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 September 30, 1997
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Commission File Number: 0-23126
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RELIANCE BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3187176
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
585 Stewart Avenue, Garden City, New York 11530
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 222-9300
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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 November 11, 1997, there were 9,684,564 shares of common stock, $.01 par
value, outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - Unaudited
Consolidated Statements of Condition at September 30, 1997 and
June 30, 1997 (Unaudited)
Consolidated Statements of Operations for the Three Months
Ended September 30, 1997 and 1996 (Unaudited)
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1997 and 1996 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
---- ----
Assets
<S> <C> <C>
Cash and due from banks............................................................. $ 18,994 $ 29,565
Money market investments............................................................ 7,400 1,100
Debt and equity securities available-for-sale....................................... 29,493 26,909
Debt and equity securities held-to-maturity (estimated market value of
$41,542 and $46,152, respectively........................................ 41,052 46,026
Mortgage-backed securities available-for-sale....................................... 776,236 721,819
Mortgage-backed securities held-to-maturity (estimated market value of..............
$176,404 and $163,108, respectively........................................ 172,172 159,356
Loans receivable:
Mortgage loans................................................................. 771,987 775,612
Consumer and other loans....................................................... 141,298 138,891
Less allowance for loan losses............................................... (5,651) (5,182)
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Loans receivable, net.................................................. 907,634 909,321
Accrued interest receivable, net.................................................... 12,845 12,040
Office properties and equipment, net................................................ 14,049 14,089
Prepaid expenses and other assets................................................... 5,477 7,580
Mortgage servicing rights........................................................... 2,907 3,046
Excess of cost over fair value of net assets acquired............................... 44,617 45,463
Real estate owned, net.............................................................. 1,877 450
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Total assets........................................................... $2,034,753 $1,976,764
========= =========
Liabilities and Stockholders' Equity
Deposits............................................................................ $1,453,496 $1,436,037
FHLB advances....................................................................... 55,200 40,000
Securities sold under agreements to repurchase...................................... 320,652 311,913
Advance payments by borrowers for taxes and insurance............................... 13,821 9,017
Accrued expenses and other liabilities.............................................. 23,554 17,127
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Total liabilities...................................................... 1,866,723 1,814,094
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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; 8,712,455 and 8,776,337
outstanding, respectively.......................................................... 108 108
Additional paid-in capital.......................................................... 106,397 105,871
Retained earnings, substantially restricted......................................... 93,067 89,660
Unrealized appreciation on securities
available-for-sale, net of taxes................................................. 4,713 1,705
Less:
Unallocated common stock held by ESOP............................................... (5,175) (5,382)
Unearned common stock held by RRP................................................... (1,302) (1,567)
Unearned common stock held by SERP.................................................. (209) (209)
Treasury stock, at cost (2,038,365 and 1,974,483 shares, respectively).............. (29,569) (27,516)
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Total stockholders' equity..................................................... 168,030 162,670
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Total liabilities and stockholders' equity.............................. $2,034,753 $1,976,764
========= =========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
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1997 1996
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Interest income:
<S> <C> <C>
First mortgage loans............................................................. $ 15,747 $ 13,751
Consumer and other loans......................................................... 3,026 2,856
Mortgage-backed securities....................................................... 15,983 14,123
Money market investments......................................................... 116 125
Debt and equity securities....................................................... 1,311 1,105
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Total interest income......................................................... 36,183 31,960
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Interest expense:
Deposits......................................................................... 14,964 13,079
Borrowed funds................................................................... 5,205 3,935
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Total interest expense........................................................ 20,169 17,014
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Net interest income before provision for loan losses.......................... 16,014 14,946
Provision for loan losses........................................................ 900 100
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Net interest income after provision for loan losses........................... 15,114 14,846
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Non-interest income:
Loan fees and service charges.................................................... 223 208
Other operating income........................................................... 679 494
Condemnation award from joint venture............................................ 1,483 --
Net loss on securities........................................................... (122) (16)
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Total non-interest income..................................................... 2,263 686
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Non-interest expense:
Compensation and benefits........................................................ 4,521 4,097
Occupancy and equipment.......................................................... 1,459 1,424
Federal deposit insurance premiums............................................... 221 772
Advertising...................................................................... 396 338
Other operating expense.......................................................... 1,450 1,366
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Total general and administrative expenses..................................... 8,047 7,997
Real estate operations, net...................................................... 225 104
Amortization of excess of cost over fair value of net assets acquired............ 846 856
SAIF recapitalization charge..................................................... -- 8,250
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Total non-interest expense.................................................... 9,118 17,207
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Income (loss) before income taxes .................................................. 8,259 (1,675)
Income tax expense (benefit) ....................................................... 3,518 (271)
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Net income (loss)................................................................... $ 4,741 $ (1,404)
====== ========
Net income (loss) per common share :
Primary...................................................... $ 0.53 $ (0.17)
======= =========
Fully Diluted................................................ $ 0.53 $ (0.17)
======= =========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
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1997 1996
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<S> <C> <C>
Cash flows from operating activities: (Unaudited)
Net income (loss).................................................................... $ 4,741 $ (1,404)
Adjustments to reconcile net income(loss) to net cash provided by operating
activities:
Provision for loan losses............................................................ 900 100
Provision for losses on real estate owned............................................ 130 50
Amortization of premiums, net........................................................ 238 34
Amortization relating to allocation and earned portion of stock plans................ 888 561
Amortization of excess of cost over fair value of net assets acquired................ 846 856
Amortization of mortgage servicing rights............................................ 139 174
Depreciation and amortization........................................................ 363 336
Net loss on securities............................................................... 122 16
Net gain on loans sold............................................................. (1) (3)
Net loss on sale of real estate owned................................................ 4 --
Increase in accrued interest receivable.............................................. (805) (341)
Decrease (increase) in prepaid expense and other assets.............................. 2,206 (2,774)
Increase in accrued expenses and other liabilities................................... 4,118 7,801
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Net cash provided by operating activities........................................ 13,889 5,406
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Cash flows from investing activities:
Originated and purchased loans, net of principal repayments on loans ................ (2,472) (7,606)
Purchases of mortgage-backed securities available-for-sale........................... (169,383) (75,612)
Proceeds from sales of mortgage-backed securities available-for-sale................. 83,994 --
Purchases of mortgage-backed securities held-to-maturity............................. (21,027) --
Principal repayments from mortgage-backed securities................................. 43,841 28,698
Purchases of debt securities available-for-sale...................................... (9,994) (5,000)
Proceeds from call of debt securities................................................ 10,000 2,313
Proceeds from sales of debt securities available-for-sale............................ 2,699 2,984
Purchases of premises and equipment.................................................. (336) (509)
Proceeds from loans sold............................................................. 1,151 1,408
Proceeds from sales of real estate owned............................................. 430 508
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Net cash used in investing activities............................................ (61,097) (52,816)
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Cash flows from financing activities:
Increase in deposits................................................................. 17,581 12,989
Increase in advance payments by borrowers for taxes and insurance.................... 4,804 5,551
Proceeds from FHLB advances.......................................................... 15,200 --
Proceeds from reverse repurchase agreements.......................................... 294,806 256,473
Repayment of reverse repurchase agreements........................................... (286,067) (231,883)
Purchases of treasury stock.......................................................... (2,242) (3,612)
Net proceeds from issuance of common stock and exercise of stock options............. 167 40
Dividends paid....................................................................... (1,312) (947)
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Net cash provided by financing activities......................................... 42,937 38,611
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Net decrease in cash and cash equivalents............................................ (4,271) (8,799)
Cash and cash equivalents at beginning of period..................................... 30,665 32,870
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Cash and cash equivalents at end of period........................................... $ 26,394 $ 24,071
======= =======
</TABLE>
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------
1997 1996
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(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the three months ended for:
Interest............................................................................. $ 19,791 $ 16,898
======= =======
Income taxes......................................................................... $ -- $ 3,420
======= =======
Non-cash investing activities:
Transfers from loans to real estate owned............................................ $ 1,991 $ 480
======= =======
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
5
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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 ended September 30, 1997 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 1997 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.
3. SUBSEQUENT EVENT
On October 17, 1997, Reliance Bancorp, Inc. announced the completion of
its acquisition of Continental Bank and its merger into Reliance
Federal Savings Bank, Reliance's wholly-owned subsidiary. In accordance
with the terms of the merger agreement, Reliance will issue 1.10 shares
of its common stock for each outstanding common share of Continental.
The total transaction value is estimated to be $24.0 million. The
acquisition of Continental Bank increased the total number of Reliance
banking offices to 30 and expands its lending and deposit services to
include commercial banking services. Reliance now has approximately
$2.2 billion in assets and $1.6 billion in deposits.
4. IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS No. 128"). SFAS No.128 specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS")
for entities with publicly held common stock or potential common stock.
This statement simplifies the standard for computing EPS previously
found in Accounting Principles Board Opinion No. 15 ("APB No. 15"). It
replaces the presentation of primary EPS with a presentation of basic
EPS and the presentation of fully diluted EPS with a presentation of
diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
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<PAGE>
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. SFAS No.
128 is effective for financial statements issued for periods ending
after December 15, 1997 and requires the restatement of all
prior-period EPS data presented. Upon adoption of SFAS No. 128, the
change from primary EPS to basic EPS will result in a modest increase
in this EPS presentation, but will not result in a material change in
the EPS presentation from fully diluted to diluted EPS.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 requires that all items that are components of
"comprehensive income" be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Comprehensive income is defined as the "change in equity [net assets]
of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes
in equity during a period except those resulting from investments by
owners and distributions to owner". Companies will be required to (a)
classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires reclassification of prior periods
presented. As the requirements of SFAS No. 130 are disclosure-related,
its implementation will have no impact on the Company's financial
condition or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS No.131"). SFAS No. 131 requires that
enterprises report certain financial and descriptive information about
operating segments in complete sets of financial statements of the
Company and in condensed financial statements of interim periods issued
to shareholders. It also requires that a Company report certain
information about their products and services, geographic areas in
which they operate and their major customers. As the requirements of
SFAS No. 131 are disclosure-related, its implementation will have no
impact on the Company's financial condition or results of operations.
SFAS No. 131 is effective for fiscal years beginning after December 15,
1997 and requires interim periods to be presented in the second year of
application.
5. RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial
information in order to conform to the current year presentation.
7
<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 September 30, 1997, the Company had 8,712,455
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. As discussed in Note 3,
on October 17, 1997 the Company acquired Continental Bank and merged its
operations into 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 and
consumer loans, multi-family and guaranteed student loans, and to a lesser
extent, commercial real estate and construction loans. In connection with the
acquisition of Continental Bank, the Bank intends to begin offering both secured
and unsecured commercial loans. In the past, the Bank has also invested in loans
secured by cooperative units ("co-op 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.
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Financial Condition
As of September 30, 1997, total assets were $2.0 billion, deposits were $1.5
billion and total stockholders' equity was $168.0 million. The mortgage-backed
securities portfolio increased $67.2 million, or 7.6%, from $881.2 million at
June 30, 1997 to $948.4 million at September 30, 1997 with the increase
primarily due to increased purchases of private label collateralized mortgage
obligations offset by amortization and prepayments.
Funding for the purchases of mortgage-backed securities was through a
combination of new deposit growth, borrowings and cash flows. Deposits increased
$17.5 million, or 1.2%, during the quarter ended September 30, 1997 as a result
of growth in new certificate of deposit products. Borrowings increased from
$351.9 million at June 30, 1997 to $375.8 million at September 30, 1997, an
increase of $23.9 million, or 6.8%. The Bank continues to use borrowings to
leverage its capital and fund asset growth.
Real estate owned increased from $450,000 at June 30, 1997 to $1.9 million at
September 30, 1997 primarily due to the foreclosure of a boat marina during the
quarter.
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>
September 31, June 30,
1997 1997
------------ -------
(Dollars in thousands)
<S> <C> <C>
Non-accrual mortgage loans delinquent more than 90 days.................... $ 11,089 $ 14,262
Non-accrual other loans delinquent more than 90 days....................... 226 188
-------- -------
Total non-accrual loans................................................ 11,315 14,451
Loans 90 days or more delinquent and still accruing........................ 371 277
-------- -------
Total non-performing loans................................................. 11,686 14,727
Total foreclosed real estate, net of related allowance for losses.......... 1,877 450
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Total non-performing assets................................................ $ 13,563 $ 15,177
======= =======
Non-performing loans to total loans........................................ 1.28% 1.61%
Non-performing assets to total assets...................................... 0.67% 0.77%
Allowance for loan losses to non-performing loans.......................... 48.35% 35.18%
Allowance for loan losses to total loans................................... 0.62% 0.57%
</TABLE>
Non-performing loans totalled $11.7 million, or 1.28% of total loans at
September 30, 1997, as compared to $14.7 million, or 1.61% of total loans at
June 30, 1997. Non-performing loans at September 30, 1997 were comprised of $9.9
million of loans secured by one- to four-family residences, $371,000 of
guaranteed student loans and $1.4 million of commercial real estate loans.
Included in non-performing commercial loans are two loans 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
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property and $500,000 second mortgage building loan. As of September 30, 1997,
the borrower has $465,000 outstanding on the building loan. An appraisal dated
March 1995, valued the property at $1.7 million. Because of cash flow problems
of the borrower and the present inability of the borrower to restructure the
loan, the Bank has commenced foreclosure proceedings.
For the quarter ended September 30, 1997, the Company experienced net
charge-offs of $431,000. The higher level of charge-offs was the result of two
commercial real estate loans and several co-op loans transferred to REO at their
fair value resulting in charge-offs. However, as a result of a decrease in
non-performing loans and an increased asset base, the non-performing assets to
total assets ratio improved to 0.67% at September 30, 1997 from 0.77% at June
30, 1997.
For the quarter ended September 30, 1997, the Company's loan loss provision was
$900,000 as compared to $300,000 in the prior quarter and $100,000 in the prior
year comparable quarter. The Company increased its provision for loan losses to
offset the higher level of charge-offs during the quarter and to continue to
increase its loan loss coverage ratios. The Company's allowance for loan losses
totalled $5.7 million at September 30, 1997 as compared to $5.2 million at June
30, 1997 which represents a ratio of allowance for loan losses to non-performing
loans and to total loans of 48.35% and 0.62% at September 30, 1997 and 35.18%
and 0.57% at June 30, 1997, respectively. Management believes the allowance for
loan losses at September 30, 1997 is adequate and sufficient reserves are
presently maintained to cover losses on any non-performing loans.
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 by the
Bank 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 pre-tax of $8.25 million. 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 remained in
compliance with its regulatory capital requirements. This legislation also
spreads the obligation for payment of the Financing Corporation ("FICO") bonds
across all SAIF and BIF members. As of January 1, 1997, BIF deposits have been
assessed a FICO payment of 1.3 basis points, while SAIF deposits pay 6.4 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 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. Prior to calendar year ended December 31, 1996, the Bank
was allowed a special bad debt deduction based on the greater of the amount
calculated under the experience method or the
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percentage of taxable income method. The statutory percentage under the latter
method was 8% for federal tax purposes.
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, 1997, and 1996.
Under legislation enacted subsequent to June 30, 1996, the Bank is no longer
able to use the percentage of taxable income method for federal tax purposes,
but is permitted to deduct bad debts only as they occur and is additionally
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 are 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 and New York City tax laws have 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 and New York City tax liability.
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 ("ARM")
and consumer loans, shorter-term fixed rate multi-family, mortgage and consumer
loans and the purchase of shorter-term fixed rate and adjustable-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.
The Company has attempted to limit its exposure to interest rate risk through
the origination and purchase of adjustable-rate mortgage loans ("ARMs") and
through purchases of adjustable-rate mortgage-backed and mortgage-related
securities and fixed rate mortgage-backed and mortgage-related securities with
short and medium-term average lives.
The actual duration of mortgage loans and mortgage-backed securities, can be
significantly impacted by changes in mortgage prepayment and market interest
rates. Mortgage prepayment rates will vary due to a number of factors, including
the regional economy in the area where the underlying mortgages were originated,
seasonal factors, demographic variables and the assumability of the underlying
mortgages. However, the largest determinants of prepayment rates are prevailing
interest rates and related mortgage refinancing opportunities. Management
monitors interest rate sensitivity so that adjustments in the asset and
liability mix, when deemed appropriate, can be made on a timely basis.
At September 30, 1997, $842.0 million, or 45.2%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $772.0 million, of which
11
<PAGE>
$413.2 million, or 53.5%, were adjustable-rate loans and $358.8 million, or
46.5%, were fixed-rate loans. In addition, at September 30, 1997, the Bank's
consumer loan portfolio totalled $141.3 million, of which $112.8 million, or
79.8%, were adjustable-rate home-equity lines of credit and guaranteed student
loans and $28.5 million, or 20.2%, were fixed-rate home-equity and other
consumer loans. At September 30, 1997, the mortgage-backed securities
held-to-maturity portfolio totalled $172.2 million, of which $97.9 million, or
56.9%, of the mortgage-backed portfolio was adjustable-rate securities and $74.3
million, or 43.1%, was fixed-rate securities. The mortgage-backed securities
portfolio classified as available-for-sale totalled $776.2 million,of which
$218.1 million, or 28.1%, were adjustable rate securities and $558.1 million, or
71.9%, were fixed-rate securities. During the quarter ended September 30, 1997,
the Bank purchased approximately $44.3 million of 30 year fixed rate
mortgage-backed securities and $146.1 million of agency and private label
collateralized mortgage obligations. In addition, the Bank sold approximately
$70.2 million of 15 year and 30 year mortgage-backed securities and $13.8
million of adjustable-rate securities. The Bank has continued to reposition its
securities portfolio by purchasing agency and private label collateral mortgage
obligations in order to increase the incremental yield of the portfolio as well
as shorten the duration of the securities portfolio. 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. The Bank has funded the purchase of these securities through
a combination of internal deposit growth and borrowings, primarily reverse
repurchase agreements.
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 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 a 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.
At September 30, 1997, 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) was a negative gap of $126.7 million , or (6.25)% of total assets at
September 30, 1997 as compared to a negative gap of $55.6 million, or (2.82)% of
total assets at June 30, 1997 and a negative gap of $136,000, or (0.01)%, at
September 30, 1996. The prepayment rates for mortgage loans, mortgage-backed
securities and consumer loans are based upon the Bank's historical performance.
Comparison of Operating Results for the Three Months Ended September 30, 1997
and 1996.
General. The Company reported net income of $4.7 million or $0.53 per fully
diluted shares for the three months ended September 30, 1997. In the prior year
quarter, the Company reported a charge to earnings of $8.25 million for the
recapitalization of the SAIF which resulted in the Company reporting a net loss
of $1.4 million, or ($0.17) per share. Excluding the impact of the SAIF
12
<PAGE>
charge, the Company's earnings for the quarter ended September 30, 1996 would
have been $3.4 million, or $0.39 per fully diluted common share as compared to
$4.7 million or $0.53 per common share for the quarter ended September 30, 1997
reflecting a 35.9% increase in earnings per share. In addition, return on
average tangible equity was 16.43% for the quarter ended September 30, 1997, an
increase of 28.8% from 12.76% reported for the quarter ended September 30, 1996.
Interest Income. Interest income increased $4.2 million, or 13.2%, from $32.0
million for the three months ended September 30, 1996, to $36.2 million for the
three months ended September 30, 1997. The increase resulted from an increase of
$183.8 million, or 10.8%, in the average balance of interest-earning assets from
$1.7 billion for the 1996 period to $1.9 billion for the 1997 period and an
increase in the average yield of interest-earning assets from 7.50% in the prior
year period to 7.66%. Interest income from mortgage loans increased by $2.0
million, or 14.5 %, from $13.8 million for the 1996 period to $15.7 million for
the 1997 period due to a $80.4 million, or 11.6%, increase in the average
balance of mortgage loans, and a 20 basis point increase in the average yield on
mortgage loans from 7.98% for the 1996 period to 8.18% for the 1997 period. The
increase in the average balance of mortgage loans is primarily due to increased
originations of multi-family loans. For the three months ended September 30,
1997, interest income from mortgage-backed securities increased $1.9 million, or
13.2%, from $14.1 million for the 1996 period to $16.0 million for the 1997
period, primarily due to an increase of $102.0 million, or 12.7%, in the average
balance of mortgage-backed securities and an increase in the average yield on
these securities of 21 basis points from 6.90% for the 1996 period to 7.11% for
the 1997 period and increased purchases of higher yielding private label
collateral mortgage obligations. 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 in loans.
Interest Expense. Interest expense for the three months ended September 30,
1997, was $20.2 million, an increase of $3.2 million, or 18.5%, from $17.0
million for the three months ended September 30, 1996. The increase in interest
expense is related to a $169.1 million, or 10.5%, increase in the average
balance of interest-bearing liabilities from $1.6 billion for the 1996 period to
$1.8 billion for the 1997 period and a 30 basis point increase in the cost of
interest-bearing liabilities from 4.23% for the 1996 period to 4.53% for the
1997 period. The increase in the average cost of interest-bearing liabilities
resulted primarily from a higher interest rate environment during the quarter
ended September 30, 1997. Interest expense on deposits increased $1.9 million,
or 14.4%, from $13.1 million for the 1996 period to $15.0 million for the 1997
period, primarily as a result of a $101.4 million, or 7.5%, increase in the
average balance of deposits and by a 26 basis point increase in the average cost
of such deposits from 3.96% in the 1996 period to 4.23% in the 1997 period.
Interest expense on borrowed funds increased $1.3 million, or 32.3%, from $3.9
million for the 1996 period to $5.2 million for the 1997 period primarily due to
a $72.2 million, or 25.6%, increase in the average balance of borrowings from
$281.7 million in the 1996 period to $353.9 million for the 1997 period and a 29
basis point increase in the average cost of such borrowings from 5.59% in the
1996 period to 5.88% in the 1997 period. The Bank continues to use borrowings to
leverage its capital and fund asset growth. 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 $16.0 million for the three months
ended September 30, 1997 as compared to $14.9 million for the three months ended
September 30, 1996, an increase of $1.1 million, or 7.1%. The increase in net
interest income was attributable to the growth in average interest-earning
assets
13
<PAGE>
to $1.9 billion for the quarter ended September 30, 1997 from $1.7 billion for
the quarter ended September 30, 1996. The growth in average interest-earning
assets was from increased investments in mortgage-backed securities and
increased originations of multi-family loans. Interest-bearing liabilities
increased $169.1 million, or 10.5%, to $1.8 billion for the 1997 period from
$1.6 billion for the 1996 period. As a result of a flattening of the yield curve
and the increased cost of interest-bearing liabilities, the Bank's net interest
spread declined from 3.27% to 3.13% and its net interest margin declined from
3.51% to 3.39%. For the quarter ended September 30, 1997, the yield on
interest-earning assets was 7.66% and the cost of interest-bearing liabilities
was 4.53% as compared to 7.50% and 4.23%, respectively for the quarter ended
September 30, 1996.
Provision for Loan Losses. The provision for loan losses totalled $900,000 for
the three months ended September 30, 1997 compared to $100,000 for the three
months ended September 30, 1996.The Company increased its provision for loan
losses to offset the higher level of charge-offs during the quarter and to
continue to increase its loan loss coverage ratios. 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 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 $1.6 million, or 230.0%, from
$686,000 for the quarter ended September 30, 1996 to $1.6 million for the
quarter ended September 30, 1997. The increase is mainly the result of a gain
from a condemnation award received from an inactive joint venture offset by a
net loss on the sale of securities.
Non-Interest Expense. Non-interest expense totalled $9.1 million for the quarter
ended September 30, 1997, an $8.1 million decrease from the $17.2 million
recorded in the prior year quarter. The decrease in non-interest expense is
primarily the result of the SAIF recapitalization charge recorded in the prior
year quarter. For the quarter ended September 30, 1997, compensation and
benefits expense increased to $4.5 million, an increase of $424,000, or 10.3%,
from $4.1 million for the quarter ended September 30, 1996. The increase in
compensation and benefits expense is mainly due to increased costs of the ESOP
benefit plan. For the quarter ended September 30, 1997, ESOP and RRP expenses
were $888,000, an increase of $327,000, or 58.3%, from $561,000 recorded in the
prior year quarter. Federal deposit insurance premiums decreased $551,000, or
71.4%, from $772,000 recorded for the quarter ended September 30, 1996 to
$221,000 for the quarter ended September 30, 1997 due to the reduction in SAIF
premiums. As a result of an increased asset base, the operating expense to
average assets ratio improved to 1.61% for the quarter ended September 30, 1997
from 1.78% in the prior year quarter. Real estate owned expense increased
$121,000, or 116.3%, from $104,000 in the 1996 period to $225,000 in the 1997
period primarily due to an increased provision for real estate losses. For the
quarter ended September 30, 1997, the provision for losses was $130,000 as
compared to $50,000 in the prior year period.
Income Tax Expense. Income tax expense was $3.5 million representing an
effective income tax rate of 42.6% for the three months ended September 30,
1997. As a result of loss in the prior year quarter the Bank had an income tax
benefit of $271,000. The Bank's effective income tax rate is primarily affected
by the amortization of excess of cost over fair value of net assets acquired for
which no tax benefit is provided as well as associated tax benefits related to a
subsidiary of the Bank.
14
<PAGE>
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. During the quarter ended
September 30, 1997, the Bank made a dividend payment of $7.0 million to the
Company. 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.
The Company is presently in its fifth stock repurchase plan whereby management
at its discretion is authorized by the Board of Directors to repurchase up to
approximately 441,000 shares of the Company's common stock. As of September 30,
1997, 213,300 common shares have been repurchased at a total cost of $5.9
million under this plan and approximately 228,000 shares remain to be
repurchased. For the quarter ended September 30, 1997, the Company repurchase
77,000 shares for a total cost of $2.2 million. As of September 30, 1997, the
Company's cumulative total of treasury shares (net of reissues for stock options
exercised) was 2,038,365 at an aggregate cost of $29.6 million.
On September 17, 1997, the Board of Directors declared a regular cash dividend
of $0.16 per common share for the quarter ending September 30, 1997. The
dividend was paid on October 17, 1997 to stockholders of record on October 3,
1997.
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
5.09%, and 1.79%, respectively, for the three months ended September 30, 1997.
The Bank's short-term liquidity ratio was 1.60% at September 30, 1997.
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 September 30, 1997,
assets qualifying for short-term liquidity, including cash and short term
investments, totalled $28.7 million.
The Bank's primary sources of funds are principal and interest payments on
loans, mortgage-backed securities and investment securities, deposits, advances
from the FHLB-NY, borrowings under reverse repurchase agreements and sales of
mortgage-backed securities and loans. 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. During the quarter ended September 30, 1997, principal payments
on loans and mortgage-backed securities totalled $31.3 million and $43.8
million, respectively, as compared to $35.5 million and $28.7 million,
respectively, in the prior year period. In addition, during the quarter ended
September 30, 1997, the Bank sold $84.0 million of agency backed mortgage-backed
securities. At September 30, 1997, borrowings from the FHLB-NY and reverse
repurchase agreements totalled $375.8 million, an increase of $23.9 million,
from $351.9 million at June 30, 1997. Deposits increased $17.5 million to $1.45
billion during the quarter ended September 30, 1997.
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 three months ended September 30, 1997, the Bank
originated and purchased mortgage loans and consumer loans in the amount of
$20.9 million and $12.6 million, respectively. During the three months ended
September 30, 1997, the Bank purchased $200.4 million of mortgage-backed
securities of which $179.4 million were classified as available-for-sale and
$21.0
15
<PAGE>
million were classified as held-to-maturity.
At September 30, 1997, the Bank had outstanding loan commitments of $12.4
million and open lines of credit of $54.7 million. In addition, the Bank had
commitments to purchase $2.7 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 September 30, 1997 totalled
$586.7 million. Management believes that a significant portion of such deposits
will remain with the Bank.
At September 30, 1997, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 5.42%, 5.42% and 14.72%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
16
<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
Not applicable.
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 1
*Incorporated by reference into the Registrant's Statement of Form S-1, as
amended, originally filed on December 3, 1993.
1 Submitted only with filing in electronic format.
17
<PAGE>
(b) Reports on Form 8-K
1) The Company filed Form 8-K on August 11, 1997,
which included a copy of the Company's press release
dated July 24, 1997 announcing its earnings for the
quarter ended June 30, 1997.
2) The Company filed Form 8-K on October 21, 1997,
which included a copy of the press release dated
October 17, 1997 announcing the completion of the
acquisition of Continental Bank by Reliance Bancorp,
Inc.
18
<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 11/14/97 /s/ Paul D. Hagan 11/14/97
- -------------------------- -------- -------------------------- --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
19
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------
1997 1996
---- ----
(In thousands, except per share amount)
<S> <C> <C>
Net Income............................................................. $ 4,741 $(1,404)
------ -------
Weighted average common shares outstanding............................. 8,225 8,372
Common stock equivalents due to dilutive
effect of stock option........................................... 749 --
------ -------
Total weighted average common shares and
equivalents outstanding.......................................... 8,974 8,372
====== ======
Earnings per common and common
share equivalents................................................ $ 0.53 $ (0.17)
====== =======
Total weighted average common shares and
equivalents outstanding.......................................... 8,974 8,372
Additional dilutive shares using ending period market value versus average
market value for the period when utilizing the treasury
stock method regarding stock options............................. 49 --
------- ------
Total shares for fully dilutive earnings per share..................... 9,023 8,372
====== ======
Fully diluted earnings per common and
common share equivalents......................................... $ 0.53 $ (0.17)
======= =======
20
</TABLE>
<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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,994
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 805729
<INVESTMENTS-CARRYING> 213224
<INVESTMENTS-MARKET> 217946
<LOANS> 913285
<ALLOWANCE> 5651
<TOTAL-ASSETS> 2034753
<DEPOSITS> 1453496
<SHORT-TERM> 375852
<LIABILITIES-OTHER> 37375
<LONG-TERM> 0
0
0
<COMMON> 106505
<OTHER-SE> 61525
<TOTAL-LIABILITIES-AND-EQUITY> 2034753
<INTEREST-LOAN> 18773
<INTEREST-INVEST> 17294
<INTEREST-OTHER> 116
<INTEREST-TOTAL> 36183
<INTEREST-DEPOSIT> 14964
<INTEREST-EXPENSE> 20169
<INTEREST-INCOME-NET> 16014
<LOAN-LOSSES> 900
<SECURITIES-GAINS> (122)
<EXPENSE-OTHER> 9118
<INCOME-PRETAX> 8259
<INCOME-PRE-EXTRAORDINARY> 8259
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4741
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.53
<YIELD-ACTUAL> 7.66
<LOANS-NON> 11315
<LOANS-PAST> 371
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5182
<CHARGE-OFFS> 497
<RECOVERIES> 66
<ALLOWANCE-CLOSE> 5651
<ALLOWANCE-DOMESTIC> 5651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4552
</TABLE>
