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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-24811
SOUND FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3887679
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1311 Mamaroneck Ave., White Plains, New York 10605
(Address of principal executive offices)
(Zip Code)
(914) 761-3636
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Shares
Outstanding at
Class August 12, 2003
-------------- ---------------------
Common Stock, 13,247,133
par value, $0.01
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2003 and March 31, 2003.......1
Consolidated Statements of Income for the Three Months
Ended June 30, 2003 and 2002..........................................2
Consolidated Statement of Changes in Stockholders' Equity for the Three
Months Ended June 30, 2003............................................3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2003 and 2002..........................................4
Notes to Unaudited Consolidated Financial Statements..................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........15
Item 4. Controls and Procedures..............................................15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings....................................................16
Item 2. Changes in Securities and Use of Proceeds............................16
Item 3. Defaults upon Senior Securities......................................16
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 5. Other Information....................................................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
Signatures...........................................................17
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands) June 30, March 31,
---------------------------------
2003 2003
---------------------------------
Assets
Cash and due from banks $ 7,387 $ 8,776
Federal funds sold and other overnight deposits 37,157 36,121
--------- ---------
Total cash and cash equivalents 44,544 44,897
--------- ---------
Securities available for sale, at fair value (including $28,484 and $29,100
pledged as collateral for borrowings under repurchase agreements at
June 30, 2003 and March 31, 2003, respectively) 339,281 295,048
Loans, net:
Mortgage loans 423,470 428,575
Consumer loans 1,483 1,551
Allowance for loan losses (Note 5) (2,492) (2,442)
--------- ---------
Total loans, net 422,461 427,684
--------- ---------
Accrued interest receivable 3,547 3,678
Federal Home Loan Bank stock 5,302 4,141
Premises and equipment, net 5,401 5,467
Deferred income taxes 120 392
Goodwill 13,970 13,970
Other assets 1,009 811
--------- ---------
Total assets $ 835,635 $ 796,088
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 633,265 $ 604,260
Borrowings (Note 6) 35,000 35,000
Mortgagors' escrow funds 3,646 4,603
Due to brokers for securities purchased 20,899 10,495
Accrued expenses and other liabilities 3,003 3,409
--------- ---------
Total liabilities 695,813 657,767
--------- ---------
Stockholders' equity (Note 1):
Preferred stock ($0.01 par value; 1,000,000 shares authorized;
none issued and outstanding) - -
Common stock ($0.01 par value; 24,000,000 shares authorized; 13,247,133
shares issued and outstanding) 132 132
Additional paid-in capital 95,467 95,395
Common stock held by Employee Stock Ownership Plan ("ESOP") (6,934) (7,059)
Common stock awards under the Recognition and Retention Plan ("RRP") (64) (100)
Retained earnings 50,992 49,937
Accumulated other comprehensive income, net of taxes (Note 7) 229 16
--------- ---------
Total stockholders' equity 139,822 138,321
--------- ---------
Total liabilities and stockholders' equity $ 835,635 $ 796,088
========= =========
See accompanying notes to unaudited consolidated financial statements.
1
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Three Months Ended
---------------------------------
June 30,
2003 2002
---------------------------------
Interest and Dividend Income
Loans $ 6,769 $ 7,614
Mortgage-backed and other securities 2,837 2,040
Federal funds sold and other overnight deposits 128 105
Other earning assets 57 46
--------- ----------
Total interest and dividend income 9,791 9,805
--------- ----------
Interest Expense
Deposits 2,879 3,084
Borrowings 365 416
Other interest-bearing liabilities 17 20
--------- ----------
Total interest expense 3,261 3,520
--------- ----------
Net interest income 6,530 6,285
Provision for loan losses (Note 5) 50 75
--------- ----------
Net interest income after provision for loan losses 6,480 6,210
--------- ----------
Non-Interest Income
Service charges and fees 285 170
Non-Interest Expense
Compensation and benefits 1,992 1,428
Occupancy and equipment 562 444
Data processing service fees 242 229
Advertising and promotion 414 148
Other 774 594
--------- ----------
Total non-interest expense 3,984 2,843
--------- ----------
Income before income tax expense 2,781 3,537
Income tax expense 1,064 1,376
--------- ----------
Net income $ 1,717 $ 2,161
============ ===========
Earnings per share (Note 4)(1):
Basic $ 0.14 $ 0.17
============ ===========
Diluted $ 0.14 $ 0.17
============ ===========
(1) Earnings per share data for the 2002 period has been adjusted to reflect
the shares issued in the second-step conversion completed on January 6,
2003.
See accompanying notes to unaudited consolidated financial statements.
2
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended June 30, 2003
(Unaudited)
(Dollars in thousands, except per share data)
Common Common Accumulated
Additional Stock Stock Other Total
Common Paid-In Held By Awards Retained Comprehensive Stockholders'
Stock Capital ESOP Under RRP Earnings Income Equity
Balance at March 31, 2003 $ 132 $95,395 $ (7,059) $ (100) $ 49,937 $ 16 $ 138,321
Net income - - - - 1,717 - 1,717
Other comprehensive income (Note 7) - - - - - 213 213
--------
Total comprehensive income - - - - - - 1,930
Dividends paid ($0.05 per share) - - - - (662) - (662)
Vesting of RRP shares - - - 36 - - 36
ESOP shares committed to be released
for allocation - 72 125 - - - 197
-------- ------------ ----------- ---------- ------------ --------- ----------------
Balance at June 30, 2003 $ 132 $95,467 $ (6,934) $ (64) $ 50,992 $ 229 $ 139,822
======== ============ =========== ========== ============ ========= ================
See accompanying notes to unaudited consolidated financial statements.
3
Sound Federal Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Three Months Ended
(In thousands) June 30,
----------------------------------
2003 2002
----------------------------------
OPERATING ACTIVITIES
Net income $ 1,717 $ 2,161
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 50 75
Depreciation, amortization and accretion 527 193
ESOP and RRP expense 233 128
Income taxes (283) 131
Other adjustments, net (202) 342
--------- ---------
Net cash provided by operating activities 2,042 3,030
--------- ---------
INVESTING ACTIVITIES
Purchases of securities available for sale (85,675) (13,272)
Proceeds from principal payments, maturities and calls of securities
available for sale 52,221 20,826
Net receipts (disbursements) for loan originations and principal payments 4,956 (19,238)
Proceeds from sales of real estate owned - 114
Purchase of Federal Home Loan Bank stock (1,161) -
Purchases of premises and equipment (122) (208)
--------- ---------
Net cash used in investing activities (29,781) (11,778)
--------- ---------
FINANCING ACTIVITIES
Net increase in deposits 29,005 24,721
Net decrease in mortgagors' escrow funds (957) (619)
Issuance of stock pursuant to stock option plan - 27
Dividends paid on common stock (662) (138)
Net cash provided by financing activities 27,386 23,991
(Decrease) increase in cash and cash equivalents (353) 15,243
Cash and cash equivalents at beginning of period 44,897 26,778
-------- ---------
Cash and cash equivalents at end of period $ 44,544 $ 42,021
======== =========
SUPPLEMENTAL INFORMATION
Interest paid $ 3,361 $ 3,348
Income taxes paid 1,261 1,250
Increase in due to brokers for securities purchased 10,404 -
See accompanying notes to unaudited consolidated financial statements.
4
Sound Federal Bancorp, Inc. and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization and Stock Offering
Initial Public Offering
On October 8, 1998, Sound Federal Bancorp issued shares of its common stock
in connection with a Plan of Reorganization ("the "Reorganization") and related
Subscription and Community Offering (the "Initial Offering"). In the Initial
Reorganization, Sound Federal Savings and Loan Association (the "Bank")
converted from a federally chartered mutual savings association to a federally
chartered stock savings association. Sound Federal Savings and Loan Association
became the wholly-owned subsidiary of Sound Federal Bancorp, which became the
majority-owned subsidiary of Sound Federal, MHC (the "Mutual Holding Company").
Sound Federal Bancorp issued a total of 5,212,218 shares of its common
stock, consisting of 2,810,510 shares (or 53.92%) issued to the Mutual Holding
Company and 2,401,708 shares (or 46.08%) issued to other stockholders. The
shares issued to other stockholders consisted of 192,129 shares purchased by the
Company's Employee Stock Ownership Plan (the "ESOP") using $1.9 million in
proceeds from a loan made by Sound Federal Bancorp; 102,200 shares contributed
by the Company to establish the Sound Federal Savings and Loan Association
Charitable Foundation (the "Charitable Foundation"); and 2,107,379 shares sold
for cash of $21.1 million ($10.00 per share) in the Initial Offering. After
deducting offering costs of $1.1 million, the net cash proceeds from the Initial
Offering were $20.0 million.
Second Step Conversion
On June 13, 2002, the respective Boards of Directors of Sound Federal
Bancorp and the Mutual Holding Company adopted a plan to convert from the mutual
holding form of organization to a fully public holding company structure (the
"Conversion"). The Conversion was completed on January 6, 2003. At that time,
the Mutual Holding Company merged into the Bank, and no longer exists. Sound
Federal Bancorp was succeeded by a new Delaware corporation known as Sound
Federal Bancorp, Inc. Common shares representing the ownership interest of the
Mutual Holding Company were sold in a subscription offering and a community
offering. Common shares owned by public shareholders (shareholders other than
the Mutual Holding Company) were converted into the right to receive new shares
of Sound Federal Bancorp, Inc. common stock determined pursuant to an exchange
ratio. The exchange ratio ensured that immediately after the Conversion and
exchange of existing shares for new shares, the public shareholders owned the
same aggregate percentage of Sound Federal Bancorp, Inc. common stock that they
owned immediately prior to the Conversion, excluding any shares purchased in the
offering. As part of these transactions, Sound Federal Savings and Loan
Association changed its name to Sound Federal Savings (the "Bank"), which is now
a wholly-owned subsidiary of Sound Federal Bancorp, Inc. (the "Holding
Company"). The Bank and the Holding Company are referred to herein as "the
Company".
The Holding Company sold 7,780,737 shares of common stock at $10.00 per
share in the offering completed on January 6, 2003, including 622,458 shares
purchased by the ESOP. In addition, each of the outstanding shares of common
stock of Sound Federal Bancorp (1,967,782 shares, net of 444,926 treasury
shares) was converted into 2.7667 shares of the Holding Company resulting in
5,444,263 outstanding shares. A total of 13,225,000 shares were outstanding as a
result of the offering and share exchange.
5
Net cash proceeds from the offering were as follows (in thousands):
Total cash proceeds (7,780,737 shares) $ 77,807
Offering costs (1,897)
----------------
Net offering proceeds 75,910
Assets received from the Mutual Holding Company 366
----------------
Increase in common stock and additional paid-in capital 76,276
Shares purchased by the ESOP (622,458 shares) (6,225)
----------------
Net cash proceeds $ 70,051
================
The Conversion and related transactions were accounted for at historical
cost, with no resulting change in the historical carrying amounts of assets and
liabilities. Consolidated stockholders' equity increased by the net cash
proceeds from the offering. Share and per share data for all periods have been
adjusted to reflect the additional shares outstanding as a result of the
offering and share exchange.
2. Basis of Presentation
The consolidated financial statements included herein have been prepared by
the Company without audit. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for the periods presented. Certain information and
footnote disclosures normally included in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. The operating results for the
periods presented are not necessarily indicative of results to be expected for
any other interim period or for the entire fiscal year ending March 31, 2004.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates. A material estimate that is particularly susceptible to
near-term change is the allowance for loan losses, which is discussed in Note 4.
The unaudited interim consolidated financial statements presented herein
should be read in conjunction with the annual audited consolidated financial
statements of the Company for the fiscal year ended March 31, 2003, included in
the Company's 2003 Annual Report on Form 10-K.
3. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, encourages the use of a fair-value-based method of
accounting for employee stock compensation plans, but permits the continued use
of the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25. Under SFAS No. 123, the grant-date fair
value of options is recognized as compensation expense over the vesting period.
The Company has elected to continue to apply APB Opinion No. 25 and disclose the
pro forma information required by SFAS No. 123. Had stock-based compensation
expense been recognized in accordance with SFAS No. 123, the
6
Company's net income and earnings per common share would have been adjusted
to the following pro forma amounts:
Three months ended
June 30,
--------------------------------------
2003 2002
--------------------------------------
(In thousands, except per share data)
Net income, as reported $ 1,717 $ 2,161
Add RRP expense included in reported
net income, net of related tax effects 22 22
Deduct RRP and stock option expense determined
under the fair-value-based method, net of (39) (40)
related tax effects
Pro forma net income $ 1,700 $ 2,143
Earnings per share:
Basic, as reported $ 0.14 $ 0.17
Basic, pro forma $ 0.14 $ 0.17
Diluted, as reported $ 0.14 $ 0.17
Diluted, pro forma $ 0.13 $ 0.16
4. Earnings Per Share
Weighted average common shares used in calculating basic and diluted
earnings per share for the three months ended June 30, 2003 were 12,383,041 and
12,716,898, respectively. For the quarter ended June 30, 2002, weighted average
common shares used in calculating basic and diluted earnings per share were
12,866,422 and 13,125,590, respectively.
5. Allowance for Loan Losses
The allowance for loan losses is increased by provisions for loan losses
charged to income and by recoveries of prior charge-offs, and is decreased by
charge-offs. Losses are charged to the allowance when all or a portion of a loan
is deemed to be uncollectible. Recoveries of loans previously charged-off are
credited to the allowance for loan losses when realized. Management's periodic
determination of the allowance is based on continuing reviews of the portfolio,
using a consistently-applied methodology. The allowance for loan losses consists
of losses that are both probable and estimable at the date of the financial
statements. In determining the allowance for loan losses, management considers
factors such as the Company's past loan loss experience, known risks in the
portfolio, adverse situations affecting a borrower's ability to repay, the
estimated value of underlying collateral, and current economic conditions.
Determining the allowance for loan losses involves significant management
judgments utilizing the best information available. Those judgments are subject
to further review by various sources, including the Company's regulators.
Changes in the allowance may be necessary in the future based on changes in
economic and real estate market conditions, new information obtained regarding
known problem loans, the identification of additional problem loans and other
factors, certain of which are outside of management's control.
7
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Three Months Ended Year Ended
-----------------------------------------------------
June 30, March 31,
-----------------------------------------------------
2003 2002 2003
-----------------------------------------------------
(in thousands)
Balance at beginning of period $ 2,442 $ 2,221 $ 2,221
Provision for loan losses 50 75 275
Mortgage loans charged off - - (54)
--------- -------- ----------
Balance at end of period $ 2,492 $ 2,296 $ 2,442
========= ======== ==========
6. Borrowings
The Company had the following outstanding borrowings under securities
repurchase agreements with the Federal Home Loan Bank (the "FHLB") at June 30,
2003:
Maturity Date Coupon Rate Borrowings
(dollars in thousands)
January 2008(1) 5.42 % $ 10,000
December 2008(1) 4.72 5,000
March 2004 3.57 7,000
March 2005 4.22 6,000
March 2006 2.27 7,000
4.11 % $ 35,000
Accrued interest payable $ 149
(1) Callable Quarterly
The securities transferred to the FHLB subject to the repurchase agreements
include U.S. Government and agency securities available for sale with a carrying
value of $11.6 million and mortgage-backed securities available for sale with a
carrying value of $16.8 million. Accrued interest receivable on the securities
was $243,000 at June 30, 2003.
7. Comprehensive Income
Comprehensive income represents the sum of net income and items of "other
comprehensive income or loss" that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net unrealized
gain or loss on securities available for sale and minimum pension liability
adjustments. The Company has reported its total comprehensive income in the
consolidated statement of changes in stockholders' equity.
8
The Company's other comprehensive income is summarized as follows:
Three Months Ended
June 30,
2003 2002
(In thousands)
Net unrealized holding gain arising
during the period on securities available
for sale $ 369 $ 1,023
Related deferred income tax effect (156) (396)
Other comprehensive income $ 213 $ 627
The Company's accumulated other comprehensive income, which is included in
stockholders' equity, is summarized as follows:
June 30, March 31,
2003 2003
(In thousands)
Net unrealized holding gain on securities available for sale $ 3,864 $ 3,495
Additional minimum pension liability (3,468) (3,468)
Related deferred income taxes (167) (11)
------------ ------------
Accumulated other comprehensive income $ 229 $ 16
============ ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Our principal business has historically consisted of offering savings and
other deposits to the general public and using the funds from these deposits to
make loans secured by residential real estate. Our net income depends primarily
upon our net interest income, which is the difference between interest income
earned on interest-earning assets, such as loans and investments, and the
interest expense paid on deposits. To a much lesser degree, our net income is
affected by non-interest income, such as banking service charges and fees. Net
income is also affected by, among other things, provisions for loan losses and
non-interest expenses. Our principal non-interest expenses consist of
compensation and benefits, occupancy and equipment, data processing service
fees, advertising and promotion and other expenses, such as ATM expenses,
professional fees and insurance premiums. Our net income also is affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates; government legislation and policies affecting
fiscal affairs, housing and financial institutions; monetary policies of the
Federal Reserve System; and the actions of bank regulatory authorities.
9
Forward-Looking Statements
When used in this report on Form 10-Q, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements reflect our current view with respect to future-looking
events and are subject to certain risks and uncertainties that could cause
actual results to differ materially from Management's current expectations.
Among others, these risks and uncertainties include changes in general economic
conditions, changes in policies by regulatory agencies, hostilities involving
the United States, fluctuations in interest rates, demand for loans in the
Company's market area, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines and other economic, competitive, governmental and technological
factors affecting our operations, markets and products. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company wishes to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from its forward-looking statements. We do not intend to
update these forward-looking statements.
Second Step Conversion
For additional information concerning the second step conversion, see Note
1 of the Notes to Unaudited Consolidated Financial Statements in this report.
Financial Condition
Assets. The Company's total assets amounted to $835.6 million at June 30,
2003 as compared to $796.1 million at March 31, 2003. The $39.5 million increase
in total assets is due primarily to a $44.2 million, or 15.0%, increase in
securities available for sale to $339.3 million, partially offset by a decrease
of $5.2 million in net loans to $422.5 million. The decrease in loans is the
result of an increase in prepayments by borrowers refinancing their mortgage
loans as market interest rates continued to decline during fiscal 2003. The
$39.5 million increase in total assets was funded primarily by a $29.0 million
increase in deposits and a $10.4 million increase in amounts due to brokers for
securities purchased.
Liabilities. Total deposits were $633.3 million at June 30, 2003, as
compared to $604.3 million at March 31, 2003. Certificates of deposit increased
$17.1 million to $380.8 million from $363.7 million, savings and club accounts
increased $5.5 million to $142.3 million from $136.8 million and money market
and NOW accounts increased $6.5 million to $110.2 million from $103.7 million.
Borrowings totaled $35.0 million at both June 30, 2003 and March 31, 2003.
Amounts that were due to brokers for securities purchased amounted to $20.9
million at June 30, 2003 compared to $10.5 million at March 31, 2003. This
amount represents securities purchased on trade dates prior to June 30, 2003
with transaction settlement dates after June 30, 2003.
Stockholders' Equity. Total stockholders' equity increased $1.5 million to
$139.8 million at June 30, 2003 as compared to $138.3 million at March 31, 2003.
The increase in stockholders' equity reflects $1.7 million in net income and an
increase of $213,000 in accumulated other comprehensive income, partially offset
by dividends of $662,000. The Company's equity to assets ratio was 16.73% at
June 30, 2003, as compared to 17.38% at March 31, 2003. In July 2003, we
announced the commencement of a stock repurchase program to repurchase up to
530,482 (4%) of our outstanding shares of common stock in order to provide
shares for reissuance upon exercise of outstanding stock options. The repurchase
of our shares at current market prices will result in a reduction in
stockholders' equity. The timing of the repurchases will depend on certain
factors, including but not limited to, market conditions and prices, the
Company's liquidity requirements and alternative uses of the Company's capital.
10
Comparison of Results of Operations for the Three Months Ended June 30, 2003
and 2002
Net Income. Net income amounted to $1.7 million or diluted earnings per
share of $0.14 for the quarter ended June 30, 2003, as compared to $2.2 million
or diluted earnings per share of $0.17 for the quarter ended June 30, 2002. The
decrease in net income for the current quarter was due primarily to a $1.1
million increase in non-interest expense partially offset by a decrease of
$312,000 in income tax expense and increases of $245,000 in net interest income
and $115,000 in non-interest income.
Interest Income. Interest income decreased $14,000 to $9.8 million for the
quarter ended June 30, 2003, as compared to the same quarter in 2002. The
decrease is due to a 145 basis point decrease in the average yield on
interest-earning assets to 5.09%, substantially offset by a $170.6 million
increase in average interest-earning assets to $772.1 million during the quarter
ended June 30, 2003 as compared to $601.5 million for the same quarter in the
prior year. The increase in the average balance of interest-earning assets was
due primarily to a $150.3 million increase in the average balance of securities
to $292.1 million and a $22.1 million increase in Federal funds sold and other
overnight deposits to $51.1 million. The increase in average interest-earning
assets was funded principally by deposit growth in the Bank's branches. The
decrease in the average yield on interest-earning assets reflects the
origination of fixed-rate loans at lower rates and the downward repricing of
adjustable-rate securities during recent periods of declining interest rates. In
addition, Federal funds sold and other overnight deposits, which earn less
interest than longer-term interest-earning assets, represented a larger portion
of average interest-earning assets (6.6% of total average interest-earning
assets for the fiscal 2004 quarter, as compared to 4.8% for the fiscal 2003
quarter).
Loans. Interest income on loans decreased $845,000 or 11.1% to $6.8 million
for the current quarter as compared to $7.6 million for the same quarter in
2002. This decrease is due to a $3.9 million decrease in the average balance of
loans to $422.6 million and a 74 basis point decrease in the yield earned to
6.42%.
The decrease in the loan portfolio is principally a result of increased
principal prepayments as a result of continued low market interest rates. The
Bank originated $84.6 million of loans during the quarter ended June 30, 2003 as
compared to $57.4 million for the same quarter in the prior year. These loans
were originated at rates lower than the yields being earned on the existing loan
portfolio. As a result, the average yield earned on the loan portfolio decreased
during fiscal 2003 and the first quarter of fiscal 2004. The Bank has not
historically sold mortgage loans it originates.
Mortgage-Backed Securities. Interest on mortgage-backed securities
increased $636,000 to $2.1 million for the quarter ended June 30, 2003, as
compared to the same quarter in 2002, due primarily to an increase of $114.6
million in the average balance to $212.1 million, partially offset by a decrease
of 216 basis points in the average yield to 4.06%. The increase in the average
balance of mortgage-backed securities is a result of the investment of the
proceeds from the Company's stock offering as well as the investment of funds
from deposit growth. The decrease in the average yield is a result of the
downward repricing of adjustable rate mortgage-backed securities. In addition,
as existing mortgage-backed securities repay, new purchases of mortgage-backed
securities are at lower rates than the existing portfolio.
Other Securities. Interest on other securities increased $161,000 to
$689,000 for the quarter ended June 30, 2003, as compared to the same quarter in
2002, due to a $35.7 million increase in the average balance of other securities
to $80.0 million, partially offset by a 132 basis point decrease in the average
yield to 3.46%. The decrease in the average yield is the result of the continued
low market interest rates.
Federal Funds Sold and Other Overnight Deposits. For the quarter ended June
30, 2003, interest on Federal funds sold and other overnight deposits increased
$23,000 to $128,000, reflecting a $22.1 million increase in the average balance
to $51.1 million partially offset by a 44 basis point decrease in the average
yield earned to 1.01%. The decrease in the average yield is the result of the
continued low market interest rates.
11
Interest Expense. Interest expense for the quarter ended June 30, 2003
totaled $3.3 million, as compared to $3.5 million for the quarter ended June 30,
2002. The average balance of interest-bearing liabilities increased $87.2
million to $649.0 million for the quarter ended June 30, 2003 from $561.8
million for the same quarter in the prior year, while the average cost of these
liabilities decreased 49 basis points to 2.02%. The increase in the average
balance of interest-bearing liabilities includes deposit growth in the Somers
branch, which was opened in July 2002, as well as growth in the existing
branches. The decrease in the average cost of liabilities is the result of
declining market interest rates during recent periods.
Interest expense on time deposits totaled $2.4 million for the current
quarter as compared to $2.6 million for the same quarter in 2002. The decrease
is due primarily to a 65 basis point decrease in the average cost to 2.55%
offset partially by a $58.0 million increase in the average balance of time
deposits to $378.6 million from $320.6 million for the same quarter last year.
The increase in the average balance includes growth in the Bank's new branch
office as well as in existing branches.
Interest on savings accounts amounted to $283,000 for the current quarter
as compared to $311,000 for the quarter ended June 30, 2002. This decrease is
the result of a 24 basis point decrease in the average cost of savings accounts
to 0.81% offset partially by a $21.1 million increase in the average balance of
savings accounts to $139.8 million.
Interest expense on other deposits (NOW and money market accounts) amounted
to $188,000 for quarter ended June 30, 2003 as compared to $214,000 for the same
quarter in the prior year. The average cost decreased 21 basis points to 0.82%
and the average balance of these accounts increased $8.7 million to $91.9
million.
For the quarter ended June 30, 2003, interest expense on borrowings
amounted to $365,000 as compared to $416,000 for the same quarter in the prior
year. The average balance of borrowings for the current quarter was $35.0
million and the average cost was 4.18%. For the quarter ended June 30, 2002, the
average balance of borrowings was $34.9 million and the average cost was 4.78%.
Net Interest Income. Net interest income for the quarter ended June 30,
2003 amounted to $6.5 million, a $245,000 increase from the same period in the
prior year. The interest rate spread was 3.07% and 4.02% for the quarters ended
June 30, 2003 and 2002, respectively. The net interest margin for those periods
was 3.39% and 4.19%, respectively. The decreases in interest rate spread and net
interest margin are primarily the result of the effect of mortgage refinancings
and lower returns on our investment portfolio as interest rates remained at 40
year lows. If interest rates remain at these low levels or decrease further,
mortgage refinancings may continue to adversely affect the Company's interest
rate spread and net interest margin.
Provision for Loan Losses. Management regularly reviews the loan portfolio
and makes provisions for loan losses in amounts required to maintain the
allowance for loan losses in accordance with generally accepted accounting
principles. The allowance consists of losses that are both probable and
estimable at the date of the financial statements. The allowance for loan losses
consists of amounts allocated to specific nonperforming loans and to loans in
each major portfolio category. Loan categories such as single-family residential
mortgage loans, which represented 91.1% of total loans at June 30, 2003, are
generally evaluated on an aggregate or "pool" basis. Our allowance for loan
losses is predominately determined on a pool basis by applying loss factors to
the current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of our historical loss
experience, delinquency trends, volume and type of lending conducted, and the
impact of current economic conditions in our market area.
The provision for loan losses was $50,000 for the quarter ended June 30,
2003 as compared to $75,000 for the quarter ended June 30, 2002. Non-performing
loans amounted to $889,000 or 0.21% of total loans at June 30, 2003, as compared
to $952,000 or 0.22% of total loans at June 30, 2002. The allowance for loan
losses amounted to $2.5 million and $2.4 million at June 30, 2003 and March 31,
2003, respectively. There were no charge-offs or recoveries in the quarters
ended June 30, 2003 and June 30, 2002.
12
Non-Interest Income. Non-interest income totaled $285,000 and $170,000 for
the quarters ended June 30, 2003 and 2002, respectively. The increase in
non-interest income was primarily due to higher levels of income from service
charges on deposit accounts, late charges on loans and various other service
fees.
Non-Interest Expense. Non-interest expense totaled $4.0 million for the
quarter ended June 30, 2003 as compared to $2.8 million for the quarter ended
June 30, 2002. This increase is due primarily to a $564,000 increase in
compensation and benefits, a $266,000 increase in advertising and promotion, a
$118,000 increase in occupancy and equipment expense and a $180,000 increase in
other non-interest expense.
The increase in compensation and benefits is primarily due to a $327,000
increase in compensation costs and a $105,000 increase in ESOP expense. The
increase in compensation expense is due primarily to normal salary increases and
increases in staff to support the growth in the Company's lending operations and
for the Somers branch, which opened in July 2002, and the Stamford branch, which
is expected to open in September 2003. The increase in ESOP expense reflects the
increase in shares committed to be released for allocation as a result of the
second-step conversion and the increase in the market value of those shares.
The increase in advertising and promotion reflects a change in the Bank's
marketing strategy. The Bank is concentrating its advertising efforts during
seasonal product promotions in the spring and fall. The increase in occupancy
and equipment is primarily due to the Company's new corporate office which was
opened in April 2003.
Income Taxes. Income tax expense amounted to $1.1 million and $1.4 million
for the quarters ended June 30, 2003 and 2002, respectively. The effective tax
rates for those same periods were 38.3% and 38.9%, respectively.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and mortgage-backed securities, and the
proceeds from maturities of investments. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Company's primary investing activities are the origination of mortgage
loans, and the purchase of short-term investments, government agency bonds,
adjustable-rate mortgage-backed securities and fixed-rate collateralized
mortgage obligations. These activities are funded primarily by deposit growth
and principal repayments on loans, mortgage-backed securities and other
investment securities. For the quarter ended June 30, 2003, the Company
originated loans totaling $84.6 million and purchased $85.7 million of
securities. These disbursements were funded by $52.2 million in principal
payments, maturities and calls of securities and $89.5 million in loan principal
repayments. For the year ended March 31, 2003, the Company originated $216.3
million of loans and purchased $229.7 million of securities.
Liquidity management for the Company is both a daily and long-term process
which is part of the Company's overall management strategy. Excess funds are
generally invested in short-term investments such as Federal funds and
certificates of deposit. In the event that the Bank should require additional
sources of funds, it could borrow from the Federal Home Loan Bank of New York
under an available line of credit.
At June 30, 2003, the Company had outstanding loan commitments of $80.0
million. The Company anticipates that it will have sufficient funds available to
meet its current loan commitments. Time deposits scheduled to mature in one year
or less from June 30, 2003, totaled $275.1 million. Management believes that a
significant portion of such deposits will remain with the Company.
13
The Bank is subject to certain minimum leverage, tangible and risk-based
capital requirements established by regulations of the OTS. These regulations
require savings associations to meet three minimum capital standards: a tangible
capital ratio requirement of 1.5% of total assets as adjusted under the OTS
regulations; a leverage ratio requirement of 4.0% of core capital to such
adjusted total assets; and a risk-based capital ratio requirement of 8.0% of
core and supplementary capital to total risk-based assets. The OTS prompt
corrective action regulations impose a 4.0% core capital requirement for
categorization as an "adequately capitalized" thrift and a 5.0% core capital
requirement for categorization as a "well capitalized" thrift. Goodwill and most
other intangible assets are deducted in determining regulatory capital for
purposes of all capital ratios. In determining the amount of risk-weighted
assets for purposes of the risk-based capital requirement, a savings association
must compute its risk-based assets by multiplying its assets and certain
off-balance sheet items by risk-weights, which range from 0% for cash and
obligations issued by the United States Government or its agencies to 100% for
consumer and commercial loans, as assigned by the OTS capital regulations. At
June 30, 2003, the Bank exceeded all of the OTS minimum regulatory capital
requirements, and was classified as a well-capitalized institution for
regulatory purposes.
The following table sets forth the capital position of the Bank as of June
30, 2003 and March 31, 2003. The actual capital amounts and ratios set forth
below are for the Bank only and, accordingly, do not include additional capital
retained by Sound Federal Bancorp, Inc.
Recent Accounting Standards and Interpretations
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, was issued in April 2003 to clarify the application of
certain aspects of the accounting for these instruments and activities. The
adoption of SFAS No. 149, which is generally effective for transactions after
June 30, 2003, is not expected to affect our consolidated financial statements.
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, was issued in May 2003. Under
the Statement, certain freestanding financial instruments that embody
obligations for the issuer and that are now classified in equity, must be
classified as liabilities (or as assets in some circumstances). Generally, SFAS
No.150 is effective for financial instruments entered into or modified after May
31, 2003 and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of this standard is not expected to
affect our consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, to provide guidance on the identification of entities
controlled through means other than voting rights. FIN No. 46 specifies how a
business enterprise should evaluate its interests in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity must
be consolidated by its primary beneficiary if the entity does not effectively
disperse risks among the parties involved. A public company with a variable
interest in an entity created before February 1, 2003 must apply FIN No. 46 in
the first interim or annual period beginning after June 15, 2003. The adoption
of FIN No. 46 is not expected to have a significant effect on our consolidated
financial statements.
14
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate risk,
as the majority of the Company's assets and liabilities are sensitive to changes
in interest rates. The Company's assets consist primarily of fixed rate mortgage
loans, which have longer maturities than the Company's liabilities which consist
primarily of deposits. The Company's mortgage loan portfolio, consisting
primarily of loans secured by residential real property located in Westchester
County, New York and Fairfield County, Connecticut, is also subject to risks
associated with the local economy. The Company does not own any trading assets.
At June 30, 2003, the Company did not have any hedging transactions in place,
such as interest rate swaps and caps. The Company's interest rate risk
management program focuses primarily on evaluating and managing the composition
of the Company's assets and liabilities in the context of various interest rate
scenarios. Factors beyond management's control, such as market interest rates
and competition, also have an impact on interest income and interest expense.
During the quarter ended June 30, 2003, there were no significant changes
in the Company's assessment of market risk.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
of June 30, 2003 (the "Evaluation Date"). Based upon that evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective in timely alerting them to any material
information relating to the Company and its subsidiaries required to be included
in the Company's Exchange Act filings.
There were no significant changes made in the Company's internal controls
or in other factors that could significantly affect these internal controls
during the period covered by this report.
15
Part II--OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(b) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(c) Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(d) Reports on Form 8-K
The Company filed a Form 8-K on April 30, 2003 that contained the Company's
news release announcing earnings for the quarter and fiscal year ended
March 31, 2003.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sound Federal Bancorp, Inc.
--------------------------------
(Registrant)
August 12, 2003 By: /s/ Anthony J. Fabiano
-----------------------------------
Anthony J. Fabiano
Duly Authorized and Chief Financial
and Accounting Officer
17
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard P. McStravick, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sound Federal
Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
August 12, 2003 /s/ Richard P. McStravick
- --------------- ----------------------------------
Date Richard P. McStravick
President and Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Anthony J. Fabiano, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sound Federal
Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
August 12, 2003 /s/ Anthony J. Fabiano
- ------------------ ----------------------
Date Anthony J. Fabiano
Senior Vice President and
Chief Financial Officer
Exhibit 32.2
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Richard P. McStravick, President and Chief Executive Officer, and Anthony J.
Fabiano, Senior Vice President and Chief Financial Officer of Sound Federal
Bancorp, Inc. (the "Company"), each certify in his capacity as an officer of the
Company that he has reviewed the Quarterly Report of the Company on Form 10-Q
for the quarter ended June 30, 2003 and that to the best of his knowledge:
(1) the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
August 12, 2003 /s/ Richard P. McStravick
- --------------- -------------------------
Date President and Chief Executive Officer
August 12, 2003 /s/ Anthony J. Fabiano
- --------------- ----------------------
Date Senior Vice President and
Chief Financial Officer