004)
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 (Incorporated by
reference to the Company's Form 10-K for the year ended
March 31, 2004)
10.8 Non-qualified Supplemental Executive Retirement
Agreement for Anthony J. Fabiano (Incorporated by
reference to the Company's Form 10-K for the year ended
March 31, 2004)
13 2005 Annual Report to Stockholders
14 Code of Ethics (Incorporated by reference to the
Company's Form 10-K for the year ended March 31, 2004)
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
35
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, 2005 /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, 2005 Date: June 10, 2005
By: /s/ Anthony J. Fabiano By: /s/ Roberta I. Bernhardt
-------------------------------- --------------------------------
Anthony J. Fabiano, Chief Roberta I. Bernhardt, Director
Financial Officer and Accounting
Officer
Date: June 10, 2005 Date: June 10, 2005
By: /s/ Joseph Dinolfo By: /s/ Donald H. Heithaus
-------------------------------- --------------------------------
Joseph Dinolfo, Director Donald H. Heithaus, Director
Date: June 10, 2005 Date: June 10, 2005
By: /s/ Joseph A. Lanza By: /s/ Eldorus Maynard
-------------------------------- --------------------------------
Joseph A. Lanza, Director Eldorus Maynard, Director
Date: June 10, 2005 Date: June 10, 2005
By: /s/ James Staudt By: /s/ Samuel T. Telerico
-------------------------------- --------------------------------
James Staudt, Director Samuel T. Telerico, Director
Date: June 10, 2005 Date: June 10, 2005
36