UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Exchange Act")
For the quarterly period ended December 31, 1996
Commission File Number: 0-23126
RELIANCE BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3187176
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
585 Stewart Avenue, Garden City, New York 11530
-----------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 222-9300
-------------
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 for the
past 90 days. Yes [ X ] No [ ]
As of February 3, 1997, there were 8,824,739 shares of common stock, $.01 par
value, outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - Unaudited
Consolidated Statements of Condition at December 31, 1996 and
June 30, 1996 (Unaudited)
Consolidated Statements of Income for the Three Months and Six Months
Ended December 31, 1996 and 1995 (Unaudited)
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1996 and 1995 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
1
<PAGE>
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
---- ----
Assets
<S> <C> <C>
Cash and due from banks......................................................... $ 21,234 $ 22,420
Money market investments........................................................ 2,300 10,450
Debt and equity securities available-for-sale................................... 24,063 13,271
Debt and equity securities held-to-maturity (estimated market value of
$46,464 and $48,036, respectively) .......................................... 46,009 48,330
Mortgage-backed securities available-for-sale................................... 687,860 591,740
Mortgage-backed securities held-to-maturity (estimated market value of
$175,829 and $184,995, respectively)......................................... 172,295 184,492
Loans receivable:
Mortgage loans............................................................. 708,804 690,967
Consumer and other loans................................................... 135,741 131,274
Less allowance for loan losses........................................... (4,766) (4,495)
--------- ---------
Loans receivable, net.............................................. 839,779 817,746
Accrued interest receivable, net................................................ 11,753 11,312
Office properties and equipment, net............................................ 14,149 13,821
Prepaid expenses and other assets............................................... 6,982 14,070
Mortgage servicing rights....................................................... 3,501 3,905
Excess of cost over fair value of net assets acquired........................... 47,155 49,429
Real estate owned, net.......................................................... 1,104 1,564
-------- --------
Total assets....................................................... $1,878,184 $1,782,550
========= =========
Liabilities and Stockholders' Equity
Deposits........................................................................ $1,371,710 $1,345,626
FHLB advances................................................................... 23,000 3,000
Securities sold under agreements to repurchase.................................. 290,547 263,160
Advance payments by borrowers for taxes and insurance........................... 7,695 8,846
Accrued expenses and other liabilities.......................................... 29,772 8,299
-------- --------
Total liabilities.................................................. 1,722,724 1,628,931
--------- ---------
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; 8,824,739 and 9,128,739
outstanding at December 31, 1996 and June 30, 1996, respectively............ 108 108
Additional paid-in capital...................................................... 104,382 104,041
Retained earnings, substantially restricted..................................... 84,141 83,966
Unrealized appreciation (depreciation) on securities
available for sale, net of taxes............................................. 587 (5,281)
Less:
Unallocated common stock held by ESOP........................................... (5,796) (6,210)
Unearned common stock held by RRP............................................... (1,980) (2,392)
Treasury stock, at cost (1,926,081 and 1,622,081 shares
at December 31, 1996 and June 30, 1996, respectively)......................... (25,982) (20,613)
--------- ---------
Total stockholders' equity................................................. 155,460 153,619
-------- --------
Total liabilities and stockholders' equity.......................... $1,878,184 $1,782,550
========= =========
</TABLE>
2
<PAGE>
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(In thousands,except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
First mortgage loans....................................... $ 14,085 $ 6,780 $ 27,836 $ 12,326
Consumer and other loans................................... 2,861 2,606 5,717 5,215
Mortgage-backed securities................................. 14,856 11,043 28,979 20,986
Money market investments................................... 223 276 348 452
Debt and equity securities................................. 1,164 427 2,269 1,109
------- -------- ------- -------
Total interest income................................... 33,189 21,132 65,149 40,088
------- ------- ------- -------
Interest expense:
Deposits................................................... 13,372 8,894 26,451 16,857
Borrowed funds............................................. 4,429 2,303 8,364 4,202
------- ------- ------- -------
Total interest expense.................................. 17,801 11,197 34,815 21,059
------- ------- ------- -------
Net interest income before provision
for loan losses ..................................... 15,388 9,935 30,334 19,029
Provision for loan losses.................................. 250 100 350 200
-------- -------- -------- --------
Net interest income after provision for loan losses..... 15,138 9,835 29,984 18,829
------- ------- ------- -------
Non-interest income:
Loan fees and service charges.............................. 200 138 408 209
Other operating income..................................... 700 251 1,194 494
Net gain on securities..................................... 122 -- 106 2
------- ------- ------- -------
Total non-interest income............................... 1,022 389 1,708 705
------- ------- ------- -------
Non-interest expense:
Compensation and benefits.................................. 4,162 2,900 8,259 5,579
Occupancy and equipment.................................... 1,347 842 2,771 1,701
Federal deposit insurance premiums......................... 599 470 1,371 898
Advertising................................................ 279 242 617 508
Other operating expense.................................... 1,443 936 2,809 1,801
------- -------- ------- -------
Total general and administrative expenses............... 7,830 5,390 15,827 10,487
Real estate operations, net................................ 117 16 221 64
Amortization of excess of cost over fair value
of net assets acquired.................................. 856 130 1,712 216
SAIF recapitalization charge............................... -- -- 8,250 --
------- -------- ------- -------
Total non-interest expense................................. 8,803 5,536 26,010 10,767
------- ------- ------- -------
Income before income taxes ................................... 7,357 4,688 5,682 8,767
Income tax expense ........................................... 3,478 2,048 3,207 3,767
------- ------- ------ -------
Net income.................................................... $ 3,879 $ 2,640 $ 2,475 $ 5,000
====== ====== ====== ======
Net income per common share .................................. $ 0.44 $ 0.30 $ 0.27 $ 0.56
====== ====== ====== ======
</TABLE>
3
<PAGE>
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Net income........................................................................... $2,475 $ 5,000
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses............................................................ 350 200
Provision for losses on real estate owned............................................ 150 --
(Accretion of discounts) amortization of premiums, net............................... 431 (282)
Amortization relating to allocation and earned portion of stock plans................ 1,152 999
Amortization of excess of cost over fair value of net assets acquired................ 1,712 216
Amortization of mortgage servicing rights............................................ 404 --
Acquisition related tax benefits not previously recognized........................... 562 --
Depreciation and amortization........................................................ 683 362
Net gain on securities............................................................... (106) (2)
Net gain on loans sold............................................................. (16) (8)
Net gain on sale of real estate owned................................................ (47) (24)
Increase in accrued interest receivable.............................................. (441) (529)
(Increase) decrease in prepaid expense and other assets.............................. 3,166 (657)
Increase in accrued expenses and other liabilities................................... 20,836 3,978
------- ------
Net cash provided by operating activities........................................ 31,311 9,253
------- ------
Cash flows from investing activities:
Originated and purchased loans, net of principal repayments on loans ................ (27,786) (31,377)
Purchases of mortgage-backed securities available-for-sale........................... (172,522) (155,729)
Proceeds from sales of mortgage-backed securities available-for-sale................. 45,193 --
Principal repayments from mortgage-backed securities................................. 53,341 66,074
Purchases of debt securities available-for-sale...................................... (15,000) --
Proceeds from call of securities..................................................... 2,313 1,300
Proceeds from sales of debt securities available-for-sale............................ 3,028 1,977
Proceeds from maturities of debt securities.......................................... 1,350 23,700
Purchases of premises and equipment.................................................. (1,036) (980)
Proceeds from loans sold............................................................. 4,607 1,356
Proceeds from sales of real estate owned............................................. 836 771
Cash paid for Bank of Westbury net of cash and cash equivalents acquired............. -- (165)
--------- -------
Net cash used in investing activities............................................ (105,676) (93,073)
--------- -------
Cash flows from financing activities:
Increase in deposits................................................................. 26,406 35,520
Decrease in advance payments by borrowers for taxes and insurance.................... (1,151) (576)
Proceeds from FHLB advances.......................................................... 40,000 --
Repayment of FHLB advances......................................................... (20,000) --
Proceeds from reverse repurchase agreements.......................................... 524,146 295,386
Repayment of reverse repurchase agreements........................................... (496,759) (230,094)
Purchases of treasury stock.......................................................... (5,908) (2,341)
Net proceeds from issuance of common stock and exercise of stock options............. 410 --
Dividends paid....................................................................... (2,115) (1,965)
--------- --------
Net cash provided by financing activities......................................... 65,029 95,930
-------- -------
Net increase (decrease) in cash and cash equivalents................................. (9,336) 12,110
Cash and cash equivalents at beginning of year....................................... 32,870 16,937
-------- -------
Cash and cash equivalents at end of year............................................. $ 23,534 $ 29,047
======= =======
</TABLE>
4
<PAGE>
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the six months ended for:
Interest............................................................................. $ 34,110 $ 20,469
======= =======
Income taxes......................................................................... $ 3,420 $ 2,303
======= =======
Non-cash investing activities:
Transfers from loans to real estate owned............................................ $ 480 $ 487
======= =======
Transfer of mortgage-backed securities
from held-to-maturity to available-for-sale......................................... $ -- $ 283,245
======= =======
</TABLE>
See accompanying notes to unaudited consolidated
financial statements.
5
<PAGE>
RELIANCE BANCORP, INC. and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Reliance Bancorp, Inc. (the "Company"), its direct
wholly-owned subsidiary Reliance Federal Savings Bank (the "Bank"), and
the subsidiaries of the Bank.
The unaudited consolidated financial statements included herein reflect
all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the three
months and six months ended December 31, 1996 are not necessarily
indicative of the results of operations that may be expected for the
entire fiscal year. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in
conjunction with audited consolidated financial statements and notes
thereto, included in the Company's 1996 Annual Report on Form 10-K.
2. EARNINGS PER SHARE
Earnings per common and common equivalent shares are calculated by
dividing net income by the weighted average number of shares of common
stock outstanding and common stock equivalents, when dilutive. Stock
options are regarded as common stock equivalents and are therefore
considered in both earnings per share calculations if dilutive. Common
stock equivalents are computed using the treasury stock method.
6
<PAGE>
ITEM 2. 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 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. As of December 31, 1996, the Company had 8,824,739
shares outstanding, all of which were common shares.
The Company is headquartered in Garden City, New York and its primary business
currently consists of the operations of its wholly owned subsidiary, 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. The Company has also expanded its operations with the
acquisition of two financial institutions. On January 11, 1996, the Company
completed its acquisition of Sunrise Bancorp, Inc. On August 11, 1995, the
Company completed the acquisition of Bank of Westbury.
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 and
consumer loans, multi-family 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 Company's results of operations are dependent primarily 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 Company'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 expenses, and
income tax expense. General and administrative expense consists primarily of
compensation and benefits, occupancy, federal deposit insurance premiums,
advertising and other general and administrative expenses. Other non-interest
expense consists of real estate operations, net, amortization of excess of cost
over fair value of net assets acquired and the SAIF recapitalization charge. The
earnings of the Company may also significantly be affected by general economic
and competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
Acquisitions
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
7
<PAGE>
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.
A summary of the net assets acquired (at their 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
========
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 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.
8
<PAGE>
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 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
======
Financial Condition
As of December 31, 1996, total assets were $1.9 billion, deposits were $1.4
billion and total stockholders' equity was $155.5 million. Total assets
increased $95.6 million, or 5.4%, from $1.8 billion at June 30, 1996 to $1.9
billion at December 31, 1996. Mortgage-backed securities increased $83.9
million, or 10.8%, from $776.2 million at June 30, 1996 to $860.1 million at
December 31, 1996 with the increase primarily due to increased purchases of
adjustable-rate and longer term fixed-rate mortgage-backed securities and
private label collateralized mortgage obligations offset by amortization and
prepayments. Mortgage loans increased $17.8 million, or 2.6%, from $691.0
million at June 30, 1996 to $708.8 million at December 31, 1996. The increase in
mortgage loans is primarily due to increased multi-family loan originations
offset by amortizations. For the six months ended December 31, 1996, the Bank
originated $40.9 million of multi-family loans. Excess of cost over fair value
of net assets acquired decreased $2.3 million, or 4.6%, during the six months
ended December 31, 1996 primarily due to $1.7 million of amortization and
approximately $562,000 of acquisition related tax benefits currently realized
and not previously recognized.
Funding for the purchases of mortgage-backed securities and loans was through a
combination of new deposit growth, borrowings and cash flows. Deposits increased
$26.1 million, or 1.9%, during the six months ended December 31, 1996 as a
result of growth in new certificate of deposit products. Borrowings increased
from $266.2 million at June 30, 1996 to $313.6 million at December 31, 1996, an
increase of
9
<PAGE>
$47.4 million, or 17.8%. The Bank continues to use borrowings to leverage its
capital and fund asset growth.
Total stockholders equity increased $1.9 million, or 1.2%, from $153.6 million
at June 30, 1996 to $155.5 million at December 31, 1996. The slight increase in
stockholders' equity is primarily due to unrealized appreciation on securities
available-for-sale, net of taxes offset by purchases of treasury stock. During
the six months ended December 31, 1996, the equity adjustment on securities
available-for-sale increased from a negative $5.3 million at June 30, 1996 to a
positive equity adjustment of $587,000 at December 31, 1996. The positive equity
adjustment was due to favorable interest rate changes during the six months
ended December 31, 1996 which increased the market value of debt and equity and
mortgage-backed securities classified as available-for-sale. This increase was
offset by a $5.4 million increase in treasury stock due to $5.9 million of stock
repurchased during the six months ended December 31, 1996 offset by the
reissuance of treasury stock for the exercise of stock options.
Non-performing assets
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more on which the Bank is accruing interest at the dates
indicated and real estate owned. It is the Bank's policy to classify any loans,
or any portion thereof, 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.
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Non-accrual mortgage loans delinquent more than 90 days.................... $ 14,387 $ 12,277
Non-accrual other loans delinquent more than 90 days....................... 275 352
------- ------
Total non-accrual loans................................................ 14,662 12,629
Loans 90 days or more delinquent and still accruing........................ 507 350
------- ------
Total non-performing loans................................................. 15,169 12,979
Total foreclosed real estate, net of related allowance for losses.......... 1,104 1,564
------ ------
Total non-performing assets................................................ $ 16,273 $ 14,543
======= =======
Non-performing loans to total loans........................................ 1.80% 1.58%
Non-performing assets to total assets...................................... 0.87% 0.82%
Allowance for loan losses to non-performing loans.......................... 31.42% 34.63%
Allowance for loan losses to total loans................................... 0.56% 0.55%
</TABLE>
Non-performing loans totalled $15.2 million, or 1.80% of total loans at December
31, 1996, an increase of $2.2 million, or 16.9%, from $13.0 million, or 1.58% of
total loans at June 30, 1996. Non-performing loans at December 31, 1996 were
comprised of $12.5 million of loans secured by one- to four-family residences,
$507,000 of guaranteed student loans and $2.1 million of commercial real estate
loans. Of the $2.2 million increase in non-performing loans, $1.2 million
relates to one borrower with two commercial real estate loans which went on
non-accrual status during the six months ended December 31, 1996. At December
31, 1996, these two loans totalled $1.2 million and were secured by a boat
marina in Lindenhurst, NY. The loans were originated in September 1994 in the
form of a $687,500 first
10
<PAGE>
mortgage on the property and a $550,000 second mortgage building loan. As of
December 31, 1996, the borrower remains more than 90 days delinquent on the
first and second mortgage loans. The Bank had commenced foreclosure proceedings
and a receiver was appointed. Subsequently, the borrower declared bankruptcy and
a bankruptcy trustee was appointed by the court and is presently operating the
property. The Bank is presently monitoring such loan and has sufficient reserves
necessary to cover any losses.
Potential Problem Loans
At December 31, 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 a $500,000
second mortgage building loan. As of December 31, 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 December 31, 1996, the borrower was 30 days
delinquent on the first and second mortgage loans. Because of the borrower's
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 although there
is no assurance that this can be accomplished.
During the six months ended December 31, 1996, the Company's loan loss provision
was $350,000 as compared to $200,000 in the prior year period. The Company
established additional loan loss reserves after analyzing non-performing loans
as well as the need to increase general valuation allowances on commercial real
estate and multi-family loans due in part to increase emphasis on origination of
multi-family loans. The Company's allowance for loan losses totalled $4.8
million at December 31, 1996 which represents a ratio of allowance for loan
losses to non-performing loans and to total loans of 31.42% and 0.56%,
respectively, as compared to 34.63% and 0.55%, respectively at June 30, 1996.
The decrease in the ratio of the allowance to non-performing loans is primarily
the result of the aforementioned commercial loans which went non-performing
during the six months ended December 31, 1996. As a result of the increase in
non-performing loans, the non-performing assets to total assets ratio increased
to 0.87% at December 31, 1996 from 0.82% at June 30, 1996. Management believes
the allowance for loan losses at December 31, 1996 is adequate and sufficient
reserves are presently maintained to cover losses on any non-performing loans.
For the six months ended December 31, 1996, the Company had net charge-offs of
$79,000. For the quarter ended December 31, 1996, the Company experienced net
recoveries of $12,000.
Impact of Legislation
Recapitalization of SAIF Fund. Legislation was signed into law during the
quarter ended September 30, 1996 to mitigate the effect of the Bank Insurance
Fund ("BIF") and Savings Association Insurance Fund ("SAIF") premium disparity.
Under the legislation a special assessment was imposed on the amount of deposits
held by SAIF-member institutions, including the Bank, as of a specified date,
March 31, 1995, to recapitalize the SAIF. The special assessment was paid on
November 27, 1996. The amount of the special assessment determined by the FDIC
was 65.7 basis points of insured deposits. As a result of enactment of this
legislation on September 30, 1996, the Bank recorded a one-time non-recurring
charge of $8.25 million prior to recognition of a tax benefit. As a result of
recognition of such charge, the Company recorded a net loss for the quarter
ended September 30, 1996 which resulted in a reduction of retained earnings. The
payment of the special assessment had the effect of immediately reducing the
capital of SAIF-member institutions, net of any tax effect; however, the Bank
remains in compliance with its regulatory capital requirements. This legislation
also spreads the obligation for payment of the Financing
11
<PAGE>
Corporation ("FICO") bonds across all SAIF and BIF members. As of January 1,
1997, BIF deposits are being assessed for FICO payments at a rate of 20% of the
rate assessed on SAIF deposits. Based on current estimates by the FDIC, BIF
deposits will be assessed a FICO payment of 1.3 basis points, while SAIF
deposits will pay an estimated 6.5 basis points on the FICO bonds. Full pro rata
sharing of the FICO payments will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. This legislation specifies that the BIF and
SAIF will be merged on January 1, 1999 provided no savings associations remain
as of that time.
As a result of this legislation, the FDIC recently lowered SAIF assessments to 0
to 27 basis points effective January 1, 1997, a range comparable to that of BIF
members. However, SAIF members will continue to make the higher FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
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. 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.
12
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Asset/Liability Management
One of the Bank's primary long-term financial objectives has been and will
continue to be to reduce the sensitivity of its earnings to interest rate
fluctuations by maintaining a matching of the maturities and interest rate
repricing characteristics of its assets and liabilities. In an effort to realize
this objective, the Bank emphasizes the origination of adjustable-rate mortgage
and consumer loans and the purchases of adjustable-rate and shorter-term
mortgage-backed securities. However, there can be no assurances that the Bank
will be able to acquire mortgage-backed securities with terms and
characteristics which conform with the Bank's investment criteria and interest
rate risk policies, such as mortgage-backed securities backed by ARMs or loans
with shorter terms.
At December 31, 1996, $871.5 million, or 49.2%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $708.8 million, of which $368.2 million, or
52.0%, were adjustable-rate loans and $340.6 million, or 48.0%, were fixed-rate
loans. In addition, at December 31, 1996, the Bank's consumer loan portfolio
totalled $135.7 million, of which $106.8 million, or 78.7%, were adjustable-rate
home-equity lines of credit and guaranteed student loans and $28.9 million, or
21.3%, were fixed-rate home-equity and other consumer loans. The Bank continues
to invest in adjustable-rate mortgage-backed securities to reduce credit risk as
well as minimize exposure to volatile interest rates. The Bank also continues to
purchase 30 year fixed rate mortgage-backed securities in order to provide a
hedge against prepayment risk in its adjustable rate mortgage-backed securities
portfolio. During the six months ended December 31, 1996, the Bank purchased
approximately $53.5 million and $74.6 million of 30 year fixed rate and 1 year
adjustable rate mortgage-backed securities classified as available-for-sale,
respectively. In addition, the Bank has recently purchased private label
collateralized mortgage obligations classified as available-for-sale to increase
the incremental yield on its mortgage-backed securities portfolio as well as
moderate risks associated with conventional mortgage-backed securities resulting
from unexpected prepayment activity. During the six months ended December 31,
1996, the Bank purchased $44.4 million of private label collateralized mortgage
obligations classified as available-for-sale. Management believes that these
securities may represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment, and interest rate options
available. At December 31, 1996, the mortgage-backed securities held-to-maturity
portfolio totalled $172.3 million, of which $113.1 million, or 65.7%, of the
mortgage-backed portfolio was adjustable-rate securities and $59.2 million, or
34.3%, was fixed-rate securities. The mortgage-backed securities portfolio
classified as available-for-sale totalled $687.9 million of which $283.3
million, or 41.2%, were adjustable rate securities and $404.6 million, or 58.8%,
were fixed-rate securities. The Bank has funded the purchase of these securities
through a combination of internal deposit growth and borrowings, primarily
reverse repurchase agreements.
At December 31, 1996, the Bank's estimated one year interest sensitivity "gap"
(the difference between interest-earning assets and interest-bearing liabilities
that reprice or mature within such period expressed as a percentage of total
assets) declined to a negative gap of $18.6 million , or (0.99)% of total assets
at December 31, 1996 as compared to a positive gap of $49.3 million, or 2.78% of
total assets at June 30, 1996 and $65.5 million, or 5.6%, at December 31, 1995.
The prepayment rates for mortgage loans, mortgage-backed securities and consumer
loans are based upon the Bank's historical performance.
The Bank's exposure to the risks of changing interest rates may be analyzed, in
part, by examining the extent to which its assets and liabilities are "interest
rate sensitive" and by monitoring the Bank's interest rate sensitivity "gap". An
asset or liability is said to be interest rate sensitive within a specific time
period
13
<PAGE>
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest-earning
assets maturing or repricing exceeds the amount of interest-bearing liabilities
maturing or repricing within the same period. A gap is considered negative when
the amount of interest-bearing liabilities maturing or repricing exceed the
amount of interest-bearing assets maturing or repricing within the same period.
Accordingly, a positive gap may enhance net interest income in a rising rate
environment and reduce net interest income in falling rate environment.
Conversely, a negative gap may enhance net interest income in a falling rate
environment and reduce net interest income in a rising rate environment.
Comparison of Operating Results for the Three Months Ended December 31, 1996 and
1995.
General. The Company reported net income of $3.9 million for the three months
ended December 31, 1996 compared to $2.6 million for the three months ended
December 31, 1995, an increase of $1.3 million or 46.9%. This represents an
annualized return on average assets of 0.83% and 0.91%, respectively, and a
return on average tangible equity of 14.75% and 7.26%, respectively, for the
three months ended December 31, 1996 and 1995.
Interest Income. Interest income increased $12.1 million, or 57.1%, from $21.1
million for the three months ended December 31, 1995, to $33.2 million for the
three months ended December 31, 1996. The increase resulted from an increase of
$639.9 million, or 56.9 %, in the average balance of interest-earning assets
from $1.1 billion for the 1995 period to $1.8 billion for the 1996 period since
the average yield of interest-earning assets remained unchanged from the prior
year period at 7.52%. Interest income from mortgage loans increased by $7.3
million, or 107.7 %, from $6.8 million for the 1995 period to $14.1 million for
the 1996 period due to a $385.5 million, or 122.0%, increase in the average
balance of mortgage loans, offset by a 55 basis point decrease in the average
yield on mortgage loans from 8.63% for the 1995 period to 8.08% for the 1996
period. The increase in the average balance of mortgage loans is due to the
acquisition of mortgage loans from Sunrise Bancorp, Inc. as well as increased
originations of multi-family loans. For the three months ended December 31,
1996, interest income from mortgage-backed securities increased $3.8 million, or
34.5%, from $11.0 million for the 1995 period to $14.8 million for the 1996
period, primarily due to an increase of $194.5 million, or 29.7%, in the average
balance of mortgage-backed securities and an increase in the average yield on
these securities of 22 basis points from 6.78% for the 1995 period to 7.00% for
the 1996 period due to the adjustable-rate mortgage-backed securities repricing
at higher rates and increased purchases of higher yielding 30 year fixed rate
securities. The increase in the average balance of mortgage-backed securities is
due to increased purchases of adjustable rate and longer term securities and
also securities acquired from Sunrise Bancorp, Inc. Mortgage-backed securities
generally bear interest rates lower than loans. Accordingly, to the extent the
demand for loans which meet the Bank's underwriting standards remains low in the
Bank's primary market area and the Bank continues to increase its investment of
mortgage-backed securities, yields on interest-earning assets may tend to be
lower than if the Bank increased its investment of funds in loans. Interest
income from consumer loans increased $255,000, or 9.8%, from $2.6 million for
the 1995 period to $2.9 million for the 1996 period due to a $20.8 million, or
18.4%, increase in the average balance of consumer loans offset by a 66 basis
point decrease in the average yield on consumer loans from 9.25% for the 1995
period to 8.59% for the 1996 period. The decrease in the yield on consumer loans
is the result of the downward repricing of prime rate based home equity lines of
credit as well as lower yielding consumer loans acquired in the Sunrise Bancorp,
Inc acquisition.
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<PAGE>
Interest Expense. Interest expense for the three months ended December 31, 1996,
was $17.8 million, an increase of $6.6 million, or 59.0%, from $11.2 million for
the three months ended December 31, 1995. The increase in interest expense is
related to a $664.9 million, or 67.1%, increase in the average balance of
interest-bearing liabilities from $990.4 million for the 1995 period to $1.7
billion for the 1996 period offset by 22 basis point decrease in the cost of
interest-bearing liabilities from 4.52% for the 1995 period to 4.30% for the
1996 period. The decrease in the average cost of interest-bearing liabilities
resulted primarily from a lower interest rate environment during the quarter
ended December 31, 1996. Interest expense on total deposits increased $4.5
million, or 50.3%, from $8.9 million for the 1995 period to $13.4 million for
the 1996 period, primarily as a result of a $521.3 million, or 61.6%, increase
in the average balance of deposits offset by 22 basis point decrease in the
average cost of such deposits from 4.20% in the 1995 period to 3.98% in the 1996
period. Interest expense on borrowed funds increased $2.1 million, or 92.3%,
from $2.3 million for the 1995 period to $4.4 million for the 1996 period.
Borrowings averaged $311.0 million for the three months ended December 31, 1996,
an increase of $ 167.0 million, or 115.9%, from $144.0 million for the three
months ended December 31, 1995. Borrowed funds, principally reverse repurchase
agreements and FHLB-NY advances, have been reinvested by the Bank in
mortgage-backed securities and loans leveraging the Bank's capital and improving
the return on tangible equity.
Net Interest Income. Net interest income was $15.4 million for the three months
ended December 31, 1996 as compared to $9.9 million for the three months ended
December 31, 1995, an increase of $5.5 million, or 54.9%. The increase in net
interest income was attributable to a $639.9 million, or 56.9%, increase in
average interest-earning assets to $1.8 billion for the quarter ended December
31, 1996 from $1.1 billion for the quarter ended December 31, 1995. The increase
in interest-earning assets is related to increased purchases of mortgage-backed
securities, increased origination of multi-family loans and assets acquired from
Sunrise Bancorp, Inc. Interest-bearing liabilities increased $ 664.9 million, or
67.1%, to $1.7 billion for the 1996 period from $990.4 million for the 1995
period. The Bank's ratio of average interest-earning assets to average
interest-bearing liabilities declined to 1.07X for the quarter ended December
31, 1996 from 1.14X for the quarter ended December 31, 1995 as a result of the
Bank leveraging its excess capital with the Sunrise Bancorp, Inc. acquisition.
Also, net interest income increased as a result of an increase in the net
interest spread from 3.00% for the three months ended December 31, 1995 to 3.22%
for the three months ended December 31, 1996. The increase in net interest
spread is mainly due to higher yielding mortgage assets acquired form Sunrise
Bancorp, Inc. and higher yields on multi-family originations. However, the net
interest margin decreased slightly from 3.53% for the three months ended
December 31, 1995 to 3.49% for the three months ended December 31, 1996 as the
Bank fully leverage its excess capital from the prior year quarter.
Provision for Loan Losses. The provision for loan losses totalled $250,000 for
the three months ended December 31, 1996 compared to $100,000 for the three
months ended December 31, 1995. The Company established additional loan loss
reserves after analyzing non-performing loans as well as the need to increase
general valuation allowances on commercial real estate and multi-family loans.
Non-performing loans at December 31, 1996 were comprised of $12.5 million of
loans secured by one- to four-family residences, $507,000, of guaranteed student
loans and $2.1 million of commercial real estate loans. The Company's allowance
for loan losses totalled $4.8 million at December 31, 1996 which represents a
ratio of allowance for loan losses to non-performing loans and to total loans of
31.42% and 0.56%, respectively. The Company's non-performing assets to total
assets ratio was 0.87% at December 31, 1996. Net recoveries were $12,000 for the
quarter ended December 31, 1996. Management believes that based upon information
currently available that 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
15
<PAGE>
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 increased $633,000, or 162.7%, from
$389,000 for the quarter ended December 31, 1995 to $1.0 million for the quarter
ended December 31, 1996 due to increased deposit and servicing fee income as
well as a net gain on the sale of securities.
Non-Interest Expense. Non-interest expense totalled $8.8 million for the quarter
ended December 31, 1996 as compared to $5.5 million for the quarter ended
December 31, 1995, an increase of $3.3 million, or 59.0%. The increase is mainly
the result of banking office personnel, occupancy costs, other operating
expenses and goodwill amortization associated with the Sunrise Bancorp, Inc.
acquisition. However, due to an increased asset base and acquisition related
efficiencies, the operating expense to average assets ratio improved to 1.68%
for the quarter ended December 31, 1996 from 1.86% in the prior year quarter.
For the quarter ended December 31, 1996, compensation and benefits expense
increased to $4.2 million, an increase of $1.3 million, or 43.5%, from $2.9
million for the quarter ended December 31, 1995. The increase in compensation
and benefits expense is due to the addition of banking office personnel from the
Sunrise Bancorp, Inc. acquisition, higher benefit expenses and normal salary
adjustments. Occupancy and equipment expense increased $505,000, or 60.0%, from
$842,000 for the quarter ended December 31, 1995 to $1.3 million for the quarter
ended December 31, 1996 due to costs associated with the operation of eleven new
banking offices. Federal deposit insurance premiums increased $129,000, or
27.4%, from $470,000 recorded for the quarter ended December 31, 1995 to
$599,000 for the quarter ended December 31, 1996 due to an increased deposit
base. However, during the quarter ended December 31, 1996, the Company received
an insurance premium refund of $169,000 which reduced deposit insurance expense.
Other operating expenses increased $507,000, or 54.2%, from $936,000 during the
quarter ended December 31, 1995 to $1.4 million for the quarter ended December
31, 1996 as a result of general expenses related to the operation of eleven new
banking offices.
Income Tax Expense. Income tax expense was $3.5 million for the three months
ended December 31, 1996 and $2.0 million for the three months ended December 31,
1995. The effective income tax rates were 47.3% for the 1996 period as compared
to 43.7% for 1995 period. The increase in the effective tax rate primarily
relates to amortization of excess of cost over fair value of net assets acquired
for which no tax benefit is provided for.
Comparison of Operating Results for the Six Months Ended December 31, 1996 and
1995.
General. The Company reported net income of $2.5 million for the six months
ended December 31, 1996 as compared to 5.0 million for the six months ended
December 31, 1996. Excluding the effect of the SAIF charge, the annualized
return on average assets and average tangible equity would have been 0.80% and
14.08%, respectively.
Interest Income. Interest income increased $25.0 million, or 62.5%, from $40.1
million for the six months ended December 31, 1995, to $65.1 million for the six
months ended December 31, 1996. The increase in net interest income was
attributable to the growth in average interest-earning assets to $1.7 billion
for the six months ended December 31, 1996 from $1.1 billion for the six months
ended December 31, 1995. The growth in interest-earning assets was directly
attributable to assets acquired from Bank of Westbury and Sunrise Bancorp, Inc.
and the Bank's increased purchases of mortgage-backed securities and increased
originations of multi-family loans. Interest income from mortgage loans
increased by $15.5 million, or
16
<PAGE>
125.8%, from $12.3 million for the 1995 period to $27.8 million for the 1996
period due to a $407.4 million, or 140.5%, increase in the average balance of
mortgage loans, offset by a 52 basis point decrease in the average yield on
mortgage loans from 8.55% for the 1995 period to 8.03% for the 1996 period. The
increase in the average balance of mortgage loans is due to the acquisition of
mortgage loans from the Bank of Westbury and Sunrise Bancorp, Inc. acquisitions
as well as increased originations of multi-family loans. For the six months
ended December 31, 1996, interest income from mortgage-backed securities
increased $8.0 million, or 38.1%, from $21.0 million for the 1995 period to
$29.0 million for the 1996 period, primarily due to an increase of $205.7
million, or 33.2%, in the average balance of mortgage-backed securities and an
increase in the average yield on these securities of 19 basis points from 6.79%
for the 1995 period to 6.98% for the 1996 period due to purchases of higher
yielding longer term mortgage-backed securities. The increase in the average
balance of mortgage-backed securities is primarily due to increased purchases of
adjustable rate and longer term securities and also from securities acquired
from Bank of Westbury and Sunrise Bancorp, Inc. Mortgage-backed securities
generally bear interest rates lower than loans. Accordingly, to the extent the
demand for loans which meet the Bank's underwriting standards remains low in the
Bank's primary market area and the Bank continues to increase its investment of
mortgage-backed securities, yields on interest-earning assets may tend to be
lower than if the Bank increased its investment of funds in loans. Interest
income from consumer loans increased $502,000, or 9.6%, from $5.2 million for
the 1995 period to $5.7 million for the 1996 period due to a $20.5 million, or
18.2%, increase in the average balance of consumer loans offset by a 66 basis
point decrease in the average yield on consumer loans from 9.32% for the 1995
period to 8.66% for the 1996 period. The decrease in the yield on consumer loans
is the result of the downward repricing of prime rate based home equity lines of
credit as well as lower yielding consumer loans acquired in the Sunrise Bancorp,
Inc. acquisition.
Interest Expense. Interest expense for the six months ended December 31, 1996,
was $34.8 million, an increase of $13.8 million, or 65.3%, from $21.0 million
for the six months ended December 31, 1995. The increase in interest expense is
related to a $698.1 million, or 74.7%, increase in the average balance of
interest-bearing liabilities offset by a 24 basis point decrease in the cost of
interest-bearing liabilities from 4.51% for the 1995 period to 4.27% for the
1996 period. The decrease in the average cost of interest-bearing liabilities
resulted primarily from a lower interest rate environment during the six months
ended December 31, 1996. Interest expense on total deposits increased $9.6
million, or 56.9%, from $16.9 million for the 1995 period to $26.5 million for
the 1996 period, primarily as a result of a $553.4 million, or 68.8%, increase
in the average balance of deposits offset by a 23 basis point decrease in the
average cost of such deposits from 4.19% for the 1995 period to 3.96% for the
1996 period. Interest expense on borrowed funds increased $4.2 million, or
99.0%, from $4.2 million for the 1995 period to $8.4 million for the 1996
period. Borrowings averaged $296.4 million for the six months ended December 31,
1996, an increase of $166.6 million, or 128.3%, from $129.8 million for the six
months ended December 31, 1995. Borrowed funds, principally reverse repurchase
agreements and FHLB-NY advances have been reinvested by the Bank in
mortgage-backed securities and multi-family loans leveraging the Bank's capital
and improving the return on tangible equity.
Net Interest Income. Net interest income was $30.3 million for the six months
ended December 31, 1996 as compared to $19.0 million for the six months ended
December 31, 1995, an increase of $11.3 million, or 59.4%. The increase in net
interest income was attributable to a $666.3 million, or 62.4% increase in
average interest-earning assets to $1.7 billion for the six months ended
December 31, 1996 from $1.1 billion for the six months ended December 31, 1995.
The increase in interest-earning assets is related to increased purchases of
mortgage-backed securities, increased originations of multi-family loans and
assets
17
<PAGE>
acquired from Bank of Westbury and Sunrise Bancorp, Inc. Interest-bearing
liabilities increased $698.1 million, or 74.7%, to $1.6 billion for the 1996
period from $934.4 million for the 1995 period. The Bank's ratio of average
interest-earning assets to average interest-bearing liabilities declined to
1.06X for the six months ended December 31, 1996 from 1.14X for the six months
ended December 31, 1995 as a result of the Bank leveraging its excess capital
with the Bank of Westbury and Sunrise Bancorp, Inc. acquisitions. Also, net
interest income increased as a result of an increase in the net interest spread
from 3.00% for the six months ended December 31, 1995 to 3.25% for the six
months ended December 31, 1996. The increase in net interest spread is mainly
due to higher yielding mortgage assets acquired from Sunrise Bancorp, Inc. and
originations of higher yielding multi-family loans. However, the net interest
margin decreased from 3.56% for the six months ended December 31, 1995 to 3.50%
for the six months ended December 31, 1996 as the Bank fully leverage its excess
capital from the prior year period.
Provision for Loan Losses. The provision for loan losses totalled $350,000 for
the six months ended December 31, 1996 as compared to $200,000 for the six
months ended December 31, 1995. The Company established additional loan loss
reserves after analyzing non-performing loans as well as the need to increase
general valuation allowances on commercial real estate and multi-family loans.
Non-performing loans at December 31, 1996 were comprised of $12.5 million of
loans secured by one- to four-family residences, $507,000 of guaranteed student
loans and $2.1 million of commercial real estate loans. The Company's allowance
for loan losses totalled $4.8 million at December 31, 1996 which represents a
ratio of allowance for loan losses to non-performing loans and to total loans of
31.42% and 0.56%, respectively. The Company's non-performing assets to total
assets ratio was 0.87% at December 31, 1996. Net charge-offs were $79,000 for
the six months ended December 31, 1996. Management believes that based upon
information currently available, its allowance for loan losses is adequate and
sufficient reserves are presently maintained to cover losses on any
non-performing loans.
Non-Interest Expense. Non-interest expense totalled $26.0 million for the six
months ended December 31, 1996 as compared to $10.8 million for the six months
ended December 31, 1995, an increase of $15.2 million, or 141.6%. Included in
non-interest expense for the six months ended December 31, 1996 is the special
SAIF charge of $8.3 million. Excluding the SAIF charge, non-interest expense
increased $7.0 million, or 65.0%. This increase is mainly the result of banking
office personnel, deposit insurance, goodwill amortization and other occupancy
costs associated with the Bank of Westbury and Sunrise Bancorp, Inc.
acquisitions. However, due to the increased asset base and the operational
efficiencies realized from the two acquisitions, the operating expense to
average assets ratio improved from 1.90% for the six months ended December 31,
1995 to 1.73% for the six months ended December 31, 1996. For the six months
ended December 31, 1996, compensation and benefits expense increased $2.7
million, or 48.0%, to $8.3 million from $5.6 million for the six months ended
December 31, 1995. The increase in compensation and benefits expense is due to
the addition of banking office personnel from the Bank of Westbury and Sunrise
Bancorp, Inc. acquisitions, higher benefit expenses and normal salary
adjustments. Occupancy and equipment expense increased $1.1 million, or 62.9%,
from $1.7 million for the six months ended December 31, 1995 to $2.8 million for
the six months ended December 31, 1996 due to costs associated with the
operation of seventeen new banking offices as well as miscellaneous data
processing costs. Other operating expenses increased $1.0 million, or 56.0%,
from $1.8 million during the six months ended December 31, 1995 to $2.8 million
for the six months ended December 31, 1996 as a result of general expenses
related to the addition of seventeen new banking offices.
Income Tax Expense. Income tax expense was $3.2 million for the six months ended
December 31, 1996 and $3.8 million for the six months ended December 31, 1995.
The effective income tax rates were 56.4%
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<PAGE>
for the 1996 period as compared to 43.0% for 1995 period. The increase in the
effective tax rate primarily relates to $1.7 million of amortization of excess
of cost over fair value of net assets acquired for which no tax benefit is
provided for. In addition, as a result of the SAIF charge such amortization
represents a higher percentage of pre-tax income thereby increasing the
effective tax rate.
Liquidity And Capital Resources
The Company's current primary sources of funds are principal and interest
payments and sales of investments securities and dividends from the Bank.
Dividend payments to the Company from the Bank are subject to the profitability
of the Bank and by applicable laws and regulations. The Company's liquidity is
available to, among other things, support future expansion of operations or
diversification into other banking related business, payments of dividends or
repurchase its common stock.
In this regard, as of December 31, 1996, the Company has repurchased a total of
$1.9 million shares of the Company's outstanding common stock in open market
transactions for a total cost of $26.0 million and at an average price of
approximately $13.49 per share. The Company is presently in its fourth stock
repurchase plan and has approximately 18,000 common shares remaining to be
repurchased under such plan.
On December 18, 1996, the Board of Directors declared a regular cash dividend of
$0.14 per common share for the quarter ending December 31, 1996. The dividend
was paid on January 17, 1997 to stockholders of record on January 3, 1997.
The Company has also used available liquidity and capital to expand its
operations with the acquisition of two financial institutions. On August 11,
1995, the Company acquired Bank of Westbury, for approximately $16.7 million in
cash and on January 11, 1996, the Company acquired Sunrise Bancorp, Inc. for
approximately $106.3 million in cash. The Company had sufficient liquidity
available to fund these purchases and as of December 31, 1996, the Bank met all
of its regulatory capital requirements. The Company was required to sell
mortgage-backed securities classified as available-for-sale to fund the purchase
of Sunrise Bancorp, Inc.
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed securities and investment securities,
advances from the FHLB-NY, borrowings under reverse repurchase agreements and
mortgage-backed securities and loan sales. While maturities and scheduled
amortization of loans, mortgage-backed securities and investment 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
5.46%, and 1.45%, respectively, for the six months ended December 31, 1996. The
Bank's short-term liquidity ratio was 1.38%, at December 31, 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.
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At December 31, 1996, assets qualifying for short-term liquidity, including cash
and short term investments, totalled $23.2 million.
The primary investment activity of the Bank is the origination of mortgage loans
and consumer loans, and the purchase of mortgages and mortgage-backed
securities. During the six months ended December 31, 1996, the Bank originated
and purchased mortgage loans and consumer loans in the amount of $75.7 million
and $25.3 million, respectively. During the six months ended December 31, 1996,
the Bank purchased $172.5 million of mortgage-backed securities all of which
were classified as available-for-sale. These activities were funded primarily by
deposits, principal repayments on loans and mortgage-backed securities, and
borrowings under reverse repurchase agreements. At December 31, 1996, borrowings
from the FHLB-NY and reverse repurchase agreements totalled $313.5 million.
At December 31, 1996, the Bank had outstanding loan commitments of $13.7 million
and open lines of credit of $49.9 million. In addition, the Bank had commitments
to purchase $8.3 million of private label collateralized mortgage obligations
classified as available-for-sale. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination and
mortgage-backed securities purchase commitments. Certificates of deposit which
are scheduled to mature in one year or less from December 31, 1996 totalled
$490.6 million. Management believes that a significant portion of such deposits
will remain with the Bank.
At December 31, 1996, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 5.61%, 5.61% and 15.53%,
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 New Accounting Standards
In October 1995, FASB issued SFAS 123 "Accounting for Stock-Based Compensation".
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all arrangements by
which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of the employer's stock. Examples are stock purchase plans, stock options,
restricted stock and stock appreciation rights.
This Statement defines fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No.25, Accounting for Stock Issued to Employees. Entities electing
to remain with the accounting in Opinion 25 must make pro forma disclosures of
net income, and if presented, earnings per share, as if the fair value based
method of accounting defined in this SFAS 123 had been applied. SFAS 123 is
effective for transactions entered into fiscal years that begin after December
15, 1995, though they may be adopted on issuance. Management will implement the
pro forma disclosures required by SFAS No. 123 with the preparation of the
annual financial statement for fiscal 1997.
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
20
<PAGE>
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. SFAS No.125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and should
be applied prospectively. Earlier or retroactive application of this Statement
is not permitted. On the Company's consolidated financial statements, there will
be no impact from SFAS No.
125.
In January 1997, FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of SFAS No. 125." ("SFAS No.127"). SFAS No. 127 postpones
the effective date by one year for certain provisions of SFAS No. 125.
Specifically, paragraph 15 of SFAS No. 125 (secured borrowings and collateral)
is deferred for all transfers of financial assets until after December 31, 1997.
Likewise, paragraphs 9-12 of SFAS No. 125 (accounting for transfers) are
deferred until after December 31, 1997, but only for repurchase agreements,
dollar-rolls, securities lending and similar transactions.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Holding Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on
November 12, 1996 (The Annual Meeting).
At the annual Meeting, the shareholders of the Company elected
Thomas G. Davis, Jr. and Donald LaPasta as directors of the
Company each to serve for a three year term and in any case,
until the election and qualification of their respective
successors. In addition, the shareholders of the Company duly
ratified the approval of the Reliance Bancorp, Inc. 1996 Stock
Option Plan and the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company for its 1997 fiscal year.
The number of votes cast at the meeting as to each matter
acted upon were as follows:
(a) Election of Directors:
For Withheld
--- --------
Thomas G. Davis, Jr. 7,755,124 80,141
Donald LaPasta 7,698,096 137,169
(b) The ratification and approval of the Reliance Bancorp, Inc.
1996 Stock Option Plan.
For: 4,403,912
Against: 474,618
Abstained: 67,925
(C) The ratification of the appointment of KPMG Peat Marwick LLP,
as independent auditors of Reliance Bancorp, Inc. for the
fiscal year ending June 30, 1997.
For: 7,730,020
Against: 79,604
Abstained: 25,641
22
<PAGE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation*
3.2 Bylaws*
11.0 Statement re Computation of Per Share Earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
* Incorporated by reference into the Registrant's Statement of Form S-1, as
amended, originally filed on December 3, 1993.
23
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reliance Bancorp, Inc.
(Registrant)
/s/ Raymond A. Nielsen 02/13/97 /s/ Paul D. Hagan 02/13/97
---------------------- -------- ----------------- --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
24
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per share amount)
<S> <C> <C> <C> <C>
Net Income $3,879 $2,640 $2,475 $5,000
----- ----- ----- -----
Weighted average common shares outstanding 8,316 8,578 8,344 8,605
Common stock equivalents due to dilutive
effect of stock option 472 309 452 304
------ ------ ------ -----
Total weighted average common shares and
equivalents outstanding 8,788 8,887 8,796 8,909
===== ===== ===== =====
Earnings per common and common
share equivalents $ 0.44 $ 0.30 $ 0.27 $ 0.56
===== ===== ===== =====
Total weighted average common shares and
equivalents outstanding 8,788 8,887 8,796 8,909
Additional dilutive shares using ending period market value versus average
market value for the period when utilizing the treasury
stock method regarding stock options 38 18 51 23
------- ------ ------ -------
Total shares for fully dilutive earnings per share 8,826 8,905 8,847 8,932
===== ===== ===== =====
Fully diluted earnings per common and
common share equivalents $ 0.44 $ 0.30 $ 0.27 $ 0.56
===== ===== ===== =====
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Form 10-Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21234
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 711923
<INVESTMENTS-CARRYING> 218304
<INVESTMENTS-MARKET> 222293
<LOANS> 844545
<ALLOWANCE> 4766
<TOTAL-ASSETS> 1878184
<DEPOSITS> 1371710
<SHORT-TERM> 313547
<LIABILITIES-OTHER> 37467
<LONG-TERM> 0
0
0
<COMMON> 104490
<OTHER-SE> 50970
<TOTAL-LIABILITIES-AND-EQUITY> 1878184
<INTEREST-LOAN> 33553
<INTEREST-INVEST> 31248
<INTEREST-OTHER> 348
<INTEREST-TOTAL> 65149
<INTEREST-DEPOSIT> 26451
<INTEREST-EXPENSE> 34815
<INTEREST-INCOME-NET> 30334
<LOAN-LOSSES> 350
<SECURITIES-GAINS> 106
<EXPENSE-OTHER> 26010
<INCOME-PRETAX> 5682
<INCOME-PRE-EXTRAORDINARY> 5682
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2475
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 7.52
<LOANS-NON> 14662
<LOANS-PAST> 507
<LOANS-TROUBLED> 376
<LOANS-PROBLEM> 1039
<ALLOWANCE-OPEN> 4495
<CHARGE-OFFS> 106
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 4766
<ALLOWANCE-DOMESTIC> 4766
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3402
</TABLE>
