UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
0-23126
Commission File Number
RELIANCE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3187176
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
585 Stewart Avenue, Garden City, New York 11530
(Address of Principal Executive Offices) (Zip Code)
(516) 222-9300
(Registrant's telephone number, including area code)
None
Securities registered pursuant to Section 12(b) of the Act
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act
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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark 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 the 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 ]
As of September 17, 1996, the aggregate market value of the shares of common
stock of the registrant outstanding was $151,004,000 excluding the 522,625
shares held by all directors and officers of the registrant. This figure is
based on the closing price by the Nasdaq National Market for a share of the
registrant's common stock on September 17, 1996, which was $18.00 as reported in
the Wall Street Journal on September 18, 1996. The number of shares of the
registrant's common stock outstanding as of September 17, 1996 was 8,911,739
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 12, 1996 and the Annual Report to
Stockholders for fiscal year 1996 are incorporated herein by reference - Parts
II and III.
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FORM 10-K CROSS REFERENCE INDEX
PART I
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Page No.
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Item 1. Business
Description of Business............................................................................................ 1
Statistical Data:
Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differential....................................................................... 25
Mortgage and Other Loan Activities................................................................................. 26
Loan Maturity and Repricing........................................................................................ 27
Summary of Allowance for Loan Losses............................................................................... 28
Composition of Loan Portfolio...................................................................................... 30
Money Market, Debt and Equity and Mortgage-Backed Securities Portfolio............................................. 31
Maturity Listing for Money Market Investments, Debt and Equity
and Mortgage-Backed Securities Portfolio....................................................................... 32
Deposit Activities................................................................................................. 33
Borrowings......................................................................................................... 35
Item 2. Properties............................................................................................................ 36
Item 3. Legal Proceedings..................................................................................................... 38
Item 4. Submission of Matters to a Vote of Security Holders................................................................... 38
PART II
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Item 5. Market for Company's Common Equity and Related
Stockholder Matters................................................................................................ 38
Item 6. Selected Financial Data............................................................................................... 39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................................ 39
Item 8. Financial Statements and Supplementary Data........................................................................... 39
Reliance Bancorp, Inc. and Subsidiary:
Independent Auditors' Report....................................................................................... 39
Consolidated Statements of Condition............................................................................... 39
Consolidated Statements of Income.................................................................................. 39
Consolidated Statements of Changes in Stockholders' Equity......................................................... 39
Consolidated Statements of Cash Flows.............................................................................. 39
Notes to Consolidated Financial Statements..................................................................... .... 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................................................... 39
PART III
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Item 10. Directors and Executive Officers of the Company....................................................................... 39
Item 11. Executive Compensation................................................................................................ 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................................................................... 39
Item 13. Certain Relationships and Related Transactions........................................................................ 40
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................................... 40
Signatures...................................................................................................................... 42
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PART I
Item 1. Business
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized
on November 16, 1993 at the direction of the Board of Directors of Reliance
Federal Savings Bank (the "Bank") for the purpose of becoming a holding company
to own all of the outstanding capital stock of the Bank upon its conversion from
a mutual to a stock form of organization. The stock conversion was completed on
March 31, 1994 which raised $103.6 million of net proceeds from the sale of
10,750,820 common shares in the conversion including the issuance of 400,820
shares of stock to the Bank's Recognition and Retention Plans and Trusts from
authorized but unissued shares at $10.00 per share. The Company retained $51.8
million of the net proceeds and used the remaining net proceeds to purchase all
of the outstanding stock of the Bank.
In addition to directing, planning and coordinating the business activities
of the Bank, the Company invests primarily in U.S. Government securities and
repurchase agreements. In addition, the Company completed its acquisitions of
Bank of Westbury, a Federal Savings Bank, in August 1995 and Sunrise Bancorp,
Inc. in January 1996.
General
The primary business of the Company is the operations of its wholly-owned
subsidiary, the Bank. The Bank's principal business is attracting retail
deposits from the general public and investing those deposits, together with
funds generated from operations, principal repayments and borrowings, primarily
in mortgage, multi-family, consumer loans (primarily home equity lines of
credit, home equity loans, auto and guaranteed student loans) and to a lesser
extent, commercial real estate and construction loans. In the past, the Bank has
also invested in loans secured by cooperative units ("co-op loans") and
commercial loans, but in recent years has discontinued its origination
activities in these areas. In addition, during periods in which the demand for
loans which meet the Bank's underwriting, investment and interest rate risk
standards is lower than the amount of funds available for investment, the Bank
invests excess funding in mortgage-backed securities, securities issued by the
U.S. Government and agencies thereof and other investments permitted by federal
laws and regulations. The Bank's revenues are derived principally from interest
on its loan and mortgage-backed securities portfolios. The Bank's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage-backed and investment securities, FHLB-NY advances and reverse
repurchase agreements.
The information presented in the financial statements and in the Form 10-K
reflect the financial condition and results of operations of the Company, as
consolidated with the Bank, its wholly-owned subsidiary. At June 30, 1996, the
Company had total assets of $1.8 billion.
Acquisition of Bank of Westbury
After the close of business on August 11, 1995, the Company completed its
acquisition of the Bank of Westbury, a Federal Savings Bank, with 6 banking
offices located in Nassau County, Long Island, New York in a transaction which
was accounted for utilizing the purchase method. The cost of the acquisition was
approximately $16.7 million in cash or $37.72 per share of common stock. The
excess of cost over the fair value of net assets acquired in the transaction was
$7.8 million, which will be amortized on a
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straight line basis over 15 years. The Company provided funds for the
acquisition from its normal cash flow. As of the completion of the acquisition,
which was effected by merging the net assets acquired into the Bank, the Bank
continued to exceed each of its regulatory capital requirements.
Acquisition of Sunrise Bancorp, Inc.
After the close of business on January 11, 1996, the Company completed the
acquisition of Sunrise Bancorp, Inc. in a transaction which was accounted for
utilizing the purchase method. The cost of the acquisition was approximately
$106.3 million in cash, or $32.00 per share of Sunrise Bancorp, Inc. common
stock outstanding. The excess of cost over the fair value of net assets acquired
generated in the transaction was $43.6 million, which will be amortized on a
straight line basis over 15 years. The Company provided funds for the
acquisition from the sale of mortgage-backed securities classified as
available-for-sale. As of the completion of the acquisition, which was effected
by merging the net assets acquired into the Bank, the Bank has continued to
exceed each of its regulatory capital requirements.
Market Area and Competition
The Bank has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank's deposit gathering area is primarily
concentrated in the communities surrounding its full service banking offices in
the New York City Borough of Queens and the New York State Counties of Nassau
and Suffolk. The Bank's primary lending area extends beyond its deposit
gathering area to the New York City Boroughs of Brooklyn, Staten Island,
Manhattan and the Bronx and the New York State County of Westchester.
The New York City metropolitan area has historically benefited from having
a large number of corporate headquarters and a diversity of financial service
industries. In particular, Long Island has historically benefited from a large
and well-developed suburban market, a well-educated employment base and a
diversity of industrial, service and high technology businesses. In recent
periods, however, due in part to the effects of a prolonged decline in the
regional economy, layoffs in the financial services industry and corporate
relocations, the New York City metropolitan and Long Island areas have
experienced reduced levels of employment and significant workforce transition.
In particular, the counties of Nassau and Suffolk have experienced reduced
employment as a result of restructuring and downsizing in the high technology
defense related industries, which have historically been significant sources of
employment in the Bank's primary market area. These events, in conjunction with
a surplus of available commercial and residential property, brought about an
overall decline in the underlying values of properties located in the area
followed by the current stabilization of values at lower levels over the past
several years.
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from savings banks, savings and loan associations, mortgage
banking companies, commercial banks, credit unions and insurance companies. Its
most direct competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Bank also
faces additional competition for deposits from money market mutual funds,
corporate and government securities funds and other financial intermediaries
such as brokerage firms and insurance companies.
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Lending Activities
Portfolio Composition. The Bank offers a variety of loans to serve the
credit needs of its communities. The Bank's loan portfolio is comprised
primarily of first mortgage loans, most of which are underwritten to meet
Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage
Association ("FNMA") standards and guidelines and are secured by one- to
four-family residences, including co-op loans and, to a lesser extent, by
multi-family residences and commercial real estate. The Bank also emphasizes the
origination of consumer loans in the form of its home equity lines of credit and
home equity loans. The remainder of the Bank's loan portfolio, at June 30, 1996,
consisted of a variety of consumer and other loans, primarily guaranteed student
loans, auto and loans on deposit accounts. At June 30, 1996, the Bank's loan
portfolio totalled $822.2 million, of which, $578.7 million were one- to
four-family loans, $131.3 million were consumer and other loans, $106.7 million
were multi-family and commercial real estate loans and $5.5 million were
construction loans.
The types of loans that the Bank may originate are subject to federal laws
and regulations. Interest rates charged by the Bank on loans are affected
principally by the demand for such loans, the cost and supply of money available
for lending purposes and rates offered by its competitors. General and economic
conditions, monetary policies of the federal government including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters also
affect interest rates charged by the Bank.
One- to Four-Family Residential Mortgage Lending. The Bank currently offers
first mortgage loans secured by one- to four-family residences and condominiums
located in the Bank's primary lending area. The Bank offers such loans as fixed
rate mortgage loans and adjustable rate mortgage loans ("ARMs") with maturities
ranging from five to 30 years. Loan originations are generally obtained from
existing or past customers, members of the local communities served, or
referrals from local real estate agents, attorneys and builders. The Bank's one-
to four-family residential mortgage loans are generally underwritten according
to guidelines of the FHLMC, FNMA and other governmental agencies. However, the
Bank originates loans for its own portfolio with amounts in excess of the loan
amounts specified by such guidelines.
At June 30, 1996, $569.0 million, or 69.2% of the Bank's total loan
portfolio consisted of one-to four-family residential loans, of which $239.3
million, or 42.1%, were ARM loans. The Bank currently offers one-year ARM loans
with terms of up to 30 years and loans with terms of up to 30 years which are
fixed for three, five, seven and ten years and convert into one-year ARM loans
at the end of the initial fixed period. These ARM loans may carry an initial
interest rate which is less than the fully indexed rate for the loan. These ARM
loans may be originated on a point or no-point basis (i.e., with or without a
loan origination fee based on a percentage of the loan amount). The maximum loan
amount for ARM loans offered by the Bank is currently $750,000 and the maximum
loan-to-value ratio is 80.0% of the property's appraised value or sales price,
whichever is lower or over 80% if private mortgage insurance is obtained.
Presently, the Bank's interest rates on ARM loans fluctuate based upon a spread
above the weekly average yield of United States Treasury securities, adjusted to
a constant maturity which corresponds to the adjustment period of the loan (the
"U.S. Treasury constant maturity index") as published weekly by the Federal
Reserve Board and are generally subject to limitations on interest rate
increases and decreases of 2.0% per adjustment period with a specified lifetime
cap. At June 30, 1996, the lifetime cap for point and no-point loans was 11.75%
and 12.75%, respectively. The Bank's ARM loans typically carry an initial
interest rate below the fully-indexed rate for the loan. However, the Bank
qualifies borrowers based upon the fully-indexed rate plus 200 basis points. The
Bank determines the initial discount rate in accordance
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with market and competitive factors and, as of June 30, 1996, the rate offered
by the Bank on point loans was 275 basis points below the fully-indexed rate of
8.50% as of such date. The rate offered by the Bank on no-point loans during the
same period was 175 basis points below the fully-indexed rate. The volume and
types of ARM loans originated by the Bank have been affected by such market
factors as the level of interest rates, competition, consumer preferences and
the availability of funds. During the past several years, demand for ARM loans
has been weak due to a low interest rate environment and consumer preference for
fixed rate loans. Accordingly, although the Bank will continue to offer ARM
loans, there can be no assurance that the Bank will be able to originate a
sufficient volume of ARM loans in the future to increase or maintain the
proportion that these loans currently bear to total loans.
The Bank currently offers fixed rate mortgage loans with terms of 10 to 30
years, secured by one-to four-family residences and condominiums. The Bank also
offers these loans on a point or no-point basis with the respective interest
rates determined in accordance with prevailing market and competitive factors.
Fixed rate mortgage loans with terms exceeding 15 years are currently originated
by the Bank for sale in the secondary market to the FHLMC, FNMA and other
investors. The maximum loan amount for fixed rate loans offered by the Bank is
currently $750,000. For fixed rate loans to be retained for the Bank's
portfolio, the Bank's underwriting standards establish an 80.0% maximum
loan-to-value ratio or over 80% if private mortgage insurance is obtained. Fixed
rate loans which meet the eligibility requirements for sale to FHLMC or FNMA
will be considered for amounts up to 95.0% of the appraised value or sales
price, whichever is lower. Loan applications which meet the eligibility
requirements of the State of New York Mortgage Agency ("SONYMA") Low Interest
Rate Program will be considered for amounts up to 100.0% of the appraised value
or sales price, whichever is lower. At June 30, 1996, $329.7 million, or 57.9%,
of the Bank's one- to four-family residential mortgage loan portfolio consisted
of fixed rate loans.
In the past, the Bank originated co-op loans. However, since 1989, the Bank
has not originated, nor does it intend to originate in the future, any co-op
loans, with the exception of loans to facilitate the restructuring of a
classified asset or the sale of real estate owned. At June 30, 1996, the Bank's
co-op loans totalled $9.7 million, or 1.2% of total loans. The Bank also, from
1983 to 1989, originated a number of "low documentation" loans. As with co-op
loans, the Bank has ceased originations of such loans.
Multi-Family and Commercial Real Estate Lending. The Bank currently offers
fixed rate loans and ARM loans (one, three, five, seven, ten and 15 year)
secured by multi-family dwellings (five or more units) and commercial real
estate (e.g., office buildings, retail stores, mixed use properties, shopping
centers, etc.). The maximum loan amounts for multi-family and commercial real
estate loans offered by the Bank are $5.0 million and $1.5 million,
respectively. The Bank offers multi-family or commercial real estate loans with
terms up to 15 years, and amortizations of up to 30 years for multi-family loans
and 15 years for commercial real estate loans. The maximum loan-to-value ratios
for multi-family and commercial real estate loans is 70.0% and 60.0%,
respectively, of the property's appraised value or sales price, whichever is
lower.
During fiscal 1996, the Bank increased its origination of multi-family
loans. For fiscal 1996, originations totalled $63.8 million as compared to $10.5
million in fiscal 1995 and $0 in fiscal 1994. The Bank increased its emphasis on
originations of 5 year ARM loans with terms of up to 15 years and amortizations
up to 30 years. These ARM loans may carry an initial interest rate which is less
than the fully indexed rate for the loan. These ARM loans are originated on a
point basis and no-point basis. Presently, the Bank's interest rates on 5 year
ARM loans fluctuate based upon a spread above the weekly average
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yield of United States Treasury securities, adjusted to a constant maturity of 5
years which corresponds to the adjustment period of the loan (the "U.S. Treasury
constant maturity index for 5 years") as published weekly by the Federal Reserve
Board. The Bank determines the initial discount rate in accordance with market
and competitive factors and, as of June 30, 1996, the rate offered by the Bank
on point loans was 100 basis points below the fully-indexed rate of 9.125% as of
such date. The rate offered by the Bank on no-point loans during the same period
was 75 basis points below the fully-indexed rate.
During fiscal 1996, the Bank originated commercial real estate loans
totalling $522,000. The Bank did not originate any commercial real estate loans
during fiscal year 1995 and 1994 other than a small loan for the sale of a real
estate owned property in fiscal 1995. Due to market conditions and the Bank's
determination to originate such loans on a selective basis, the Bank's
commercial real estate originations in recent periods have been relatively low
in comparison to its other lending activities. The Bank determines the interest
rate and term of each multi-family or commercial real estate loan on a
case-by-case basis and in accordance with prevailing market and competitive
factors. In making its determination, the Bank will consider the financial
resources and income level of the borrower, the borrower's experience in owning
or managing similar property, the marketability of the property and the Bank's
lending experience with the borrower, and the property's net operating income
available for debt service.
At June 30, 1996, the Bank's multi-family loans, consisting of 79 loans,
totalled $79.6 million, or 9.7% of the Bank's total loan portfolio. Commercial
property loans, consisting of 134 loans, totalled $27.1 million, or 3.3% of the
Bank's total loan portfolio. At June 30, 1996, all multi-family loans were
current and performing in accordance with their terms. At June 30, 1996, the
Bank had 3 commercial real estate loans totalling $739,000 which were not
performing in accordance with their loan terms and are on non-accrual status.
Loans secured by commercial properties generally involve a greater degree
of risk than residential mortgage loans. Because payments on loans secured by
commercial properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
Additionally, the recent declines in real estate values have been more
pronounced with respect to commercial properties. The Bank seeks to minimize
these risks by originating such loans on a selective basis.
Construction Lending. The Bank currently offers construction loans secured
by one- to four-family, multi-family and commercial real estate properties on a
selective basis. The Bank's construction loan originations in recent periods
have primarily been made to finance the construction of one- to four- family
residential properties. As of June 30, 1996, construction loans totalled $5.5
million or 0.67% of total loans. At June 30, 1996, the Bank's largest
outstanding commitment was $5.1 million for the construction of 35 pre-sold,
two-family dwellings located in Brooklyn, New York.
Consumer and Other Lending. The Bank currently offers three general types
of consumer loans consisting of: (1) home equity lines of credit, (2) home
equity loans and (3) guaranteed student loans. The Bank offers adjustable rate
home equity lines of credit secured by one- to four-family owner-occupied
properties (including condominiums) which serve as the primary residence of the
borrower. Co-op units do not qualify as security for such loans. The Bank's home
equity line of credit loans include a standard home equity line of credit, which
may be secured only by a first or second mortgage on the underlying property,
and a mini-home equity line of credit, which may be secured by any recorded
mortgage on the underlying property. Both are open end lines of credit available
only to borrowers within the Bank's
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lending community. The maximum line of credit is presently $250,000 for the
standard home equity line of credit and $50,000 for the mini-home equity line of
credit. Each line of credit loan is limited to a maximum loan-to-value ratio of
80.0%, less any prior lien(s); provided the maximum loan amount plus any prior
lien balance does not exceed $350,000. For the standard home equity line of
credit, borrowers may draw on their line for a period of 10 years and may pay
interest only on a monthly basis. At the end of the 10 year period, borrowers
must repay principal and interest at a 20-year amortization rate. For the
mini-home equity line of credit, borrowers may draw on their line for a period
of 5 years and may pay interest only on a monthly basis. Borrowers must then
repay principal and interest at a 10-year amortization rate. Advances under each
line of credit are accessed by the borrower drawing a personal check on his or
her individual account set up specifically for the program. The account is
separate and distinct from any other checking account held by the borrower. At
June 30, 1996, the Bank's home equity lines of credit totalled $81.2 million, or
9.9% of total loans.
The Bank also offers fixed rate home equity loans with terms ranging from
one to 15 years. Such loans are secured by one- to four-family owner-occupied
real property (including condominiums) which is the primary residence of the
borrower. The loan is available only to borrowers within the Bank's lending
community and co-op units do not qualify as security for such loans. The maximum
loan amount is $50,000, and the maximum loan-to-value ratio is 75.0%, less any
prior liens; provided that the loan amount plus any prior lien balance does not
exceed a total of $350,000. At June 30, 1996, the Bank's home equity loans
totalled $16.7 million, or 2.0% of total loans.
The Bank's guaranteed student loans are made only under the Guaranteed
Student Loan Program administered by the New York State Higher Education
Services Corporation ("NYSHESC"). The Bank does not fix the amount, maturity, or
interest rate for its Education Loans; however, such terms meet the maximums
authorized by NYSHESC and therefore are guaranteed by NYSHESC. The Bank will not
approve an Education Loan application for any course of study offered by any
school with a default ratio above 15.0% on the most recent Cohort Default Rate
Listing published by the United States Department of Education. Increased
competition for guaranteed student loans in general has resulted in reduced
origination activity by the Bank for such loans. At June 30, 1996, the Bank's
guaranteed student loans totalled $18.8 million, or 2.3% of total loans.
Additionally, the Bank offers loans fully secured by its deposit accounts
which, at June 30, 1996, totalled $5.8 million, or 0.70% of total loans. The
Bank offered other consumer loans in the form of home improvement, auto and boat
loans; however, the Bank currently offers only auto loans. At June 30, 1996,
such loans totalled $7.9 million or 0.97% of total loans.
Loan Approval Procedures and Authority. Loan approval authority has been
granted by the Board of Directors to the Bank's Mortgage Loan Committee and
Consumer Loan Committee. For all mortgage loans originated by the Bank, upon
receipt of a completed loan application from a prospective borrower, a credit
report is ordered, certain other information is verified and, if necessary,
additional financial information is requested. An appraisal of the real estate
intended to secure the proposed loan is required and is currently performed by
Board approved independent fee appraisers. The Bank requires title insurance on
all mortgage loans, except for certain consumer loans secured by real estate.
Borrowers must also obtain hazard insurance and may be required to obtain flood
insurance prior to closing. Borrowers generally are required to advance funds on
a monthly basis together with each payment of principal and interest to a
mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes and private mortgage insurance premiums, if required.
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Delinquent Loans and Foreclosed Assets
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of specific steps to induce the borrower to cure
the delinquency and restore the loan to a current status.
The Bank's collection procedures applicable to mortgage loans include a
computerized delinquency notice being sent at the time a payment is over 15 days
past due, with a second notice being sent at the time payment becomes 30 days
past due. A personal letter is generally sent after the 40th day of delinquency.
In the event that payment is not received after the 60th day, a division
supervisor will be notified. Such supervisor will then order an inspection of
the property within the next week and assume control of the account within two
weeks. If personal contact is made with the borrower during inspection or any
time prior to foreclosure, the Bank will attempt to obtain full payment or work
out a repayment schedule with the borrower to avoid foreclosure. Foreclosure
notices are sent when a loan is 85-90 days delinquent. Foreclosure commences on
the 91st day of delinquency. Most loan delinquencies are cured within 90 days
and no legal action is taken.
The Bank's collection procedures applicable to home equity lines of credit
are generally similar to those discussed above; however, if an agreeable
resolution of the delinquency is not reached, a notice of intent to foreclose is
generally sent after the 45th day of delinquency and the matter is generally
transferred to the supervisor on the same day. As with mortgage loans,
foreclosures for home equity lines of credit commence on the 91st day of
delinquency.
With respect to delinquent payments on other loans (e.g., mini-home equity
loans, automobile loans, etc.), delinquency letters are sent to borrowers at the
end of 26 and 40 days. In the event such loans become delinquent 120 days or
more, the account is charged off and legal action is pursued.
Non-Accrual Loans. The following table sets forth information regarding
non-accrual loans and loans delinquent 90 days or more, on which the Bank is
accruing interest at the dates indicated. It is the Bank's policy to classify
any loans, or any portion thereof, that have been determined to be
uncollectible, in whole or in part, as non-accrual loans. With the exception of
guaranteed student loans, the Bank also classifies as non-accrual loans all
loans 90 days or more past due. When a loan is placed on non-accrual status, the
Bank ceases the accrual of interest owed and previously accrued interest is
charged against interest income. During the fiscal years ended June 30, 1996,
1995, and 1994, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totalled $554,000,
$130,000 and $122,000, respectively. These amounts were not included in the
Bank's interest income for the respective periods.
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At June 30,
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1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
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Non-accrual mortgage loans delinquent
more than 90 days .............................. $12,277 $ 3,210 $ 2,666 $ 4,073 $ 4,879
Non-accrual other loans delinquent
more than 90 days .............................. 352 -- 88 95 105
------- ------- ------- ------- -------
Total non-accrual loans ............................ 12,629 3,210 2,754 4,168 4,984
Loans 90 days or more delinquent
and still accruing ............................. 350 461 843 1,099 1,019
------- ------- ------- ------- -------
Total non-performing loans ......................... 12,979 3,671 3,597 5,267 6,003
------- ------- ------- ------- -------
Total foreclosed real estate, net of
related allowance for losses ................... 1,564 1,558 2,911 3,909 5,815
------- ------- ------- ------- -------
Total non-performing assets ........................ $14,543 $ 5,229 $ 6,508 $ 9,176 $11,818
======= ======= ======= ======= =======
Non-performing loans to total loans ................ 1.58% 1.10% 1.08% 1.43% 1.46%
Non-performing assets to total assets .............. 0.82% 0.56% 0.78% 1.25% 1.75%
</TABLE>
Potential Problem Loans
As of June 30, 1996, there were approximately $2.2 million of other loans
not included in the table above where known information about possible credit
problems of the borrowers caused management to have concerns as to the ability
of the borrower to comply with present loan repayment terms. Set forth below is
a description of the largest potential problem loans.
At June 30, 1996, the Bank had two loans outstanding totalling $1.2 million
secured by a boat marina in Lindenhurst, NY. The loans were originated in
September 1994 in the form of a $687,500 first mortgage on the property and
$550,000 second mortgage building loan. As of June 30, 1996, the borrower is 29
days delinquent on the first mortgage loan and 59 days delinquent on the
building loan. Subsequent to year end, the Bank has commenced foreclosure
proceedings and a receiver has been appointed. The borrower has obtained a loan
commitment subject to certain conditions which is sufficient to satisfy the
principal due on the loan; however, there is no guarantee the borrower will meet
all of the conditions of the loan commitment.
At June 30, 1996, the Bank had two loans outstanding totalling $1.0 million
secured by a funeral home in Westbury, NY. The loans were originated in August
1995 in the form of a $580,000 first mortgage on the property and $500,000
second mortgage building loan. As of June 30, 1996, the borrower has $465,000
outstanding on the building loan. An appraisal dated March 1995, valued the
property at $1.7 million. As of June 30, 1996, the borrower is 59 days
delinquent on the first and second mortgage loans. Because of cash flow
problems, the Bank is presently monitoring the loans due to their size and
inability to obtain a takeout of the second mortgage position. The Bank is
currently working with the borrower to bring these loans current.
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Allowances for Losses on Loans, Investments in Real Estate and Real Estate
Owned.
The Bank's allowance for loan losses is established and maintained through
a provision for loan losses based on management's evaluation of the risk
inherent in the Bank's loan portfolio and the condition of the local economy in
the Bank's market areas. Such evaluation, which includes a review of all loans
on which full collectibility is not reasonably assured, considers among other
matters, the estimated fair market value of the underlying collateral, economic
and regulatory conditions, and other factors that warrant recognition of an
adequate loan loss allowance. The evaluation includes a system of ranges and
percentages as a supplemental measure for reviewing the adequacy of the
allowance for loan losses. Although management believes it uses the best
information available to make determinations with respect to the adequacy of the
Bank's allowance for loan losses, future adjustments may be necessary if
economic and other conditions differ from the economic and other conditions in
the assumptions used in making the initial determinations which such adjustments
could have an adverse impact on the earnings or financial condition of the
Company.
General valuation 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. The Bank'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 ("OTS") and the Federal Deposit Insurance Company ("FDIC"),
both of which can order the establishment of additional general or specific loss
allowances.
As a result of the declines in local and regional real estate market values
and the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institutions by the OTS and the FDIC. While the Bank believes it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to materially increase at that time its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings at that time.
Investment Activities
General
As part of the present investment policy, the Bank deploys a large portion
of its investable funds into mortgage-backed securities, and to a lesser extent,
U.S. Government and agency obligations, and state and municipal debt securities.
The investment policy of the Bank, which is approved by the Board of Directors
and implemented by the Bank's Investment Committee as authorized by the Board,
is designed primarily to generate a favorable return for the Bank without
compromising the Bank's business objectives or incurring undue interest rate or
credit risk, and to provide and maintain liquidity for the Bank.
The Investment Committee, which is comprised of the Bank's Chief Executive
Officer, President, Senior Vice President - Treasurer and Vice President -
Investment Officer, meets as needed but not less than on a monthly basis to
monitor the Bank's investment transactions, to establish future investment
strategies and to set future spending parameters. The Board of Directors reviews
the Bank's investment policy on a quarterly basis and the Bank's investment
activity on a monthly basis. In establishing its investment strategies, the
Committee considers the Bank's business and growth plans, its interest rate
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sensitivity "gap" position, the local and national economic environment, the
types of securities to be held and other factors.
Although federally-chartered savings institutions have authority to invest
in various types of assets, including U.S. Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers acceptances, repurchase agreements, loans
of federal funds, and, subject to certain limits, corporate securities,
commercial paper and mutual funds, the Bank currently favors mortgage-backed
securities over other types of securities due to the Bank's focus upon
residential mortgage lending. SFAS 115 requires that investments in equity
securities that have readily determinable fair values and all investments in
debt securities are to be classified in one of the following three categories
and accounted for accordingly: (1) trading securities; (2) securities
available-for-sale; and (3) securities held-to-maturity. Unrealized gains or
losses on trading securities would be included in the determination of net
income. Unrealized gains and losses on available-for-sale securities are
excluded from the earnings and reported as a separate component of equity, net
of taxes. Upon the purchase of an investment security the Bank and the Company
will make a determination as to the classification of the securities. However,
the Bank and the Company currently do not purchase securities with the intention
of trading such securities, nor does the Bank or the Company maintain trading
portfolios. With the exception of U.S. Treasury securities, the Bank currently
purchases securities with the intention and ability to hold them to maturity.
These securities are stated at cost, adjusted for amortization of premium and
accretion of discount using the level-yield method.
Debt and Equity Securities
At June 30, 1996, the Bank's debt and equity securities portfolio
classified held-to-maturity totalled $48.3 million. The debt and equity
securities held-to-maturity portfolio consisted of $35.0 million in U.S.
Government agency obligations, $391,000 in municipal obligations and $13.0
million of FHLB stock. At June 30, 1996, the Bank's debt and equity securities
portfolio classified available-for-sale totalled $13.3 million. The debt and
equity securities available-for-sale portfolio consisted of $10.2 million in
U.S. Government agency obligations, $3.0 million in U.S. Treasury notes, and
$61,000 in marketable equity securities. At June 30, 1996, the holding Company
did not hold any debt and equity securities. The Company sold debt and equity
securities available-for-sale during the year to repurchase its stock and pay
cash dividends. The Bank's current investment policy does not permit the Bank to
invest in non-investment grade bonds or high-risk mortgage derivatives. At June
30, 1996, the Company and the Bank also had money market investments which
consisted of $1.0 million in federal funds and $9.5 million in repurchase
agreements.
Mortgage-Backed Securities
The Bank invests in mortgage-backed securities and utilizes such
investments to complement its mortgage lending activities in periods of low loan
demand for the types of mortgage loans the Bank originates to be held for
investment in conformance with its underwriting standards and interest rate risk
policies, namely, ARM loans and shorter-term fixed rate loans secured by one- to
four-family properties and multi-family loans. At June 30, 1996, the Bank's
entire mortgage-backed securities portfolio, was directly or indirectly insured
or guaranteed by the FNMA, GNMA or FHLMC. At June 30, 1996, mortgage-backed
securities totalled $776.2 million, or 43.5% of total assets, of which $184.5
million were classified as held-to-maturity and $591.7 million were classified
as available-for-sale. The Bank has increased its purchases of mortgage-backed
securities as a result of the lower demand for the types of loans held for
investment by the Bank, resulting in excess funding being invested in
adjustable-rate and shorter-
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term mortgage-backed securities. In addition, the Bank increased its purchases
of mortgage-backed securities available-for-sale as part of its leveraging
strategy in order to improve its return on equity. At June 30, 1996, the
mortgage-backed securities portfolio classified as available-for-sale had an
unrealized loss of $9.3 million. The market value of all mortgage-backed
securities totalled approximately $776.7 million at June 30, 1996.
As of June 30, 1996, $363.6 million, or 46.8%, of the Bank's
mortgage-backed securities portfolio carried adjustable rates repricing
annually. The portfolio had a weighted average interest rate yield of 6.86% at
June 30, 1996. Investments in mortgage-backed securities involve a risk that
actual prepayments will exceed prepayments estimated over the life of the
security which may result in a loss of any premium paid for such instruments
thereby reducing the net yield on such securities. In addition, if interest
rates increase, the market value of such securities may be adversely affected.
Sources of Funds
General. Deposits, loans and mortgage-backed securities principal and
interest payments, FHLB-NY advances and reverse repurchase agreements are the
primary sources of the Bank's funds for use in lending, investing and for other
general purposes. The Bank utilizes borrowings as part of its asset/liability
management strategy.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank presently offers passbook savings, demand
deposit, NOW, money market, and certificate accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates, pricing of deposits and competition. The Bank's deposits are
primarily obtained from areas surrounding its offices, and the Bank relies
primarily on marketing new products, service and long-standing relationships
with customers to attract and retain these deposits. The Bank does not use
brokers to obtain deposits, nor does it offer a negotiated rate on large dollar
deposits.
When management determines the levels of the Bank's deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings
and the rates charged on other sources of funds. The Bank has maintained a high
level of passbook, demand deposit and NOW accounts ("core deposits"), which has
contributed to its low cost-of-funds. Passbook, demand deposits and NOW accounts
represented 41.7% of total deposits at June 30, 1996 as compared to 36.1% of
total deposits at June 30, 1995.
Borrowings. The Bank has utilized borrowed funds to grow, leveraging the
Bank's capital and improving the return on equity. Borrowed funds, principally
from the FHLB-NY and reverse repurchase agreements are utilized as a source of
funding in order to take advantage of favorable rates of interest in comparison
to its other sources of funds. The Bank's FHLB-NY advances are generally secured
by a blanket lien against the Bank's mortgage portfolio, mortgage-backed and
investment securities portfolios and the Bank's investment in the stock of the
FHLB-NY. The maximum amount that the FHLB-NY will advance for purposes other
than for meeting withdrawals, fluctuates from time to time in accordance with
the policies of the FHLB-NY. At June 30, 1996, total advances from the FHLB-NY
was $3.0 million. The Bank has also entered into reverse repurchase agreements
with nationally recognized primary securities dealers. Reverse repurchase
agreements are accounted for as borrowings and are secured by the securities
sold with agreements to repurchase. At June 30, 1996, borrowings under reverse
repurchase agreements totalled $263.2 million.
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Subsidiary Activities
The Bank formed a number of subsidiaries in the mid-1980s to enter into
real estate-development joint ventures for the development of properties located
in the Bank's primary lending area, all of which are currently inactive. The
Bank does not currently intend to form any new subsidiaries or use any currently
inactive subsidiaries to enter into new real estate development projects. The
Bank maintains the following active subsidiary.
RFS Insurance Agency Inc. RFS Insurance was organized by the Bank on April
15, 1983 for the purpose of engaging in the sale of savers life insurance issued
by American International Life Insurance ("AILI") through its Savers Life
Insurance Program. AILI terminated this program on January 1, 1989; since that
time the Bank has originated no new policies and has only accepted renewals of
existing policies. The Bank currently offers the sale of non-deposit investment
products (annuities and mutual funds) to Bank customers through this subsidiary
and recognizes fee income from such sales.
Personnel
As of June 30, 1996, the Bank had 325 full-time employees and 180 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation
General. The Company and the Bank will report their income on a calendar
year basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank is being audited by the Internal Revenue Service
("IRS") for the calendar years 1989 and 1990. The IRS has specifically audited
the items related to joint ventures losses and has submitted the findings to a
joint committee for further action. Based upon preliminary discussions with the
IRS, management of the Bank believes that any actions taken by the IRS will not
materially affect the financial condition and results of operations of the
Company and the Bank. In addition, the Bank's and the Bank of Westbury's tax
returns are being audited by New York State for the 1992, 1993 and 1994 tax
years.
Tax Bad Debt Reserves. For calendar years ended December 31, 1995 and 1994,
the Bank was allowed a special bad debt deduction based on the greater of the
amount calculated under the experience method or the percentage of taxable
income method. The statutory percentage under the latter method was 8% for 1995
and 1994. The percentage of taxable income method was allowable only if the Bank
maintained at least 60% of its total assets in qualifying assets, as defined. If
qualifying assets fell below 60%, the Bank would have been required to recapture
its tax bad debt reserve into taxable income over a four-year period. The Bank's
qualifying assets as a percentage of total assets exceeded the 60% limitation as
of and during the fiscal years ended June 30, 1996, 1995 and 1994. The Bank used
the percentage of taxable income method in its 1994 and 1995 tax return.
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Under legislation enacted subsequent to June 30, 1996, the Bank will no
longer be able to use the percentage of taxable income method for federal tax
purposes, but will be permitted to deduct bad debts only as they occur and will
additionally be required to recapture (that is, take into taxable income) the
excess balance of its bad debt reserves as of December 31, 1995 over the balance
of such reserves as of December 31, 1987. However, such recapture requirements
would be suspended for each of two successive taxable years beginning January 1,
1996 in which the Bank originates a minimum amount of certain residential loans
based upon the average of the principal amounts of such loans made by the Bank
during its six taxable years preceding January 1, 1996. As a result of this
legislation, the Bank will incur additional federal tax liability, but with no
impact on the Bank's results of operations. The New York State tax law has been
amended to prevent a similar recapture of the Bank's bad debt reserve, and to
permit continued future use of the bad debt reserve methods, for purposes of
determining the Bank's New York State tax liability. No amendments to the New
York City law have been made; therefore, the Company cannot predict whether such
changes to New York City law will be adopted and, if so, in what form.
Distributions. To the extent that (I) the Bank's tax bad debt reserve for
losses on qualifying real property loans exceeds the amount that would have been
allowed under the experience method and (ii) the Bank makes "nondividend
distributions" to the Company that are considered to have been made from the
excess bad debt reserve, i.e., that portion, if any, of the balance of the
reserve for qualifying real property loans attributable to certain deductions
under the percentage of taxable income method, or the supplemental reserve for
losses on loans ("Excess Distributions"), then an amount based on the
distribution will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserves. Thus, any dividends to the Company that would
reduce amounts appropriated to the Bank's bad debt reserves and deducted for
federal income tax purposes would create a tax liability for the Bank.
The amount of additional taxable income created from an Excess Distribution
is an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if after the Conversion, the Bank makes a
"nondividend distribution", approximately one and one-half times the amount so
used would be includable in gross income for federal income tax purposes,
assuming a 35.0% corporate income tax rate (exclusive of state and city taxes).
See "Regulation and Supervision-Limitations on Capital Distributions" for limits
on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20.0%.
The excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
experience method is treated as a preference item for purposes of computing the
AMTI. Only 90.0% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75.0% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT.
The Bank was subject to an environmental tax liability for the tax year ended
December 31, 1995, which liability was not material.
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Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70.0% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20.0% of the stock of a
corporation distributing a dividend, 80.0% of any dividends received may be
deducted.
State and Local Taxation
New York State and New York City Taxation. The Bank is subject to the New
York State Franchise Tax on Banking Corporations in an amount equal to the
greater of (I) 9.0% of "entire net income" allocable to New York State, during
the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 3.0% of "alternative
entire net income" allocable to New York State, (b) 0.01% of the value of the
Bank's assets allocable to New York State with certain modifications, or (C)
$250. Entire net income is similar to federal taxable income, subject to certain
modifications (including the addition of interest income on state and municipal
obligations, the partial exclusion of interest income on certain United States
Treasury, New York State, and New York City obligations, and an additional New
York State bad debt deduction). Alternative entire net income is equal to entire
net income without certain deductions which are allowable for the calculation of
entire net income. New York State also imposes several surcharges on the
Franchise Tax on Banking Corporations including a 17.0% Metropolitan
Transportation Business Tax Surcharge and an additional 7.5% surcharge which
currently apply to the Bank.
The Bank is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. Currently, New York City does
not impose surcharges applicable to the Bank.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
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REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination and supervision by
the Office of Thrift Supervision ("OTS"), as its chartering agency, and the
Federal Deposit Insurance Corporation ("FDIC"), as the deposit insurer. The Bank
is a member of the FHLB System and its deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or through legislation,
could have a material adverse impact on the Company, the Bank and their
operations. The Company, as a savings and loan holding company, is required to
file certain reports with, and otherwise comply with the rules and regulations
of the OTS and of the Securities and Exchange Commission ("SEC") under the
federal securities laws. Certain of the regulatory requirements applicable to
the Bank and to the Company are referred to below or elsewhere herein.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by the Home Owner's Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act"). The HOLA and the FDI
Act were amended by the Financial Institution Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). FIRREA was enacted for the purpose of resolving problem
savings institutions, establishing a new thrift insurance fund, reorganizing the
regulatory structure applicable to savings institutions, and imposing bank-like
standards on savings institutions. FDICIA, among other things, requires that
federal banking regulators intervene promptly when a depository institution
experiences financial difficulties, mandates the establishment of a risk-based
deposit insurance assessment system and requires imposition of numerous
additional safety and soundness operational standards and restrictions. FIRREA
and FDICIA both contain provisions affecting numerous aspects of the operations
and regulations of federally-insured savings banks and empower the OTS and the
FDIC, among other agencies, to promulgate regulations implementing their
provisions. The description of statutory provisions and regulations applicable
to savings institutions set forth in this document do not purport to be a
complete description of such statutes and regulations and their effects on the
Bank.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Unless an
exception applies, savings institutions may not make a loan or extend credit to
a single or related group of borrowers in excess of 15.0% of the Bank's
unimpaired capital and surplus. An additional amount may be lent, equal to 10.0%
of unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain securities and bullion, but does
not include real estate. At June 30, 1996, the Bank's largest aggregate
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amount of loans to one borrower consisted of $7.0 million, and the second
largest borrower had an aggregate balance of $4.4 million, which were below the
Bank's loans to one borrower limit of $14.6 million at such date. At June 30,
1996, both of these borrowers were current.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender ("QTL") test. Under the QTL test, as modified by FDICIA, a savings bank
is required to maintain at least 65.0% of its "portfolio assets" (total assets
less (I) specified liquid assets up to 20.0% of total assets, (ii) intangibles,
including goodwill, and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
on a monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test must either convert to a bank
charter or operate under certain restrictions. If the savings institution does
not convert to a bank charter, generally it will be prohibited from: (I)
engaging in any new activity not permissible for a national bank, (ii) paying
dividends not permissible under national bank regulations, (iii) obtaining
advances from any FHLB, and (iv) establishing any new branch office in a
location not permissible for a national bank in the institution's home state. In
addition, beginning three years after the institution failed the QTL test, the
institution would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from an
FHLB as promptly as possible. As of June 30, 1996, the Bank maintained 92.40% of
its portfolio assets in qualified thrift investments and, therefore, met the QTL
test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice to the OTS, make
capital distributions during a calendar year equal to the greater of: (I) 100%
of its net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year; or
(ii) 75.0% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its fully phased-in requirement or the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Furthermore, under the OTS prompt
corrective action regulations, the Bank would be prohibited from making any
capital distribution if, after the distribution, the Bank would have (I) a total
risk-based capital ratio of less than 8.0%, (ii) a Tier 1 risk-based capital
ratio of less than 4.0% or (iii) a leverage ratio of less than 4.0%.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10.0% depending upon economic conditions and the savings flows
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of member institutions, and is currently 5.0%. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1.0%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity and short-term liquidity ratios for
June 30, 1996 were 8.68% and 2.59%, respectively, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed as a percentage upon the savings institution's
total assets, including consolidated subsidiaries, as reported in the bank's
latest quarterly thrift financial report. The assessments paid by the Bank for
the fiscal year ended June 30, 1996, totalled $264,000.
Branching. The OTS regulations authorize federally chartered savings
associations to branch nationwide to the extent allowed by federal statute. This
permits federal savings and loan associations with interstate networks to
diversify more easily their loan portfolios and lines of business
geographically. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions. The branching powers afforded federal
savings banks are broader than the branching authority currently available to
national banks and state chartered institutions, which generally lack the
authority to branch outside their state of domicile. However, national banks and
state chartered banks and savings banks will have increased authority under 1995
legislation to establish interstate branches beginning no later than June 1997.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "satisfactory" CRA rating
in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in
certain transactions with related parties or "affiliates" (i.e., any company
that controls or is under common control with an institution, including the
Company and any non-savings institution subsidiaries) is limited by Sections 23A
and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of "covered transactions" (including extension of credit to, purchases of
assets from or the issuance of a guarantee, acceptance or letter of credit on
behalf of affiliate) with any individual affiliate to 10.0% of the capital and
surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20.0% of the savings institution's capital
and surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
provides that certain transactions with affiliates, (including loan, asset sales
or purchases, and any servicing, leases or other agreements) must be on terms
and under circumstances, including credit standards, that are substantially the
same or at least as
17
<PAGE>
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(C) of the Bank Holding Company Act ("BHC Act"). Further, no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
principal shareholders (generally considered to be those owners controlling or
having the power to vote ten percent or more of any class of the Company's
stock) as well as entities controlled by such persons, are currently governed by
Sections 22(g) and 22(h) of the FRA, and the Federal Reserve Board's ("FRB")
Regulation O thereunder. Among other things, these regulations require such
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and may not involve more than the normal risk of
repayment. Such regulations also place individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position, and require certain Board approval procedures to be followed.
Loans to executive officers are subject to additional restrictions. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-affiliated parties," including
officers, directors and controlling stockholders and other parties participating
in the control of the affairs of the institution. 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. Criminal penalties for most financial institution crimes
include fines of up to $1 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to impose enforcement action on
an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements, or engages in unsafe and
unsound purchases. Possible enforcement action ranges from the imposition of a
capital plan, capital directive or cease and desist order to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances.
Standards for Safety and Soundness. FDICIA as amended, required each
federal banking agency to prescribe for all insured depository institutions and
their holding companies standards relating to internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, and compensation, fees and benefits and such
other operational and managerial standards as the agency deems appropriate. In
February, 1995, the OTS, together with the other federal bank regulatory
agencies, adopted guidelines prescribing safety and soundness standards pursuant
to FDICIA, as amended. The guidelines establish general standards relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. In general, the guidelines require, among other things,
appropriate systems and practices to identify and mange the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and described compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal shareholder. Additional
18
<PAGE>
guidelines to establish general standards for asset quality and earnings were
recently finalized. In addition, regulations were adopted pursuant to FDICIA to
require a savings association that is given notice by the OTS that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan to the OTS. If, after being so notified, a savings association fails to
submit an acceptable compliance plan or fails in any material respect to
implement an accepted compliance plan, the OTS may issue an order directing
corrective actions including certain types of restrictions which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
standard, a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based
capital standard. Core capital is defined as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain qualifying supervisory goodwill
and certain mortgage servicing rights ("MSRs") and purchased credit card
relationships. The OTS regulations require that, in meeting the leverage ratio,
tangible and risk-based capital standards, institutions must deduct investments
in and loans to subsidiaries engaged in activities as principal not permissible
for a national bank. The OTS also has the authority to establish higher
individual capital requirements for specific institutions which have been deemed
by the OTS to pose an unusual risk. In addition, the OTS prompt corrective
action regulation provides that a savings institution that has a leverage
capital ratio of less than 4.0% (3.0% for institutions receiving the highest
CAMEL examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions unless the institution has received the highest
examination rating. See "Prompt Corrective Regulatory Action".
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
FDICIA required that the OTS (and other federal banking agencies) revise
the risk-based capital standards, with appropriate transition rules, to ensure
that such standards take account of interest rate risk, concentration of risk
and the risks of nontraditional activities. The OTS regulations set forth the
methodology for calculating an interest rate risk component that would be
incorporated into the OTS risk-based capital regulations. A savings institutions
with "above normal" interest rate risk exposure must deduct from total capital a
portion of its capital to cover such interest rate risk for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200-basis point increase or decrease in market interest rates
(except when the 3-month Treasury bond equivalent yield falls below 4.0%, then
the decrease will be equal to one-half of that Treasury rate) divided by the
estimated economic value of the institution's assets, as calculated in
accordance with guidelines set forth by the OTS.
19
<PAGE>
A savings institution whose measured interest rate risk exposure exceeds 2.0%
must deduct an interest rate component in calculating its total capital under
the risk-based capital rule. The interest rate risk component is an amount equal
to one-half of the difference between the institution's measured interest rate
risk and 2.0%, multiplied by the estimated economic value of the bank's assets.
That dollar amount is deducted from an institution's total capital in
calculating compliance with its risk-based capital requirement. For the present
time, the OTS has deferred implementation of the interest-rate risk component.
If the Bank had been subject to an interest-rate risk component as of June 30,
1996, the Bank would not have been subject to any deduction from capital as a
result of its interest rate risk position.
At June 30, 1996, the Bank met each of its capital requirements. The
following table sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, and the Bank's historical amounts
and percentages at June 30, 1996.
At June 30, 1996
-----------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- --- ------- ---- ------- ------
Tangible ......... $ 26,118 1.5% $ 97,470 5.6% $ 71,352 4.1%
Leverage ......... 52,236 3.0 97,470 5.6 45,234 2.6
Risk-based ....... 55,478 8.0 101,911 14.70 46,433 6.7
Prompt Corrective Regulatory Action. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of under capitalization. Generally,
subject to a narrow exception, FDICIA requires the banking regulator to appoint
a receiver or conservator for an institution that is critically
undercapitalized. FDICIA authorizes the banking regulators to specify the ratio
of tangible capital to assets at which an institution becomes critically
undercapitalized and requires that ratio to be no less than 2.0% of assets.
Under the OTS final rule implementing FDICIA, a savings institution that
has a ratio of total risk-based capital to risk-based assets of less than 8.0%
or a leverage ratio or a Tier 1 capital to risk-based assets ratio that is less
than 4.0% is considered to be "undercapitalized". A savings institution that has
a total risk-based capital ratio of less than 6.0%, a Tier I risk-based capital
ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered
to be "significantly undercapitalized" and a savings institution that has a
tangible capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." Generally, a capital restoration plan must be
filed with the OTS within 45 days of the date an institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, capital distributions and management fees. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
20
<PAGE>
Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established a
risk-based assessment system for insured depository institutions that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities and other criteria relevant to each institution's risk
profile as in regard to the insurance fund. Under the risk-based assessment
system, the average assessment paid by institutions insured under the SAIF and
Bank Insurance Fund (BIF) was increased. Under this system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, consisting of 1) well capitalized, 2) adequately capitalized
or 3) undercapitalized, and one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information which the FDIC determines to be
relevant to the institution's financial conditions and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. There
are nine assessment risk classifications (i.e., combinations of capital groups
and supervisory subgroups) to which different assessment rates are applied.
Assessment rates range from 23 basis points for an institution in the highest
category (i.e., well-capitalized and healthy) to 31 basis points for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The Bank's assessment rate for fiscal year 1996 is .23% of
deposits. The Bank paid $2.4 million for federal insurance premiums to the SAIF
for the fiscal year ended June 30, 1996.
The FDI Act requires that the SAIF and BIF funds each be recapitalized
until reserves are at least 1.25% of insured deposits. Upon reaching the 1.25%
reserve ratio, the assessment rates for that fund could be reduced. The FDIC has
concluded that the BIF has currently attained the 1.25% reserve ratio, but that
the SAIF is not likely to reach the 1.25% reserve ratio until sometime after the
year 2000, at the earliest. The FDIC has issued final regulations to reduce the
assessment rates for the BIF. Currently, over 90% of BIF members pay only the
statutory annual minimum of $2,000 for deposit insurance. Under the proposal,
BIF-insured institutions would pay an average of $0.04 per $100 of insured
deposits. The reduction in the BIF assessment rates occurred during the latter
half of calendar year 1995. The resulting disparity in deposit insurance
assessments between SAIF members and BIF members provide BIF-insured
institutions with certain competitive advantages in the pricing of loans and
deposits, because of lowered operating costs and may cause other competitive
inequities. SAIF-insured institutions continue to pay assessments at the current
SAIF assessment rates. Consequently, the Bank will be adversely affected in
comparison to BIF-insured institutions.
To recapitalize the SAIF, legislation is being considered by Congress to
assess a one time special assessment on SAIF insured institutions. The precise
amount of any such assessment is uncertain but some regulatory officials have
estimated that it would be 69 to 85 basis points of SAIF insured deposits held
on a specified date. If enacted, such legislation will would have a
significantly adverse effect on operating expenses and results of operations.
Congress is also considering legislation that would merge the SAIF and BIF,
eliminate the federal thrift charter and require savings associations to become
banks. If this legislation is enacted, it may have adverse tax effects, require
divestiture of certain activities or otherwise change the Company's operations.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue
21
<PAGE>
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS. The management of the Bank does not
know of any practice, condition or violation that might lead to termination of
deposit insurance.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1.0% 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 advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 1996, of $13.0 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended June 30, 1996, 1995 and 1994,
dividends from the FHLB to the Bank amounted to $725,000, $502,000 and $517,000,
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would likely also be reduced. Further,
there can be no assurance that the impact of FDICIA and the FIRREA on the FHLBs
will not also cause a decrease in the value of the FHLB stock held by the Bank.
Federal Reserve System
The FRB regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves be maintained against aggregate transaction accounts as follows: For
accounts aggregating $52.0 million or less (subject to adjustment by the FRB)
the reserve requirement is 3.0%; and for accounts greater than $52.0 million,
the reserve requirement is $1.6 million plus 10.0% (subject to adjustment by the
FRB between 8.0% and 14.0%) against that portion of total transaction accounts
in excess of $52.0 million. The first $4.3 million of otherwise reservable
balances (subject to adjustments by the FRB) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS. Because required
reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a FRB or a pass-through account as defined by
the FRB, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow from
the Federal Reserve "discount window," but FRB regulations require institutions
to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA, as amended. As such, the Company has registered
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement
22
<PAGE>
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the holding company's subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5.0%
of the voting stock of another savings institution or holding company without
prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
As a unitary savings and loan holding company (i.e. one that controls only
one thrift subsidiary), the Company generally will not be restricted under
existing banking laws as to the types of business activities in which it may
engage, provided that the Bank continues to be a QTL. See "Federal Savings
Institution Regulation - QTL Test" for a discussion of the QTL requirements.
Upon any nonsupervisory acquisition by the Company of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings institution by OTS, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to limitations on the types of business activities in which
it could engage. The HOLA limits the activities of a multiple savings and loan
holding company and its non-insured institution subsidiaries primarily 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 OTS, and certain
other activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. Certain
states do not authorize interstate acquisitions under any circumstances;
however, federal law authorizing acquisitions in supervisory cases would preempt
such state law.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. This requirement would apply to acquisitions of the
Company's stock.
23
<PAGE>
In addition, federal regulations governing conversions of mutual savings
institutions to the stock form of organization prohibit the direct or indirect
acquisition without prior OTS approval of more than 10.0% of any equity security
of a savings institution within three years of the savings institution's
conversion to stock form. This limitation applies to acquisitions of the stock
of the Company. Such acquisition may be disapproved if it is found, among other
things, that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions, (b) would be manipulative
or deceptive, (c) would subvert the fairness of the conversion, (d) would be
likely to result in injury to the savings institution, (e) would not be
consistent with economical home financing, (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the savings
institution's conversion proceeds.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the Exchange
Act of 1934, as amended (the "Exchange Act"). The Company and its officers and
directors are subject to periodic reporting, proxy solicitation regulations,
insider trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the Common Stock issued in the Conversion does not cover the resale of
such shares. Shares of the Common Stock purchased by persons who are not
affiliates of the Company may be resold without registration. Shares purchased
by an affiliate of the Company will be subject to the resale restrictions of
Rule 144 under the Securities Act. If the Company meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
the Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1.0% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain circumstances.
24
<PAGE>
STATISTICAL DATA
The detailed statistical data that follows is being presented in accordance with
Guide 3, prescribed by the Securities and Exchange Commission. This data should
be read in conjunction with the financial statements and related notes and the
discussion included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations incorporated herein by reference to the 1996
Annual Report to Stockholders included and as Exhibit 13.0 to this Form 10-K.
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential.
A, B. Page 16 of the Company's 1996 Annual Report presents the distribution
of assets, liabilities and stockholders' equity and interest differential,
under the caption "Analysis of Net Interest Income" and is incorporated
herein by reference.
C. Interest Differential
Page 17 of the Company's 1996 Annual Report presents the interest
differential under the caption "Rate/Volume Analysis" and is incorporated
herein by reference.
25
<PAGE>
A. Mortgage and Other Loan Activities
The following table sets forth the Bank's loan originations, loan purchases,
sales, and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the year ended June 30,
--------------------------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period ...................................... $ 224,841 $ 231,615 $ 263,507
Mortgage loans originated:
One-to four-family ........................................ 38,557 10,913 22,907
Co-operatives ............................................. -- 86 45
Multi-family .............................................. 63,840 10,500 --
Construction .............................................. 4,159 12,589 6,846
Commercial ................................................ 522 155 --
--------- --------- ---------
Total mortgage loans originated ......................... 107,078 34,243 29,798
Mortgage loans purchased .................................... 426,328 1,236 --
--------- --------- ---------
Total mortgage loans originated
and purchased ......................................... 533,406 35,479 29,798
Transfer of mortgage loans
to real estate owned ...................................... (1,450) (646) (2,730)
Principal repayments ........................................ (59,984) (40,126) (52,710)
Sales of loans .............................................. (5,830) (1,481) (6,250)
--------- --------- ---------
At end of period ....................................... $ 690,983 $ 224,841 $ 231,615
========= ========= =========
Other loans (gross):
At beginning of period .................................... $ 108,653 $ 100,250 $ 103,645
Other loans originated .................................... 35,816 33,586 28,148
Other loans purchased ..................................... 23,489 -- --
Principal repayments ...................................... (37,548) (25,183) (31,543)
--------- --------- ---------
At end of period ....................................... $ 130,410 $ 108,653 $ 100,250
========= ========= =========
</TABLE>
26
<PAGE>
B. Loan Maturity and Repricing
The following table shows the maturity or period to repricing of the Bank's loan
portfolio at June 30, 1996. Loans that have adjustable rates are shown as being
due in the period during which the interest rates are next subject to change.
The table does not include prepayments or scheduled principal amortization.
Prepayments and scheduled principal amortization on loans totalled $97.5 million
and $65.3 million, $84.3 million, respectively, for the years ended June 30,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
At June 30, 1996
--------------------------------------------------------------------------------
Mortgage Loans
--------------------------------------------------------------------------------
One- to Multi- Commercial
four-family Co-operative family Real Estate Construction
----------- ------------ ------ ----------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year ............................... $221,495 $ 8,596 $ 5,300 $ 9,505 $ 5,560
After one year:
One to three years ......................... 10,999 361 733 7,029 --
Three to five years ........................ 17,904 272 73,430 9,600 --
Five to ten years .......................... 92,731 122 -- 136 --
Ten to twenty years ........................ 193,775 59 108 864 --
Over twenty years .......................... 32,127 277 -- -- --
-------- -------- -------- -------- --------
Total due after one year ...................... 347,536 1,091 74,271 17,629 --
-------- -------- -------- -------- --------
Total amounts due ............................. $569,031 $ 9,687 $ 79,571 $ 27,134 $ 5,560
======== ======== ======== ======== ========
Discounts, premiums and
deferred loan fees, net ....................
Allowance for loan losses .....................
Loans receivable, net ......................
<CAPTION>
At June 30, 1996
----------------------------------------------------------------------
Consumer and Other Loans
----------------------------------------------------------------------
Home
Equity Home
Lines of Equity Other Total
Credit Loans Loans Receivable
------ ----- ----- ----------
<S> <C> <C> <C> <C>
Amounts due:
Within one year ............................... $ 81,205 $ 123 $ 21,516 $ 353,300
After one year:
One to three years ......................... -- 1,265 6,410 26,797
Three to five years ........................ -- 3,959 3,277 108,442
Five to ten years .......................... -- 8,940 701 102,630
Ten to twenty years ........................ -- 2,460 554 197,820
Over twenty years .......................... -- -- -- 32,404
--------- --------- --------- ---------
Total due after one year ...................... -- 16,624 10,942 468,093
--------- --------- --------- ---------
Total amounts due ............................. $ 81,205 $ 16,747 $ 32,458 821,393
========= ========= ========= =========
Discounts, premiums and
deferred loan fees, net ..................... 848
Allowance for loan losses ..................... (4,495)
---------
Loans receivable, net ....................... $ 817,746
=========
</TABLE>
The following table sets forth, at June 30, 1996, the dollar amount of all fixed
rate loans contractually due after June 30, 1996, and adjustable rate loans
repricing after June 30, 1996.
<TABLE>
<CAPTION>
Due After June 30, 1996
--------------------------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family ..................................... $328,920 $ 18,616 $347,536
Co-operative ............................................ 465 626 1,091
Multi-family ............................................ 1,788 72,483 74,271
Commercial real estate .................................. 2,381 15,248 17,629
Consumer and other loans ................................... 27,566 -- 27,566
-------- -------- --------
Total loans ................................................ $361,120 $106,973 $468,093
======== ======== ========
</TABLE>
27
<PAGE>
C. Summary of Allowance for Loan Losses
The following table sets forth the Bank's allowances for loan, investment
in real estate and real estate owned losses at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period .......................... $ 1,729 $ 1,417 $ 1,344 $ 1,110 $ 2,179
Charge-offs:
One- to four-family .................................. (67) (54) (241) (14) (145)
Multi-family ......................................... -- -- -- -- --
Co-op ................................................ (76) (28) (74) -- (767)
Commercial real estate ............................... -- -- -- -- (245)
Consumer and other loans ............................. (122) (31) (79) (54) (25)
-------- -------- -------- -------- --------
Total charge-offs ................................. (265) (113) (394) (68) (1,182)
Recoveries:
Mortgage loans ....................................... 35 17 14 51 --
Consumer and other loans ............................. 54 8 60 17 5
-------- -------- -------- -------- --------
Total recoveries .................................. 89 25 74 68 5
Allowances of acquired institutions ................. 2,217 -- -- -- --
Provision for loan losses ............................... 725 400 393 234 108
-------- -------- -------- -------- --------
Balance at end of the period ............................ $ 4,495 $ 1,729 $ 1,417 $ 1,344 $ 1,110
======== ======== ======== ======== ========
Ratio of net charge-offs during the period
to average loans outstanding during
the period ........................................... 0.03% 0.03% 0.09% -- 0.27%
Ratio of allowance for loan losses to total
loans at the end of the period ....................... 0.55% 0.52% 0.43% 0.37% 0.27%
Ratio of allowance for loan losses to non-
performing loans at the end of the period ............ 34.63% 47.10% 39.38% 25.52% 18.49%
Allowance for losses on investment
in real estate:
Balance at beginning of period .......................... $ -- $ -- $ -- $ 44,157 $ 44,157
Charge-offs .......................................... -- -- -- (44,157) --
Provision for losses .................................... -- -- -- -- --
-------- -------- -------- -------- --------
Balance at the end of the period ........................ $ -- $ -- $ -- $ -- $ 44,157
======== ======== ======== ======== ========
Allowance for losses on real estate owned:
Balance at beginning of period .......................... $ 589 $ 632 $ 2,288 $ 416 $ 1,061
Charge-offs .......................................... (384) (103) (2,740) (253) (901)
Recoveries ........................................... -- -- 11 -- --
Allowances of acquired institutions .................. 188 -- -- -- --
Provision for losses .................................... 375 60 1,073 2,125 256
-------- -------- -------- -------- --------
Balance at the end of the period ........................ $ 768 $ 589 $ 632 $ 2,288 $ 416
======== ======== ======== ======== ========
</TABLE>
28
<PAGE>
The following table sets forth the Bank's allocation of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable at the dates indicated. The portion of the allowance for loan losses
allocated to each loan category does not represent the total available for
future losses which may occur within the loan category since the total loan loss
reserve is a valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- -------------------------
% of Loans in % of Loans in % of Loans in
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to-four-family(1) ................ $3,336 70.46% $1,249 60.84% $1,073 65.73%
Commercial real estate ................ 158 3.30 -- 0.68 -- 0.75
Multi-family .......................... 278 9.69 74 5.64 -- 2.71
Construction and land ................. 47 0.67 -- 0.22 -- 0.60
Consumer and other loans .............. 676 15.88 406 32.62 344 30.21
------ ------ ------ ------ ------ ------
Total allowances ................. 4,495 100.00% $1,729 100.00% $1,417 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
1993 1992
--------------------------------- -----------------------------
% of Loans in % of Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
One- to-four-family(1) ................ $1,104 67.27% $ 883 70.17%
Commercial real estate ................ -- 1.14 -- 1.20
Multi-family .......................... -- 3.13 -- 3.65
Construction and land ................. -- 0.23 -- --
Consumer and other loans .............. 240 28.23 227 24.98
------ ------ ------ ------
Total allowances ................. $1,344 100.00% $1,110 100.00%
====== ====== ====== ======
</TABLE>
(1) Includes allocations for co-op loans.
29
<PAGE>
D. Composition of Loan Portfolio
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and in percentages of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............................ $ 569,031 69.28% $ 194,290 58.26% $ 208,550 62.85%
Co-operative................................... 9,687 1.18 8,774 2.63 9,567 2.88
Multi-family................................... 79,571 9.69 18,774 5.63 8,991 2.71
Commercial..................................... 27,134 3.30 2,258 0.68 2,504 0.75
Construction................................... 5,560 0.67 745 0.22 2,003 0.60
--------- ------ --------- ------ --------- ------
Total mortgage loans....................... 690,983 84.12 224,841 67.42 231,615 69.79
--------- ------ --------- ------ --------- ------
Consumer and other loans:
Home equity lines of credit.................... 81,205 9.89 70,954 21.28 61,338 18.48
Guaranteed student loans....................... 18,754 2.28 20,529 6.16 22,924 6.91
Home equity loans.............................. 16,747 2.04 15,774 4.73 14,334 4.32
Loans on deposit accounts...................... 5,782 0.70 980 0.29 982 0.30
Other loans.................................... 7,922 0.97 416 0.12 672 0.20
--------- ------ --------- ------ --------- ------
Total consumer and other loans................ 130,410 15.88 108,653 32.58 100,250 30.21
--------- ------ --------- ------ --------- ------
Total loans.................................... 821,393 100.00% 333,494 100.00% 331,865 100.00%
====== ====== ======
Discounts, premiums and
deferred loan fees, net....................... 848 315 272
Allowance for loan losses...................... (4,495) (1,729) (1,417)
--------- --------- ---------
Total loans, net............................... $ 817,746 $ 332,080 $ 330,720
========= ========= =========
<CAPTION>
June 30,
---------------------------------------------------
1993 1992
-------------------- ----------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............................ $ 236,798 64.50% $ 276,079 67.24%
Co-operative................................... 10,163 2.77 12,035 2.93
Multi-family................................... 11,506 3.13 14,996 3.65
Commercial..................................... 4,183 1.14 4,934 1.20
Construction................................... 857 0.23 -- --
--------- ------ --------- ------
Total mortgage loans....................... 263,507 71.77 308,044 75.02
--------- ------ --------- ------
Consumer and other loans:
Home equity lines of credit.................... 59,513 16.21 54,509 13.28
Guaranteed student loans....................... 24,871 6.77 27,291 6.65
Home equity loans.............................. 16,661 4.54 16,789 4.08
Loans on deposit accounts...................... 1,146 0.31 1,280 0.31
Other loans.................................... 1,454 0.40 2,700 0.66
--------- ------ --------- ------
Total consumer and other loans................ 103,645 28.23 102,569 24.98
--------- ------ --------- ------
Total loans.................................... 367,152 100.00% 410,613 100.00%
====== ======
Discounts, premiums and
deferred loan fees, net....................... 105 116
Allowance for loan losses...................... (1,344) (1,110)
--------- ---------
Total loans, net............................... $ 365,913 $ 409,619
========= =========
</TABLE>
30
<PAGE>
E. Money Market, Debt and Equity and Mortgage-Backed Securities Composition
Table.
The following table sets forth certain information regarding the carrying and
market values of the Company's money market investments and its portfolios of
debt and equity and mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Money Market Investments
Federal funds sold and repurchase agreements ............... $ 10,450 $ 10,450 $ 2,700 $ 2,700 $ 4,000 $ 4,000
======== ======== ======== ======== ======== ========
Debt and Equity Securities
Held-to-Maturity:
United State Agency Obligations .......................... $ 34,950 $ 34,612 $ -- $ -- $ -- $ --
United States Treasury Notes ............................. -- -- 14,997 14,972 30,002 29,902
Obligations of New York State and
local municipalities .................................. 391 435 1,394 1,412 1,397 1,451
Obligations of other states .............................. -- -- -- -- 1,891 1,971
FHLB stock ............................................... 12,989 12,989 7,499 7,499 6,202 6,202
-------- -------- -------- -------- -------- --------
Total debt and equity securities
held-to-maturity ................................... $ 48,330 $ 48,036 $ 23,890 $ 23,883 $ 39,492 $ 39,526
======== ======== ======== ======== ======== ========
Available-for-Sale:
United States Agency Obligations ........................ $ 10,319 10,227 $ -- $ -- $ -- $ --
United Sates Treasury Bills ............................. -- -- 10,531 10,547 24,448 24,393
United States Treasury Notes ............................ 2,992 2,983 13,377 13,333 13,346 13,195
Marketable equity securities ............................ 42 61 -- -- -- --
-------- -------- -------- -------- -------- --------
Total debt and equity securities
available-for-sale ................................. $ 13,353 $ 13,271 $ 23,908 $ 23,880 $ 37,794 $ 37,588
======== ======== ======== ======== ======== ========
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by
GNMA ................................................... $125,195 $125,700 $157,073 $160,939 $120,032 $118,175
FHLMC .................................................. 14,967 15,005 188,611 186,727 213,585 206,180
FNMA ................................................... 44,330 44,290 68,078 68,154 60,582 58,955
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities
held-to-maturity .................................. $184,492 $184,995 $413,762 $415,820 $394,199 $383,310
======== ======== ======== ======== ======== ========
Available-for-Sale:
Pass-through certificates guaranteed by
GNMA ................................................... $170,142 $169,753 $ -- $ -- $ -- $ --
FHLMC .................................................. 255,498 249,598 77,072 78,195 -- --
FNMA ................................................... 172,863 169,944 25,845 26,258 -- --
REMIC .................................................. 2,503 2,445 -- -- -- --
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities
available-for-sale ................................ $601,006 $591,740 $102,917 $104,453 $ -- $ --
======== ======== ======== ======== ======== ========
</TABLE>
31
<PAGE>
F. Maturity Listing for Money Market Investments, Debt and Equity and
Mortgage-Backed Securities Portfolio
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's federal funds
sold and repurchase agreement, debt and equity securities and mortgage-backed
securities at June 30, 1996. There were no debt and equity, exclusive of
obligations of the U.S. Treasury securities, issued by any one entity with a
total carrying value in excess of 10.0% of retained earnings at June 30, 1996.
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------------------
One Year or Less One to Five Years
-------------------------- ---------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Money Market Investments
Federal funds sold and repurchase agreement ............ $10,450 5.29% -- --
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations ............ $ -- -- $ 9,931 6.00%
Obligations of New York State and local municipalities . -- -- 391 7.88
FHLB stock ............................................. -- -- -- --
------- -------
Total debt and equity securities held-to-maturity . $ -- -- $10,322 6.07%
======= =======
Available-for-Sale:
United States Treasury Notes ........................... $ 2,992 5.24% $ -- --
United States Government Agency Obligations ............ 3,342 6.08 6,977 6.05
Marketable Equities .................................... -- -- -- --
------- -------
Total debt and equity securities available-for-sale $ 6,334 5.68% $ 6,977 6.05%
======= =======
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by
GNMA ................................................... $ -- -- 4 9.85%
FHLMC .................................................. -- -- -- --
FNMA ................................................... -- -- --
------- -------
Total mortgage-backed securities held-to-maturity . $ -- -- $ 4 9.85%
======= =======
Available-for-Sale:
Pass-through certificates guaranteed by
GNMA ................................................... $ -- $ 254 7.85%
FHLMC .................................................. 1,959 8.00 23,626 6.16
FNMA ................................................... -- -- 30,785 6.50
FHLMC REMIC ............................................ -- -- -- --
------- -------
Total mortgage-backed securities available-for-sale $ 1,959 8.00% $54,665 6.36%
======= =======
<CAPTION>
At June 30, 1996
----------------------------------------------------------
Five to Ten Years More Than Ten Years
-------------------------- ---------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Money Market Investments
Federal funds sold and repurchase agreement ............ -- -- -- --
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations ............ $25,019 7.57% $ -- --
Obligations of New York State and local municipalities . -- -- -- --
FHLB stock ............................................. -- -- 12,989 6.50
------- --------
Total debt and equity securities held-to-maturity . $25,019 7.57% $ 12,989 6.50%
======= ========
Available-for-Sale:
United States Treasury Notes ........................... -- -- $ -- --
United States Government Agency Obligations ............ -- -- -- --
Marketable Equities .................................... -- -- 42 1.08
------- --------
Total debt and equity securities available-for-sale -- -- $ 42 1.08%
======= ========
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by
GNMA ................................................... -- -- $125,191 6.78%
FHLMC .................................................. 146 7.82 14,821 7.03
FNMA ................................................... -- -- 44,330 7.27
------- --------
Total mortgage-backed securities held-to-maturity . $ 146 7.82% $184,342 6.92%
======= ========
Available-for-Sale:
Pass-through certificates guaranteed by
GNMA ................................................... $ 2,381 7.76% $167,507 6.72%
FHLMC .................................................. -- -- 229,913 7.38
FNMA ................................................... -- -- 142,078 7.28
FHLMC REMIC ............................................ 2,503 6.50 -- --
------- --------
Total mortgage-backed securities available-for-sale $ 4,884 7.11% $539,498 7.15%
======= ========
<CAPTION>
At June 30, 1996
----------------------------------------------------------
Total Securities
----------------------------------------------------------
Annualized
Average Approx. Weighted
Life Carrying Market Average
(in years) Value Value Yield
---------- ----- ----- -----
<S> <C> <C> <C> <C>
Money Market Investments
Federal funds sold and repurchase agreement ............ -- $ 10,450 $ 10,450 5.29%
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations ............ 7.9 $ 34,950 $ 34,612 7.12%
Obligations of New York State and local municipalities . 3.8 391 435 7.88
FHLB stock ............................................. -- 12,989 12,989 6.50
-------- --------
Total debt and equity securities held-to-maturity . 7.9 $ 48,330 $ 48,036 6.96%
======== ========
Available-for-Sale:
United States Treasury Notes ........................... 0.6 $ 2,992 $ 2,983 5.24%
United States Government Agency Obligations ............ 1.9 10,319 10,227 6.06
Marketable Equities .................................... -- 42 61 1.08
-------- --------
Total debt and equity securities available-for-sale 1.6 $ 13,353 $ 13,271 5.86%
======== ========
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by
GNMA ................................................... 5.86 $125,195 $125,700 6.78%
FHLMC .................................................. 4.57 14,967 15,005 7.04
FNMA ................................................... 5.52 44,330 44,290 7.27
-------- --------
Total mortgage-backed securities held-to-maturity . 5.67 $184,492 $184,995 6.92%
======== ========
Available-for-Sale:
Pass-through certificates guaranteed by
GNMA ................................................... 6.08 $170,142 $169,753 6.74%
FHLMC .................................................. 7.09 255,498 249,598 7.27
FNMA ................................................... 5.72 172,863 169,944 7.14
FHLMC REMIC ............................................ 5.50 2,503 2,445 6.50
-------- --------
Total mortgage-backed securities available-for-sale 6.38 $601,006 $591,740 7.08%
======== ========
</TABLE>
32
<PAGE>
G. Deposit Activities
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Opening balance ........................................ $ 670,317 $ 587,221 $ 600,278
Bank of Westbury deposits assumed ...................... 151,992 -- --
Sunrise Bancorp, Inc. deposits assumed ................. 479,213 -- --
Excess of deposits (withdrawals) ....................... 1,679 61,084 (30,831)
Interest credited on deposits .......................... 42,425 22,012 17,774
---------- ---------- ----------
Ending balance ......................................... $1,345,626 $ 670,317 $ 587,221
========== ========== ==========
Net increase (decrease) in deposits .................... $ 675,309 $ 83,096 $ (13,057)
========== ========== ==========
Percentage increase (decrease) ......................... 100.7% 14.2% (2.2%)
</TABLE>
At June 30, 1996, the Bank has outstanding $36.0 million in certificate of
deposit accounts in amounts of $100,000 or more, maturing as follows:
Weighted
Amount Average Rate
------ ------------
(In thousands)
Maturity Period:
Three months or less ....................... $ 9,247 5.12%
Over three through six months .............. 7,462 5.39
Over six through 12 months ................. 7,450 5.22
Over 12 months ............................. 11,858 6.00
------- ----
Total ................................ $36,017 5.48%
======= ====
33
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
For the year ended June 30,
---------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Average of Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts............. $ 353,617 33.43% 2.50% $ 236,047 38.09% 2.50% $268,779 45.04% 2.57%
NOW accounts.................. 58,576 5.54 1.95 25,275 4.08 1.90 25,927 4.34 1.93
---------- ------ -------- ------ -------- ------
Total passbook and
NOW accounts................ 412,193 38.97 2.42 261,322 42.17 2.44 294,706 49.38 2.51
---------- ------ -------- ------ -------- ------
Money market accounts......... 97,975 9.26 2.54 91,051 14.69 2.50 105,594 17.69 2.51
---------- ------ -------- ------ -------- ------
Certificate accounts:
31 days.................. 70 0.01 2.50 85 0.01 2.50 317 0.05 2.51
91 days.................. 23,655 2.24 4.79 2,565 0.41 3.31 3,512 0.59 2.53
4 months................ 447 0.04 4.31 317 0.05 2.80 453 0.08 2.53
6 months................ 78,709 7.44 5.08 46,687 7.53 4.24 47,120 7.89 2.95
9 months................ 55,401 5.24 5.49 17,732 2.86 5.83 -- -- --
12 months................ 145,466 13.76 5.07 81,499 13.15 4.58 71,969 12.06 3.37
15 months................ 60,638 5.73 6.22 31,777 5.13 6.32 -- -- --
18 months................ 79,042 7.47 6.14 38,857 6.27 5.38 23,773 3.98 4.02
18 month variable IRA.... -- -- -- 37 0.01 4.91 508 0.09 3.41
24 months................ 10,655 1.01 5.75 -- -- -- -- -- --
30 months................ 11,990 1.13 5.16 10,303 1.66 4.83 9,908 1.66 4.84
36 months................ 11,576 1.09 5.09 10,943 1.77 4.98 11,753 1.97 5.23
42 months................ 2,962 0.28 5.34 3,337 0.54 5.46 3,941 0.66 6.43
48 months................ 20,553 1.94 5.42 22,683 3.66 5.48 22,312 3.74 5.73
60 months................ 43,425 4.11 6.28 -- -- -- -- -- --
72 months................ -- -- -- 232 0.04 7.75 296 0.05 7.75
96 months................ -- -- -- 286 0.05 8.00 663 0.11 8.00
Other certificates............ 2,973 0.28 5.28 -- -- -- -- -- --
---------- ------ -------- ------ -------- ------
Total certificates............ 547,562 51.77 5.48 $267,340 43.14 5.04 $196,525 32.93 3.87
---------- ------ -------- ------ -------- ------
Total deposits................ $1,057,730 100.00% 4.02 $619,713 100.00% 3.57 $596,825 100.00% 2.96
========== ====== ======== ====== ======== ======
</TABLE>
34
<PAGE>
The following table presents, by rate categories, the balances of the
Bank's certificate accounts outstanding, interest rate categories, at June 30,
1996, 1995 and 1994 and the remaining periods to maturity of certificate deposit
accounts outstanding at June 30, 1996.
<TABLE>
<CAPTION>
Period to maturity from
June 30, 1996 June 30,
------------------------------------------------ --------------------------------------
One to Two to Over
Within Two Three Three
One Year Years Years Years 1996 1995 1994
-------- ----- ----- ----- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.99% or less................... $ 1,410 $ -- $ -- $ -- $ 1,410 $ 837 $ 28,835
3.00% to 3.99%.................. 2,388 -- -- -- 2,388 2,907 80,172
4.00% to 4.99%.................. 156,029 10,184 475 2 166,690 37,255 60,691
5.00% to 5.99%.................. 254,913 73,346 18,561 16,100 362,920 160,180 17,730
6.00% to 6.99%.................. 62,978 21,504 5,757 45,581 135,820 145,378 7,906
7.00% to 7.99%.................. 4,914 236 -- 89 5,239 237 1,672
8.00% to 8.99%.................. 21 21 188 5 235 -- --
9.00% and greater............... -- -- 134 -- 134 142 747
-------- -------- -------- -------- -------- -------- --------
Total........................... $482,653 $105,291 $ 25,115 $ 61,777 $674,836 $346,936 $197,753
======== ======== ======== ======== ======== ======== ========
</TABLE>
H. Borrowings
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the fiscal years ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the
Year Ended June 30,
-----------------------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
FHLB-NY advances:
Average balance outstanding .................................... $ 29,882 $ 95,554 $ 62,531
Maximum amount outstanding at any
month-end during the period ............................... 71,218 126,000 88,000
Balance outstanding at end of period .......................... 3,000 40,000 78,000
Weighted-average interest rate during the period .............. 7.29% 6.00% 3.57%
Weighted-average interest rate at end of period ............... 5.98% 7.60% 4.60%
Reverse repurchase agreements:
Average balance outstanding .................................... $150,173 $ 10,103 $ --
Maximum amount outstanding at any
month-end during the period ............................... 279,678 57,035 --
Balance outstanding at end of period .......................... 263,160 57,035 --
Weighted-average interest rate during the period .............. 5.58% 6.09% --
Weighted-average interest rate at end of period ............... 5.41% 6.04% --
Total borrowings:
Average balance outstanding .................................... $180,055 $105,657 $ 62,531
Maximum amount outstanding at any
month-end during the period ............................... 282,678 183,035 88,000
Balance outstanding at end of period .......................... 266,160 97,035 78,000
Weighted-average interest rate during the period .............. 5.87% 6.01% 3.57%
Weighted-average interest rate at end of period ............... 5.42% 6.68% 4.60%
</TABLE>
35
<PAGE>
Item 2. Properties
The Bank conducts its business through its administrative office and 28
full-service branch offices. Loan originations are processed at the
administrative office.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Date Date of Leasehold
Leased or Leased or Lease Improvements at
Location Owned Acquired Expiration(1) June 30, 1996
-------- ----- -------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Administrative Office:
585 Stewart Avenue
Garden City, NY 11530................................... Leased 1977 2002 $ 47
Banking Offices:
300 Garden City Plaza
Garden City, NY 11530
(Home Office)............................................ Leased 1979 2004 --
983 Willis Avenue
Albertson, NY 11507..................................... Owned 1965 -- 545
422 Hillside Avenue
Williston Park, NY 11596................................ Leased 1972 2017 284
380 Hillside Avenue(2)
Williston Park, NY 11596................................ Owned 1964 -- 211
570 Stewart Avenue
Bethpage, NY 11714...................................... Leased 1963 2008 38
341 Post Avenue
Westbury, NY 11590...................................... Owned 1995 -- 325
2530 Stewart Avenue
Westbury, NY 11590...................................... Owned 1995 -- 432
405 Jerusalem Avenue
Hicksville, NY 11801.................................... Leased 1995 2005 29
2843 Jerusalem Avenue
North Bellmore, NY 11710................................ Leased 1995 2012 6
172 New Hyde Park Road
Franklin Square, NY 11010............................... Leased 1995 2020 --
215 Glen Cove Road
Carle Place, NY 11514................................... Leased 1995 1996 1
312 Conklin Street
Farmingdale, NY 11735................................... Owned 1996 -- 185
195 Merritt Road
South Farmingdale, NY 11735............................ Owned 1996 -- 592
1074 Old Country Road
Plainview, NY 11803..................................... Owned 1996 -- 140
300 S. Wellwood Avenue
Lindenhurst, NY 11757................................... Owned 1996 -- 239
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Date Date of Leasehold
Leased or Leased or Lease Improvements at
Location Owned Acquired Expiration(1) June 30, 1996
-------- ----- -------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
(Continued)
1134 Deer Park Avenue
North Babylon, NY 11703................................. Leased 1996 1998 --
2087 Deer Park Avenue
Deer Park, NY 11729..................................... Owned 1996 -- 189
2080 Deer Park Avenue(2)
Deer Park, NY 11729...................................... Owned 1996 -- 159
434 Union Boulevard
West Islip, NY 11795.................................... Leased 1996 2004 --
340 Washington Avenue
North Brentwood, NY 11717............................... Owned/Leased(6) 1996 2014 141
742 Route 25 A
Kings Park, NY 11754.................................... Leased 1996 2002 --
250 Smithtown Boulevard
Nesconset, NY 11767..................................... Owned 1996 -- 249
245 Lake Avenue
St. James, NY 11780..................................... Owned 1996 -- 206
335 Main Street
Farmingdale, NY 11735.................................... Leased 1996 2000 --
375 Fulton Avenue
Farmingdale, NY 11735.................................... Leased 1996 2002 --
233-15 Hillside Avenue
Queens Village, NY 11427................................ Owned 1961 -- 374
19-01 Utopia Parkway
Whitestone, NY 11357.................................... Leased(4) 1976 2026 --
32-02 Francis Lewis Blvd
Flushing, NY 11358...................................... Owned 1957 -- 205
69-09 164th Street
Flushing, NY 11365...................................... Owned 1967 -- 674
204-12 Hillside Avenue(3)
Hollis, NY 11423........................................ Owned/Leased 1954 2003 42
162-04 Jamaica Avenue
Jamaica, NY 11432....................................... Leased(5) 1989 2001 755
216-26 Jamaica Avenue
Queens Village, NY 11428................................ Owned 1939 -- 56
------
Total.......................................... $6,124
======
(Footnotes on next page)
</TABLE>
37
<PAGE>
(1) Leased property includes all option periods.
(2) Drive-up facility.
(3) The Bank owns one half of the property and leases the other half.
(4) The Bank pays all real estate taxes on this property.
(5) This branch was originally owned by the Bank. The Bank has subsequently
sold the property and is now leasing it. The transaction is being treated
as a capital lease (sale/leaseback).
(6) The Bank owns the building and leases the land. Option to purchase the land
at the end of the last lease option.
Item 3. Legal Proceedings
The Bank is involved in various legal actions arising in the ordinary
course of its business which, in the aggregate, involve amounts which are
believed by management to be not material to the financial condition of the
Bank.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market and
quoted under the symbol "RELY". As of September 17, 1996, the Company had 1,100
stockholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
Information regarding the Company's common stock and its price for the 1996
fiscal year appears on page 55 of the 1996 Annual Report under the caption
"Stockholder Information" and is incorporated herein by this reference.
On September 18, 1996, the Company's Board of Directors adopted a
Stockholder Protection Rights Plan and declared a dividend of one preferred
share purchase right ("Right") for each outstanding share of common stock of the
Company. Each Right, initially, will entitle stockholders to buy a one
one-hundredth interest in a share of a new series of preferred stock of the
Corporation at an exercise price of $60.00, upon the occurrence of certain
events described in the Plan. Initially, Rights will not be exercisable and will
transfer with and only with the shares of common stock. The Rights will be
exercisable and separately transferable ten business days after a person or
group of persons acquires 10% or more of the common stock of Reliance Bancorp,
Inc. ("Acquiring Person") or a person or group of persons announces a tender
offer, the consummation of which would result in ownership by a person or group
of persons of 10% or more of Company common stock. Subject to certain
limitations, the Company's Board of Directors may reduce the 10% threshold.
If a person or group of persons becomes an Acquiring Person, each Right,
unless redeemed by the Board of Directors at a price of $0.01 per Right, will
entitle its holder (other than such person or member of such group) to purchase,
at the then-current exercise price of the Right, a number of shares of common
stock of Reliance Bancorp, Inc. having a market value equal to twice the
exercise price of the Right. Alternatively, at any time after an Acquiring
Person becomes such, but prior to the acquisition by such person of 50% or more
of the Company's common stock, the Board of Directors may, at its option, direct
the issuance of one share of common stock in exchange for each Right other than
those held by the Acquiring Person.
38
<PAGE>
The Rights dividend distribution will be payable to stockholders of record
on October 3, 1996. The Rights will expire ten years later on October 3, 2006.
The distribution of the Rights is not taxable to stockholders.
Item 6. Selected Financial Data
Information regarding selected financial data appears on page 10 of the
1996 Annual Report under the caption "Selected Financial Data" and is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 12 through 24 of the 1996
Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
Item 8. Financial Statements and Supplementary Data
Information regarding the financial statements and the Independent
Auditors' Report appears on pages 25 through 52 of the 1996 Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
Information regarding the directors and executive officers of the Company
appears on pages 5 through 9 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on November 12, 1996 under the caption
"Information With Respect to the Nominees, Continuing Directors, and Named
Executive Officers" and is incorporated herein by this reference.
Item 11. Executive Compensation
Information regarding executive compensation included under the caption
"Summary Compensation Table" appears on page 14 of the Company's Proxy Statement
for the Annual Meeting of Stockholders to be held on November 12, 1996 and is
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
appears on page 3 and 4 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held November 12, 1996 under the caption "Security
Ownership of Certain Beneficial Owners" and is incorporated herein by this
reference.
39
<PAGE>
Information regarding security ownership of management appears on pages 5
through 7 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 12, 1996 under the caption "Information with
Respect to the Nominees, Continuing Directors and Named Executive Officers" and
is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions
appears on page 19 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 12, 1996 under the caption "Transactions
With Certain Related Persons" and is incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 1996 and are
incorporated by this reference:
- Consolidated Statements of Condition at June 30, 1996 and 1995
- Consolidated Statements of Income for each of the years in the three
year period ended June 30, 1996
- Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three year period ended June 30, 1996
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended June 30, 1996
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1996
None
40
<PAGE>
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
3.1 Certificate of Incorporation of Reliance Bancorp, Inc. (1)
3.2 By-Laws of Reliance Bancorp, Inc. (1)
10.1(a) Reliance Federal Savings Bank Recognition and Retention Plan for
Officers and Employees (2)
10.1(b) Reliance Federal Savings Bank Recognition and Retention Plans for
Outside Directors (2)
10.2 Reliance Bancorp, Inc. 1994 Incentive Stock Option Plan (2)
10.3 Reliance Bancorp, Inc. 1994 Stock Option Plan for Outside Directors (2)
10.4(a) Form of Reliance Bancorp, Inc. Employee Stock Ownership Plan and
Trust (1)
10.4(b) Form of Reliance Federal Savings Bank Employee Stock Ownership
Trust Agreement (1)
10.5 Form of Employment Agreement between Reliance Federal Savings
Bank and Certain Officers (1)
10.6 Form of Employment Agreement between Reliance Bancorp, Inc.
and Certain Executive Officers (1)
10.7 Form of Change-in-Control Agreement between Reliance Federal
Savings Bank and Certain Officers (1)
10.8 Form of Change-in-Control Agreement among the Reliance Bancorp,
Inc. and Certain Officers (1)
10.9 Form of Reliance Federal Savings Bank Employee Severance
Compensation Plan (1)
10.10 Form of Reliance Federal Savings Bank Supplemental Executive
Retirement Plan (1)
10.11 ESOP Loan Commitment Letter and Form of ESOP Loan Documents (1)
10.12 Form of Reliance Federal Savings Bank Outside Directors' Consultation
and Retirement Plan (1)
10.13 Form of Reliance Bancorp, Inc. Employment Agreement
11.0 Statement Re: Computation of Per Share Earnings
13.0 1996 Annual Report to Stockholders
21.0 Subsidiaries information incorporated herein by reference to Part 1 -
Subsidiaries
23.0 Consent of Independent Auditors
27.0 Financial Data Schedule
99.0 Proxy Statement for the Annual Meeting of Stockholders to be held on
November 12, 1996
99.1 Stockholders Protection Rights Agreement; dated as of September 18, 1996 (3)
</TABLE>
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, Registration No. 33-72476
(2) Incorporated by reference into this document from the Exhibits to the 1996
Proxy Statement for the Annual Meeting of Stockholders to be held on November
12, 1996.
(3) Incorporated by reference into this document from the Exhibits filed with
the registration statement on Form 8-A, filed on September 27, 1996.
41
<PAGE>
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.
Reliance Bancorp, Inc.
-------------------------------
(Registrant)
/s/ Raymond A. Nielsen September 18, 1996
-------------------------------
Raymond A. Nielsen
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:
NAME TITLE DATE
---- ----- ----
/s/ Raymond A. Nielsen President and September 18, 1996
- -------------------------- Chief Executive Officer ------------------
Raymond A. Nielsen
/s/ Paul D. Hagan Chief Financial Officer September 18, 1996
- -------------------------- ------------------
Paul D. Hagan
/s/ Raymond L. Nielsen Chairman of the Board and former September 18, 1996
- -------------------------- Chief Executive Officer ------------------
Raymond L. Nielsen
/s/ Thomas G. Davis, Jr. Director September 18, 1996
- -------------------------- ------------------
Thomas G. Davis, Jr.
/s/ Conrad J. Gunther, Jr. Director September 18, 1996
- -------------------------- ------------------
Conrad J. Gunther, Jr.
/s/ Douglas G. LaPasta Director September 18, 1996
- -------------------------- ------------------
Douglas G. LaPasta
/s/ Donald LaPasta Director September 18, 1996
- -------------------------- ------------------
Donald LaPasta
/s/ Peter F. Neumann Director September 18, 1996
- -------------------------- ------------------
Peter F. Neumann
/s/ J. William Newby Director September 18, 1996
- -------------------------- ------------------
J. William Newby
42
Exhibit 10.6
TWO YEAR
RELIANCE BANCORP, INC.
EMPLOYMENT AGREEMENT
(As Amended September 11, 1996)
This AGREEMENT, originally effective as of July 1, 1994, and as amended as
of November 29, 1995 and September 11, 1996, is made by and between Reliance
Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of
Delaware, with its principal administrative office at 585 Stewart Avenue, Garden
City, New York, and___________ ("Executive"). Any reference to "Bank" herein
shall mean Reliance Federal Savings Bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Holding Company
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
___________ of the Holding Company. Executive shall render administrative and
management services to the Holding Company such as are customarily performed by
persons in a similar executive capacity. During said period, Executive also
agrees to serve, if elected, as an officer and director of any subsidiary of the
Holding Company. Failure to reelect Executive as ___________ of the Holding
Company or failure to reelect Executive as ___________ of the Bank without the
consent of Executive shall constitute a breach of this Agreement.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as July 1, 1996 and shall continue for a period of
twenty-four (24) full calendar months thereafter; provided, however, that for
purposes only of the obligation to make payments to the Executive pursuant to
Section 5 of this Agreement (the "Section 5 Obligation") the term of this
Agreement shall continue for a period of thirty-six (36) full calendar months
after the date of such written notice. Commencing on July 1, 1996, the
twenty-four (24) or thirty-six (36) month, as the case may be, terms of this
Agreement shall be extended for one day each day until such time as the Board of
Directors of the Holding Company (the "Board") or Executive elects not to extend
the terms of the Agreement by giving written notice to the other party in
accordance with
1
<PAGE>
Section 8 of this Agreement, in which case the terms of this Agreement shall be
fixed and shall end on the second anniversary of the date of such written
notice; except as regards the Section 5 Obligation, in which case the term of
the Section 5 Obligation shall be fixed and shall end on the third anniversary
of the date of such written notice.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Holding Company and participation in community
and civic organizations; provided, however, that, with the approval of the
Board, as evidenced by a resolution of such Board, from time to time, Executive
may serve, or continue to serve, on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which, in such
Board's judgment, will not present any conflict of interest with the Holding
Company, or materially affect the performance of Executive's duties pursuant to
this Agreement.
(c) In the event that Executive's duties and responsibilities with respect
to the Bank are temporarily or permanently terminated pursuant to Sections 7 or
16 of the Employment Agreement dated July 1, 1996, between Executive and the
Bank ("Bank Agreement") and the course of conduct upon which such termination is
based would not constitute grounds for Termination for Cause under Section 7 of
this Agreement then Executive shall continue to serve as___________ of the
Holding Company. However, Executive shall not perform, in any respect, directly
or indirectly, during the pendency of his temporary or permanent suspension or
termination from the Bank, duties and responsibilities formerly performed at the
Bank as part of his duties and responsibilities as ___________ of the Holding
Company. Nothing in this provision shall be interpreted as restricting the
Holding Company's right to remove Executive for cause in accordance with Section
7 of this Agreement. Notwithstanding any other provisions of this Agreement,
subsequent to Executive's temporary or permanent termination pursuant to Section
7 or 16 of the Bank Agreement, any benefits and payments to Executive for future
services under this Agreement shall be made only to the extent those benefits
and payments are commensurate with the level of such future services rendered
and time expended by the Executive in connection with Executive's duties and
responsibilities performed under this Agreement subsequent to such termination.
In the event Executive is temporarily or permanently terminated pursuant to
Section 7 or 16 of the Bank Agreement and continues his duties under this
Agreement, the Holding Company shall promptly provide written notification of
such occurrence to the Regional Director of the Office of Thrift Supervision.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Section 1. The Holding
Company shall pay Executive as compensation a salary of not less than $________
per year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any employee benefit plan
2
<PAGE>
maintained by the Bank or Holding Company. Such Base Salary shall be payable
weekly. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually; the first such review will be made no later than one
year from the date of this Agreement. Such review shall be conducted by the
Board or a Committee designated by the Board, and the Board may increase
Executive's Base Salary. The increased Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Holding Company shall also provide Executive at no
cost to Executive with all such other benefits as are provided uniformly to
permanent full-time employees of the Holding Company and the Bank.
(b) The Holding Company will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company will
not, without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder. Without limiting the generality of the foregoing provisions
of this Subsection (b), Executive will be entitled to participate in or receive
benefits under any employee benefit plans including, but not limited to,
retirement plans, supplemental retirement plans, pension plans, profit-sharing
plans, health-and-accident plan, medical coverage or any other employee benefit
plan or arrangement made available by the Holding Company in the future to its
senior executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Executive will be entitled to incentive compensation and
bonuses as provided in any plan of the Holding Company in which Executive is
eligible to participate. Nothing paid to Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Holding Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing his
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Holding Company of Executive's full-time employment hereunder for any reason
other than a Change in Control, as defined in Section 5(a) hereof, upon
Retirement, as defined in Section 6 hereof or Termination for Cause, as defined
in Section 7 hereof; (ii) Executive's resignation from the Holding Company's
employ, upon any (A) failure to elect or reelect or to appoint or reappoint
Executive as___________ , unless consented to by
3
<PAGE>
Executive, (B) a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, (and any such material change shall be
deemed a continuing breach of this Agreement), (C) a relocation of Executive's
principal place of employment by more than thirty (30) miles from its location
at the effective date of this Agreement, or a material reduction in the benefits
and perquisites to Executive from those being provided as of the effective date
of this Agreement, provided, however, that the Holding Company may materially
reduce benefits and perquisites generally provided on a nondiscriminatory basis
to all employees without incurring the payments pursuant to the provisions of
this Section, (D) liquidation or dissolution of the Bank or Holding Company, or
(E) breach of this Agreement by the Holding Company. Upon the occurrence of any
event described in clauses (A),(B),(C), (D), (E), above, Executive shall have
the right to elect to terminate his employment under this Agreement by
resignation upon not less than sixty (60) days prior written notice given within
a reasonable period of time not to exceed, except in case of a continuing
breach, four calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination on the Date of
Termination as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to: (i) the amount of the remaining salary
payments that the Executive would have earned if he continued his employment
with the Holding Company or Bank during the remaining unexpired term of this
Agreement at the Executive's Base Salary at the Date of Termination; (ii) the
average of the amount of bonus and any other compensation paid to the Executive
during the term of the Agreement times the remaining number of years of the
Agreement and any fraction thereof, and; (iii) an amount equal to the average of
the annual contributions that were made on the Executive's behalf to any
employee benefit plans of the Holding Company or Bank during the term of the
Agreement times the remaining number of years of the Agreement and any fraction
thereof. At the election of Executive, which election is to be made within
thirty (30) days of the Date of Termination, such payments shall be made in a
lump sum or paid monthly during the remaining term of the agreement following
Executive's termination. In the event that no election is made, payment to
Executive will be made on a monthly basis during the remaining term of the
Agreement. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Bank or the Holding
Company for Executive prior to his termination, except to the extent such
coverage may be changed in its application to all bank or Holding Company
employees on a nondiscriminatory basis. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
(d) Upon the occurrence of an event of Termination, Executive will be
entitled to receive benefits due him under or contributed by the Bank or the
Holding Company on his behalf pursuant
4
<PAGE>
to any retirement, incentive, profit sharing, bonus, performance, disability or
other employee benefit plan maintained by the Bank or the Holding Company on
Executive's behalf to the extent such benefits are not otherwise paid to
Executive under a separate provision of this Agreement.
(e) In the event that Executive is receiving monthly payments pursuant to
Section 4(b) hereof, on an annual basis thereafter, between the dates of January
1 and January 31 of each year, Executive shall elect whether the balance of the
amount payable under the Agreement at that time shall be paid in a lump sum or
on a pro rata basis. Such election shall be irrevocable for the year for which
such election is made.
5. CHANGE IN CONTROL.
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or the Holding Company as set forth
below. For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1 (a) of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Holding Company within the meaning of the Home
Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office
of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the
date hereof (provided, that in applying the definition of change in control as
set forth under the rules and regulations of the OTS, the Board shall substitute
its judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's outstanding
securities except for any securities of the Bank purchased by the Holding
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any employee benefit plan of the Bank, or (B)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board, or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity, or (D) a proxy statement is
distributed soliciting proxies from stockholders of the Holding Company, by
someone other than the current management of the Holding Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Holding Company or Bank with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are exchanged for or converted into
5
<PAGE>
cash or property or securities not issued by the Bank or the Holding Company or
(E) a tender offer is made for 20% or more of the voting securities of the Bank
or Holding Company then outstanding.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board has determined that a Change in
Control has occurred, Executive shall be entitled to the benefits provided in
paragraphs (c), (d), (e), (f) and (g) of this Section 5 upon his subsequent
termination of employment at any time during the term of this Agreement due to
(1) Executive's dismissal or (2) Executive's voluntary resignation following any
demotion, loss of title, office or significant authority or responsibility,
reduction in annual compensation or benefits or relocation of his principal
place of employment by more than 30 miles from its location immediately prior to
the Change in Control, unless such termination is because of his death, or
Termination for Cause.
(c) Upon the occurrence of a Change in Control followed by Executive's
termination of employment as provided in Section 5(b), the Holding Company shall
pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the greater of the payments due for the
remaining term of the Agreement or three (3) times Executive's average annual
compensation for the two (2) preceding taxable years, such annual compensation
shall include any Base Salary, commissions, bonuses, pension and profit sharing
plan benefits, severance payments, retirement benefits, director or committee
fees, fringe benefits, or any other amount in the nature of compensation earned,
recognized or paid or to be earned, recognized or paid to Executive during any
such year. At the election of Executive, which election is to be made within
thirty (30) days of the Date of Termination following a Change in Control, such
payment may be made in a lump sum or paid in equal monthly installments during
the twenty-four (24) months following Executive's termination. In the event that
no election is made, payment to Executive will be made on a monthly basis during
the twenty-four (24) months following Executive's termination.
(d) Upon the occurrence of a Change in Control, Executive will be entitled
to receive benefits due him under or contributed by the Bank or the Holding
Company on his behalf pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Bank or the Holding Company on Executive's behalf to the extent such benefits
are not otherwise paid to Executive under a separate provision of this
Agreement.
(e) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Holding Company will cause to be continued life,
medical and disability coverage substantially identical to the coverage
maintained by the Bank or Holding Company for Executive prior to his severance,
except to the extent that such coverage may be changed in its applications for
all Bank or Holding Company employees on a nondiscriminatory basis. Such
coverage and payments shall cease upon the expiration of twenty-four (24) full
calendar months following the Date of Termination.
6
<PAGE>
(f) In the event that Executive is receiving monthly payments pursuant to
Section 5(c) hereof, on an annual basis, thereafter, between the dates of
January 1 and January 31 of each year, Executive shall elect whether the balance
of the amount payable under the Agreement at that time shall be paid in a lump
sum or on a pro rata basis pursuant to such section. Such election shall be
irrevocable for the year for which such election is made.
(g) Notwithstanding the preceding paragraphs of this Section 5, for any
taxable year in which it is determined that the Executive shall be liable for
the payment of an excise tax under Section 4999 of the Code, with respect to any
payment in the nature of the compensation made by the Holding Company, the Bank,
or any affiliate or successor thereof to (or for the benefit of) Executive, the
Company shall pay to the Executive an amount determined under the following
formula:
An amount equal to: (E x P) + X
WHERE:
X = E x P
--------------------------------
1 - [(FI x (1 - SLI)) + SLI + E]
E = the rate at which the excise tax is assessed under Section
4999 of the Code;
P = the amount with respect to which such excise tax is
assessed, determined without regard to this paragraph (g);
FI = the highest marginal rate of federal income tax applicable
to Executive under the Code for the taxable year in
question; and
SLI = the sum of the highest marginal rates of income and payroll
tax applicable to Executive under applicable state and
local laws for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Executive under the terms of this Agreement or otherwise and
on which an excise tax under Section 4999 of the Code will be assessed, the
payment determined under this Section 5(g) shall be made to Executive on the
earlier of (i) the date the Holding Company is required to withhold such tax, or
(ii) the date the tax is required to be paid by Executive.
(h) Notwithstanding the foregoing, if it shall subsequently be determined
in a final judicial determination or a final administrative settlement to which
Executive is a party that the excess parachute payment as defined in Section
4999 of the Code, is different from the amount determined as "P", above (such
different amount being hereafter referred to as the "Determinative Excess
Parachute Payment") then the Holding Company's independent accountants shall
determine
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the amount (the "Adjustment Amount") the Executive must pay to the Holding
Company, or the Holding Company must pay to the Executive, in order to put the
Executive (or the Holding Company, as the case may be) in the same position as
the Executive (or the Holding Company, as the case may be) would have been if
the amount determined as "P" above had been equal to the Determinative Excess
Parachute Payment. In determining the Adjustment Amount, the independent
accountants shall take into account any and all taxes (including any penalties
and interest) paid by or for Executive or refunded to Executive or for
Executive's benefit. As soon as practicable after the Adjustment Amount has been
so determined, the Holding Company shall pay the Adjustment amount to Executive
or the Executive shall repay the Adjustment Amount to the Holding Company, as
the case may be.
(i) In each calendar year that Executive receives payments or benefits
under the Employment Agreement, Executive shall report on his state and federal
income tax returns such information as is consistent with the determination made
by the independent accountants of the Holding Company as described above. The
Holding Company shall indemnify and hold Executive harmless from any and all
losses, costs and expenses (including without limitation, reasonable attorney's
fees, interest, fines and penalties) which Executive incurs as a result of so
reporting such information. Executive shall promptly notify the Holding Company
in writing whenever the Executive receives notice of the institution of a
judicial or administrative proceeding, formal or informal, in which the federal
tax treatment under Section 4999 of the Code of any amount paid or payable under
this Supplemental Agreement is being reviewed or is in dispute. The Holding
Company shall assume control at its expense over all legal and accounting
matters pertaining to such federal tax treatment (except to the extent necessary
or appropriate for Executive to resolve any such proceeding with respect to any
matter unrelated to amounts paid or payable pursuant to this contract) and
Executive shall cooperate fully with the Holding Company in any such proceeding.
The Executive shall not enter into any compromise or settlement or otherwise
prejudice any rights the Holding Company may have in connection therewith
without prior consent to the Holding Company.
6. TERMINATION UPON RETIREMENT.
Termination of Executive based on "Retirement" shall mean termination in
accordance with the Holding Company's or Bank's retirement policy or in
accordance with any retirement arrangement established with Executive's consent
with respect to him. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Holding
Company or the Bank and other plans to which Executive is a party.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of a
material loss to the Holding Company or one of its affiliates caused by
Executive's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses) or final cease and desist order, or any material breach of
this
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Agreement. For purposes of this Section, no act, or the failure to act, on
Executive's part shall be "willful" unless done, or omitted to be done, not in
good faith and without reasonable belief that the action or omission was in the
best interest of the Holding Company or its affiliates. Notwithstanding the
foregoing, Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a Notice of Termination
which shall include a copy of a resolution duly adopted by the affirmative vote
of not less than three-fourths of the members of the Board at a meeting of the
Board called and held for that purpose (after reasonable notice to Executive and
an opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause. Any stock options and
related limited rights granted to Executive under any stock option plan, or any
unvested awards granted to Executive under any stock benefit plan of the Bank,
the Holding Company or any subsidiary or affiliate thereof, shall become null
and void effective upon Executive's receipt of Notice of Termination for Cause
pursuant to Section 8 hereof, and shall not be exercisable by or delivered to
Executive at any time subsequent to such Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given,
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until the dispute is finally resolved in accordance with this Agreement. Amounts
paid under this Section are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.
9. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 9 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Holding Company as may reasonably be required by the Holding
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 8 hereof, Executive agrees not to compete with the Bank and/or the
Holding Company for a period of one (1) year following such termination in any
city, town or county in which the Bank and/or the Holding Company has an office
or has filed an application for regulatory approval to establish an office,
determined as of the effective date of such termination, except as agreed to
pursuant to a resolution duly adopted by the Board. Executive agrees that during
such period and within said cities, towns and counties, Executive shall not work
for or advise, consult or otherwise serve with, directly or indirectly, any
entity whose business materially competes with the depository, lending or other
business activities of the Bank and/or the Holding Company. The parties hereto,
recognizing that irreparable injury will result to the Bank and/or the Holding
Company, its business and property in the event of Executive's breach of this
Subsection 10(a) agree that in the event of any such breach by Executive, the
Bank and/or the Holding Company will be entitled, in addition to any other
remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Executive represents and
admits that in the event of the termination of his employment pursuant to
Section 8 hereof, Executive's experience and capabilities are such that
Executive can obtain employment in a business engaged in other lines and/or of a
different nature than the Bank and/or the Holding Company, and that the
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood. Nothing herein will be construed as prohibiting the Bank
and/or the Holding Company from pursuing any other remedies available to the
Bank and/or the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Bank. Executive will not, during or
after the term of his employment, disclose any knowledge of the past, present,
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planned or considered business activities of the Bank or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge
of banking, financial and/or economic principles, concepts or ideas which are
not solely and exclusively derived from the business plans and activities of the
Holding Company. In the event of a breach or threatened breach by Executive of
the provisions of this Section, the Holding Company will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Holding Company or affiliates thereof, or from rendering any services to any
person, firm, corporation, other entity to whom such knowledge, in whole or in
part, has been disclosed or is threatened to be disclosed. Nothing herein will
be construed as prohibiting the Holding Company from pursuing any other remedies
available to the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company subject to Section 13
hereof.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
13. EFFECT OF ACTION UNDER BANK AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits, as provided by this Agreement, are paid to or received by
Executive under the Employment Agreement dated July 1, 1994, between Executive
and the Bank, such compensation payments and benefits paid by the Bank will be
subtracted from any amount due simultaneously to Executive under similar
provisions of this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation
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of law, and any attempt, voluntary or involuntary, to affect any such action
shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Holding Company's executive office, in
accordance with the rules of the American Arbitration Bank then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided,
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however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Executive under this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees and other expenses paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Holding Company, if Executive is successful
pursuant to a legal judgment, arbitration or settlement.
21. INDEMNIFICATION.
The Holding Company shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
22. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Reliance Bancorp, Inc. has caused this Agreement, as
originally executed on July 1, 1994 and amended on November 29, 1995 to be
executed as amended on September 11, 1996 and its seal to be affixed hereunto by
its duly authorized officer and its directors, and Executive has signed this
Agreement, as amended, on the 11th day of September, 1996.
ATTEST: RELIANCE BANCORP, INC.
BY:
- ----------------------- ----------------------
Robert F. Pelosi
Secretary
[SEAL]
WITNESS:
- ----------------------- -----------------------
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Exhibit 10.6
FIVE YEAR
RELIANCE BANCORP, INC.
EMPLOYMENT AGREEMENT
(As Amended September 11, 1996)
This AGREEMENT is made effective as of September 11, 1996, by and between
Reliance Bancorp, Inc. (the "Holding Company"), a corporation organized under
the laws of Delaware, with its principal administrative office at 585 Stewart
Avenue, Garden City, New York, and ___________ ("Executive"). Any reference to
"Bank" herein shall mean Reliance Federal Savings Bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Holding Company
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. CONSIDERATION PROVIDED BY THE EXECUTIVE.
During the period of his employment hereunder, Executive agrees to serve as
___________ of the Holding Company. Executive shall render administrative and
management services to the Holding Company such as are customarily performed by
persons in a similar executive capacity. During said period, Executive also
agrees to serve, if elected, as an officer and director of any subsidiary of the
Holding Company. Failure to reelect Executive as ___________ of the Holding
Company, failure to reelect Executive as ___________ of the Bank or, failure to
nominate or reelect Executive to the Board of Directors of the Holding Company
or Bank, without the consent of Executive shall constitute a breach of this
Agreement.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of sixty (60) full calendar months thereafter. Commencing on the
date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the Board of Directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the fifth anniversary of the date of such written notice.
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(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Holding Company and the Bank and participation
in community and civic organizations; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the
Holding Company, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) In the event that Executive's duties and responsibilities with respect
to the Bank are temporarily or permanently terminated pursuant to Sections 7 or
16 of the Employment Agreement dated July 1, 1994, as amended between Executive
and the Bank ("Bank Agreement") and the course of conduct upon which such
termination is based would not constitute grounds for Termination for Cause
under Section 7 of this Agreement, then Executive shall continue to serve as
___________ of the Holding Company. However, Executive shall not perform, in any
respect, directly or indirectly, during the pendency of his temporary or
permanent suspension or termination from the Bank, duties and responsibilities
formerly performed at the Bank as part of his duties and responsibilities as
___________ of the Holding Company. Nothing in this provision shall be
interpreted as restricting the Holding Company's right to remove Executive for
cause in accordance with Section 7 of this Agreement. Notwithstanding any other
provisions of this Agreement, subsequent to Executive's temporary or permanent
termination pursuant to Section 7 or 16 of the Bank Agreement, any benefits and
payments to Executive for future services under this Agreement shall be made
only to the extent those benefits and payments are commensurate with the level
of such future services rendered and time expended by the Executive in
connection with Executive's duties and responsibilities performed under this
Agreement subsequent to such termination. In the event Executive is temporarily
or permanently terminated pursuant to Section 7 or 16 of the Bank Agreement and
continues his duties under this Agreement, the Holding Company shall promptly
provide written notification of such occurrence to the Regional Director of the
Office of Thrift Supervision.
3. CONSIDERATION PROVIDED BY THE HOLDING COMPANY.
(a) The compensation specified under this Agreement shall constitute the
consideration paid by the Holding Company in exchange for the duties described
in Section 1. The Holding Company shall pay Executive as compensation a salary
of not less than $ _______ per year ("Base Salary"). Base Salary shall include
any amounts of compensation deferred by Executive under any employee benefit
plan maintained by the Bank or Holding Company. Such Base Salary shall be
payable weekly. During the period of this Agreement, Executive's Base Salary
shall be reviewed at least annually; the first such review will be made no later
than one year from the date of this Agreement. Such review shall be conducted by
the Board or a Committee designated by the Board, and the Board may increase
Executive's Base Salary. The increased Base Salary shall
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become the "Base Salary" for purposes of this Agreement. In addition to the Base
Salary provided in this Section 3(a), the Holding Company shall also provide
Executive at no cost to Executive with all such other benefits as are provided
uniformly to permanent full-time employees of the Holding Company and the Bank.
(b) The Holding Company will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company will
not, without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder. Without limiting the generality of the foregoing provisions
of this Subsection (b), Executive will be entitled to participate in or receive
benefits under any employee benefit plans, whether tax-qualified or otherwise,
including, but not limited to, retirement plans, supplemental retirement plans,
pension plans, profit-sharing plans, health-and-accident plan, medical coverage
or any other employee benefit plan or arrangement made available by the Holding
Company in the future to its senior executives and key management employees,
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of the Holding
Company in which Executive is eligible to participate. Nothing paid to Executive
under any such plan or arrangement will be deemed to be in lieu of other
compensation to which Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Holding Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses including out time or capital expenses
associated with membership in clubs or organizations as mutually agreed to
between the Board and the executive incurred by Executive performing his
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
(d) Except as otherwise provided in this Section 3(d), the Holding Company
will provide to Executive for each calendar year during the term of this
Agreement and for the remaining term of this Agreement after a termination of
employment following an Event of Termination as defined in Section 4 of this
Agreement, no later than 90 days after the close of the calendar year to which
such payment pertains ("Benefit Year"), a "Benefit Equity Payment" in addition
to the contributions actually made (or benefits actually accrued) with respect
to such year to any tax-qualified or non-tax-qualified compensation or benefit
plan, arrangement, policy or program funded or sponsored by the Holding Company
or the Bank, including but not limited to those of the following types: deferred
compensation, retirement, defined benefit pension, defined contribution pension,
supplemental executive retirement, profit sharing, stock option or stock bonus
award, life insurance, health, medical, dental, disability, incentive
compensation or bonus plan, perquisites, or other fringe benefits ("Benefit
Plans") made on his behalf or otherwise accrued as consideration for his
services described in Section 1 of this Agreement. The Benefit
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Equity Payment shall be an amount calculated by an actuary accountant or other
licensed professional to equal the amount of the contributions (or other
benefits) which would have been made or accrued for the Executive for such year
pursuant to all Benefit Plans as consideration for his services described in
Section 1 of this Agreement but were not made or accrued because (i) any of the
Benefit Plans were terminated or not funded, or (ii) the Executive was no longer
employed or will not be employed by the Holding Company or Bank.
For purposes of calculating the Benefit Equity Payment for Benefit Years
during which the Executive was employed by the Holding Company for the full year
and for the first partial year of this Agreement, the difference between (i) and
(ii) is deemed to be zero (0).
(e) To the extent that the Holding Company or Bank continues to offer any
life, medical, health, disability or dental insurance in which Executive
participates in on the last day of his employment (each being a "Welfare Plan"),
after an Event of Termination (as herein defined), Executive and his dependents
shall be continued as participants in such Welfare Plans subject to the same
premium contributions on the part of Executive as were required immediately
prior to the Event of Termination until the earlier of (i) his death (ii) his
employment by another employer other than one of which he is the majority owner
or (iii) the end of the remaining term of this Agreement. If the Holding Company
or Bank does not offer the Welfare Plans after the Event of Termination, then
the Holding Company shall provide the Executive with a payment equal to the
actuarial value of the provision of such benefit for the period which runs until
the earlier of (i) his death (ii) his employment by another employer other than
one of which he is the majority owner or (iii) the end of the remaining term of
this Agreement.
(f) The use or provision of any membership, license, automobile use, or
other perquisites shall be continued during the remaining term of the Agreement
on the same financial terms and obligations as were in place immediately prior
to the Change In Control. To the extent that any item referred to in this
paragraph will at the end of the term of this Agreement, no longer be available
to the Executive, the Executive will have the option to purchase all rights then
held by the Holding Company or Bank to such item for a price equal to the then
fair market value of the item.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Holding Company of Executive's full-time employment hereunder for any reason
other than, upon Retirement, as defined in Section 6 hereof or Termination for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon any (A) failure to elect or reelect or to appoint
or reappoint Executive as ___________ of the Holding Company, failure to elect
or reelect or to appoint or reappoint Executive as ___________ of the Bank, or,
failure to nominate or reelect Executive to
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the Board of Directors of the Holding Company or Bank, unless any such event was
consented to by Executive (B) a material change in Executive's function, duties,
or responsibilities, which change would cause Executive's position to become one
of lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, (and any such material change shall be
deemed a continuing breach of this Agreement), (C) a relocation of Executive's
principal place of employment by more than thirty (30) miles from its location
at the effective date of this Agreement, or a material reduction in the benefits
and perquisites to Executive from those being provided as of the effective date
of this Agreement, provided, however, that the Holding Company may materially
reduce benefits and perquisites generally provided on a nondiscriminatory basis
to all employees without incurring the payments pursuant to the provisions of
this Section, (D) liquidation or dissolution of the Bank or Holding Company, or
(E) breach of this Agreement by the Holding Company. Upon the occurrence of any
event described in clauses (A), (B), (C), (D) or (E), above, Executive shall
have the right to elect to terminate his employment under this Agreement by
resignation upon not less than sixty (60) days prior written notice given within
a reasonable period of time not to exceed, except in case of a continuing
breach, four calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination on the Date of
Termination as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be: (i) the amount of the
remaining payments (or benefits) that the Executive would have earned if he
continued his employment with the Holding Company or Bank during the remaining
unexpired term of this Agreement, based on the Executive's Base Salary at the
Date of Termination, as set out in Sections 3(a)(b) and (d) and the amount still
due the Executive under any paragraph of Section 3 for service through the Date
of Termination. At the election of Executive, which election is to be made
within thirty (30) days of the Date of Termination, such payments shall be made
in a lump sum or paid monthly during the remaining term of the agreement
following Executive's termination. In the event that no election is made,
payment to Executive will be made in a lump sum. Such payments shall not be
reduced in the event Executive obtains other employment following termination of
employment.
(c) Upon the occurrence of an Event of Termination, Executive will be
entitled to receive benefits due him under or contributed by the Bank or the
Holding Company on his behalf pursuant to any retirement, incentive, profit
sharing, bonus, performance, disability or other employee benefit plan
maintained by the Bank or the Holding Company on Executive's behalf to the
extent such benefits are not otherwise paid to Executive under a separate
provision of this Agreement.
(d) In the event that Executive is receiving monthly payments pursuant to
Section 4(b) hereof, on an annual basis, thereafter, between the dates of
January 1 and January 31 of each year, Executive shall elect whether, the
balance of the amount payable under the Agreement at that time shall be paid in
a lump sum or on a pro rata basis. Such election shall be irrevocable for the
year for which such election is made.
5
<PAGE>
5. CHANGE IN CONTROL.
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or the Holding Company as set forth
below. For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Holding Company within the meaning of the Home
Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office
of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the
date hereof (provided, that in applying the definition of change in control as
set forth under the rules and regulations of the OTS, the Board shall substitute
its judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's outstanding
securities except for any securities of the Bank purchased by the Holding
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any employee benefit plan of the Bank, or (B)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board, or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity, or (D) a proxy statement is
distributed soliciting proxies from stockholders of the Holding Company, by
someone other than the current management of the Holding Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Holding Company or Bank with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company or (E) a tender offer is made for
20% or more of the voting securities of the Bank or Holding Company then
outstanding.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board has determined that a Change in
Control has occurred, Executive shall be entitled to the benefits provided in
paragraphs (c), (d), (e), (f) and (g) of this Section 5 upon his subsequent
termination of employment at any time during the term of this Agreement due to
(1) Executive's dismissal or (2) Executive's voluntary resignation following any
demotion, loss of title, office or significant authority or responsibility,
reduction in annual
6
<PAGE>
compensation or benefits or relocation of his principals place of employment by
more than 30 miles from its location immediately prior to the Change in Control,
unless such termination is because of his death, or Termination for Cause
provided, however, that such payments shall be reduced by any payment made under
Section 4 of this agreement.
(c) Upon the occurrence of a Change in Control followed by Executive's
termination of employment as provided in Section 5(b), the Holding Company shall
pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the greater of: 1) the payments due for the
remaining term of the Agreement or 2) five (5) times Executive's average annual
compensation for the three (3) preceding taxable years. Such annual compensation
shall include Base Salary and any other taxable income, including but not
limited to amounts related to the granting, vesting or exercise of stock or
stock option awards, commissions, bonuses, pension and profit sharing plan
benefits, severance payments, retirement benefits, director or committee fees
and fringe benefits paid or to be paid to Executive during any such year. At the
election of Executive, which election is to be made within thirty (30) days of
the Date of Termination following a Change in Control, such payment may be made
in a lump sum or paid in equal monthly installments during the sixty (60) months
following Executive's termination. In the event that no election is made,
payment to Executive will be made on a monthly basis during the thirty-six (36)
months following Executive's termination.
(d) Upon the occurrence of a Change in Control, Executive will be entitled
to receive benefits due him under or contributed by the Bank or the Holding
Company on his behalf pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Bank or the Holding Company on Executive's behalf to the extent such benefits
are not otherwise paid to Executive under a separate provision of this
Agreement.
(e) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Holding Company will cause to be continued life,
medical and disability coverage substantially identical to the coverage
maintained by the Bank or Holding Company for Executive and any of his
dependents covered under such plans prior to the Change in Control. Such
coverage and payments shall cease upon the expiration of sixty (60) full
calendar months following the Date of Termination.
(f) In the event that Executive is receiving monthly payments pursuant to
Section 5(c) hereof, on an annual basis, thereafter, between the dates of
January 1 and January 31 of each year, Executive shall elect whether the balance
of the amount payable under the Agreement at that time shall be paid in a lump
sum or on a pro rata basis pursuant to such section. Such election shall be
irrevocable for the year for which such election is made.
(g) Notwithstanding the preceding paragraphs of this Section 5, for any
taxable year in which the Executive shall be liable, as determined for the
payment of an excise tax under Section 4999 of the Code, with respect to any
payment in the nature of the compensation made
7
<PAGE>
by the Company or the Bank to (or for the benefit of) Executive, the Company
shall pay to the Executive an amount determined under the following formula:
An amount equal to: (E x P) + X
WHERE:
X = E x P
--------------------------------
1 - [(FI x (1 - SLI)) + SLI + E]
E = the rate at which the excise tax is assessed under Section
4999 of the Code;
P = the amount with respect to which such excise tax is
assessed, determined without regard to this Section 2;
FI = the highest marginal rate of deferral income tax applicable
to Executive under the Code for the taxable year in
question; and
SLI = the sum of the highest marginal rates of income and payroll
tax applicable to Executive under applicable state and
local laws for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Executive under the terms of this Supplemental Agreement or
otherwise and on which an excise tax under Section 4999 of the Code will be
assessed, the payment determined under this Section 2 shall be made to Executive
on the earlier of (i) the date the Company is required to withhold such tax, or
(ii) the date the tax is required to be paid by Executive.
(h) Notwithstanding the foregoing, if it shall subsequently be determined
in a final judicial determination or a final administrative settlement to which
Executive is a party that the excess parachute payment as defined in Section
4999 of the Code, reduced as described above, is more than the amount determined
as "P", above (such greater amount being hereafter referred to as the
"Determinative Excess Parachute Payment") then the Company's independent
accountants shall determine the amount (the "Adjustment Amount") the Company
must pay to the Executive, in order to put the Executive (or the Company, as the
case may be) in the same position as the Executive (or the Company, as the case
may be) would have been if the amount determined as "P" above had been equal to
the Determinative Excess Parachute Payment. In determining the Adjustment
Amount, the independent accountants shall take into account any and all taxes
(including any penalties and interest) paid by or for Executive or refunded to
Executive or for Executive's benefit. As soon as practicable after the
Adjustment Amount has been so determined, the Company shall pay the Adjustment
Amount to Executive.
8
<PAGE>
(i) In each calendar year that Executive receives payments or benefits
under the Employment Agreement, Executive shall report on his state and federal
income tax returns such information as is consistent with the determination made
by the independent accountants of the Company as described above. The Company
shall indemnify and hold Executive harmless from any and all losses, costs and
expenses (including without limitation, reasonable attorney's fees, interest,
fines and penalties) which Executive incurs as a result of so reporting such
information. Executive shall promptly notify the Company in writing whenever the
Executive receives notice of the institution of a judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under Section
4999 of the Code of any amount paid or payable under this Supplemental Agreement
is being reviewed or is in dispute. The Company shall assume control at its
expense over all legal and accounting matters pertaining to such federal tax
treatment (except to the extent necessary or appropriate for Executive to
resolve any such proceeding with respect to any matter unrelated to amounts paid
or payable pursuant to this contract) and Executive shall cooperate fully with
the Company in any such proceeding. The Executive shall cooperate fully with the
Company in any such proceeding. The Executive shall not enter into any
compromise or settlement or otherwise prejudice any rights the Company may have
in connection therewith without prior consent to the Company.
6. TERMINATION UPON RETIREMENT.
Termination of Executive based on "Retirement" shall mean termination in
accordance with the Holding Company's or Bank's retirement policy or in
accordance with any retirement arrangement established with Executive's consent
with respect to him. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Holding
Company or the Bank and other plans to which Executive is a party.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of a
material loss to the Holding Company or one of its affiliates caused by
Executive's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses) or final cease and desist order, or any material breach of
this Agreement. For purposes of this Section, no act, or the failure to act, on
Executive's part shall be "willful" unless done, or omitted to be done, not in
good faith and without reasonable belief that the action or omission was in the
best interest of the Holding Company or its affiliates. Notwithstanding the
foregoing, Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a Notice of Termination
which shall include a copy of a resolution duly adopted by the affirmative vote
of not less than three-fourths of the members of the Board at a meeting of the
Board called and held for that purpose (after reasonable notice to Executive and
an opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying termination for Cause and specifying the particulars thereof
in detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination
9
<PAGE>
for Cause. Any stock options and related limited rights granted to Executive
under any stock option plan, or any unvested awards granted to Executive under
any stock benefit plan of the Bank, the Holding Company or any subsidiary or
affiliate thereof, shall become null and void effective upon Executive's receipt
of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not
be exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given);
provided, however, that if a dispute regarding the Executive's termination
exists, the "Date of Termination" shall be determined in accordance with Section
8(c) of this Agreement.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 9 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
10
<PAGE>
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Holding Company as may reasonably be required by the Holding
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 8 hereof, Executive agrees not to compete with the Bank and/or the
Holding Company for a period of one (1) year following such termination in any
city, town or county in which the Bank and/or the Holding Company has an office
or has filed an application for regulatory approval to establish an office,
determined as of the effective date of such termination, except as agreed to
pursuant to a resolution duly adopted by the Board. Executive agrees that during
such period and within said cities, towns and counties, Executive shall not work
for or advise, consult or otherwise serve with, directly or indirectly, any
entity whose business materially competes with the depository, lending or other
business activities of the Bank and/or the Holding Company. The parties hereto,
recognizing that irreparable injury will result to the Bank and/or the Holding
Company, its business and property in the event of Executive's breach of this
Subsection 10(a) agree that in the event of any such breach by Executive, the
Bank and/or the Holding Company will be entitled, in addition to any other
remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Executive represents and
admits that in the event of the termination of his employment pursuant to
Section 8 hereof, Executive's experience and capabilities are such that
Executive can obtain employment in a business engaged in other lines and/or of a
different nature than the Bank and/or the Holding Company, and that the
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood. Nothing herein will be construed as prohibiting the Bank
and/or the Holding Company from pursuing any other remedies available to the
Bank and/or the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Bank. Executive will not, during or
after the term of his employment, disclose any knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge
of banking, financial and/or economic principles, concepts or ideas which are
not solely and exclusively derived from the business plans and activities of the
Holding Company. Further, Executive may disclose information regarding the
business activities of the Bank or Holding Company to the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC")
pursuant to a formal regulatory request. In the event of a breach or threatened
breach by Executive of the provisions of this Section, the Holding Company will
be entitled to an injunction restraining Executive from disclosing, in whole or
in part, the knowledge of the past, present, planned or considered business
11
<PAGE>
activities of the Holding Company or affiliates thereof, or from rendering any
services to any person, firm, corporation, other entity to whom such knowledge,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein will be construed as prohibiting the Holding Company from
pursuing any other remedies available to the Holding Company for such breach or
threatened breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company subject to Section 13
hereof.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
13. EFFECT OF ACTION UNDER BANK AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits, as provided by this Agreement, are paid to or received by
Executive under the Employment Agreement dated July 1, 1994, between Executive
and the Bank, such compensation payments and benefits paid by the Bank will be
subtracted from any amount due simultaneously to Executive under similar
provisions of this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
12
<PAGE>
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Holding Company's executive office, in
accordance with the rules of the American Arbitration Bank then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that Executive shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
20. PAYMENT OF COSTS AND LEGAL FEES AND REINSTATEMENT OF BENEFITS.
13
<PAGE>
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of: (1) all legal fees incurred by Executive in resolving such dispute or
controversy, and (2) any back-pay, including salary, bonuses and any other cash
compensation, fringe benefits and any compensation and benefits due Executive
under this Agreement.
21. INDEMNIFICATION.
During the term of this Agreement and for an additional period of seven
years thereafter, the Holding Company shall provide Executive (including his
heirs, executors and administrators) with coverage under a standard directors'
and officers' liability insurance policy at its expense, and shall indemnify,
hold harmless and defend Executive (and his heirs, executors and administrators)
to the fullest extent permitted under Delaware law against all expenses and
liabilities reasonably incurred by him in connection with or arising out of any
action, suit or proceeding in which he may be involved by reason of his having
been a director or officer of the Holding Company (whether or not he continues
to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
22. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
23. MISCELLANEOUS.
(a) Unless otherwise subject to law, all lump sum calculations shall be
done in using the methods, rates and assumptions setout in Code Section 1274(d)
and the regulations and statements issued thereunder by the IRS.
14
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Reliance Bancorp, Inc. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
its directors, and Executive has signed this Agreement, on the 11th day of
September, 1996.
ATTEST: RELIANCE BANCORP, INC.
BY:
- -------------------------- ------------------------
Robert F. Pelosi
Secretary
[SEAL]
WITNESS: Executive
- -------------------------- --------------------------
15
<TABLE>
<CAPTION>
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended June 30,
---------------------------------
1996 1995
------- -------
(In thousands, except per share amount)
<S> <C> <C>
Net Income $11,723 $ 9,702
======= =======
Weighted average common shares outstanding 8,594 9,327
Common stock equivalents due to dilutive
effect of stock option 323 60
------- -------
Total weighted average common shares and
equivalents outstanding 8,917 9,387
======= =======
Earnings per common and common share equivalents $ 1.31 $ 1.03
======= =======
Total weighted average common shares and
equivalents outstanding 8,917 9,387
Additional dilutive shares using ending period
market value versus average market value for
the period when utilizing the treasury stock
method regarding stock options 29 17
------- -------
Total shares for fully dilutive earnings per share 8,946 9,404
======= =======
Fully diluted earnings per common and
common share equivalents $ 1.31 $ 1.03
======= =======
</TABLE>
43
Reliance Bancorp, Inc. and Subsidiary
Financial Section
- --------------------------------------------------------------------------------
Contents
-------------------------------------------------------------
Selected Consolidated Financial and Other Data
of the Company.......................................... 10
-------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 12
-------------------------------------------------------------
Consolidated Statements of Condition as of
June 30, 1996 and 1995.................................. 25
-------------------------------------------------------------
Consolidated Statements of Income for
the years ended June 30, 1996, 1995 and 1994............ 26
-------------------------------------------------------------
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
June 30, 1996, 1995 and 1994............................ 27
-------------------------------------------------------------
Consolidated Statements of Cash Flows for
the years ended June 30, 1996, 1995 and 1994............ 28
-------------------------------------------------------------
Notes to Consolidated Financial Statements.............. 30
-------------------------------------------------------------
Independent Auditors' Report............................ 51
-------------------------------------------------------------
Selected Consolidated Quarterly Financial Data.......... 52
-------------------------------------------------------------
9
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Financial and Other Data of the Company
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Set forth below are the selected consolidated financial and other data of the
Company. This financial data is derived in part from, and it should be read in
conjunction with the Company's consolidated financial statements and related
notes.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
Selected Financial Data: 1996 1995 1994 1993 1992
====================================================
<S> <C> <C> <C> <C> <C>
Total Assets....................................................... $1,782,550 $931,436 $830,501 $736,276 $676,054
Loans Receivable, Net.............................................. 817,746 332,080 330,720 365,913 409,619
Debt and Equity Securities Available-for-Sale...................... 13,271 23,880 37,588 -- --
Debt and Equity Securities Held-to-Maturity(1)..................... 48,330 23,890 39,492 38,819 48,613
Mortgage-Backed Securities Held-to-Maturity........................ 184,492 413,762 394,199 304,490 169,858
Mortgage-Backed Securities Available-for-Sale...................... 591,740 104,453 -- -- --
Excess of Cost Over Fair Value of Net Assets Acquired.............. 49,429 -- -- -- --
Real Estate Owned, Net............................................. 1,564 1,558 2,911 3,909 5,815
Deposits........................................................... 1,345,626 670,317 587,221 600,278 610,908
FHLB Advances...................................................... 3,000 40,000 78,000 65,000 --
Securities Sold Under Agreements to Repurchase..................... 263,160 57,035 -- -- --
Total Stockholders' Equity(2)...................................... 153,619 153,733 157,851 61,412 54,779
<CAPTION>
For the Year Ended June 30,
----------------------------------------------------
Selected Operating Data: 1996 1995 1994 1993 1992
====================================================
Interest Income.................................................... $ 100,372 $ 61,260 $ 47,224 $ 48,178 $ 55,058
Interest Expense................................................... 52,985 28,361 20,024 21,322 32,313
----------------------------------------------------
Net Interest Income.............................................. 47,387 32,899 27,200 26,856 22,745
Less Provision for Loan Losses..................................... 725 400 393 234 108
----------------------------------------------------
Net Interest Income After Provision for Loan Losses.............. 46,662 32,499 26,807 26,622 22,637
Non-Interest Income:
Loan Fees and Service Charges...................................... 826 269 260 234 219
Other Operating Income............................................. 1,606 841 859 960 908
Net Gain on Securities............................................. 678 147 -- -- 3,634
----------------------------------------------------
Total Non-Interest Income...................................... 3,110 1,257 1,119 1,194 4,761
----------------------------------------------------
Non-Interest Expense:
Compensation and Benefits.......................................... 13,395 9,562 7,068 6,534 6,382
Occupancy and Equipment............................................ 4,481 2,462 2,336 2,252 2,670
Federal Deposit Insurance Premiums................................. 2,399 1,376 1,374 820 1,282
Advertising........................................................ 1,152 1,158 670 658 413
Other Operating Expenses........................................... 4,169 3,039 2,366 2,078 2,165
----------------------------------------------------
Total General and Administrative Expenses...................... 25,596 17,597 13,814 12,342 12,912
Real Estate Operations, Net........................................ 579 (385) 1,080 3,598 3,317
Amortization of Excess of Cost Over Fair
Value of Net Assets Acquired..................................... 1,928 -- -- -- --
----------------------------------------------------
Total Non-Interest Expense..................................... 28,103 17,212 14,894 15,940 16,229
----------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle....................... 21,669 16,544 13,032 11,876 11,169
Income Tax Expense................................................. 9,946 6,842 5,538 5,243 4,643
----------------------------------------------------
Income Before Cumulative Effect of
Change in Accounting Principle................................... 11,723 9,702 7,494 6,633 6,526
Cumulative Effect of Change in
Accounting Principle(3).......................................... -- -- 1,200 -- --
----------------------------------------------------
Net Income..................................................... $ 11,723 $ 9,702 $ 8,694 $ 6,633 $ 6,526
====================================================
Earnings Per Share(4).............................................. $ 1.31 $ 1.03 $ 0.22 N/A N/A
</TABLE>
(See footnotes on following page)
10
<PAGE>
<TABLE>
<CAPTION>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Financial and Other Data of the Company
- --------------------------------------------------------------------------------------------------------------------------------
At or for the Year Ended June 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
=============================================================
Selected Financial Ratios and Other Data:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on Average Assets(3) ................................. 0.83% 1.08% 1.15% 0.97% 0.96%
Return on Average Stockholders' Equity(3) ................... 7.58 6.17 9.82 11.19 12.05
Return on Average Tangible Stockholders' Equity(3) .......... 9.18 6.17 9.82 11.19 12.05
Average Stockholders' Equity to Average Assets .............. 10.92 17.60 11.68 8.65 7.98
Stockholders' Equity to Total Assets ........................ 8.62 16.51 19.01 8.34 8.10
Tangible Stockholders' Equity to Tangible Assets ............ 6.01 16.51 19.01 8.34 8.10
Core Deposits to Total Deposits ............................. 41.68 36.12 49.08 47.92 40.79
Net Interest Spread ......................................... 3.17 3.11 3.36 3.77 3.10
Net Interest Margin(5) ...................................... 3.52 3.77 3.69 4.03 3.45
Operating Expense to Average Assets(6) ...................... 1.81 1.97 1.82 1.80 1.90
Operating Income to Average Assets(7) ....................... 0.16 0.14 0.15 0.17 0.17
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities ...................... 1.09X 1.20X 1.12X 1.08X 1.07X
Asset Quality Ratios:
Non-Performing Loans to Total Loans(8) ...................... 1.58% 1.10% 1.08% 1.43% 1.46%
Non-Performing Loans to Total Assets ........................ 0.73 0.39 0.43 0.72 0.89
Non-Performing Assets to Total Assets(9) .................... 0.82 0.56 0.78 1.25 1.75
Allowance for Loan Losses to Total Loans .................... 0.55 0.52 0.43 0.37 0.27
Allowance for Loan Losses to Non-Performing Loans ........... 34.63 47.10 39.38 25.52 18.49
Other Data:
Number of Deposit Accounts .................................. 164,368 68,617 63,416 67,143 71,813
Full-Service Banking Offices ................................ 28 11 11 11 11
-------------------------------------------------------------
</TABLE>
(1) Includes marketable equity securities of $5.0 million at June 30, 1992.
(2) For 1992 and 1993, amounts represent only retained earnings, substantially
restricted, and at June 30, 1996, 1995 and 1994 includes retained earnings
of $84.0 million, $76.2 million and $70.1 million, respectively,
substantially restricted.
(3) Reflects the cumulative effect of the Company's adoption of Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes," in
the fiscal year ended June 30, 1994.
(4) Earnings per share for fiscal year ended 1994 is based on net income from
March 31, 1994 to June 30, 1994.
(5) Calculation is based upon net interest income before provision for loan
losses divided by average interest- earning assets.
(6) Operating expense represents total non-interest expense less real estate
operations, net and amortization of excess of cost over fair value of net
assets acquired.
(7) Operating income represents total non-interest income less net gain on sale
of debt and equity securities.
(8) Non-performing loans consist of all loans 90 days or more past due and any
other loans, or any portion thereof, that have been determined to be
uncollectible.
(9) Non-performing assets consist of non-performing loans, investments in real
estate and real estate owned.
11
<PAGE>
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
General
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized
on November 16, 1993 and is the holding company for Reliance Federal Savings
Bank (the "Bank"). On March 31, 1994, the Company issued 10,750,820 shares of
common stock at $10.00 per share raising total net proceeds of $103.6 million of
which $51.8 million was retained by the Company with the remaining net proceeds
being used by the Company to purchase all of the outstanding stock of the Bank.
The Company is headquartered in Garden City, New York and its primary
business currently consists of the operation of its wholly-owned subsidiary, the
Bank. In addition to directing, planning and coordinating the business
activities of the Bank, the Company currently invests primarily in U.S.
Government securities and repurchase agreements. In addition, the Company
completed the acquisitions of the Bank of Westbury, a Federal Savings Bank, in
August 1995 and Sunrise Bancorp, Inc. in January 1996, both of which were merged
into the Bank. The Company had no operations prior to March 31, 1994 and,
accordingly, the results of operations prior to that date reflect only those of
the Bank and its subsidiaries.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations and borrowings, primarily in mortgage, multi-family and consumer
loans (primarily in the form of home equity loans and home equity lines of
credit, secured by one- to four-family, owner occupied, residential properties,
auto and guaranteed student loans), and to a lesser extent, commercial real
estate and construction loans. In the past, the Bank has also invested in loans
secured by co-operative units ("co-op loans") and commercial loans, however, in
recent years the Bank has discontinued its origination activities in these
areas. In addition, during periods in which the demand for loans which meet the
Bank's underwriting and interest rate risk standards and policies is lower than
the amount of funds available for investment, the Bank invests in
mortgage-backed securities, securities issued by the U.S. Government and
agencies thereof and other investments permitted by federal laws and
regulations.
The Company's results of operations are dependent primarily on interest
income from its securities investments and earnings of the Bank. The Bank's
results of operations are primarily dependent on its net interest income, which
is the difference between the interest earned on its assets, primarily its loan
and securities portfolios, and its cost of funds, which consists of the interest
paid on its deposits and borrowings. The Bank's net income also is affected by
its provision for loan losses as well as non-interest income, general and
administrative expense, other non-interest expense, and income tax expense.
General and administrative expense consists primarily of compensation and
benefits, occupancy expenses, federal deposit insurance premiums, advertising
expense and other general and administrative expenses. Other non-interest
expense consists of real estate operations, net and amortization of excess of
cost over the fair value of net assets acquired. The earnings of the Company and
Bank are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
Acquisition of Bank of Westbury
At the close of business on August 11, 1995, the Company completed its
acquisition of the Bank of Westbury, a Federal Savings Bank, with 6 banking
offices located in Nassau County, Long Island, New York in a transaction which
was accounted for as a purchase. The cost of the acquisition was approximately
$16.7 million in cash or $37.72 per share of common stock. The excess of cost
over the fair value of net assets acquired in the transaction was $7.8 million
which is being amortized on a straight line basis over 15 years. The Company
provided funds for the acquisition from its normal cash flow. As of the
completion of the acquisition, which was effected by merging the net assets
acquired into the Bank, the Bank continued to exceed each of its regulatory
capital requirements.
Acquisition of Sunrise Bancorp, Inc.
On January 11, 1996, the Company completed the acquisition of Sunrise
Bancorp, Inc., with 11 banking offices located in the counties of Nassau and
Suffolk, Long Island, New York, in a transaction which was accounted for as a
purchase. The cost of the acquisition was approximately $106.3 million in cash,
or $32.00 per share of
12
<PAGE>
Sunrise Bancorp, Inc. common stock outstanding. The excess of cost over the fair
value of net assets acquired generated in the transaction was $43.6 million,
which is being amortized on a straight line basis over 15 years. The Company
provided funds for the acquisition from the sale of mortgage-backed securities
classified as available-for-sale. As of the completion of the acquisition, which
was effected by merging the net assets acquired into the Bank, the Bank
continued to exceed each of its regulatory capital requirements. See Note 3 of
the Notes to the Consolidated Financial Statements for the pro forma unaudited
combined condensed consolidated financial information of the Company and the
Bank of Westbury and Sunrise Bancorp, Inc. for the fiscal years ended June 30,
1996 and 1995.
Financial Condition
As of June 30, 1996, total assets were $1.8 billion, deposits were $1.3
billion and total stockholders' equity was $153.6 million.
In accordance with an implementation guide for Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," released by the Financial Accounting Standards Board
(FASB) on November 15, 1995, the Bank realigned its mortgage-backed securities
portfolio in December 1995 by transferring approximately $283.2 million from the
held-to-maturity to the available-for-sale category. The Bank realigned its
mortgage-backed securities portfolio in order to be more flexible and better
positioned for managing the portfolio under changing interest rates and other
market conditions. Mortgage-backed securities held-to-maturity decreased from
$413.8 million at June 30, 1995 to $184.5 million at June 30, 1996, a decrease
of $229.3 million, or 55.4%; mortgage-backed securities available-for-sale
increased to $591.7 million at June 30, 1996, from $104.5 million at June 30,
1995, an increase of $487.3 million, or 466.5%. At June 30, 1996, the unrealized
depreciation on securities available-for-sale, net of taxes was $5.3 million as
compared to unrealized appreciation of $839,000 at June 30, 1995. The increase
in the unrealized depreciation on available-for-sale securities was due to the
increase in interest rates during the second half of year ended June 30, 1996.
The mortgage-backed securities portfolio increased $258.0 million, or
49.8%, from $518.2 million at June 30, 1995 to $776.2 million at June 30, 1996
with the increase primarily due to $197.3 million of mortgage-backed securities
acquired from Bank of Westbury and Sunrise Bancorp, Inc. and increased purchases
of adjustable-rate and longer term fixed-rate mortgage-backed securities offset
by amortization and prepayments and sales. The Company sold approximately $180.6
million of mortgage-backed securities available-for-sale in order to fund the
purchase of Sunrise Bancorp, Inc. as well as reposition the portfolio
composition.
Mortgage loans increased from $224.4 million at June 30, 1995 to $691.0
million at June 30, 1996, an increase of $466.4 million, or 207.9%. The increase
in mortgage loans is primarily due to $423.0 million of mortgage loans acquired
from the Sunrise Bancorp, Inc. and Bank of Westbury as well increased
multi-family loan originations.
Funding for the purchases of mortgage-backed securities and loans was
through a combination of new deposit growth, borrowings and cash flows. Deposits
increased $675.3 million, or 100.7%, from $670.3 million at June 30, 1995 to
$1.3 billion at June 30, 1996. The increase in deposits is mainly the result of
the $628.9 million in deposits acquired from Sunrise Bancorp, Inc. and Bank of
Westbury as well as new certificate of deposit products. Borrowings increased
from $97.0 million at June 30, 1995 to $266.2 million at June 30, 1996, an
increase of $169.2 million, or 174.3%, as the Bank leveraged its capital and
improved returns on average tangible equity.
Non-performing loans totalled $13.0 million, or 1.58% of total loans at
June 30, 1996, an increase of $9.3 million, or 253.6% from $3.7 million, or
1.10% of total loans at June 30, 1995, primarily due to non-performing loans
acquired from Sunrise Bancorp, Inc. and Bank of Westbury. Non-performing loans
at June 30, 1996 were comprised of $12.0 million of loans secured by one- to
four-family residences, $350,000 of guaranteed student loans and two commercial
properties with loan balances totalling $655,000. The Company's allowance for
loan losses totalled $4.5 million at June 30, 1996 which represents a ratio of
allowance for loan losses to non-performing loans and to total loans of 34.63%
and 0.55%, respectively, as compared to 47.10% and 0.52%, respectively at June
30, 1995. The decrease in the ratio of the allowance to non-performing loans is
the result of the generally lower reserve levels maintained by the Sunrise
Bancorp, Inc. and the Bank of Westbury. Management believes the reserve at June
30, 1996 is adequate on non-performing loans and total loans. The Company's
non-performing assets to total assets ratio was 0.82% at June 30, 1996. For the
fiscal year ended June 30, 1996, the Company experienced net loan charge-offs of
$176,000.
13
<PAGE>
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
Asset/Liability Management
One of the Bank's primary long-term financial objectives has been and will
continue to be to monitor the sensitivity of its earnings to interest rate
fluctuations by maintaining an appropriate matching of the maturities and
interest rate repricing characteristics of its assets and liabilities in
relation to the current and anticipated interest rate environment. In an effort
to realize this objective and minimize the Bank's exposure to interest rate
risk, the Bank emphasizes the origination of adjustable-rate mortgage ("ARMs")
and consumer loans, shorter-term fixed rate mortgage and consumer loans and the
purchase of adjustable-rate and shorter-term fixed rate mortgage-backed
securities. However, there can be no assurances that the Bank will be able to
originate adjustable rate loans or acquire mortgage-backed securities with terms
and characteristics which conform with the Bank's underwriting standards,
investment criteria or interest rate risk policies.
At June 30, 1996, $819.3 million, or 49.2%, of the Bank's interest-earning
assets consisted of adjustable-rate loans and mortgage-backed securities. The
Bank's mortgage loan portfolio totalled $691.0 million, of which, $354.5
million, or 51.3%, were adjustable-rate loans and $336.4 million, or 48.7%, were
fixed-rate loans. In addition, at June 30, 1996, the Bank's consumer loan
portfolio totalled $131.3 million, of which, $102.0 million, or 77.7%, were
adjustable-rate home equity lines of credit and guaranteed student loans and
$29.3 million, or 22.3%, were fixed-rate home equity and other consumer loans.
At June 30, 1996, the mortgage-backed securities portfolio totalled $776.2
million of which $591.7 million was classified as available-for-sale and $184.5
million was classified as held-to-maturity. Of the securities classified as
available-for-sale, $241.3 million, or 40.8%, of the mortgage-backed portfolio
were adjustable-rate securities and $350.4 million, or 59.2%, were fixed-rate
securities. Of the $184.5 million classified as held-to-maturity, $121.4
million, or 65.8%, of the mortgage-backed portfolio were adjustable-rate
securities and $63.1 million, or 34.2%, were fixed-rate securities. The Bank
expects to continue to invest in adjustable-rate and shorter term fixed-rate
mortgage-backed securities to reduce credit risk as well as minimize exposure to
volatile interest rates. However, during the year ended June 30, 1996 the Bank
increased its investment in 30 year fixed rate mortgage-backed securities in
order to hedge its adjustable rate portfolio against prepayment risk. It should
be noted that adjustable-rate loans and mortgage-backed securities backed by ARM
loans initially bear rates of interest below that of comparable fixed rate loans
or mortgage-backed securities backed by fixed rate loans. Accordingly, increased
emphasis on adjustable-rate loans and mortgage-backed securities may, under
certain interest rate conditions, result in the Bank's yield on interest-earning
assets being lower than it could be if fixed rate loans were emphasized.
At June 30, 1996, the Bank's estimated one year interest sensitivity "gap"
(the difference between assets that reprice or mature within such period
expressed as a percentage of total assets) was $49.3 million, or a positive
2.78%, of total assets, based on the following table setting forth the
interest-earning assets and interest-bearing liabilities outstanding at June 30,
1996. A gap is considered positive when the amount of interest rate sensitive
assets maturing or repricing within a specified time frame exceeds the amount of
interest rate sensitive liabilities repricing or maturing within that same time
period. A gap is considered negative when interest rate sensitive liabilities
maturing or repricing within a specified time period exceeds the amount of
interest rate sensitive assets repricing or maturing within that same time
period. Accordingly, in a rising interest rate environment, the Bank's positive
gap position will better position the Bank to have the yield on its assets
increasing at a pace more closely matching the increase in the cost of
interest-bearing liabilities than if the Bank had a negative gap.
Interest Rate Sensitivity Analysis
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1996, which are anticipated
by the Bank, using certain assumptions based on its historical experience and
other data available to management, to reprice or mature in each of the future
time periods shown. This table does not necessarily indicate the impact of
general interest rate movements on the Bank's net interest income because the
actual repricing of various assets and liabilities is subject to customer
discretion and competitive and other pressures and, therefore, actual experience
may vary from that indicated.
14
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------------------------------------------------------------------
More Than
3 Months More Than More Than More Than
3 Months to 12 1 Year to 3 Years to 5 Years to More Than
or Less Months 3 Years 5 Years 10 Years 10 Years Total
=======================================================================================
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage Loans(1) ..................... $109,624 $240,520 $ 144,323 $103,652 $ 66,754 $ 26,110 $ 690,983
Other Loans(1) ........................ 89,199 26,941 8,488 2,595 1,805 1,382 130,410
Mortgage-Backed Securities ............ 162,445 263,754 125,719 53,668 75,288 100,929 781,803
Federal Funds Sold .................... 1,000 -- -- -- -- -- 1,000
Debt and Equity Securities ............ -- 19,339 9,600 7,890 25,000 42 61,871
---------------------------------------------------------------------------------------
Total Interest-Earning Assets ....... 362,268 550,554 288,130 167,805 168,847 128,463 1,666,067
Net Premiums, Unearned Discount
and Deferred Fees(2) ................ 978 1,450 726 342 352 506 4,354
---------------------------------------------------------------------------------------
Net Interest-Earning Assets ......... 363,246 552,004 288,856 168,147 169,199 128,969 1,670,421
---------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Passbook Accounts ..................... 33,479 86,468 153,953 83,937 78,558 22,129 458,524
NOW Accounts .......................... 4,030 10,938 22,234 14,854 18,989 10,908 81,953
Money Market Accounts ................. 8,043 20,767 36,951 20,124 18,801 5,267 109,953
Certificate of Deposit Accounts ....... 187,643 295,010 130,406 61,777 -- -- 674,836
Borrowed Funds ........................ 169,234 50,304 46,622 -- -- -- 266,160
---------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities .. 402,429 463,487 390,166 180,692 116,348 38,304 1,591,426
---------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap ........... $(39,183) $ 88,517 $(101,310) $(12,545) $ 52,851 $ 90,665 $ 78,995
=======================================================================================
Cumulative Interest Rate Sensitivity Gap $(39,183) $ 49,334 $ (51,976) $(64,521) $(11,670) $ 78,995
=========================================================================
Cumulative Interest Rate Sensitivity Gap
as a Percentage of Total Assets ....... (2.20)% 2.78% (2.92)% (3.63)% (0.66)% 4.44%
Cumulative Net Interest-Earning Assets as
a Percentage of Cumulative Interest-
Bearing Liabilities ..................... 90.26% 105.70% 95.86% 95.51% 99.25% 104.96%
---------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of the GAP analysis, mortgage and other loans are not reduced
for the allowance for loan losses and non-performing loans.
(2) For purposes of the GAP analysis, premiums, unearned discount and deferred
loan fees are pro rated.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which limit adjustments to interest rates on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. Finally, the ability of borrowers to service
their ARM loans may decrease in the event of an interest rate increase. The
table reflects the estimates of management as to periods to repricing at
particular points in time. Among the factors considered, management monitors
both current trends and its historical repricing experience with respect to
particular or similar products. For example, the Bank has a number of deposit
accounts, including passbook savings, NOW accounts and money market accounts
which, subject to certain regulatory exceptions not relevant here, may be
withdrawn at any time. The Bank, based upon its historical experience, assumes
that while all customers in these account categories could withdraw their funds
on any given day, they will not do so, even if market interest rates were to
change. As a result, different assumptions may be used at different points in
time.
15
<PAGE>
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the
Company's consolidated statements of condition and the consolidated statements
of income for the years ended June 30, 1996, 1995, and 1994 and reflects the
average yields on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the fiscal years
shown. Average balances are derived from daily balances. The average balance of
loans receivable includes loans on which the Bank has discontinued accruing
interest. The yields and costs include fees, premiums and discounts which are
considered adjustments to yields.
<TABLE>
<CAPTION>
For the year ended June 30
----------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-Earning Assets:
Mortgage Loans, Net................... $ 473,427 $ 39,073 8.25% $226,299 $17,701 7.82% $242,627 $17,552 7.23%
Consumer and Other Loans, Net......... 121,565 10,942 9.00 104,754 9,540 9.11 101,773 8,059 7.92
Mortgage-Backed Securities(1)......... 685,348 46,084 6.72 459,468 29,469 6.41 333,635 18,440 5.53
Money Market Investments.............. 17,349 991 5.71 14,590 804 5.51 12,358 422 3.41
Debt and Equity Securities(1)......... 49,203 3,282 6.67 67,508 3,746 5.55 47,236 2,751 5.82
---------- --------- --------- -------- -------- -------
Total Interest-Earning Assets....... 1,346,892 100,372 7.45 872,619 61,260 7.02 737,629 47,224 6.40
--------- -------- -------
Non-Interest Earning Assets............. 63,883 21,930 20,520
---------- --------- --------
Total Assets........................ $1,410,775 $894,549 $758,149
========== ========= ========
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Passbook Accounts................... 353,617 8,942 2.53 $236,047 5,926 2.51 $268,779 7,012 2.61
NOW Accounts........................ 58,576 1,161 1.98 25,275 485 1.92 25,927 488 1.88
Money Market Accounts............... 97,975 2,515 2.57 91,051 2,283 2.51 105,594 2,666 2.52
Certificate of Deposit Accounts..... 547,562 29,807 5.44 267,340 13,318 4.98 196,525 7,625 3.88
Borrowed Funds...................... 180,055 10,560 5.87 105,657 6,349 6.01 62,531 2,233 3.57
--------- --------- --------- -------- ------- -------
Total Interest-Bearing
Liabilities....................... 1,237,785 52,985 4.28 725,370 28,361 3.91 659,356 20,024 3.04
--------- -------- -------
Non-Interest Bearing Liabilities........ 18,919 11,719 10,259
---------- --------- --------
Total Liabilities................... 1,256,704 737,089 669,615
Stockholders' Equity.................... 154,071 157,460 88,534
---------- --------- --------
Total Liabilities and
Stockholders' Equity.............. $1,410,775 $894,549 $758,149
========== ======== ========
Net Interest Income/Interest
Rate Spread(2)........................ $ 47,387 3.17% $32,899 3.11% $27,200 3.36%
======== ==== ======= ==== ======= ====
Net Interest-Earning Assets/
Net Interest Margin(3)................ $ 109,107 3.52% $147,249 3.77% $ 78,273 3.69%
========== ==== ======== ==== ======== ====
Ratio of Interest-Earning Assets to
Interest-Bearing Liabilities.......... 1.09x 1.20x 1.12x
==== ==== ====
</TABLE>
(1) Includes securities available-for-sale.
(2) Net interest rate spread represents the difference between the average yield
on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
16
<PAGE>
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year ended June 30, 1996 Year ended June 30, 1995
Compared to Compared to
Year ended June 30, 1995 Year ended June 30, 1994
================================= ===============================
Increase (Decrease) Increase (Decrease)
in Net Interest Income in Net Interest Income
--------------------------------- -------------------------------
Due to Due to
-------------------- --------------------
Volume Rate Net Volume Rate Net
--------------------------------- -------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage Loans, Net....................... $20,347 $1,025 $21,372 $(1,227) $1,376 $ 149
Consumer and Other Loans, Net............. 1,518 (116) 1,402 242 1,239 1,481
Mortgage-Backed Securities................ 15,127 1,488 16,615 7,756 3,273 11,029
Money Market Investments.................. 156 31 187 87 295 382
Debt and Equity Securities................ (1,133) 669 (464) 1,128 (133) 995
--------------------------------- -------------------------------
Total................................... 36,015 3,097 39,112 7,986 6,050 14,036
--------------------------------- -------------------------------
Interest-Bearing Liabilities:
Passbook Accounts......................... 2,969 47 3,016 (827) (259) (1,086)
NOW Accounts.............................. 660 16 676 (12) 9 (3)
Money Market Accounts..................... 177 55 232 (372) (11) (383)
Certificate of Deposits Accounts.......... 15,154 1,335 16,489 3,186 2,507 5,693
Borrowed Funds............................ 4,363 (152) 4,211 2,067 2,049 4,116
--------------------------------- -------------------------------
Total................................... 23,323 1,301 24,624 4,042 4,295 8,337
--------------------------------- -------------------------------
Net Change in Net Interest Income........... $12,692 $1,796 $14,488 $ 3,944 $1,755 $ 5,699
================================= ===============================
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995.
General. Net income for fiscal 1996 was $11.7 million, an increase of $2.0
million, or 20.8%, from $9.7 million for fiscal 1995. Net income for fiscal 1996
and fiscal 1995 represent a return on average assets of 0.83% and 1.08%,
respectively, and a return on average equity of 7.58% and 6.17%, respectively.
Interest Income. Interest income increased by $39.1 million, or 63.8%, from
$61.3 million for fiscal 1995, to $100.4 million for fiscal 1996. The increase
resulted primarily from a $474.3 million increase in average interest-earning
assets from $872.6 million for fiscal 1995 to $1.3 billion for fiscal 1996 and
from a 43 basis point increase in the average yield of interest-earning assets
from 7.02% in fiscal 1995 to 7.45% in fiscal 1996. The increase in the average
interest-earning assets was primarily due to assets acquired in the Bank of
Westbury and Sunrise Bancorp, Inc. acquisitions. Interest income on
mortgage-backed securities increased $16.6 million, or 56.4%, from $29.5 million
for fiscal 1995 to $46.1 million for fiscal 1996, primarily due to an increase
of $225.9 million, or 49.2%, in the average balance of these securities, and an
increase in the average yield on these securities of 31 basis points from 6.41%
for fiscal 1995 to 6.72% for fiscal 1996 due to upward repricing of these
assets. Mortgage-backed securities generally bear interest rates lower than
loans. Accordingly, to the extent the demand for loans which meet the Bank's
underwriting standard remains low and the Company continues to increase its
investments in mortgage-backed securities, yields on interest-earning assets may
tend to be lower than if loan demand were to be stronger. Interest income from
mortgage loans increased by $21.4 million, or 120.7%, due to a $247.1 million,
or 109.2%, increase in the average balance of mortgage loans and from a 43 basis
point increase in the average yield on mortgage loans from 7.82% for fiscal 1995
to 8.25% for fiscal 1996. The increase in the average mortgage loans was
primarily due to loans acquired in the Bank of Westbury and Sunrise Bancorp,
Inc. acquisitions and increased originations of multi-family loans. The increase
in the average
17
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Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
yield resulted primarily from the upward repricing of the Company's
adjustable-rate loans and higher rates earned on the multi-family loans.
Interest Expense. Interest expense for fiscal 1996 was $53.0 million, an
increase of $24.6 million, or 86.8%, from the $28.4 million recorded for fiscal
1995. The increase is primarily the result of a $512.4 million, or 70.6%,
increase in the average balance of interest-bearing liabilities from $725.4
million for fiscal 1995 to $1.2 billion for fiscal 1996 and from a 37 basis
point increase in the cost of interest-bearing liabilities from 3.91% for fiscal
1995 to 4.28% for fiscal 1996. The increase in the average balance of
interest-bearing liabilities was primarily due to deposits acquired in the Bank
of Westbury and Sunrise Bancorp, Inc. acquisitions and additional borrowings.
Interest expense on total deposits increased $20.4 million, or 92.7%, from $22.0
million for fiscal 1995 to $42.4 million for fiscal 1996, primarily as a result
of a $426.3 million, or 68.8% increase in the average balance of deposits from
$619.7 million in fiscal 1995 to $1.0 billion in fiscal 1996 and from a 46 basis
point increase in the average cost of such deposits from 3.55% in fiscal 1995 to
4.01% in fiscal 1996. The increase in the average cost of deposits resulted
primarily from the Bank competitively raising interest rates on certificate of
deposit accounts to attract new deposits. The average balance of certificate
accounts increased $280.2 million, or 104.8%, from $267.3 million for fiscal
1995 to $547.6 million for fiscal 1996. In addition to the increase in the
average balance of certificate accounts, the average balance of core deposits
also increased $150.9 million, or 57.7%, from $261.3 million for fiscal 1995 to
$412.2 million for fiscal 1996. The increase relates to core deposits acquired
in the Bank of Westbury and Sunrise Bancorp, Inc. acquisitions which resulted in
the core deposit ratio increasing from 36.12% at June 30, 1995 to 41.68% at June
30, 1996. Interest expense on borrowed funds increased $4.2 million, or 66.3%,
from $6.3 million for fiscal 1995 to $10.6 million for fiscal 1996. Borrowings
averaged $180.0 million for fiscal 1996, an increase of $74.4 million, or 70.4%,
from the $105.7 million for fiscal 1995. The Company continues to utilize
borrowed funds to grow, leveraging the Bank's capital and improving the return
on equity. Borrowed funds, principally from the FHLB-NY and reverse repurchase
agreements, have been invested by the Company primarily in mortgage-backed
securities and multi-family loans.
Net Interest Income. Net interest income for fiscal 1996 increased $14.5
million, or 44.0%, from $32.9 million for fiscal 1995 to $47.4 million for
fiscal 1996. The increase in net interest income primarily relates to an
increase in the net interest spread coupled with the significant growth in the
average balances of interest-earning assets and interest-bearing liabilities.
The net interest rate spread increased from 3.11% for fiscal 1995 to 3.17% for
fiscal 1996 as a result of higher yielding loans acquired from the Bank of
Westbury and Sunrise Bancorp, Inc. acquisitions. Average interest-earning assets
increased $474.3 million, or 54.4%, from $872.6 million in fiscal 1995 to $1.3
billion in fiscal 1996 while average interest-bearing liabilities increased
$512.4 million, or 70.6%, from $725.4 in fiscal 1995 to $1.2 billion in fiscal
1996. As a result of leveraging the Bank's capital with the two acquisitions,
net interest margin decreased from 3.77% in fiscal 1995 to 3.52% in fiscal 1996.
In addition, the ratio of average interest-earning assets to interest-bearing
liabilities declined from 1.20x in fiscal 1995 to 1.09x in fiscal 1996.
Provision for Loan Losses. The provision for loan losses for fiscal 1996 was
$725,000, an increase of $325,000, or 81.3%, from $400,000 for fiscal 1995. When
determining the provision for loan losses, management assesses the risk inherent
in its loan portfolio based on information available to management at such time
relating to trends in the national and local economies, trends in the real
estate market and trends in the Company's level of non-performing loans and
assets and net charge-offs. Non-performing loans increased from $3.7 million at
the end of fiscal 1995 to $13.0 million at the end of fiscal 1996 and net
charge-offs increased from $88,000 for fiscal 1995 to $176,000 for fiscal 1996.
Management increased the provision for loan losses during fiscal 1996 due to its
assessment of the loan portfolio and to increase loan loss coverage on
non-performing loans acquired from Sunrise Bancorp, Inc. and Bank of Westbury to
bring such reserves in line with Company policy. In addition, the Company has
increased its origination of multi-family loans which may possess a greater
credit risk than one- to four-family loans and requires greater general reserve
levels. Management believes that based upon information currently available its
allowance for loan losses is adequate to cover future loan losses. However, if
general economic conditions and real estate values within the Bank's primary
lending area decline, the level of non-performing loans may increase resulting
in larger provisions for loan losses which, in turn, would adversely affect net
income.
Non-Interest Income. Non-interest income for fiscal 1996 increased $1.9 million,
or 147.4%, from $1.2 million for fiscal 1995 to $3.1 million for fiscal 1996.
The increase in non-interest income relates to a gain of $678,000 in fiscal 1996
from the sale of mortgage-backed securities classified as available-for-sale in
order to fund the purchase of Sunrise Bancorp, Inc. In addition, the increase
relates to increased servicing income, and deposit fee income as it relates to
the two acquisitions and a recovery of claim which was previously written off.
18
<PAGE>
Non-Interest Expense. Non-interest expense totalled $28.1 million for the fiscal
year ended June 30, 1996 as compared to $17.2 million for the fiscal year ended
June 30, 1995, an increase of $10.9 million, or 63.3%. The increase is mainly
the result of banking office personnel, deposit insurance premiums, goodwill
amortization and other occupancy costs associated with the Sunrise Bancorp, Inc.
and Bank of Westbury acquisitions, however, the operating expense to average
assets ratio decreased from 1.97% for the fiscal year ended June 30, 1995 to
1.81% for the fiscal year ended June 30, 1996 primarily due to the increased
asset base and acquisition related efficiencies. For the fiscal year ended June
30, 1996, compensation and benefits expense increased to $13.4 million, an
increase of $3.8 million, or 40.1%, from $9.6 million for the fiscal year ended
June 30, 1995. The increase in compensation and benefits expense is due to the
aforementioned addition of banking office personnel, higher benefit expenses and
normal salary adjustments. Occupancy and equipment expense increased $2.0
million, or 82.0%, from $2.5 million for the fiscal year ended June 30, 1995 to
$4.5 million for the fiscal year ended June 30, 1996 due to costs associated
with the operation of the seventeen new banking offices as well as miscellaneous
data processing costs. Other operating expenses increased $1.2 million, or
37.2%, from $3.0 million during the fiscal year ended June 30, 1995 to $4.2
million for the fiscal year ended June 30, 1996 as a result of general expenses
related to the addition of the seventeen new banking offices.
For the fiscal year ended June 30, 1996, real estate owned expenses were
$579,000 as compared to income of $385,000 in the prior year period. The
increase in real estate owned expenses primarily relates to the reduction in net
gains on the sale of real estate owned from $657,000 in fiscal 1995 to $19,000
in fiscal 1996. In addition, during the fiscal year ended June 30, 1996, the
Bank established a provision for REO losses of $375,000 as compared to $60,000
for the prior year period. Additional reserves on real estate owned were
established in order to facilitate the sale of such properties in the current
market place.
During fiscal year 1996, the Bank recognized amortization of excess of cost
over fair value of net assets acquired of $1.9 million as compared to no
amortization in fiscal 1995. The amortization of cost over fair value of net
assets acquired relates to the Company accounting for the acquisitions of Bank
of Westbury and Sunrise Bancorp, Inc. using the purchase method.
Income Tax Expense. Income tax expense increased $3.1 million, or 45.4%,
from $6.8 million for fiscal 1995 to $9.9 million for fiscal 1996. The effective
income tax rate was 45.9% for fiscal 1996 as compared to 41.4% for fiscal 1995.
The increase in the effective tax rate primarily relates to no tax benefit
provided for the amortization of excess of cost over fair value of net assets
acquired and other employee benefit expenses.
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994.
General. Net income for fiscal 1995 was $9.7 million, an increase of $1.0
million, or 11.6%, from $8.7 million for fiscal 1994. Net income for fiscal 1995
and fiscal 1994 represent a return on average assets of 1.08% and 1.15%,
respectively, and a return on average equity of 6.17% and 9.82%, respectively.
Excluding the recording of a one time non-recurring benefit for the positive
cumulative effect of a change in accounting for income taxes of $1.2 million in
1994, net income increased $2.2 million, or 29.5%, primarily due to a $5.7
million, or 21.0%, increase in net interest income offset in part, by a $2.3
million increase in non-interest expense and a $1.3 million increase in income
tax expense.
Interest Income. Interest income increased by $14.0 million, or 29.7%, from
$47.2 million for fiscal 1994, to $61.2 million for fiscal 1995. The increase
resulted primarily from an increase in the average yield of interest-earning
assets from 6.40% to 7.02%, a 62 basis point increase, and from an increase of
$135.0 million, or 18.3%, in the average balance of such assets from $737.6
million for fiscal 1994 to $872.6 million for fiscal 1995. The increase in the
average yield on interest-earning assets was primarily due to the upward
repricing of the Company's adjustable-rate mortgage backed securities. Interest
income on mortgage-backed securities increased $11.0 million, or 59.8%, from
$18.4 million for fiscal 1994 to $29.4 million for fiscal 1995, primarily due to
an increase of $125.8 million, or 37.7%, in the average balance of these
securities, and an increase in the average yield on these securities of 88 basis
points from 5.53% for fiscal 1994 to 6.41% for fiscal 1995 due to upward
repricing of these assets. Mortgage-backed securities generally bear interest
rates lower than loans. Accordingly, to the extent the demand for loans which
meet the Bank's underwriting standard remains low and the Company continues to
increase its investments in mortgage-backed securities, yields on interest
earning assets may tend to be lower than if loan demand were to be stronger.
Interest income from mortgage loans increased by $149,000, or 0.8%, due to a 59
basis point increase in the average yield on
19
<PAGE>
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
mortgage loans from 7.23% for fiscal 1994 to 7.82% for fiscal 1995 offset by a
$16.3 million, or 6.7%, decrease in the average balance of mortgage loans. The
increase in the average yield resulted primarily from the upward repricing of
the Company's adjustable rate loans. Interest income on consumer loans increased
$1.5 million, or 18.3%, from $8.0 million for fiscal 1994 to $9.5 million for
fiscal 1995. The increase is primarily due to the upward repricing of the prime
rate based home equity lines during fiscal 1995. Interest income on debt and
equity securities increased $1.0 million, or 36.2%, from $2.7 million for fiscal
1994 to $3.7 million for fiscal 1995. The increase is the result of the Company
purchasing U.S. Treasury securities with proceeds from the conversion.
Interest Expense. Interest expense for fiscal 1995, was $28.3 million, an
increase of $8.3 million, or 41.6% from the $20.0 million recorded for fiscal
1994. The increase is primarily the result of an 87 basis point increase in the
cost of interest-bearing liabilities from 3.04% for fiscal 1994 to 3.91% for
fiscal 1995, and by a $66.0 million, or 10.0%, increase in the average balance
of interest-bearing liabilities from $659.4 million for fiscal 1994 to $725.4
million for fiscal 1995. The increase in the average balance of interest-bearing
liabilities was primarily due to the leverage strategy employed during fiscal
1995 the effect of which was to increase the average balance of certificate of
deposit accounts and borrowed money, consisting primarily of FHLB advances and
reverse repurchase agreements. The average balance of certificate accounts
increased $70.8 million, or 36.0%, from $196.5 million for fiscal 1994 to $267.3
million for fiscal 1995. Borrowings averaged $105.6 million for fiscal 1995, an
increase of $43.1 million, or 69.0%, from the $62.5 million for fiscal 1994.
While the average balance of certificates accounts and borrowings increased,
core deposits decreased $33.4 million, or 11.3%, from $294.7 million for fiscal
1994 to $261.3 million for fiscal 1995 partially due to account holders
investing funds from core deposit accounts into higher yielding certificate
accounts. The increase in the average cost of interest-bearing liabilities
resulted primarily from increased utilization of FHLB advances and reverse
repurchase agreements which generally bear higher interest rates than deposits
and the generally higher interest rate environment which resulted in higher
borrowing costs. Additionally, such increase resulted from the Bank
competitively raising interest rates on certificate of deposit accounts to
attract new deposits and leverage the Bank's capital. Interest expense on total
deposits increased $4.2 million, or 23.7% from $17.8 million for fiscal 1994 to
$22.0 million for fiscal 1995, primarily as a result of a 57 basis point
increase in the average cost of such deposits and a $22.9 million increase in
the average balance of deposits. Interest expense on borrowed funds increased
$4.1 million, or 184.3%, from $2.2 million for fiscal 1994 to $6.3 for fiscal
1995. During this period, and from time to time in the past, the Company has
utilized borrowed funds to grow, leveraging the Bank's capital and improving the
return on equity. Borrowed funds, principally from the FHLB-NY and reverse
repurchase agreements, have been invested by the Company primarily in
mortgage-backed securities in response to lower loan demand.
Net Interest Income. Net interest income for fiscal 1995 increased $5.7 million,
or 21.0%, from $27.2 million for fiscal 1994 to $32.9 million for fiscal 1995.
The increase in net interest income is the result of a $135.0 million, or 18.3%,
increase in average interest-earning assets from $737.6 million in fiscal 1994
to $872.6 million in fiscal 1995 as compared to a $66.0 million, or 10.0%,
increase in average interest-bearing liabilities. The higher increase in average
interest-earning assets was the result of the stock conversion proceeds being
invested in mortgage-backed securities and U.S. government securities. While the
Bank's leveraging strategy has had the effect of increasing net income and net
interest income, net interest spread has compressed as a result of a flattening
of the yield curve. The net interest rate spread decreased from 3.36% for fiscal
1994 to 3.11% for fiscal 1995 however, the net interest margin increased from
3.69% to 3.77%.
Provision for Loan Losses. The provision for loan losses for fiscal 1995 was
$400,000, as compared to $393,000 for fiscal 1994. When determining the
provision for loan losses, management assesses the risk inherent in its loan
portfolio based on information available to management at such time relating to
trends in the national and local economies, trends in the real estate market and
trends in the Company's level of non-performing loans and assets and net
charge-offs. Non-performing loans increased slightly from $3.6 million at the
end of fiscal 1994 to $3.7 million at the end of fiscal 1995 while net
charge-offs decreased from $320,000 for fiscal 1994 to $88,000 for fiscal 1995.
Although, non-performing loans increased slightly and net charge-offs decreased,
management determined to keep the provision for loan losses relatively stable
during fiscal 1995 due to its assessment of the loan portfolio in consideration
of the continued weakness in the local economy attributed to workforce
transition, high real property taxes and other occupancy costs. In addition, the
Company has increased its origination of multi-family loans which may possess a
greater credit risk than one- to four-family loans. Management believes that
based upon information
20
<PAGE>
currently available its allowance for loan losses is adequate to cover future
loan losses. However, if general economic conditions and real estate values
within the Bank's primary lending area decline, the level of non-performing
loans may increase resulting in larger provisions for loan losses which, in
turn, would adversely affect net income.
Non-Interest Income. Non-interest income for fiscal 1995 increased $138,000, or
12.3%, from $1.1 million for fiscal 1994 to $1.3 million for fiscal 1995. The
increase is due to a gain on the call of a debt security.
Non-Interest Expense. Non-interest expense totalled $17.2 million for fiscal
1995 as compared to $14.9 million for fiscal 1994, an increase of $2.3 million,
or 15.6%. The increase is mainly the result of the increase in compensation and
benefits expense, advertising expense and other operating expenses offset by a
significant reduction in real estate operations expense. Expenses related to
real estate operations decreased from $1.1 million for fiscal 1994 to income of
$385,000 for fiscal 1995. This decrease was directly attributable to the gain on
the sale of real estate owned and lower provisions for losses associated with
real estate operations. For fiscal 1995 compensation and benefits expense
increased to $9.6 million as compared to $7.1 million for fiscal 1994. The
increase in compensation and benefits expense is due primarily to establishment
of stock based benefit plans in connection with the conversion of the Bank and
normal salary increases. Advertising expense totalled $1.2 million for fiscal
1995, an increase of $488,000, or 72.8%, due primarily to the Bank aggressively
marketing its deposit products and its "Lifetime Prime" home equity line of
credit. Other operating expenses increased $673,000, or 28.4%, due primarily to
costs associated with operating as a public company. The Company's operating
expenses to average assets ratio was 1.97% for fiscal 1995 as compared to 1.82%
for fiscal 1994.
Income Tax Expense. Income tax expense increased $1.3 million, or 23.5%, from
$5.5 million for fiscal 1994 to $6.8 million for fiscal 1995. The effective
income tax rates were 41.4% for fiscal 1995 as compared to 42.5% for fiscal
1994. The decrease in the effective tax rate primarily reflects the change in
the calculation of tax bad debt for state and local tax purposes.
Cumulative Effect of Change in Accounting for Income Taxes. Income from the
cumulative effect of change in accounting for income taxes occurred in fiscal
1994 due to the recording of the one-time benefit with the adoption of SFAS No.
109 "Accounting for Income Taxes" in fiscal 1994.
Liquidity and Capital Resources
The Company's current primary sources of funds are principal and interest
payments and sales of securities available-for-sale and dividends from the Bank.
Dividend payments to the Company from the Bank are subject to the profitability
of the Bank and to applicable laws and regulations. During fiscal year 1996,
1995 and 1994, the Bank did not make any dividend payments to the Company. The
Company's liquidity is also available to, among other things, support future
expansion of operations or diversification into other banking related
businesses, payments of dividends or repurchase its common stock. In this
regard, the Company declared cash dividends of $3,924,000 and $3,641,000 during
fiscal year 1996 and 1995, respectively. The Company did not declare any
dividends in fiscal year 1994.
During fiscal 1994, the Company repurchased 362,375 shares at an aggregate
cost of $3,744,000. During fiscal 1995, the Company repurchased 998,930 shares
at an aggregate cost of $13,040,000. On May 7, 1996, the Company announced the
approval of its fourth five percent stock repurchase plan which allows the
Company to repurchase up to 461,287 common shares. As of June 30, 1996, 97,000
shares under this program were repurchased at an aggregate cost of $1,488,000.
During fiscal 1996, the Company repurchased 260,776 shares at an aggregate cost
of $3,829,000. Through June 30, 1996, all repurchases were funded by the
Company, therefore, the capital and liquidity of the Bank were not affected. On
August 11, 1995, the Company completed the acquisition of Bank of Westbury for
approximately $16.7 million in cash. The Company had sufficient liquidity
available to fund the purchase and as of August 11, 1995, the Bank met all of
its regulatory capital requirements.
On January 11, 1996, the Company completed the acquisition of Sunrise
Bancorp, Inc. for approximately $106.3 million in cash. The Company provided
funds for the acquisition from the sale of mortgage-backed securities classified
as available-for-sale. As of the completion of the acquisition, the Bank
continued to exceed each of its regulatory capital requirements.
21
<PAGE>
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed securities and debt and equity securities,
advances from the FHLB-NY, borrowings under reverse repurchase agreements and
loan sales. While maturities and scheduled amortization of loans,
mortgage-backed securities and debt securities are predictable sources of funds,
deposit flows and mortgage prepayments are strongly influenced by changes in
general interest rates, economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid assets
and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulations. The minimum
required liquidity and short-term liquidity ratios are currently 5.0% and 1.0%,
respectively. The Bank's liquidity and short-term liquidity ratios averaged
8.68% and 2.59%, respectively, for the fiscal year ended June 30, 1996. The
Bank's short-term liquidity ratio was 1.97% at June 30, 1996.
The Bank's most liquid assets are cash and short-term investments. The
levels of the Bank's liquid assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period. At June 30,
1996, assets qualifying for short-term liquidity, including cash and short-term
investments, totalled $31.5 million.
The primary investment activity of the Bank is the origination of mortgage
loans and consumer loans, and the purchase of mortgage-backed securities. During
the fiscal year ended June 30, 1996, the Bank originated mortgage loans and
consumer loans in the amount of $107.1 million and $35.8 million, respectively.
During the fiscal year ended June 30, 1996, the Bank purchased $399.1 million of
mortgage-backed securities of which $384.2 million, or 95.7%, were classified as
available-for-sale and purchased as part of the Bank's growth strategy. These
activities were funded primarily by deposits, principal repayments on loans and
mortgage-backed securities and borrowings from the FHLB-NY and reverse
repurchase agreements. At June 30, 1996, borrowings from the FHLB-NY and reverse
repurchase agreements totalled $3.0 million and $263.2 million, respectively. At
June 30, 1996, the Bank had outstanding loan commitments of $16.5 million and
open lines of credit of $45.0 million. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less from
June 30, 1996 totalled $482.7 million. Management believes that a significant
portion of such deposits will remain with the Bank.
At June 30, 1996, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 5.60%, 5.60% and 14.70%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurements of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as the price of goods and services.
Impact of New Accounting Standards
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long Lived Assets to be Disposed of." SFAS No. 121
establishes accounting standards for recognizing and measuring impairment of
long-lived assets and certain identifiable intangibles to be disposed of. SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 121 is effective for financial statements for fiscal
years beginning after December 15, 1995. SFAS No. 121, when adopted, is not
expected to have a material adverse effect on the Company's financial condition.
In June 1995, the FASB issued SFAS No.122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities" to eliminate the accounting distinction between rights to
service mortgage loans that are acquired through loan origination and those
acquired through purchase. Thus, if mortgage loans are sold or securitized but
the rights to service those loans are retained, the total cost of such loans
(whether originated or acquired) should be allocated to (1) the mortgage
servicing rights, and (2) the loan themselves based on their relative fair
value. SFAS 122 is effective for fiscal years beginning after December 15, 1995
to loan origination or securitization of mortgage servicing rights and to
impairment evaluations of all capitalized
22
<PAGE>
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
mortgage servicing rights, including those purchased prior to the effective date
of SFAS No. 122. SFAS No. 122, when adopted, is not expected to have a material
adverse effect on the Company's financial condition.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 applies to all transactions in
which an entity acquires goods or services by issuing equity instruments or by
incurring liabilities where the payment amounts are based on the entity's common
stock price, except for employee stock ownership plans. SFAS No. 123 established
a fair value based method of accounting for stock-based compensation arrangement
with employees, rather then the intrinsic value based method that is contained
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No.25"). SFASNo. 123 does not require an entity to adopt the
new fair value based method for purposes of preparing its basic financial
statements. While the SFAS No. 123 fair value based method is considered by the
FASB to be preferable to the APB No. 25 method, entities are allowed to continue
to use the APB No. 25 method for preparing its basic financial statements.
Entities not adopting the fair value based method under SFAS No. 123 are
required to present pro forma net income and earnings per share information, in
the notes to the financial statements, as if the fair value based method had
been adopted.
The accounting requirements of SFAS No. 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995, but may
also be adopted upon the issuance of SFAS No. 123. The disclosure requirements
are effective for financial statements for fiscal years beginning after December
15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially
adopted for recognizing compensation cost. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using the APB No.
25 method must include the effects of all awards granted in fiscal years that
begin after December 15, 1994. Pro forma disclosures for awards granted in the
first fiscal year beginning after December 15, 1994 need not be included in
financial statements for that fiscal year but should be presented subsequently
whenever financial statements for that fiscal year are presented for comparative
purposes with financial statements for a later fiscal year. The Company
currently does not intend to adopt the provisions of this statement early.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). SFAS No. 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. Under this approach, an entity, subsequent to a transfer of financial
assets, must recognize the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. Standards for
distinguishing transfers of financial assets that are sales from those that are
secured borrowings are provided in SFAS No. 125. A transfer not meeting the
criteria for a sale must be accounted for as a secured borrowing with pledge of
collateral.
SFAS No. 125 requires that liabilities and derivatives incurred or obtained
by transferors as part of a transfer of financial assets be initially measured
at fair value, if practicable. It additionally requires that servicing assets
and other retained interests in transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Servicing assets and liabilities must be subsequently measured by amortization
in proportion to and over the period of estimated net servicing income or loss
and assessed for asset impairment, or increased obligation, based on their fair
value.
This Statement supersedes the FASB's SFAS No. 76, "Extinguishment of Debt",
and SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with
Recourse." SFAS No. 125 amends SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," ("SFAS No. 115") to prohibit the classification
of a debt security as held-to-maturity if it can be prepaid or otherwise settled
in such a way that the holder of the security would not recover substantially
all of its recorded investment. It further requires that loans and other assets
that can be prepaid or otherwise settled in such a way that the holder would not
recover substantially all of its recorded investment shall be subsequently
measured like debt securities classified as available-for-sale or trading under
SFAS No. 115, as amended by SFAS No. 125. SFAS No. 125 also amends and extends
to all servicing assets and liabilities the accounting standards for mortgage
servicing rights now in SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities," and supersedes SFAS No. 122, "Accounting for Mortgage Servicing
Rights."
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
The Company is currently reviewing the impact of the implementation of SFAS No.
125 on its consolidated financial statements.
23
<PAGE>
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
Impact of Legislation
Recapitalization of SAIF Fund. Legislation is pending in Congress to mitigate
the effect of the Bank Insurance Fund ("BIF") and Savings Association Insurance
Fund ("SAIF") premium disparity. Under the legislation a special assessment
would be imposed on the amount of deposits held by SAIF-member institutions,
including the Bank, as of a specified date, currently March 31, 1995, to
recapitalize the SAIF. The amount of the special assessment would be left to the
discretion of the FDIC but is generally estimated at between 79 to 85 basis
points of insured deposits. The legislation would also require that the BIF and
SAIF be merged, provided that subsequent legislation is enacted requiring
federal savings associations to become national banks or state chartered banks
or thrifts, and that the Financing Insurance Company ("FICO") payments be spread
across all BIF and SAIF members. The payment of the special assessment would
have the effect of immediately reducing the capital of SAIF-member institutions,
net of any tax effect; however, it would not affect the Bank's compliance with
its regulatory capital requirements. Management cannot predict whether
legislation imposing such an assessment will be enacted, or, if enacted, the
specific terms of such legislation including the amount of any special
assessment and when and whether ongoing SAIF premiums will be reduced to a level
equal to that of BIF premiums. Management can also not predict whether or when
the BIF and SAIF will merge. A significant increase in SAIF insurance premiums
or a significant special assessment to recapitalize the SAIF would likely have
an adverse effect on the operating expenses of the Company. The assessment of a
79 to 85 basis point fee to recapitalize the SAIF would result in a $5.6 million
to $6.0 million payment on an after-tax basis.
Tax Bad Debt Reserves. Under Section 593 of the Internal Revenue Code, thrift
institutions such as the Bank, which meet certain definitional tests, primarily
relating to their assets and the nature of their business, are permitted to
establish a tax reserve for bad debts and to make annual additions thereto,
which additions may, within specified limitations, be deducted in arriving at
their taxable income. The Bank's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, may
currently be computed using an amount based on the Bank's actual loss experience
(the "Experience Method"), or a percentage equal to 8% of the Bank's taxable
income (the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve. Similar deductions for additions to the Bank's bad
debt reserve are permitted under the New York State Bank Franchise Tax and the
New York City Banking Corporation Tax; however, for purposes of these taxes, the
effective allowable percentage under the PTI method is 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 (the "1996 Act"),
signed into law in August, 1996, Section 593 of the Code was amended, and the
Bank, as a "large bank" (one with assets having an adjusted basis of more than
$500 million), will be unable to make additions to its tax bad debt reserve, but
will be permitted to deduct bad debts only as they occur and will additionally
be required to recapture (that is, take into taxable income) over a multi-year
period, beginning with the Bank's taxable year beginning on January 1, 1996, the
excess of the balance of its bad debt reserves (other than the supplemental
reserve) as of December 31, 1995 over the balance of such reserves as of
December 31, 1987, or over a lesser period if the Bank's loan portfolio has
decreased since December 31, 1987. However, such recapture requirements would be
suspended for each of two successive taxable years beginning January 1, 1996 in
which the Bank originates a minimum amount of certain residential loans based
upon the average of the principal amounts of such loans made by the Bank during
its six taxable years preceding January 1, 1996. As a result of passage of the
1996 Act, the Bank will incur additional federal tax liability, which has been
accrued in the statements of condition. However, the Act will have no impact on
the Bank's results of operations. The New York State tax law has been amended to
prevent a similar recapture of the Bank's bad debt reserve, and to permit
continued future use of the bad debt reserve methods, for purposes of
determining the Bank's New York State tax liability. The Bank's officers and
industry leaders continue to seek such amendments to the New York City tax law;
however, the Company cannot predict whether such changes to New York City law
will be adopted and, if so, in what form.
24
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Condition
- --------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30,
-------------------------------
1996 1995
===============================
<S> <C> <C>
Assets
Cash and due from banks.................................................................... $ 22,420 $ 14,237
Money market investments................................................................... 10,450 2,700
Debt and equity securities available-for-sale.............................................. 13,271 23,880
Debt and equity securities held-to-maturity (with estimated
market values of $48,036 and $23,883, respectively)...................................... 48,330 23,890
Mortgage-backed securities available-for-sale.............................................. 591,740 104,453
Mortgage-backed securities held-to-maturity (with estimated
market values of $184,995 and $415,820, respectively).................................... 184,492 413,762
Loans receivable:
Mortgage loans........................................................................... 690,967 224,448
Consumer and other loans................................................................. 131,274 109,361
Less allowance for loan losses......................................................... (4,495) (1,729)
-------------------------------
Loans receivable, net................................................................ 817,746 332,080
Accrued interest receivable, net........................................................... 11,312 6,668
Office properties and equipment, net....................................................... 13,821 4,765
Prepaid expenses and other assets.......................................................... 14,070 3,443
Purchased mortgage servicing rights........................................................ 3,905 --
Excess of cost over fair value of net assets acquired...................................... 49,429 --
Real estate owned, net..................................................................... 1,564 1,558
-------------------------------
Total assets......................................................................... $1,782,550 $931,436
===============================
Liabilities and Stockholders' Equity
Deposits................................................................................... $1,345,626 $670,317
FHLB advances.............................................................................. 3,000 40,000
Securities sold under agreements to repurchase............................................. 263,160 57,035
Advance payments by borrowers for taxes and insurance...................................... 8,846 3,468
Accrued expenses and other liabilities..................................................... 8,299 6,883
-------------------------------
Total liabilities.................................................................... 1,628,931 777,703
-------------------------------
Commitments
Stockholders' Equity
Preferred stock, $.01 par value, 4,000,000 shares authorized; none issued.................. -- --
Common stock, $.01 par value, 20,000,000 shares authorized;
10,750,820 shares issued; 9,128,739 and 9,389,515 shares outstanding, respectively....... 108 108
Additional paid-in capital................................................................. 104,041 103,655
Retained earnings, substantially restricted................................................ 83,966 76,167
Unrealized appreciation (depreciation) on securities available-for-sale, net of taxes...... (5,281) 839
Less:
Unallocated common stock held by ESOP...................................................... (6,210) (7,038)
Unearned common stock held by Recognition and Retention Plan (RRP)......................... (2,392) (3,214)
Treasury stock, at cost (1,622,081 and 1,361,305 shares, respectively)..................... (20,613) (16,784)
-------------------------------
Total stockholders' equity............................................................... 153,619 153,733
-------------------------------
Total liabilities and stockholders' equity............................................. $1,782,550 $931,436
===============================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
- --------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
For the Year Ended June 30,
------------------------------------------------
1996 1995 1994
================================================
<S> <C> <C> <C>
Interest Income:
First Mortgage Loans.................................................... $ 39,073 $ 17,701 $17,552
Consumer and Other Loans................................................ 10,942 9,540 8,059
Mortgage-Backed Securities.............................................. 46,084 29,469 18,440
Money Market Investments................................................ 991 804 422
Debt and Equity Securities.............................................. 3,282 3,746 2,751
------------------------------------------------
Total Interest Income................................................. 100,372 61,260 47,224
------------------------------------------------
Interest Expense:
Deposits................................................................ 42,425 22,012 17,791
Borrowed Funds.......................................................... 10,560 6,349 2,233
------------------------------------------------
Total Interest Expense................................................ 52,985 28,361 20,024
------------------------------------------------
Net Interest Income Before Provision for Loan Losses.................... 47,387 32,899 27,200
Provision for Loan Losses................................................. 725 400 393
------------------------------------------------
Net Interest Income After Provision for Loan Losses..................... 46,662 32,499 26,807
------------------------------------------------
Non-Interest Income:
Loan Fees and Service Charges........................................... 826 269 260
Other Operating Income.................................................. 1,606 841 859
Net Gain on Securities.................................................. 678 147 --
------------------------------------------------
Total Non-Interest Income............................................. 3,110 1,257 1,119
------------------------------------------------
Non-Interest Expense:
Compensation and Benefits............................................... 13,395 9,562 7,068
Occupancy and Equipment................................................. 4,481 2,462 2,336
Federal Deposit Insurance Premiums...................................... 2,399 1,376 1,374
Advertising............................................................. 1,152 1,158 670
Other Operating Expenses................................................ 4,169 3,039 2,366
------------------------------------------------
Total General and Administrative Expenses............................. 25,596 17,597 13,814
Real Estate Operations, Net............................................. 579 (385) 1,080
Amortization of Excess of Cost Over Fair Value of Net Assets Acquired... 1,928 -- --
------------------------------------------------
Total Non-Interest Expense........................................... 28,103 17,212 14,894
------------------------------------------------
Income Before Income Taxes and Cumulative Effect of
Change in Accounting Principle.......................................... 21,669 16,544 13,032
Income Tax Expense........................................................ 9,946 6,842 5,538
------------------------------------------------
Income Before Cumulative Effect of Change in Accounting Principle......... 11,723 9,702 7,494
Cumulative Effect of Change in Accounting for Income Taxes................ -- -- 1,200
------------------------------------------------
Net Income................................................................ $ 11,723 $ 9,702 $ 8,694
================================================
Earnings Per Share (1994 based on net income from
March 31, 1994 to June 30, 1994)........................................ $ 1.31 $ 1.03 $ 0.22
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
====================================================================================================================================
(Dollars in thousands, except share amounts)
For the Year Ended June 30,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Common Stock (Par Value: $.01):
Balance at Beginning of Year ............................................ $ 108 $ 108 $ --
Shares Issued Pursuant to Initial Common
Stock Offering (10,750,820 shares) .................................... -- -- 108
----------------------------------------------------
Balance at End of Year .................................................... 108 108 108
----------------------------------------------------
Additional Paid in Capital:
Balance at Beginning of Year ............................................ 103,655 103,479 --
Initial Common Stock Offering ........................................... -- -- 103,467
Allocation of ESOP Stock and Earned Portion of RRPs ..................... 386 176 12
----------------------------------------------------
Balance at End of Year .................................................. 104,041 103,655 103,479
----------------------------------------------------
Retained Earnings:
Balance at Beginning of Year ............................................ 76,167 70,106 61,412
Net Income .............................................................. 11,723 9,702 8,694
Dividends Declared ...................................................... (3,924) (3,641) --
----------------------------------------------------
Balance at End of Year .................................................. 83,966 76,167 70,106
----------------------------------------------------
Unrealized Appreciation (Depreciation) in
Securities Available-for-Sale, Net of Tax:
Balance at Beginning of Year ............................................ 839 (118) --
Unrealized Appreciation on Securities Transferred from
Held-to-Maturity to Available-for-Sale, Net of Tax ...................... 1,144 -- --
Change in Unrealized Appreciation (Depreciation), Net of Tax ............ (7,264) 957 (118)
----------------------------------------------------
Balance at End of Year .................................................. (5,281) 839 (118)
----------------------------------------------------
Employee Stock Ownership Plan:
Balance at Beginning of Year ............................................ (7,038) (8,004) --
Common Stock Acquired by ESOP ........................................... -- -- (8,280)
Allocation of ESOP Stock ................................................ 828 966 276
----------------------------------------------------
Balance at End of Year .................................................. (6,210) (7,038) (8,004)
----------------------------------------------------
Recognition and Retention Plans:
Balance at Beginning of Year ............................................ (3,214) (3,976) --
Common Stock Acquired by RRPs ........................................... -- -- (4,140)
Earned Portion of RRPs .................................................. 822 762 164
----------------------------------------------------
Balance at End of Year .................................................. (2,392) (3,214) (3,976)
----------------------------------------------------
Treasury Stock:
Balance at Beginning of Year ............................................ (16,784) (3,744) --
Common Stock Purchased, at Cost (260,776, 998,930
and 362,375 shares) ..................................................... (3,829) (13,040) (3,744)
----------------------------------------------------
Balance at End of Year .................................................. (20,613) (16,784) (3,744)
----------------------------------------------------
Total Stockholders' Equity ................................................ $153,619 $153,733 $157,851
----------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
====================================================================================================================================
(Dollars in thousands)
For the Year Ended June 30,
-----------------------------------------------------
1996 1995 1994
=====================================================
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income ................................................................ $ 11,723 $ 9,702 $ 8,694
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses .............................................. 725 400 393
Provision for Losses on Real Estate Owned .............................. 375 60 1,073
Amortization of Premiums (Accretion of Discounts), Net ................. (567) (1,459) 500
Depreciation and Amortization .......................................... 1,027 467 387
Net Gain on Securities ................................................. (678) (147) --
Amortization Relating to Allocation and Earned Portions of
Stock Plans ........................................................... 2,036 1,904 452
Amortization of Excess of Cost Over Fair Value of
Net Assets Acquired ................................................... 1,928 -- --
Amortization of Purchased Mortgage Servicing Rights ..................... 240 -- --
Net Gain on Loans Sold ................................................ (30) -- (35)
Net Gain on Sale of Real Estate Owned ................................. (19) (657) (34)
Cumulative Effect of Change in Accounting for Income Taxes ............ -- -- (1,200)
(Increase) Decrease in Accrued Interest Receivable .................... 738 (1,657) 181
(Increase) Decrease in Prepaid Expenses and Other Assets .............. 3,037 (263) (901)
Increase (Decrease) in Accrued Expenses and Other Liabilities ........... (6,413) 1,318 (1,896)
-----------------------------------------------------
Net Cash Provided by Operating Activities ............................. 14,122 9,668 7,614
-----------------------------------------------------
Cash Flows From Investing Activities:
Principal Repayments on Loans, Net of Originations
and Purchased Loans .......................................... (44,258) (3,820) 26,307
Purchases of Mortgage-Backed Securities Held-to-Maturity ...... (16,472) (63,894) (167,714)
Purchases of Mortgage-Backed Securities Available-for-Sale .... (382,645) (105,654) --
Proceeds from Sales of Mortgage-Backed Securities Available-for-Sale 180,590 -- --
Principal Repayments from Mortgage-Backed Securities .......... 148,059 47,586 77,230
Proceeds from Call of Debt Securities ......................... 21,800 -- --
Proceeds from Sales of Debt Securities Available-for-Sale ..... 29,245 11,146 --
Purchases of Debt Securities Available-for-Sale ............... -- (19,654) (37,565)
Purchases of Debt and Equity Securities Held-to-Maturity ...... (20,000) (1,296) (671)
Proceeds from Maturities of Debt Securities ................... 28,100 40,338 --
Purchases of Premises and Equipment ........................... (2,595) (1,610) (624)
Proceeds from Loans Sold ...................................... 5,860 1,481 6,250
Proceeds from Sale of Real Estate Owned ....................... 1,715 2,572 2,369
Cash Paid for Bank of Westbury Net of Cash and
Cash Equivalents Acquired .................................... (165) -- --
Cash Paid for Sunrise Bancorp, Inc. Net of Cash and
Cash Equivalents Acquired .................................... (94,259) -- --
-----------------------------------------------------
Net Cash Used in Investing Activities ....................... (145,025) (92,805) (94,418)
-----------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows Continued
====================================================================================================================================
(Dollars in thousands)
For the Year Ended June 30,
-------------------------------------------------
1996 1995 1994
=================================================
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits ........................................... $ 44,558 $ 83,096 $(13,057)
Decrease in Advance Payments by Borrowers
for Taxes and Insurance .................................................. (9,210) (12) (261)
Net Proceeds from Issuance of Common Stock ................................ -- -- 103,575
Purchase of Stock for RRPs ................................................ -- -- (4,140)
Purchase of Stock for ESOP ................................................ -- -- (8,280)
Proceeds from FHLB Advances ............................................... -- 344,000 307,000
Repayment of FHLB Advances ................................................ (87,000) (382,000) (294,000)
Proceeds from Reverse Repurchase Agreements ............................... 824,727 98,694 --
Repayment of Reverse Repurchase Agreements ................................ (618,602) (41,659) --
Purchase of Treasury Stock ................................................ (3,829) (13,040) (3,744)
Dividends Paid ............................................................ (3,808) (2,707) --
--------
Net Cash Provided by Financing Activities ................................. 146,836 86,372 87,093
-------------------------------------------------
Net Increase in Cash and Cash Equivalents ................................. 15,933 3,235 289
Cash and Cash Equivalents at Beginning of Year ............................ 16,937 13,702 13,413
--------
Cash and Cash Equivalents at End of Year .................................. $ 32,870 $ 16,937 $ 13,702
=================================================
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest .................................................................. $ 50,847 $ 28,211 $ 20,077
=================================================
Income Taxes .............................................................. $ 8,384 $ 5,965 $ 6,366
Non-cash Investing Activities:
Transfers from Loans to Real Estate Owned ................................. $ 1,311 $ 622 $ 2,410
=================================================
Transfers of Mortgage-Backed Securities From Held-to-Maturity
to Available-for-Sale ................................................. $283,245 $ -- $--
=================================================
Supplemental Information to the Consolidated Statements of Cash Flows Relating
to the Bank of Westbury and Sunrise Bancorp, Inc. Acquisitions
Non-cash investing and financing transactions relating to the Bank of
Westbury and Sunrise Bancorp, Inc. acquisitions not reflected in the
Consolidated Statements of Cash Flows for the year ended June 30, 1996 are
listed below:
Fair Value of Assets Acquired, Excluding Cash and
Cash Equivalents Acquired .......................................... $745,341
Liabilities Assumed .................................................. (702,273)
--------
Excess of Cost Over Fair Value of Net Assets Acquired ................ 51,356
Cash Paid for Bank of Westbury and Sunrise Bancorp, Inc.,
Net of Cash and Cash Equivalents Acquired .......................... $ 94,424
========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Reliance Bancorp, Inc. (the
"Company") and subsidiary conform to generally accepted accounting principles
and to general practice within the financial services industry. The following is
a description of the more significant policies which the Company follows in
preparing and presenting its consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary Reliance Federal Savings Bank (the
"Bank"). All significant intercompany transactions and balances are eliminated
in consolidation.
As more fully discussed in Note 2, Reliance Bancorp Inc., a Delaware
corporation, was organized by the Bank for the purpose of acquiring all of the
capital stock of the Bank pursuant to the conversion of the Bank from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Company is subject to the financial reporting requirements of the
Securities and Exchange Act of 1934, as amended.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of condition and
income for the years presented. Estimates that are susceptible to change include
the determination of the allowances for losses on loans and the valuation of
real estate acquired in connection with foreclosures. Certain reclassifications
have been made to prior year amounts to conform to the current year
presentation.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, federal funds sold and repurchase agreements with an
original term to maturity of less than three months.
(c) Securities Available-for-Sale
At June 30, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No.115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires securities, including debt, equity and
mortgage-backed securities, classified as available-for-sale to be recorded at
estimated fair value. Such securities, prior to the adoption of SFAS No. 115,
were recorded at the lower of cost or estimated market value with aggregate
declines in market value below amortized cost charged against earnings. Under
SFAS No. 115, changes in unrealized gains or losses of available-for-sale
securities are reported net of tax as a separate component in stockholders'
equity. The adoption of SFAS No. 115 had no impact on fiscal 1994 net income.
The Company's ability and intent as of June 30, 1994 regarding the holding of
securities to maturity was utilized to then classify securities as either
held-to-maturity or available-for-sale.
In accordance with an implementation guide for SFAS No. 115, released by
the Financial Accounting Standards Board (FASB) on November 15, 1995, the Bank
realigned its mortgage-backed securities portfolio in December 1995 by
transferring approximately $283.2 million from the held-to-maturity to the
available-for-sale category. The Bank realigned its mortgage-backed securities
portfolio in order to be more flexible and better positioned for managing the
portfolio under changing interest rates and other market conditions.
Debt securities are classified as available-for-sale when management
intends to hold the securities for indefinite periods of time or when the
securities may be utilized for tactical asset/liability management strategy and
may be sold from time to time to effectively manage interest rate exposure and
resultant prepayment risk and liquidity needs. Premiums and discounts are
amortized or accreted, respectively, using the level-yield method. Readily
marketable equity securities are also classified as available-for-sale. Gains or
losses on the sales of the securities are recognized when sold using the
specific identification method.
(d) Debt and Equity Securities Held-to-Maturity
Debt and equity securities classified as held-to-maturity are carried at
cost unless there is a permanent impairment of value, at which time they are
valued at the lower of cost or market value resulting in a new cost basis for
the security. The debt securities are adjusted for amortization of premiums and
accretion of discounts over the term of the security using the level-yield
method. The Company currently has the ability and intent to hold the debt
securities until maturity. Equity securities classified held-to-maturity are not
readily marketable.
(e) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities. Mortgage-backed securities held-to-maturity are carried at current
30
<PAGE>
unpaid principal balances, adjusted for unamortized premiums and unaccreted
discounts. Premiums are amortized and discounts are accreted to income over the
estimated life of the respective securities using the level-yield method. The
Company currently has the ability and intent to hold the securities until
maturity.
(f) Loans
Loans are stated at the principal amount outstanding, less unearned
discounts and net deferred loan origination fees, if applicable. Interest on
loans not made on a discounted basis is credited to income based on the
principal amount outstanding during the period. Unearned income on discounted
loans originated by the Bank, principally education loans, is recognized as
income using the level-yield method. Gains and losses on the sale of loans are
determined using the specific identification method.
Interest on loans is recognized on the accrual basis. Loans are placed on
nonaccrual status when principal or interest becomes 90 days or more past due
for mortgage loans and commercial loans and 120 days past due for other loans,
unless the obligation is both well secured and in the process of collection.
Accrued interest receivable previously recognized is reserved when a loan is
placed on nonaccrual status. Loans remain on nonaccrual status until principal
and interest payments are current or the obligation is considered both well
secured and in the process of collection. A loan is considered a troubled debt
restructuring when changes, such as reduction in interest rates or deferral of
interest or principal payments, are made to contractual terms due to a
borrower's weakened financial condition.
The Company defers loan origination fees on multi-family loans, less
certain direct costs, and subsequently recognizes them as an adjustment of the
loan's yield over the contractual life of the loan using the level-yield method
or, in the case of loans with below-market introductory rates, generally over
the applicable introductory period, using the interest method.
Effective July 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114") and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" ("SFAS No. 118"). Under SFAS No. 114 and SFAS No. 118, a loan is
considered impaired when, based upon current information and events, it is
probable that a creditor will be unable to collect all amounts due including
principal and interest, according to the contractual terms of the loan
agreement. These statements require that impaired loans that are within their
scope be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or as a practical expedient, at
the loan's current observable market price, or the fair value of the collateral
if the loan is collateral dependent. The amount by which the recorded investment
of an impaired loan exceeds the measurement value is recognized by creating a
valuation allowance through a charge to the provision for loan losses. In
connection with the adoption of SFAS No. 114, the Company has, for all years
prior to its adoption, reclassified in-substance foreclosed loans, net of the
related allowance for losses, if any, from real estate owned to loans receivable
in the Company's statements of condition. Interest income received on impaired
loans is recognized on a cash basis. The adoption of SFAS No. 114 and No. 118
had no impact on fiscal 1996 net income.
(g) Allowance for Loan Losses
A provision for loan losses charged to income is reflected as an addition
to a valuation allowance which is netted against loans receivable. Management's
periodic evaluation of the adequacy of the valuation allowance considers the
Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations which may affect the borrower's ability to repay, estimated
value of the underlying collateral and the current real estate markets and
economic condition in the Bank's lending areas. In addition, the Bank's
regulators, as an integral part of their examination process, periodically
review the Bank's allowance for losses on loans and real estate. Accordingly,
the Bank may be required to take certain charge-offs and recognize additions to
the allowance based on the regulators' judgments concerning information
available to them during their examination.
(h) Office Properties and Equipment
Depreciation and amortization are provided on a straight-line method over
the estimated useful lives of the assets. The cost of leasehold improvements is
being amortized using the straight-line method over the shorter of the term of
the related leases or the estimated useful lives.
(i) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired in the fiscal
1996 acquisitions of Bank of Westbury and Sunrise Bancorp, Inc. is amortized
using the straight line method over fifteen years. The excess of cost over the
fair value of net assets acquired is evaluated periodically by the Company for
impairment in response to changes in circumstances or events.
31
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
(j) Real Estate Owned
Real estate acquired through foreclosure are recorded at the lower of cost
(unpaid loan balance plus foreclosure costs) or fair market value at the time of
acquisition. The carrying value of individual properties is subsequently
adjusted to the extent it exceeds estimated fair market value less costs to
sell. Operating expenses of holding real estate, net of related income, are
charged against income as incurred. Gains on sales of real estate are recognized
when down payment and other requirements are met; otherwise such gains are
deferred and recognized on the installment method of accounting. Losses on the
disposition of real estate, including expenses incurred in connection with the
disposition, are charged to income. A valuation allowance is maintained through
provisions for real estate losses charged to income for any decrease in the fair
value of property less costs to sell, which is netted against real estate owned.
(k) Taxes on Income
The Company files a calendar-year Federal income tax return on a
consolidated basis with its subsidiary.
Effective July 1, 1993, the Bank adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires a change from the deferred method to the
asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date, whereas under the deferred method, deferred
taxes were not adjusted for subsequent changes in tax rates. The cumulative
effect at July 1, 1993 of this change in the method of accounting for income
taxes has been included in the Consolidated Statements of Income for the year
ended June 30, 1994.
(l) Retirement Plan
The Bank's retirement plan is non-contributory and covers substantially all
eligible employees. The plan conforms to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. The Bank's policy is to
accrue for all pension costs and to fund the maximum amount allowable for tax
purposes.
Actuarial gains and losses that arise from changes in assumptions
concerning future events, used in estimating pension costs, are amortized over a
period that reflects the long range nature of pension expense.
(m) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost.
(n) Earnings Per Share
Earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding, adjusted for the unallocated portion of shares held by the Employee
Stock Ownership Plan ("ESOP") in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-6. For the years ended
June 30, 1996 and 1995 and for the period from March 31, 1994, (date of
conversion) to June 30, 1994, the weighted average number of shares of common
stock and common stock equivalents outstanding (adjusted for unallocated ESOP
shares) were 8,946,000, 9,404,000 and 9,762,000, respectively.
Earnings per share for fiscal year 1994 was computed on earnings for the
period March 31, 1994 (conversion date) through June 30, 1994. Earnings per
share are not presented for periods prior to conversion to stock form, as no
stock was outstanding.
2. Stock Form of Ownership
On September 16, 1993, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of a
holding company. As part of the conversion, the Company was incorporated under
Delaware law on November 16, 1993. The Company completed its initial public
offering on March 31, 1994 and issued 10,750,820 shares of common stock
resulting in net proceeds of approximately $103,575,000. The Company retained
$51,787,500 of the net proceeds and used the remaining net proceeds to purchase
all of the outstanding stock of the Bank. The financial position and results of
operations of the Company as of and for the years ended June 30, 1996 and 1995
and for the period from March 31, 1994 to June 30, 1994 are presented in Note
20.
32
<PAGE>
During fiscal 1994, the Company repurchased 362,375 shares at an aggregate
cost of $3,744,000. During fiscal 1995, the Company repurchased 998,930 shares
at an aggregate cost of $13,040,000. On May 7, 1996, the Company announced the
approval of its fourth five percent stock repurchase plan which allows the
Company to repurchase up to 461,287 common shares. As of June 30, 1996, 97,000
shares under this program were repurchased at an aggregate cost of $1,488,000.
During fiscal 1996, the Company repurchased 260,776 shares at an aggregate cost
of $3,829,000. Through June 30, 1996, all repurchases were funded by the
Company, therefore, the capital and liquidity of the Bank were not affected.
At the time of the conversion, the Bank established a liquidation account
with a balance equal to its retained earnings reflected in its statement of
condition. The balance in the liquidation account at June 30, 1996 and 1995 was
approximately $30,416,000 and $36,969,000, respectively. The liquidation account
will be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of
its shares of common stock if the effect thereof would cause stockholders'
equity to be reduced below applicable regulatory capital maintenance
requirements, the amount required for the liquidation account, or if such
declaration and payment would otherwise violate regulatory requirements. During
fiscal 1996, the Company declared cash dividends totalling $3,924,000.
3. Acquisitions
Bank of Westbury Acquisition
After the close of business day on August 11, 1995, the Company completed
the acquisition of the Bank of Westbury in a transaction which was accounted for
as a purchase. The cost of the acquisition was $16.7 million. In addition, the
Company incurred approximately $422,000 of acquisition-related costs and
$225,000 for the lease buyout of data processing equipment. The excess of cost
over the fair value of net assets acquired generated in the transaction was $7.8
million, which will be amortized on a straight line basis over 15 years. The
Company provided funds for the acquisition from its normal cash flow. As of the
completion of the acquisition, which was effected by merging the net assets
acquired into the Bank, the Bank continued to exceed each of its regulatory
capital requirements. The Company's consolidated results of operations include
Bank of Westbury's results of operations commencing August 12, 1995.
A summary of the net assets acquired (at their estimated fair values) in
the Bank of Westbury acquisition is as follows:
After the Close of Business
on August 11, 1995
===========================
(In thousands)
Assets acquired:
Cash and cash equivalents ................................ $ 17,219
Investment securities .................................... 2,713
Mortgage-backed securities ............................... 68,140
Loans receivable, net .................................... 72,741
Net deferred tax asset ................................... 911
Real estate owned ........................................ 376
Other assets ............................................. 4,106
--------
Total assets acquired .................................. 166,206
--------
Liabilities assumed:
Deposits ................................................. 151,992
Borrowed funds ........................................... 3,000
Other liabilities ........................................ 1,605
--------
Total liabilities assumed .............................. 156,597
--------
Net assets acquired .................................... $ 9,609
========
33
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
Sunrise Bancorp, Inc. Acquisition
After the close of business day on January 11, 1996, the Company completed
the acquisition of Sunrise Bancorp, Inc. in a transaction which was accounted
for as a purchase. The cost of the acquisition was approximately $106.3 million
in cash, or $32.00 per share of Sunrise Bancorp, Inc. common stock outstanding
at January 11, 1996. In addition, the Company incurred approximately $893,000 of
acquisition related expenses. The excess of cost over the fair value of net
assets acquired generated in the transaction was $43.6 million, which will be
amortized on a straight line basis over 15 years. The Company provided funds for
the acquisition from the sale of mortgage-backed securities classified as
available-for-sale. As of the completion of the acquisition, which was effected
by merging the net assets acquired into the Bank, the Bank continued to exceed
each of its regulatory capital requirements. The Company's consolidated results
of operations include Sunrise Bancorp, Inc.'s results of operation commencing
January 12, 1996.
A summary of the net assets acquired (at their fair values) in the Sunrise
Bancorp, Inc. acquisition is as follows:
After the Close of Business
on January 11, 1996
===========================
(In thousands)
Assets acquired:
Cash and cash equivalents ................................ $ 12,906
Investment securities .................................... 69,880
Mortgage-backed securities ............................... 129,994
Loans receivable, net .................................... 373,826
Purchased mortgage servicing rights ...................... 3,404
Office properties and equipment .......................... 6,022
Real estate owned ........................................ 651
Other assets ............................................. 12,577
--------
Total assets acquired .................................. 609,260
--------
Liabilities assumed:
Deposits ................................................. 479,213
Borrowed funds ........................................... 47,000
Other liabilities ........................................ 17,178
Net deferred tax liability ............................... 2,285
--------
Total liabilities assumed .............................. 545,676
Net assets acquired .................................. $ 63,584
========
The following summarizes the actual and unaudited projected amortization of
discounts and premiums relating to the fair market value adjustments and the
excess of cost over fair value of net assets acquired:
<TABLE>
<CAPTION>
Excess of Cost Total
Over Fair Value Net Discount Net Discount Net Net Net Decrease
of Net Assets (Premium) on (Premium) on Premium on Premium on In Income
Acquired Securities Loans Other Assets Liabilities Before Taxes
===================================================================================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amortization:
1996 actual....................... $ (1,928) $ 89 $ 45 $ (123) $ 454 $ (1,463)
1997 projected.................... (3,424) (334) (196) (310) 597 (3,667)
1998 projected.................... (3,424) (182) (169) (262) 467 (3,570)
1999 projected.................... (3,424) (92) (140) (241) 457 (3,440)
2000 projected.................... (3,424) (38) (112) (207) 300 (3,481)
thereafter estimated.............. (35,732) 144 (158) (1,367) 9 (37,104)
- -----------------------------------------------------------------------------------------------------------------------------------
$(51,356) $(413) $(730) $(2,510) $2,284 $(52,725)
====================================================================================================================================
</TABLE>
Set forth below is unaudited pro forma combined condensed consolidated
results of operations of the Company, the Bank of Westbury and Sunrise Bancorp,
Inc. for the years ended June 30, 1996 and 1995. This information was prepared
as if the acquisitions of the Bank of Westbury and Sunrise Bancorp, Inc. had
been consummated at the beginning of each period and is based on the historical
financial statements of the Company, the Bank of Westbury and Sunrise Bancorp,
Inc. after giving effect to the acquisition under the purchase method of
accounting.
34
<PAGE>
Subjective estimates have been utilized in determining the pro forma
adjustments applied to the historical results of operations of the Company, the
Bank of Westbury and Sunrise Bancorp, Inc. Accordingly, the following pro forma
unaudited combined condensed consolidated financial information is not intended
to be indicative of the results of operations which would have been attained had
the acquisition been consummated at either of the foregoing dates or which may
be attained in the future.
<TABLE>
<CAPTION>
Year ended June 30, 1996 Year ended June 30, 1995
--------------------------------------------------------------------
(Unaudited) (Unaudited)
Historical Historical
Reliance Reliance
Bancorp, Inc. Pro forma Bancorp, Inc. Pro forma
and Subsidiary Combined(1) and Subsidiary Combined(1)
====================================================================
<S> <C> <C> <C> <C>
Interest income ............................................... $100,372 $121,074(2) $ 61,260 $107,106(2)
Interest expense .............................................. 52,985 65,124 28,361 51,168
--------------------------------------------------------------------
Net interest income ........................................... 47,387 55,950 32,889 55,938
Provision for loan losses ..................................... 725 846 400 880
--------------------------------------------------------------------
Net interest income after provision for loan losses ........... 46,662 55,104 32,499 55,058
Non-interest income ........................................... 3,110 4,538 1,257 3,838
Non-interest expense .......................................... 28,103 39,034(3) 17,212 40,131
--------------------------------------------------------------------
Income before income taxes .................................... 21,669 20,608 16,544 18,765
Income tax expense ............................................ 9,946 9,891(4) 6,842 9,007(4)
--------------------------------------------------------------------
Net income .................................................... $ 11,723 $ 10,717 $ 9,702 $ 9,758
====================================================================
Earnings per common share ..................................... $ 1.31 $ 1.20 $ 1.03 $ 1.04
====================================================================
</TABLE>
(1) Pro forma combined results of operations for the year ended June 30, 1996
were calculated, in part, based upon actual unaudited results of operations
of the combined institutions since the date of each acquisition (the Bank
of Westbury on August 11, 1995 and Sunrise Bancorp, Inc. on January 11,
1996), and adding such results to the Bank of Westbury's earnings for the
month of July 1995 and the 11 day period from August 1, 1995 to August 11,
1995 and Sunrise Bancorp, Inc. earnings from July 1995 to December 1995 and
the 11 day period from January 1, 1996 to January 11, 1996; and applying
pro forma adjustments to amortize the excess of cost over fair value of net
assets acquired and purchase accounting premiums and discounts.
Pro forma combined results of operations for the year ended June 30,
1995 were calculated, in part, based upon actual unaudited results of
operations for the year ended June 30, 1995; and applying pro forma
adjustments to amortize the excess of cost over fair value of net assets
acquired and purchase accounting premiums and discounts. As such, the pro
forma results of operations stated herein reflect the valuation of the
assets and liabilities acquired in the Bank of Westbury and Sunrise
Bancorp, Inc. acquisitions and the subsequent accretion of discount, at a
point in time other than that assumed for the acquisition in the year end
data presented above and, in addition, regardless of later changes in the
affected assets or liabilities. As a result, the pro forma information set
forth should not be relied upon as an indication of what the performance of
the Company would have been had the acquisition of Bank of Westbury and
Sunrise Bancorp, Inc. occurred on the date assumed in calculating the year
ended pro forma data above.
(2) Pro forma interest income for the year ended June 30, 1996 and 1995 was
adjusted by approximately $3.6 million and $7.2 million, respectively, for
the effect on interest income for the sale of mortgage-backed securities
used to fund the purchase of Sunrise Bancorp, Inc.
(3) Pro forma non-interest expense for the year ended June 30, 1996 was\
adjusted for various non-recurring employee benefit expenses and other
transaction related expenses totalling approximately $19.0 million for the
Sunrise Bancorp, Inc. acquisition.
(4) An effective income tax rate of 48.0% was assumed for the pro forma
combined income for the years ended June 30, 1996 and 1995.
4. Money Market Investments
Money market investments generally have original maturities of three months
or less. The following presents the components of money market investments:
June 30,
-----------------
1996 1995
=================
(In thousands)
Federal Funds Sold.......................................... $ 1,000 $1,000
Repurchase Agreements....................................... 9,450 1,700
-----------------
Total Money Market Investments.............................. $10,450 $2,700
=================
The Company purchases securities under agreements to resell (repurchase
agreements). These agreements represent short-term loans and are reflected as an
asset in the consolidated statements of condition. The same securities are to be
resold at maturity of the repurchase agreements.
35
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
Securities purchased under repurchase agreements averaged $7,225,000 for
the year ended June 30, 1996 and $3,807,000 for the year ended June 30, 1995.
The maximum amount of such agreements outstanding at any month-end during the
fiscal year ended June 30, 1996 and 1995 was $11,000,000 and $13,300,000,
respectively.
5. Debt and Equity Securities
A summary of the amortized cost and estimated market values of debt and
equity securities are as follows:
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
=================================================================
(In thousands)
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Government Agency Obligations ............................ $ 34,950 $ -- $ (338) $ 34,612
Obligations of New York State and Local Municipalities ........ 391 44 -- 435
FHLB Stock .................................................... 12,989 -- -- 12,989
-----------------------------------------------------------------
$ 48,330 $ 44 $ (338) $ 48,036
=================================================================
Available-for-Sale:
U.S. Government Agency Obligations ............................ $ 10,319 $ -- $ (92) $ 10,227
United States Treasury Notes .................................. 2,992 -- (9) 2,983
Marketable Equity Securities .................................. 42 19 -- 61
$ 13,353 $ 19 $ (101) $ 13,271
=================================================================
June 30, 1996
-----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
=================================================================
(In thousands)
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Government Treasury Notes ................................ $ 14,997 $ -- $ (25) $ 14,972
Obligations of New York State and Local Municipalities ........ 1,394 18 -- 1,412
FHLB Stock .................................................... 7,499 -- -- 7,499
-----------------------------------------------------------------
Available-for-Sale:
United States Treasury Bills .................................. $ 10,531 $ 16 $ -- $ 10,547
United States Treasury Notes .................................. 13,377 -- (44) 13,333
-----------------------------------------------------------------
$ 23,908 $ 16 $ (44) $ 23,880
=================================================================
</TABLE>
The amortized cost and estimated market value of debt and equity securities
at June 30, 1996 and 1995, by contractual maturity are shown below:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
----------------------------------------- --------------------------------------------
Held-to-maturity Available-for-sale Held-to-maturity Available-for-sale
----------------------------------------- --------------------------------------------
Estimated Estimated Estimated Estimated
Amortized market Amortized market Amortized market Amortized market
cost value cost value cost value cost value
=======================================================================================
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due in One Year or Less .................. $ -- $ -- $ 6,334 $ 6,318 $15,998 $15,988 $23,908 $23,880
Due After One Year
Through Five Years ..................... 10,322 10,220 6,977 6,892 393 396 -- --
Due after Five Years
Through Ten Years ...................... 25,019 24,827 -- -- -- -- -- --
Equity Securities ........................ 12,989 12,989 42 61 7,499 7,499 -- --
-------
$48,330 $48,036 $13,353 $13,271 $23,890 $23,883 $23,908 $23,880
=======
</TABLE>
36
<PAGE>
There were no sales of debt and equity securities in fiscal 1994. In fiscal
1996 and 1995, gross proceeds from the sale of debt and equity securities
available-for-sale totalled $30,345,000 and $11,146,000, respectively. For
fiscal 1996 and 1995 gross realized gains totalled $20,000 and $153,000,
respectively, and gross realized losses totalled $15,000 and $6,000,
respectively.
6. Mortgage-Backed Securities
The amortized cost and estimated market values of mortgage-backed
securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
==================================================================
(In thousands)
<S> <C> <C> <C> <C>
Held-to-Maturity:
Pass-through Certificates Guaranteed by:
GNMA ................................................. $125,195 $ 511 $ (6) $125,700
FHLMC ................................................ 14,967 38 -- 15,005
FNMA ................................................. 44,330 71 (111) 44,290
------------------------------------------------------------------
$184,492 $ 620 $ (117) $184,995
==================================================================
Available-for-Sale:
Pass-through Certificates Guaranteed by:
GNMA ................................................. $170,142 $ 1,110 $ (1,499) $169,753
FHLMC ................................................ 255,498 828 (6,728) 249,598
FNMA ................................................. 172,863 756 (3,675) 169,944
REMIC ................................................ 2,503 -- (58) 2,445
------------------------------------------------------------------
$601,006 $ 2,694 $(11,960) $591,740
==================================================================
June 30, 1996
------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
==================================================================
(In thousands)
<S> <C> <C> <C> <C>
Held-to-Maturity:
Pass-through Certificates Guaranteed by:
GNMA ................................................. $157,073 $ 3,866 $ -- $160,939
FHLMC ................................................ 188,611 601 (2,485) 186,727
FNMA ................................................. 68,078 410 (334) 68,154
------------------------------------------------------------------
$413,762 $4,877 $ (2,819) $415,820
==================================================================
Available-for-Sale:
Pass-through Certificates Guaranteed by:
FHLMC ................................................ $ 77,072 $ 1,123 $ -- $ 78,195
FNMA ................................................. 25,845 413 -- 26,258
------------------------------------------------------------------
$102,917 $ 1,536 $ -- $104,453
==================================================================
</TABLE>
There were no sales of mortgage-backed securities during the fiscal years
ended June 30, 1995 and 1994. In fiscal 1996, gross proceeds from the sale of
mortgage-backed securities available-for-sale totalled $180,587,000. Gross
realized gains totalled $1,881,000 and gross realized losses totalled
$1,208,000.
37
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
<TABLE>
<CAPTION>
7. Loans
Loans are summarized as follows:
June 30,
------------------------
1996 1995
(In thousands)
========================
<S> <C> <C>
Mortgage Loans:
One- to four-family................................. $569,031 $194,290
Co-op............................................... 9,687 8,774
Multi-family........................................ 79,571 18,774
Commercial Real Estate.............................. 27,134 2,258
Construction........................................ 5,560 745
------------------------
690,983 224,841
Less:
Unearned Discount, Premiums and Deferred Loan
Origination Fees, Net......................... (16) (393)
------------------------
Total Mortgage Loans......................... 690,967 224,448
------------------------
Consumer and Other Loans:
Home Equity Lines of Credit.................... 81,205 70,954
Guaranteed Student Loans....................... 18,754 20,529
Home Equity Loans.............................. 16,747 15,774
Loans on Deposit Accounts...................... 5,782 980
Other Loans.................................... 7,922 416
------------------------
130,410 108,653
Net Deferred Loan Origination Costs............ 864 708
------------------------
Total Consumer and Other Loans............... 131,274 109,361
Less Allowance for Loan Losses................... (4,495) (1,729)
Loans Receivable, Net.......................... $817,746 $332,080
========================
June 30,
------------------------
1996 1995
========================
(In thousands)
Commitments Outstanding:
Mortgage Loans................................. $ 8,650 $ 7,573
========================
Consumer and Other Loans....................... $ 7,865 $ 6,987
========================
Unused Lines of Credit......................... $45,044 $38,036
========================
</TABLE>
At June 30, 1996 and 1995, the Company had commitments to sell loans of
$1,734,000 and $224,000, respectively. At June 30, 1996, the Company had
commitments to purchase loans of $1,945,000. At June 30, 1995, there were no
commitments to purchase loans.
The principal balance of loans in arrears three months or more:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------
1996 1995
================================================
No. of No. of
loans Amounts loans Amounts
------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family Mortgages..................... 142 $11,538 30 $3,210
Consumer and Other Loans.......................... 77 702 84 461
Commercial Real Estate............................ 3 739 -- --
------------------------------------------------
222 $12,979 114 $3,671
================================================
</TABLE>
38
<PAGE>
Interest income that would have been recorded under the original terms of
loans classified as non-accrual and interest income actually recognized are as
follows:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1996 1995 1994
=========================
(In thousands)
<S> <C> <C> <C>
Interest Income that would have been Recorded..................................... $622 $175 $191
Interest Income Recognized........................................................ (68) (45) (69)
------------------------
Interest Income Foregone.......................................................... $554 $130 $122
=========================
</TABLE>
In accordance with SFAS No. 114, the Company deems certain loans impaired
when, based upon current information and events, it is probable that the Company
will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. SFAS No. 114 generally
does not apply to large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, such as one- to four-family mortgage
loans and consumer loans. Loans individually reviewed for impairment by the
Company are limited to multi-family loans, commercial loans, construction and
land loans, loans modified in a troubled debt restructuring and selected large
one- to four-family loans. Examples of measurement techniques utilized by the
Company include present value of expected future cash flows, the loan's market
price if one exists, and the estimated fair value of the collateral. In
addition, SFAS No. 114 amended SFAS No. 15 to limit the application of the
concept of an in-substance foreclosure to those situations where the creditor
has obtained physical possession of the loan collateral, regardless of whether
formal foreclosure proceedings have occurred.
At June 30, 1996, the Company had two commercial loans totalling $655,000
with no related allowance which were considered impaired. The Company's average
recorded investment in impaired loans for the year ended June 30, 1996 was
$493,000. The Company did not recognize any interest income on impaired loans
for the year ended June 30, 1996.
The Bank generally originates fixed rate loans with terms greater than 15
years for sale to FHLMC, FNMA or other secondary market investors. At June 30,
1996 and 1995, there were no fixed rate loans classified as held for sale.
Included in mortgage loans at June 30, 1996 and 1995 are $354,551,000 and
$144,616,000, respectively, of adjustable rate mortgage loans.
Proceeds from the sale of first mortgage loans were $5,860,000, $1,481,000
and $6,250,000 during the fiscal years ended June 30, 1996, 1995 and 1994. Gross
realized gains and losses resulting from sale of first mortgage loans were as
follows:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1996 1995 1994
=======================================
(In thousands)
<S> <C> <C> <C>
Gross Realized Gains............................................................ $ 34 $ 1 $ 50
Gross Realized Losses........................................................... (4) (1) (15)
---------------------------------------
$ 30 $ -- $ 35
=======================================
</TABLE>
The Bank services mortgage loans for investors which are not included in
the accompanying consolidated statements of condition. A summary of the
principal balance, custodial escrow, servicing income and number of loans
serviced for others by the Bank are as follows:
<TABLE>
<CAPTION>
At or for the year ended June 30,
---------------------------------------
1996 1995 1994
=======================================
(Dollars in thousands)
<S> <C> <C> <C>
Principal Balances.............................................................. $ 455,626 $ 32,367 $ 34,743
=======================================
Custodial Escrow................................................................ $ 6,980 $ 357 $ 375
=======================================
Servicing Income (Excludes PMSR Amortization)................................... $ 861 $ 120 $ 131
=======================================
Number of Loans................................................................. 7,497 333 352
=======================================
</TABLE>
39
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
Fees earned for servicing loans are reported as income when the related
mortgage payments are collected. PMSRs are amortized as a reduction to loan
service fee income on a method that approximates the level-yield basis over the
estimated remaining life of the underlying mortgage loans. PMSRs are carried at
fair value and impairment, if any, is recognized through a valuation allowance.
For the year ended June 30, 1996, no impairment existed in the PMSRs and as a
result, no valuation allowance was required.
PMSR activity is summarized as follows:
<TABLE>
<S> <C>
Balance at July 1, 1995................................................................................. $ --
PMSRs Acquired in Acquisitions of Bank of Westbury and Sunrise Bancorp, Inc............................. 4,145
Less Amortization....................................................................................... 240
--------
Balance at June 30, 1996................................................................................ $ 3,905
========
</TABLE>
8. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1996 1995 1994
===================================
(In thousands)
<S> <C> <C> <C>
Balance at Beginning of the Year................................................ $1,729 $1,417 $ 1,344
Provision for Loan Losses....................................................... 725 400 393
Allowances of Acquired Institutions............................................. 2,217 -- --
Charge-offs..................................................................... (265) (113) (394)
Recoveries...................................................................... 89 25 74
-----------------------------------
Balance at End of the Year...................................................... $4,495 $1,729 $ 1,417
===================================
</TABLE>
9. Real Estate Owned
<TABLE>
<CAPTION>
Real estate owned, net is summarized as follows:
June 30,
----------------------
1996 1995
======================
(In thousands)
<S> <C> <C>
One- to four-family Residences.................................................. $1,293 $ 841
Co-ops.......................................................................... 1,039 1,306
Allowance for Losses on Real Estate Owned....................................... (768) (589)
----------------------
$1,564 $ 1,558
======================
</TABLE>
Results of operating real estate owned for the years ended June 30, 1996,
1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1996 1995 1994
===============================
(In thousands)
<S> <C> <C> <C>
Net Gain on Sale on Real Estate Owned........................................... $ 19 $ 657 $ 34
Net Expenses of Holding Property................................................ (223) (212) (41)
Provision for Losses............................................................ (375) (60) (1,073)
-------------------------------
$ (579) $ 385 $(1,080)
===============================
</TABLE>
Activity in the allowance for losses in real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1996 1995 1994
===============================
(In thousands)
<S> <C> <C> <C>
Balance at Beginning of the Year................................................ $ 589 $ 632 $ 2,288
Provision for Losses............................................................ 375 60 1,073
Allowance of Acquired Institutions.............................................. 188 -- --
Charge-offs..................................................................... (384) (103) (2,740)
Recoveries...................................................................... -- -- 11
-------------------------------
Balance at End of the Year...................................................... $ 768 $ 589 $ 632
===============================
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
10. Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
June 30,
-----------------------
1996 1995
=======================
(In thousands)
<S> <C> <C>
Debt Securities.............................................................................. $ 657 $ 420
Mortgage-Backed Securities................................................................... 4,860 3,746
Loans Receivable, Net of Reserves for Uncollectible Interest of $1,030 and $243, respectively 5,795 2,502
-----------------------
Accrued Interest Receivable, Net............................................................. $11,312 $ 6,668
=======================
</TABLE>
11. Office Properties and Equipment
A summary of office properties and equipment is as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1996 1995
=======================
(In thousands)
<S> <C> <C>
Land...................................................................................... $ 4,094 $ 574
Buildings................................................................................. 8,495 2,445
Furniture, Fixtures and Equipment......................................................... 11,047 4,458
Leasehold Improvements.................................................................... 2,812 1,746
Capital Lease............................................................................. 1,470 1,470
-----------------------
Office Properties and Equipment, at Cost.................................................. 27,918 10,693
Less Accumulated Depreciation and Amortization............................................ 14,097 5,928
-----------------------
Office Properties and Equipment, Net.................................................... $13,821 $ 4,765
=======================
</TABLE>
In October 1989, the Bank sold a building used for a branch operation
located in Jamaica, New York for approximately $2.3 million, and subsequently
leased back a portion of the building to conduct the branch operation. The Bank
received approximately $2 million in cash from the transaction, after expenses
of the sale, which generated a gain of approximately $1.1 million. The gain has
been deferred and is being amortized over the twelve-year lease period. Deferred
gain on sale amounted to approximately $497,000, $590,000 and $683,000 at June
30, 1996, 1995 and 1994, respectively and is included in accrued expenses and
other liabilities. The leaseback is recorded as a capital lease in the amount of
$1,470,000 at June 30, 1996 and 1995 (refer to the above table) and the related
obligation under capital leases of $802,000 and $923,000 at June 30, 1996 and
1995 is reflected in accrued expenses and other liabilities. The projected
annual lease payments amount to $215,000 per year (including interest) and total
$1,148,000 through the duration of the lease.
Depreciation and amortization of office properties and equipment, included
in occupancy and equipment expense, was approximately, $995,000, $467,000 and
$387,000 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
12. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------
1996 1995
------------------------------------------- ---------------------------------------
Weighted Weighted
average average
rate Amount Percent rate Amount Percent
=========================================== =======================================
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW .................................... 2.17% $ 81,953 6% 1.90% $ 25,685 4%
Passbook ............................... 2.50 458,524 34 2.50 216,414 32
Money Market ........................... 2.64 109,953 8 2.50 81,282 12
Certificates of Deposit ................ 5.40 674,836 50 5.74 346,936 52
Non-Interest Bearing Demand Deposit .... -- 20,360 2 -- -- --
------------------------------------------------------------------------------------
$1,345,626 100% $670,317 100%
=========================================== =======================================
</TABLE>
41
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1996 1995
---------------------- ----------------------
Amount Percent Amount Percent
====================== ======================
(Dollars in thousands)
Contractual Maturity of Certificate of Deposit Accounts:
<S> <C> <C> <C> <C>
Under 12 months................................................................. $482,653 72% $284,342 82%
Over 12 months to 36 months..................................................... 130,406 19 55,342 16
Over 36 months.................................................................. 61,777 9 7,252 2
---------------------- ----------------------
$674,836 100% $346,936 100%
====================== ======================
</TABLE>
The aggregate amount of certificates of deposit accounts with a minimum
denomination of $100,000 was approximately $36,017,000 and $15,420,000 at June
30, 1996 and 1995, respectively. Interest expense on deposits is summarized as
follows:
<TABLE>
<CAPTION>
For the year ended June 30,
----------------------------------
1996 1995 1994
----------------------------------
(In thousands)
<S> <C> <C> <C>
NOW............................................................................. $ 1,161 $ 485 $ 488
Passbook........................................................................ 8,942 5,926 7,012
Money Market.................................................................... 2,515 2,283 2,666
Certificates of Deposit......................................................... 29,807 13,318 7,625
----------------------------------
$42,425 $22,012 $17,791
==================================
</TABLE>
13. Borrowed Funds
The Bank was obligated for borrowings as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
---------------------------------------------------------
Weighted Weighted
average average
rate Amount rate Amount
========================================================
(Dollars in thousands)
<S> <C> <C> <C> <C>
Advances from FHLB--NY ........................................ 5.98% $ 3,000 7.60% $ 40,000
Reverse Repurchase Agreements ................................. 5.41% 263,160 6.04% 57,035
-------- --------
$266,160 $ 97,035
======== ========
</TABLE>
Information concerning borrowings under reverse repurchase agreements is
summarized as follows:
<TABLE>
<CAPTION>
At or For the Year
Ended June 30,
---------------------------
1996 1995
===========================
(Dollars in thousands)
<S> <C> <C>
Average Balance during the Year..................................................................... $150,173 $10,103
Average Interest Rate during the Year............................................................... 5.58% 6.09%
Maximum Month-end Balance during the Year........................................................... $279,678 $57,035
Mortgage-Backed Securities Pledged as Collateral under Reverse Repurchase Agreements at Year End:
Carrying Value.................................................................................... $284,124 $59,600
Estimated Value................................................................................... $277,652 $59,524
</TABLE>
As a member of the Federal Home Loan Bank System (FHLB), the Bank borrows
from the FHLB on a secured basis. Borrowings at June 30, 1996 and 1995 were
secured by a blanket lien over all assets equal to 110% of borrowings.
14. Income Taxes
The Company files a consolidated Federal income tax return on a
calendar-year basis. For calendar years ended December 31, 1995 and 1994, the
Bank was allowed a special bad debt deduction based on the greater of the amount
calculated under the experience method or the percentage of taxable income
method. The statutory percentage under the latter method was 8% for 1995 and
1994. The percentage of taxable income method was allowable only if
42
<PAGE>
the Bank maintained at least 60% of its total assets in qualifying assets, as
defined. If qualifying assets fell below 60%, the Bank would have been required
to recapture its tax bad debt reserve into taxable income over a four-year
period. The Bank's qualifying assets as a percentage of total assets exceeded
the 60% limitation as of and during the fiscal years ended June 30, 1996, 1995
and 1994. The Bank used the percentage of taxable income method in its 1994 and
1995 tax return.
Under legislation enacted subsequent to June 30, 1996, the Bank will no
longer be able to use the percentage of taxable income method for federal tax
purposes, but will be permitted to deduct bad debts only as they occur and will
additionally be required to recapture (that is, take into taxable income) the
excess balance of its bad debt reserves as of December 31, 1995 over the balance
of such reserves as of December 31, 1987. However, such recapture requirements
would be suspended for each of two successive taxable years beginning January 1,
1996 in which the Bank originates a minimum amount of certain residential loans
based upon the average of the principal amounts of such loans made by the Bank
during its six taxable years preceding January 1, 1996. As a result of this
legislation, the Bank will incur additional federal tax liability, but with no
impact on the Bank's results of operations. The New York State tax law has been
amended to prevent a similar recapture of the Bank's bad debt reserve, and to
permit continued future use of the bad debt reserve methods, for purposes of
determining the Bank's New York State tax liability. No amendments to the New
York City law have been made; therefore, the Company cannot predict whether such
changes to New York City law will be adopted and, if so, in what form.
The Company files state and local tax returns on a calendar-year basis.
State and local taxes imposed on the Company consist of New York State franchise
tax, New York City Financial Corporation tax and Delaware franchise tax. The
Company's annual liability for New York State and New York City purposes is the
greater of a tax on income or an alternative tax based on a specified formula.
The Company's liability for Delaware franchise tax is based on the lesser of a
tax based on an authorized shares method or an assumed par value capital method;
however under either method, the Company's total tax will not exceed $150,000.
For the fiscal year ended June 30, 1996 and 1995, the Company's Delaware
franchise tax was based on the assumed par value capital method. The Company
provided for New York State and New York City taxes based on taxable income for
the years ended June 30, 1996, 1995 and 1994.
As discussed in Note 1, the Company adopted SFAS No. 109 as of January 1,
1993. The cumulative effect of this change in accounting for income taxes of
$1,200,000 is determined as of July 1, 1993 and is reported separately in the
consolidated statement of income for the fiscal year ended June 30, 1994. The
cumulative effect of the change in accounting represents the difference between
the net deferred tax asset at July 1, 1993 of $95,000 and the net deferred tax
liability recorded at June 30, 1993 of $1,105,000.
In connection with the acquisitions of the Bank of Westbury and Sunrise
Bancorp, Inc. a net deferred tax asset of $911,000 and a net deferred tax
liability of $2,285,000, respectively, were recognized for temporary differences
between the book basis and tax basis of assets and liabilities acquired.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1996 and June 30, 1995 are presented below:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
=======================
(In thousands)
<S> <C> <C>
Deferred Tax Assets:
Provisions for Losses on Loans and Real Estate Owned ................................. $ -- $ 426
Office Properties and Equipment, Primarily due to Depreciation and Amortization ...... -- 469
Unrealized Loss on Available-for-Sale Securities ..................................... 4,058 12
Deferred Fees ........................................................................ 264 --
Deposits ............................................................................. 795 --
Other ................................................................................ 600 19
----------------------
Total Deferred Tax Assets .......................................................... 5,717 926
----------------------
Deferred Tax Liabilities:
Provision for Losses on Loans and Real Estate Owned .................................. $ 326 $ --
Mortgage Loans ....................................................................... 950 --
Debt and Equity and Mortgage-Backed Securities ....................................... 218 --
Office Properties and Equipment ...................................................... 690 --
Purchased Mortgage Servicing Rights .................................................. 629 --
Unrealized Gain on Available-for-Sale Securities ..................................... -- 667
Deferred Fees ........................................................................ -- 234
Other ................................................................................ 261 221
----------------------
Total Deferred Tax Liabilities ..................................................... 3,074 1,122
----------------------
Net Deferred Tax Asset (Liability) ..................................................... $ 2,643 $ (196)
=======================
</TABLE>
43
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
The total income tax provision for the years ended June 30, 1996, 1995 and
1994 differs from the amount of tax provision that would result by applying the
statutory United States Federal income tax rate of 35% for fiscal 1996 and 34%
for fiscal 1995 and 1994 to income before income taxes and cumulative effect of
change in accounting principle for the following reasons:
<TABLE>
<CAPTION>
For the years ended June 30,
1996 1995 1994
=======================================================
Amount % Amount % Amount %
-------------------------------------------------------
Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax Provision Statutory Rate............................................ $7,584 35.0% $5,625 34.0% $4,431 34.0%
Tax Exempt Interest on Municipal Investments............................ (23) (0.01) (73) (0.4) (75) (0.5)
Amortization of Excess of Cost Over Fair Value of Net Assets Acquired... 675 3.1 -- -- -- --
State and Local Income Tax, Net of Federal Income Tax Benefit........... 1,684 7.8 1,114 6.7 1,179 9.0
Other, Net.............................................................. 26 0.1 176 1.1 3 --
-------------------------------------------------------
Income Tax Expense.................................................... $9,946 45.9% $6,842 41.4% $5,538 42.5%
=======================================================
</TABLE>
The components of the provision for income taxes for the years ended June
30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1996 1995 1994
================================
(In thousands)
Current:
<S> <C> <C> <C>
Federal.................................................................... $6,746 $4,708 $ 4,443
State and Local............................................................ 2,460 1,470 2,124
--------------------------------
9,206 6,178 6,567
--------------------------------
Deferred:
Federal.................................................................... 497 446 (691)
State and Local............................................................ 243 218 (338)
--------------------------------
740 664 (1,029)
--------------------------------
$9,946 $6,842 $ 5,538
================================
</TABLE>
15. Commitments
At June 30, 1996 the Company was obligated under a number of non-cancelable
operating leases on property used for banking purposes. Rental expense under
these leases for the fiscal years ended June 30, 1996, 1995 and 1994 is
approximately $819,000, $577,000 and $571,000, respectively. The projected
minimum annual rentals under the terms of these leases, exclusive of taxes and
other charges, are summarized as follows:
Amount
=============
(In thousands)
Year ended June 30:
1997.................................................... $1,031
1998.................................................... 925
1999.................................................... 801
2000.................................................... 693
2001.................................................... 582
Thereafter.............................................. 1,159
-------------
$5,191
=============
The Bank is a party to financial instruments with off-balance sheet risk in
order to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of the
purchaser to a third party. The Bank, in connection with its service
corporations, at June 30, 1996 and 1995, has outstanding balances on letters of
credits of $500,000 at each year end. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers (See Note 7).
44
<PAGE>
16. Retirement Plan
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated statements of condition at June 30:
<TABLE>
<CAPTION>
1996 1995
===================
(In thousands)
Actuarial Present Value of Benefits Obligations:
<S> <C> <C>
Vested Benefit Obligation..................................................... $6,933 $6,391
Accumulated Benefit Obligation................................................ 7,000 6,444
===================
Plan Assets at Fair Value....................................................... 8,435 7,899
Projected Benefit Obligation for Service Rendered to Date....................... 8,655 7,845
-------------------
Plan Assets (Less Than) in Excess of Projected Benefit Obligation............... (220) 54
Unrecognized Net Asset Value Being Amortized over 15 Years...................... (26) (32)
Unrecognized Prior Service Cost................................................. (66) (74)
Unrecognized Net Loss Due to Past Experience Different from Assumptions Made.... 710 617
-------------------
Prepaid Pension Cost............................................................ $ 398 $ 565
===================
</TABLE>
The components of net pension expense for the years ended June 30 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
============================
(In thousands)
<S> <C> <C> <C>
Service Cost-benefits Earned during the Year.................................... $ 330 $ 282 $ 270
Interest Cost on Projected Benefit Obligation................................... 553 502 468
Net Amortization and Deferral................................................... 64 9 (460)
Actual Return on Plan Assets.................................................... (778) (680) (198)
----------------------------
Net Pension Expense............................................................. $ 169 $ 113 $ 80
============================
<CAPTION>
1996 1995 1994
============================
<S> <C> <C> <C>
Assumptions Used:
Weighted Average Discount Rate.................................................... 7.0% 7.0% 7.0%
Rate of Increase in Compensation Levels........................................... 5.0% 5.0% 5.0%
Expected Long-term Rate of Return on Assets....................................... 9.0% 9.0% 9.0%
</TABLE>
17. Stock Benefit Plans
The following plans became effective upon the Conversion of the Bank from
mutual to stock form.
Stock Option Plan
The Company maintains the 1994 Incentive Stock Option Plan (the "Stock Option
Plan"). Under the Stock Option Plan, 824,895 stock options (which expire ten
years from the date of grant, March 31, 1994) have been granted to the executive
officers and officers of the Company and its affiliate, the Bank. Each option
entitles the holder to purchase one share of the Common stock at an exercise
price equal to $10.00 per share (the initial public offering price). Options
will be exercisable in whole or in part over 5 years. However, all options
become 100% exercisable in the event that the employee terminates his employment
due to death, disability, normal retirement, or in the event of a change in
control of the Bank or the Company. Simultaneous with the grant of these
options, the Personnel Committee of the Board of Directors granted "Limited
Rights" with respect to the shares covered by the options. Limited Rights
Franted are subject to terms and conditions and can be exercised only in the
event of a change in control of the Company. Upon exercise of a limited right,
the holder shall receive from the Company a cash payment equal to the difference
between the exercise price of the option ($10.00) and the fair market value of
the underlying shares of common stock. At June 30, 1996, 329,958 options granted
were exercisable but none were exercised.
Stock Option Plan for Outside Directors
The Company maintains the 1994 Stock Option Plan for Outside Directors (the
"Directors' Option Plan"). Each member of the Board of Directors who is not an
officer or employee of the Company or the Bank was granted a non-statutory
option to purchase shares of the Common Stock. In the aggregate, members of the
Board of Directors of the Company were granted options to purchase 196,650
shares of the Common Stock of the Company at an exercise price equal to $10.00
per share (the initial public offering price). All of the options granted under
the Directors' Option Plan become exercisable in three equal installments
commencing one year after the date of grant and expire upon the earlier of 10
years following the date of grant or one year following the date the optionee
ceases to be a
45
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
director. On June 19, 1996, 6,727 options were granted to a new director at an
exercise price of $15.25 per share. An additional 6,728 options have been
reserved for future grant. At June 30, 1996, 131,100 options granted were
exercisable but none were exercised.
Employees Stock Ownership Plan ("ESOP")
The Bank has established an Employee Stock Ownership Plan and Trust ("ESOP") for
eligible employees. Full-time employees employed with the Bank as of January 1,
1993, and full-time employees of the Company or the Bank employed after such
date who have been credited with at least 1,000 hours during a twelve-month
period and who have attained age 21 are eligible to participate.
The ESOP borrowed $8,280,000 from the Company and used the funds to
purchase 828,000 shares of Common Stock issued in the Conversion. The loan will
be repaid principally from the Bank's discretionary contributions to the ESOP
over a 10 year period. At June 30, 1996 and 1995, the loan had an outstanding
balance of $6,472,000 and $7,303,000, respectively, and an interest rate of
8.25% and 9.0%, respectively. Interest expense for the obligation was $588,000
and $655,000, respectively, for the years ended June 30, 1996 and 1995. Shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is paid. Contributions to the ESOP and shares
released from the loan collateral in an amount proportional to the repayment of
the ESOP loan will be allocated among participants on the basis of compensation,
as described in the plan, in the year of allocation. Benefits generally become
100% vested after five years of credited service. However, in the event of a
change in control, as defined in the plan, any unvested portion of benefits
shall vest immediately. Forfeitures will be reallocated among participating
employees, in the same proportion as contributions. Benefits are payable upon
death, retirement, disability, or separation from service based on vesting
status and share allocations made.
In fiscal 1994, the Company adopted Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 provides
guidance for accounting for all ESOPs and significantly changes the way
employers report transactions with leveraged ESOPs. SOP 93-6 requires that the
issuance or sales of treasury shares to the ESOP be reported when the issuance
or sale occurs, and that compensation expense be recognized for shares committed
to be released to directly compensate employees equal to the fair value of the
shares committed. In addition, SOP 93-6 requires that leveraged ESOP debt and
related interest expense be reflected in the employer's financial statements.
Prior practice was to recognize compensation expense based on the employer's
contributions to the ESOP. The adoption by the Bank and the application of SOP
93-6 will result in fluctuations in compensation expense as a result of changes
in the fair value of the Company's common stock; however, any such compensation
expense fluctuations will result in an offsetting adjustment to paid in capital.
Therefore, total capital will not be affected.
As of June 30, 1996, 165,600 shares were allocated to participants and
41,400 shares were committed to be released. As shares are released from
collateral, the shares become outstanding for earnings per share computations.
As of June 30, 1996 and 1995, the fair market value of the 621,000 and 703,800
unearned shares, respectively, was $9,703,000 and $10,029,150, respectively.
Recognition and Retention Plans and trusts ("RRPs")
The Bank maintains a Recognition and Retention Plan for Officers and a
Recognition and Retention Plan for Outside Directors (the "RRPs"). The purpose
of the RRPs is to provide executive officers, officers, and directors of the
Bank with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Bank. The RRPs acquired an aggregate
of 414,000 shares of the Company's common stock in the Conversion of which
410,895 shares have been awarded to Officers and Directors (327,715 at the time
of the Conversion and 83,180 thereafter). On June 19, 1996, 1,552 shares were
awarded to a new director. An additional 1,550 shares have been reserved for
future awards to directors. Such amounts represent deferred compensation and
have been accounted for as a reduction of stockholders' equity. Awards vest at a
rate of 20% per year for directors and officers, commencing one year from the
date of award. Awards become 100% vested upon termination of employment due to
death, disability, or following a change in control of the Bank or the Company.
The Company recorded compensation expenses for the ESOP and RRP of $2.0 million,
$1.9 million and $452,000, respectively, for the years ended June 30, 1996 and
1995 and for the period from the Conversion date to June 30, 1994.
18. Regulatory Matters
Federal regulations require institutions to have a minimum regulatory
tangible capital equal to 1.5% of total assets, a 3% core capital ratio and an
8% risk-based capital ratio. The OTS prompt corrective action standards
effectively establish a minimum 2% tangible capital ratio, a minimum 4% leverage
ratio (core) capital ratio and a minimum 4%
46
<PAGE>
Tier 1 risked based capital ratio. As of June 30, 1996 and 1995, the Bank was in
compliance with the regulatory capital requirements.
Additionally, under prompt corrective action regulations, the regulators
have adopted rules, which require them to take action against undercapitalized
institutions, based upon five categories of capitalization: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." The rules adopted generally provide that an
insured institution whose risk-based capital ratio is 10% or greater, Tier 1
risk-based capital is 6% or greater, and leverage ratio is 5% or greater is
considered a "well capitalized" institution. As of June 30, 1996, 1995 and 1994,
the Bank is considered a "well capitalized" institution.
Dividend payments to the Company from the Bank are subject to the
profitability of the Bank and by applicable laws and regulations. During fiscal
1996, 1995 and 1994, the Bank did not make any dividend payments to the Company.
The following table sets forth in terms of dollars and percentages the OTS
tangible, leverage and risk-based capital requirements, and the Bank's
historical amounts and percentages at June 30, 1996.
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
===========================================================================
<S> <C> <C> <C> <C> <C> <C>
Tangible.............................. $26,118 1.5% $ 97,470 5.6% $71,352 4.1%
Leverage.............................. 52,236 3.0 97,470 5.6 45,234 2.6
Risk-based............................ 55,478 8.0 101,911 14.70 46,433 6.7
</TABLE>
19. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
("SFAS No. 107"), requires disclosure of estimated fair value information for
the Company's financial instruments. Fair values are most commonly derived from
quoted market prices available in the formal trading marketplaces. In many
cases, the Company's financial instruments are not bought or sold in formal
trading marketplaces. Accordingly, in cases where quoted market prices are not
available, fair values are derived or estimated based on a variety of valuation
techniques. These techniques are sensitive to the various assumptions and
estimates used and the resulting fair value estimates may be materially affected
by minor variations in those assumption or estimates. In that regard, it is
likely that amounts different from the fair value estimates would be realized by
the Company in immediate settlement of the financial instruments.
SFAS No. 107 excludes certain financial instruments as well as all
nonfinancial instruments from fair value disclosure. Accordingly, the fair
values presented do not represent the Company's fair value as a going concern.
In addition, the differences between the carrying amounts and the fair values
presented may not be realized since the Company generally intends to hold these
financial instruments to maturity and realize their recorded value.
SFAS No. 107 provides minimal guidance and no limitations with regard to
assumptions and estimates to be used. Therefore, while disclosure of estimated
fair values is required, the fair value amounts presented in the financial
statements do not represent the underlying value of the Company, nor do they
provide any basis for comparison of the value of this Company with similar
companies. June 30,
<TABLE>
<CAPTION>
----------------------------------------------------------
1996 1995
==========================================================
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------------------
(In thousands)
On Balance Sheet:
<S> <C> <C> <C> <C>
Cash and Due from Banks ....................................... $ 22,420 $ 22,420 $ 14,237 $ 14,237
Money Market Investments ...................................... 10,450 10,450 2,700 2,700
Debt and Equity Securities Available-for-Sale ................. 13,271 13,271 23,880 23,880
Debt and Equity Securities Held-to-Maturity ................... 48,330 48,036 23,890 23,883
Mortgage-Backed Securities Available-for-Sale ................. 591,740 591,740 104,453 104,453
Mortgage-Backed Securities Held-to-Maturity ................... 184,492 184,995 413,762 415,820
Loans Receivable, Net ......................................... 817,746 814,988 332,080 338,153
Purchased Mortgage Servicing Rights ........................... 3,905 4,555 -- --
Deposits ...................................................... 1,345,626 1,342,419 670,317 671,499
Borrowed Funds ................................................ 266,160 265,867 97,035 97,409
Off Balance Sheet:
Outstanding Commitments ....................................... 61,559 61,559 52,596 52,596
Letters of Credit ............................................. 500 500 500 500
</TABLE>
47
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
Methods and assumptions used to produce fair value are stated below:
Cash and Due from Banks
The carrying amounts reported in the consolidated statements of condition
approximate the assets' fair values.
Money Market Investments
The carrying amounts of federal funds sold and repurchase agreements approximate
their fair values because these investments all mature in three months or less.
Debt, Equity and Mortgage-Backed Securities
Fair values for debt, equity and mortgage-backed securities are based on
published market or securities dealers' estimated prices.
Loans
Fair value estimates are calculated for pools of loans with similar
characteristics. The loans are first segregated by type, such as 1-4 family
residential, other residential, commercial, construction, and consumer, and then
further segregated into fixed and adjustable rate categories.
Fair value is estimated by discounting expected future cash flows. Expected
future cash flows are based on contractual cash flows, adjusted for prepayments.
Prepayment estimates are based on a variety of factors including the Bank's
experience with respect to each loan category, the effect of current economic
and lending conditions, and regional statistics for each loan category, if
available. The discount rates used are based on market rates for new loans of
similar type and purpose, adjusted, when necessary, for factors such as
servicing cost, credit risk, and term.
As mentioned previously, this technique of estimating fair value is extremely
sensitive to the assumptions and estimates used. While management has attempted
to use assumptions and estimates which are the most reflective of the loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than those determined in formal trading marketplaces. As such,
readers are again cautioned in using this information for purposes of evaluating
the financial condition and/or value of the Company in and of itself or in
comparison with any other company.
Purchased Mortgage Servicing Rights
The fair value is estimated based upon a third party valuation which stratifies
the mortgage servicing portfolio based upon the predominate risk characteristics
of the underlying cash flows utilizing current market assumptions regarding
discount rates, prepayment speeds, delinquency rates, etc.
Other Receivables and Payables
The carrying amounts of short-term receivables and payables, including accrued
interest approximate their fair values.
Deposits
SFAS No. 107 stipulates that the fair values of deposits with no stated
maturity, such as demand deposits, savings, NOW accounts and money market
accounts, are equal to the amount payable on demand. The relative insensitivity
of the majority of these deposits to interest rate changes creates a significant
inherent value which is not reflected in the fair value reported.
The fair value of certificates of deposit are based on discounted
contractual cash flows using rates which approximate the rates offered by the
Company for deposits of similar remaining maturities.
Other Borrowings
Fair value estimates are based on discounting contractual cash flows using rates
which approximate the rates offered for borrowings of similar remaining
maturities.
Outstanding Commitments
Fair value of commitments outstanding are estimated based on the fees that would
be charged for similar agreements, considering the remaining term of the
agreement, the rate offered and the creditworthiness of the parties.
48
<PAGE>
20. Parent-Only Financial Information
The following condensed statements of condition at June 30, 1996 and 1995
and condensed statements of income and cash flows for the years ended June 30,
1996 and 1995 and for the period March 31, 1994 (date of conversion) to June 30,
1994 for Reliance Bancorp, Inc. (parent company only) reflects the Company's
investment in its wholly-owned subsidiary, the Bank, using the equity method of
accounting. The Company had no results of operation prior to March 31, 1994.
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30,
---------------------------
1996 1995
===========================
(In thousands)
<S> <C> <C>
Assets
Cash ................................................................................ $ 361 $ 178
Money Market Investments ............................................................ 9,450 1,700
Debt Securities Available-for-Sale .................................................. -- 23,880
ESOP Loan Receivable ................................................................ 6,472 7,303
Other Assets ........................................................................ 909 836
Investment in Reliance Federal Savings Bank ......................................... 137,680 120,921
---------------------------
Total Assets ...................................................................... $154,872 $154,818
===========================
Liabilities and Stockholders' Equity
Accrued Expenses............................................................................. $ 1,253 $ 1,085
Stockholders' Equity......................................................................... 153,619 153,733
---------------------------
Total Liabilities and Stockholders' Equity................................................. $154,872 $154,818
===========================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Period
For the year For the year March 31,1994
Ended Ended (conversion date)
June 30, 1996 June 30, 1995 to June 30, 1994
======================================================
(In thousands)
<S> <C> <C> <C>
Interest Income--Securities and Repurchase Agreements ..................... $ 958 $ 1,804 $ 471
Interest Income--ESOP Loan Receivable ..................................... 588 655 146
------------------------------------------------------
Total Interest Income ................................................... 1,546 2,459 617
Other Operating Income .................................................... 3 -- --
Other Operating Expense ................................................... (551) (497) (73)
------------------------------------------------------
Income Before Income Taxes and Equity in Undistributed Earnings of the Bank 998 1,962 544
Provision for Income Taxes ................................................ (445) (810) (231)
------------------------------------------------------
Income before Equity in Undistributed Earnings of the Bank ................ 553 1,152 313
Equity in Undistributed Earnings of Reliance Federal Savings Bank ......... 11,170 8,550 1,826
------------------------------------------------------
Net Income .............................................................. $ 11,723 $ 9,702 $ 2,139
======================================================
</TABLE>
49
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
For the year For the year March 31,1994
Ended Ended (conversion date)
June 30, 1996 June 30, 1995 to June 30, 1994
====================================================
(In thousands)
<S> <C> <C> <C>
Cash from Operating Activities:
Net Income................................................................... $ 11,723 $ 9,702 $ 2,139
Equity in Undistributed Earnings of the Bank................................. (11,170) (8,550) (1,826)
Accretion of Discounts....................................................... (906) (229)
Net Gain on Sale of Securities............................................... (3) -- --
Increase in Other Assets..................................................... (73) (491) (332)
Increase (Decrease) in Accrued Expenses...................................... 52 (107) 258
----------------------------------------------------
Net Cash Provided by (Used in) Operating Activities........................ 529 (352) 10
----------------------------------------------------
Cash Flows from Investing Activities:
Purchase of Debt Securities Available-for-Sale............................... -- (19,654) (37,565)
Maturities of Debt Securities Available-for-Sale............................. -- 23,300 --
Proceeds from Sales of Debt Securities Available-for-Sale.................... 23,883 11,146 --
Principal Payments (Funding) of ESOP Loan Receivable......................... 831 977 (8,280)
Payments for Investments in Subsidiary....................................... (9,673) -- (51,788)
----------------------------------------------------
Net Cash Provided by (Used in) Investing Activities........................ 15,041 15,769 (97,633)
----------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from the Issuance of Common Stock................................... -- -- 103,575
Purchase of Treasury Stock................................................... (3,829) (13,040) (3,744)
Dividends Paid............................................................... (3,808) (2,707) --
----------------------------------------------------
Net Cash Provided by (Used in) Financing Activities........................ (7,637) (15,747 99,831
----------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents......................... 7,933 (330) 2,208
Cash and Cash Equivalents at Beginning of Period............................. 1,878 2,208 --
----------------------------------------------------
Cash and Cash Equivalents at the End of Period............................... $ 9,811 $ 1,878 $ 2,208
====================================================
</TABLE>
50
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
[LOGO] KPMG Peat Marwick LLP
Certified Public Accountants
One Jericho Plaza
Jericho, NY 11753
To the Board of Directors and Stockholders of
Reliance Bancorp, Inc.
We have audited the accompanying consolidated statements of condition of
Reliance Bancorp, Inc. and subsidiary as of June 30, 1996 and 1995 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended June 30, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Reliance
Bancorp, Inc. and subsidiary as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1(k) to the consolidated financial statements,
effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes). In
addition, as discussed in note 1(c) to the consolidated financial statements,
effective June 30, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115 (Accounting for Certain Investments in
Debt and Equity Securities).
/s/ KPMG Peat Marwick LLP
July 18, 1996
51
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Quarterly Financial Data
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
For the Fiscal 1996 Quarter Ended
--------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
(Dollars in thousands, except per share data)
==========================================================================
<S> <C> <C> <C> <C>
Interest Income......................................... $18,956 $21,132 $29,156 $31,128
Interest Expense........................................ 9,862 11,197 15,601 16,325
--------------------------------------------------------------------------
Net Interest Income..................................... 9,094 9,935 13,555 14,803
Provision for Loan Losses............................... 100 100 425 100
--------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses..... 8,994 9,835 13,130 14,703
Non-Interest Income..................................... 316 389 1,405 1,000
General and Administrative Expense...................... (5,097) (5,390) (7,286) (7,823)
Real Estate Operations, net............................. (48) (16) (366) (149)
Amortization of Excess of Cost Over Fair Value of
Net Assets Acquired................................... (86) (130) (856) (856)
--------------------------------------------------------------------------
Income Before Provision for Income Taxes................ 4,079 4,688 6,027 6,875
Income Tax Expense...................................... 1,719 2,048 2,904 3,275
--------------------------------------------------------------------------
Net Income.............................................. $ 2,360 $ 2,640 $ 3,123 $ 3,600
==========================================================================
Earnings Per Share...................................... $ 0.26 $ 0.30 $ 0.35 $ 0.40
==========================================================================
<CAPTION>
For the Fiscal 1995 Quarter Ended
--------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
==========================================================================
<S> <C> <C> <C> <C>
Interest Income......................................... $13,667 $14,404 $16,182 $17,007
Interest Expense........................................ 5,613 6,318 7,857 8,573
--------------------------------------------------------------------------
Net Interest Income..................................... 8,054 8,086 8,325 8,434
Provision for Loan Losses............................... 100 100 100 100
--------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses..... 7,954 7,986 8,225 8,334
Non-Interest Income..................................... 413 286 276 282
General and Administrative Expense...................... (4,372) (4,254) (4,463) (4,508)
Real Estate Operations, net............................. (114) (28) 556 (29)
--------------------------------------------------------------------------
Income Before Provision for Income Taxes................ 3,881 3,990 4,594 4,079
Income Tax Expense...................................... 1,703 1,604 1,871 1,664
--------------------------------------------------------------------------
Net Income.............................................. $ 2,178 $ 2,386 $ 2,723 $ 2,415
==========================================================================
Earnings Per Share...................................... $ 0.23 $ 0.25 $ 0.29 $ 0.26
==========================================================================
</TABLE>
52
<PAGE>
RELIANCE BANCORP, INC.
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Raymond L. Nielsen
Chairman of the Board and
former Chief Executive Officer
Raymond A. Nielsen
Chief Executive Officer
and President
Thomas G. Davis, Jr.
Retired--President and Director
Institutional Mortgage Investors
Management Corp.
Donald LaPasta
Retired--Chairman of the Board
and Chief Executive Officer
Reliance Federal Savings Bank
Douglas G. LaPasta
Principal of Stonehill
Management Consultants
Conrad J. Gunther, Jr.
Vice President
Allied Coverage Corp.
Peter F. Neumann
President
Bradley & Parker
Flynn-Neumann Agency, Inc.
J. William Newby
Owner/President
Beacon Mortgage Company
EXECUTIVE OFFICERS
Raymond A. Nielsen
Chief Executive Officer
and President
Joseph F. Lavelle
Senior Vice President
Retail Banking Division
Gerald M. Sauvigne
Executive Vice President and
Treasurer
Paul D. Hagan
Vice President
Chief Financial Officer
Robert F. Pelosi
Senior Vice President and
Corporate Secretary
John F. Traxler
Vice President
Investment Officer
RELIANCE FEDERAL SAVINGS BANK*
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
*Executive officers of Reliance bancorp, Inc.
also serve as executive officers
of Reliance Federal Savings Bank
VICE PRESIDENTS
John C. Correll
Home Mortgage
Frank A. Dreiss, Jr.
Data Processing
John J. Hogan
Marketing
James F. Kramer
Controller
William J. McKenna
Loan Servicing
Jeannette Sabatelli
Consumer Credit
Frances Secondo
Internal Audit
Kevin J. Talty
Mortgage Originations
ASSISTANT VICE PRESIDENTS
John Brackx
Dorothy J. Brown
Joseph C. Byrne
Christine Gerber
Diane M. Holland
Steven F. Leibow
John Martingale
Vincent Martucci
Francis J. McHale, Jr.
Stephen Plezia
Ronald Session
<PAGE>
QUEENS
Auburndale
32-02 Francis Lewis Boulevard
Flushing, New York 11358
Mary Wright
AVP--Branch Manager
Hillcrest
69-09 164th Street
Flushing, New York 11365
Carol Murray
AVP--Branch Manager
Hollis
204-12 Hillside Avenue
Hollis, New York 11423
Pat Klos
AVP--Branch Manager
Jamaica
162-04 Jamaica Avenue
Jamaica, NY 11432
Ruby Griffin
AVP--Branch Manager
Queens Village
216-26 Jamaica Avenue
Queens Village, New York 11428
Lucille Rocco
AVP--Branch Manager
Whitestone
19-01 Utopia Parkway
Whitestone, New York 11357
Ligia Delgado
Branch Manager
Winchester
233-15 Hillside Avenue
Queens Village, New York 11427
Margaret Modesti
AVP--Branch Manager
NASSAU
Albertson
983 Willis Avenue
Albertson, New York 11507
Hope Scorcia
AVP--Branch Manager
Bethpage
570 Stewart Avenue
Bethpage, New York 11714
Joanne Alexander
AVP--Branch Manager
Carle Place
215 Glen Cove Road
Carle Place, New York 11514
Farmingdale
312 Conklin Street
Farmingdale, New York 11735
Sidney Johnsen
Branch Manager
South Farmingdale
195 Merritt Road
So. Farmingdale, New York 11735
Rosemary Demeo
AVP--Branch Manager
Franklin Square
172 New Hyde Park Road
Franklin Square, New York 11010
Janet Heck
Branch Manager
Hicksville
405 Jerusalem Avenue
Hicksville, New York 11801
Jacqueline Harrison
Branch Manager
North Bellmore
2843 Jerusalem Avenue
North Bellmore, New York 11710
Maureen Milo
Branch Manager
Roosevelt Field
300 Garden City Plaza
Garden City, New York 11530
Jean Hahn
Branch Manager
Salisbury
2530 Stewart Avenue
Westbury, New York 11590
Ann Marie Richartz
Branch Manager
Westbury
341 Post Avenue
Westbury, New York 11590
Thomas Rose
AVP--Branch Manager
Williston Park
422 Hillside Avenue
Williston Park, New York 11596
Dennis Holzbaur
AVP--Branch Manager
SUFFOLK
Deer Park
2087 Deer Park Avenue
Deer Park, New York 11729
Emil Savoia
AVP--Branch Manager
Kings Park
742 Route 25A
Kings Park, New York 11754
Rosemarie DiPiano
Branch Manager
Lindenhurst
300 S. Wellwood Avenue
Lindenhurst, New York 11757
Richard Griesche
Branch Manager
Nesconset
250 Smithtown Boulevard
Nesconset, New York 11767
Catherine Maidhof
Branch Manager
North Babylon
1134 Deer Park Avenue
North Babylon, New York 11703
Anthony Ferrante
Branch Manager
North Brentwood
340 Washington Avenue
North Brentwood, New York 11717
Richard Morrison
Branch Manager
Plainview
1074 Old Country Road
Plainview, New York 11803
Sandra McGrath
Branch Manager
St. James
245 Lake Avenue
St. James, New York 11780
Doreen Midili
Branch Manager
West Islip
434 Union Boulevard
West Islip, New York 11795
Lisa Guariglia
Branch Manager
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 22,420
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 605,011
<INVESTMENTS-CARRYING> 232,822
<INVESTMENTS-MARKET> 233,031
<LOANS> 822,241
<ALLOWANCE> 4,495
<TOTAL-ASSETS> 1,782,550
<DEPOSITS> 1,345,626
<SHORT-TERM> 266,160
<LIABILITIES-OTHER> 17,145
<LONG-TERM> 0
104,149
0
<COMMON> 0
<OTHER-SE> 49,470
<TOTAL-LIABILITIES-AND-EQUITY> 1,782,550
<INTEREST-LOAN> 50,015
<INTEREST-INVEST> 49,366
<INTEREST-OTHER> 991
<INTEREST-TOTAL> 100,372
<INTEREST-DEPOSIT> 42,425
<INTEREST-EXPENSE> 52,985
<INTEREST-INCOME-NET> 47,387
<LOAN-LOSSES> 725
<SECURITIES-GAINS> 678
<EXPENSE-OTHER> 28,103
<INCOME-PRETAX> 21,669
<INCOME-PRE-EXTRAORDINARY> 21,669
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,723
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
<YIELD-ACTUAL> 7.45
<LOANS-NON> 12,629
<LOANS-PAST> 350
<LOANS-TROUBLED> 382
<LOANS-PROBLEM> 2,200
<ALLOWANCE-OPEN> 1,729
<CHARGE-OFFS> 265
<RECOVERIES> 89
<ALLOWANCE-CLOSE> 4,495
<ALLOWANCE-DOMESTIC> 4,495
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,498
</TABLE>
