UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
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0-23126
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Commission File Number
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 Identification No.)
Incorporation or Organization)
585 Stewart Avenue, Garden City, New York 11530
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(Address of Principal Executive Offices) (Zip Code)
(516) 222-9300
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(Registrant's telephone number, including area code)
None
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Securities registered pursuant to Section 12(b) of the Act
Common Stock, $.01 par value
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Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
As of September 15, 1997 the aggregate market value of the shares of common
stock of the registrant outstanding was $253,480,000 excluding the 565,519
shares held by all directors and officers of the registrant. This figure is
based on the closing price by the Nasdaq National Market for a share of the
registrant's common stock on September 15, 1997, which was $32.125 as reported
in the Wall Street Journal on September 16, 1997. The number of shares of the
registrant's common stock outstanding as of September 15, 1997 was 8,709,455
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 19, 1997 and the Annual Report to
Stockholders for fiscal year 1997 are incorporated herein by reference - Parts
II and III.
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FORM 10-K CROSS REFERENCE INDEX
PART I
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Page No.
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Item 1. Business
Description of Business.......................................................................................... 1
Statistical Data:
Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differential..................................................................... 27
Mortgage and Other Loan Activities............................................................................... 28
Loan Maturity and Repricing...................................................................................... 29
Summary of Allowance for Loan Losses............................................................................. 30
Composition of Loan Portfolio.................................................................................... 32
Money Market, Debt and Equity and Mortgage-Backed Securities Portfolio........................................... 33
Maturity Listing for Money Market Investments, Debt and Equity
and Mortgage-Backed Securities Portfolio..................................................................... 34
Deposit Activities............................................................................................... 35
Borrowings....................................................................................................... 37
Item 2. Properties.......................................................................................................... 38
Item 3. Legal Proceedings................................................................................................... 40
Item 4. Submission of Matters to a Vote of Security Holders................................................................. 40
PART II
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Item 5. Market for Company's Common Equity and Related Stockholder Matters.................................................. 40
Item 6. Selected Financial Data............................................................................................. 41
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................................41
Item 8. Financial Statements and Supplementary Data......................................................................... 41
Reliance Bancorp, Inc. and Subsidiary:
Independent Auditors' Report................................................................................. 41
Consolidated Statements of Condition......................................................................... 41
Consolidated Statements of Income............................................................................ 41
Consolidated Statements of Changes in Stockholders' Equity................................................... 41
Consolidated Statements of Cash Flows........................................................................ 41
Notes to Consolidated Financial Statements................................................................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................ 41
PART III
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Item 10. Directors and Executive Officers of the Company..................................................................... 41
Item 11. Executive Compensation.............................................................................................. 41
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................................... 42
Item 13. Certain Relationships and Related Transactions...................................................................... 42
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................... 42
Signatures.................................................................................................................... 45
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PART I
Item 1. Business
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation
organized on November 16, 1993 at the direction of the Board of Directors of
Reliance Federal Savings Bank (the "Bank") for the purpose of becoming a holding
company to own all of the outstanding capital stock of the Bank upon its
conversion from a mutual to a stock form of organization. The stock conversion
was completed on March 31, 1994 which raised $103.6 million of net proceeds from
the sale of 10,750,820 common shares in the conversion including the issuance of
400,820 shares of stock to the Bank's Recognition and Retention Plans and Trusts
from authorized but unissued shares at $10.00 per share. The Company retained
$51.8 million of the net proceeds and used the remaining net proceeds to
purchase all of the outstanding stock of the Bank.
In addition to directing, planning and coordinating the business
activities of the Bank, the Company invests primarily in U.S. Government
securities and repurchase agreements. In addition, the Company completed its
acquisitions of Bank of Westbury, a Federal Savings Bank, in August 1995 and
Sunrise Bancorp, Inc. in January 1996 and intends to close its planned
acquisition of Continental Bank ("Continental") in the fourth quarter of
calendar year 1997.
General
The primary business of the Company is the operations of its
wholly-owned subsidiary, the Bank. The Bank's principal business is attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations, principal repayments and borrowings,
primarily in mortgage, multi-family, consumer loans (primarily home equity lines
of credit, home equity loans, auto and guaranteed student loans) and to a lesser
extent, commercial real estate and construction loans. In the past, the Bank has
also invested in loans secured by cooperative units ("co-op loans") and
commercial loans, but in recent years has discontinued its origination
activities in these areas. In the future, with the planned acquisition of
Continental, the Bank expects to begin originating commercial loans. In
addition, during periods in which the demand for loans which meet the Bank's
underwriting, investment and interest rate risk standards is lower than the
amount of funds available for investment, the Bank invests excess funding in
mortgage-backed securities, securities issued by the U.S. Government and
agencies thereof and other investments permitted by federal laws and
regulations. The Bank's revenues are derived principally from interest on its
loan and mortgage-backed securities portfolios. The Bank's primary sources of
funds are deposits, principal and interest payments on loans and mortgage-backed
and investment securities, FHLB-NY advances and reverse repurchase agreements.
The information presented in the consolidated financial statements and
in the Form 10-K reflect the financial condition and results of operations of
the Company, as consolidated with the Bank, its wholly-owned subsidiary. At June
30, 1997, the Company had total assets of $2.0 billion.
Planned Acquisition of Continental Bank
On May 5, 1997, the Company announced that it had entered into a
definitive agreement to acquire Continental, a commercial bank with 2 full
service banking offices located in Nassau and Suffolk counties
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in Long Island, New York, a commercial lending facility and 5 check cashing
facilities in Manhattan. Under the terms of the 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 $24.2 million. As of
June 30, 1997(unaudited), total assets of Continental were $177.3 million,
deposit were $136.2 million and total stockholders' equity was $13.4 million.
The merger is subject to the approval of Continental shareholders, as well as
certain regulatory approvals. The merger is expected to be completed in the
fourth quarter of calendar year 1997.
Market Area and Competition
The Bank has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank's deposit gathering area is primarily
concentrated in the communities surrounding its full service banking offices in
the New York City Borough of Queens and the New York State Counties of Nassau
and Suffolk. The Bank's primary lending area extends beyond its deposit
gathering area to the New York City Boroughs of Brooklyn, Staten Island,
Manhattan and the Bronx and the New York State County of Westchester.
The New York City metropolitan area has historically benefited from
having a large number of corporate headquarters and a diversity of financial
service industries. In particular, Long Island has historically benefited from a
large and well-developed suburban market, a well-educated employment base and a
diversity of industrial, service and high technology businesses. During the late
1980s and early 1990s, the New York City metropolitan experienced reduced
employment as a result of layoffs in the financial services industry, corporate
relocations and a general decline of the local, regional and national economies.
Additionally, during that period the area experienced a general weakening of
real estate values and a decline in home sales and construction. In particular,
the counties of Nassau and Suffolk suffered reduced employment as a result of
restructuring and downsizing in the high technology and defense related
industries, which have historically been significant sources of employment in
the Bank's primary market area. As a result, loan delinquencies increased and
the underlying values of properties securing non-performing loans made by
lending institutions generally declined resulting in substantial losses to some
institutions. In 1993, however, the economy of the Bank's primary market area
began to stabilize as demonstrated by improved employment and economic
indicators. Since such time, residential real estate values in the Bank's
primary market have stabilized and recently begun to improve. However,
commercial real estate values, which experienced the greatest declines during
the late 1980s and early 1990s, have only recently begun to stabilize and have
not improved as much as residential real estate and generally remain below the
values experienced in the late 1980s.
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from savings banks, savings and loan associations, mortgage
banking companies, commercial banks, credit unions and insurance companies. Its
most direct competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Bank also
faces additional competition for deposits from money market mutual funds,
corporate and government securities funds and other financial intermediaries
such as brokerage firms and insurance companies.
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Lending Activities
Portfolio Composition. The Bank offers a variety of loans to serve the
credit needs of its communities. The Bank's loan portfolio is comprised
primarily of first mortgage loans, most of which are underwritten to meet
Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage
Association ("FNMA") standards and guidelines and are secured by one- to
four-family residences, including co-op loans and, to a lesser extent, by
multi-family residences and commercial real estate. The Bank also emphasizes the
origination of consumer loans in the form of its home equity lines of credit and
home equity loans. The remainder of the Bank's loan portfolio, at June 30, 1997,
consisted of a variety of consumer and other loans, primarily guaranteed student
loans, auto and loans on deposit accounts. At June 30, 1997, the Bank's loan
portfolio totalled $914.5 million, of which, $552.6 million were one- to
four-family loans, $8.6 million were co-op loans, $138.1 million were consumer
and other loans, $190.3 million were multi-family loans, $23.4 million were
commercial real estate loans, and $1.4 million were construction loans.
The types of loans that the Bank may originate are subject to federal
laws and regulations. Interest rates charged by the Bank on loans are affected
principally by the demand for such loans, the cost and supply of money available
for lending purposes and rates offered by its competitors. General and economic
conditions, monetary policies of the federal government including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters also
affect interest rates charged by the Bank.
One- to Four-Family Residential Mortgage Lending. The Bank currently
offers first mortgage loans secured by one- to four-family residences and
condominiums located in the Bank's primary lending area. The Bank offers such
loans as fixed rate mortgage loans and adjustable rate mortgage loans ("ARMs")
with maturities ranging from five to 30 years. Loan originations are generally
obtained from existing or past customers, members of the local communities
served, or referrals from local real estate agents, attorneys and builders. The
Bank's one- to four-family residential mortgage loans are generally underwritten
according to guidelines of the FHLMC, FNMA and other governmental agencies.
However, the Bank originates loans for its own portfolio with amounts in excess
of the loan amounts specified by such guidelines.
At June 30, 1997, $552.6 million, or 60.4% of the Bank's total loan
portfolio consisted of one- to four-family residential loans, of which $241.7
million, or 43.7%, were ARM loans. The Bank currently offers one-year ARM loans
with terms of up to 30 years and loans with terms of up to 30 years which are
fixed for three, five, seven and ten years and convert into one-year ARM loans
at the end of the initial fixed period. These ARM loans may carry an initial
interest rate which is less than the fully indexed rate for the loan. These ARM
loans may be originated on a point or no-point basis (i.e., with or without a
loan origination fee based on a percentage of the loan amount). The maximum loan
amount for ARM loans offered by the Bank is currently $750,000 and the maximum
loan-to-value ratio is 80.0% of the property's appraised value or sales price,
whichever is lower or over 80% if private mortgage insurance is obtained.
Presently, the Bank's interest rates on ARM loans fluctuate based upon a spread
above the weekly average yield of United States Treasury securities, adjusted to
a constant maturity which corresponds to the adjustment period of the loan (the
"U.S. Treasury constant maturity index") as published weekly by the Federal
Reserve Board and are generally subject to limitations on interest rate
increases and decreases of 2.0% per adjustment period with a specified lifetime
cap. At June 30, 1997, the lifetime cap for point and no-point loans was 11.75%
and 12.75%, respectively. The Bank's ARM loans typically carry an initial
interest rate below the fully-indexed rate for the loan. However, the Bank
qualifies borrowers based upon
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the fully-indexed rate plus 200 basis points. The Bank determines the initial
discount rate in accordance with market and competitive factors and, as of June
30, 1997, the rate offered by the Bank on point loans was 275 basis points below
the fully-indexed rate of 8.40% as of such date. The rate offered by the Bank on
no-point loans during the same period was 175 basis points below the
fully-indexed rate. The volume and types of ARM loans originated by the Bank
have been affected by such market factors as the level of interest rates,
competition, consumer preferences and the availability of funds. During the past
several years, demand for ARM loans has been weak due to a low interest rate
environment and consumer preference for fixed rate loans. Accordingly, although
the Bank will continue to offer ARM loans, there can be no assurance that the
Bank will be able to originate a sufficient volume of ARM loans in the future to
increase or maintain the proportion that these loans currently bear to total
loans.
The Bank currently offers fixed rate mortgage loans with terms of 10 to
30 years, secured by one- to four-family residences and condominiums. The Bank
also offers these loans on a point or no-point basis with the respective
interest rates determined in accordance with prevailing market and competitive
factors. Fixed rate mortgage loans with terms exceeding 15 years are currently
originated by the Bank for sale in the secondary market to the FHLMC, FNMA and
other investors. The maximum loan amount for fixed rate loans offered by the
Bank is currently $750,000. For fixed rate loans to be retained for the Bank's
portfolio, the Bank's underwriting standards establish an 80.0% maximum
loan-to-value ratio or over 80% if private mortgage insurance is obtained. Fixed
rate loans which meet the eligibility requirements for sale to FHLMC or FNMA
will be considered for amounts up to 95.0% of the appraised value or sales
price, whichever is lower. Loan applications which meet the eligibility
requirements of the State of New York Mortgage Agency ("SONYMA") Low Interest
Rate Program will be considered for amounts up to 100.0% of the appraised value
or sales price, whichever is lower. At June 30, 1997, $310.9 million, or 56.3%,
of the Bank's one- to four-family residential mortgage loan portfolio consisted
of fixed rate loans.
In the past, the Bank originated co-op loans. However, since 1989, the
Bank has not originated, nor does it intend to originate in the future, any
co-op loans, with the exception of loans to facilitate the restructuring of a
classified asset or the sale of real estate owned. At June 30, 1997, the Bank's
co-op loans totalled $8.6 million, or 0.95% of total loans. The Bank also, from
1983 to 1989, originated a number of "low documentation" loans. As with co-op
loans, the Bank has ceased originations of such loans.
Multi-Family and Commercial Real Estate Lending. The Bank currently
offers fixed rate loans and ARM loans (one, three, five, seven, ten and 15 year)
secured by multi-family dwellings (five or more units) and commercial real
estate (e.g., office buildings, retail stores, mixed use properties, shopping
centers, etc.). The maximum loan amounts for multi-family and commercial real
estate loans offered by the Bank are $5.0 million and $1.5 million,
respectively. The Bank offers multi-family or commercial real estate loans with
terms up to 15 years, and amortizations of up to 30 years for multi-family loans
and 15 years for commercial real estate loans. The maximum loan-to-value ratios
for multi-family and commercial real estate loans is 70.0% and 60.0%,
respectively, of the property's appraised value or sales price, whichever is
lower.
During fiscal 1997, the Bank increased its origination of multi-family
loans. For fiscal 1997, originations totalled $115.9 million as compared to
$63.8 million in fiscal 1996 and $10.5 in fiscal 1995. The Bank increased its
emphasis on originations of 5 year ARM loans with terms of up to 15 years and
amortizations up to 30 years. These ARM loans may carry an initial interest rate
which is less than the fully indexed rate for the loan. These ARM loans are
originated on a point basis and no-point basis.
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Presently, the Bank's interest rates on 5 year ARM loans fluctuate based upon a
spread above the weekly average yield of United States Treasury securities,
adjusted to a constant maturity of 5 years which corresponds to the adjustment
period of the loan (the "U.S. Treasury constant maturity index for 5 years") as
published weekly by the Federal Reserve Board. The Bank determines the initial
discount rate in accordance with market and competitive factors and, as of June
30, 1997, the rate offered by the Bank on point loans was 100 basis points below
the fully-indexed rate of 8.785% as of such date. The rate offered by the Bank
on no-point loans during the same period was 75 basis points below the
fully-indexed rate.
During fiscal 1997, the Bank originated commercial real estate loans
totalling $650,000, as compared to $522,000 for fiscal 1996. The Bank did not
originate any commercial real estate loans during fiscal year 1995 other than a
small loan for the sale of a real estate owned property. Due to market
conditions and the Bank's determination to originate such loans on a selective
basis, the Bank's commercial real estate originations in recent periods have
been relatively low in comparison to its other lending activities.
The Bank determines the interest rate and term of each multi-family or
commercial real estate loan on a case-by-case basis and in accordance with
prevailing market and competitive factors. In making its determination, the Bank
will consider the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property, the marketability
of the property and the Bank's lending experience with the borrower, and the
property's net operating income available for debt service.
At June 30, 1997, the Bank's multi-family loans, consisting of 165
loans, totalled $190.3 million, or 20.8% of the Bank's total loan portfolio.
Commercial property loans, consisting of 118 loans, totalled $23.4 million, or
2.56% of the Bank's total loan portfolio. At June 30, 1997, all multi-family
loans were current and performing in accordance with their terms. At June 30,
1997, the Bank had 9 commercial real estate loans totalling $3.3 million which
were not performing in accordance with their loan terms and are on non-accrual
status.
Loans secured by commercial properties generally involve a greater
degree of risk than residential mortgage loans. Because payments on loans
secured by commercial properties are often dependent on the successful operation
or management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
Additionally, the past declines in real estate values have been more pronounced
with respect to commercial properties. The Bank seeks to minimize these risks by
originating such loans on a selective basis.
Construction Lending. The Bank currently offers construction loans
secured by one- to four-family, multi-family and commercial real estate
properties on a selective basis. The Bank's construction loan originations in
recent periods have primarily been made to finance the construction of one- to
four-family residential properties. As of June 30, 1997, construction loans
totalled $1.4 million or 0.16% of total loans. In addition, as of June 30, 1997,
the Bank has an outstanding commitment to fund a construction loan in the amount
of $12.0 million, of which $425,000 has been disbursed
Consumer and Other Lending. The Bank currently offers three general
types of consumer loans consisting of: (1) home equity lines of credit, (2) home
equity loans and (3) guaranteed student loans. The Bank offers adjustable rate
home equity lines of credit secured by one- to four-family owner-occupied
properties (including condominiums) which serve as the primary residence of the
borrower. Co-op units
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do not qualify as security for such loans. The Bank's home equity line of credit
loans include a standard home equity line of credit, which may be secured only
by a first or second mortgage on the underlying property, and a mini-home equity
line of credit, which may be secured by any recorded mortgage on the underlying
property. Both are open end lines of credit available only to borrowers within
the Bank's lending community. The maximum line of credit is presently $250,000
for the standard home equity line of credit and $50,000 for the mini-home equity
line of credit. Each line of credit loan is limited to a maximum loan-to-value
ratio of 80.0%, less any prior lien(s); provided the maximum loan amount plus
any prior lien balance does not exceed $350,000. For the standard home equity
line of credit, borrowers may draw on their line for a period of 10 years and
may pay interest only on a monthly basis. At the end of the 10 year period,
borrowers must repay principal and interest at a 20-year amortization rate. For
the mini-home equity line of credit, borrowers may draw on their line for a
period of 5 years and may pay interest only on a monthly basis. Borrowers must
then repay principal and interest at a 10-year amortization rate. Advances under
each line of credit are accessed by the borrower drawing a personal check on his
or her individual account set up specifically for the program. The account is
separate and distinct from any other checking account held by the borrower. At
June 30, 1997, loans outstanding under the Bank's home equity lines of credit
totalled $91.8 million, or 10.0% of total loans.
The Bank also offers fixed rate home equity loans with terms ranging
from one to 15 years. Such loans are secured by one- to four-family
owner-occupied real property (including condominiums) which is the primary
residence of the borrower. The loan is available only to borrowers within the
Bank's lending community and co-op units do not qualify as security for such
loans. The maximum loan amount is $50,000, and the maximum loan-to-value ratio
is 75.0%, less any prior liens; provided that the loan amount plus any prior
lien balance does not exceed a total of $350,000. At June 30, 1997, the Bank's
home equity loans totalled $19.5 million, or 2.1% of total loans.
The Bank's guaranteed student loans are made only under the Guaranteed
Student Loan Program administered by the New York State Higher Education
Services Corporation ("NYSHESC"). The Bank does not fix the amount, maturity, or
interest rate for its Education Loans; however, such terms meet the maximums
authorized by NYSHESC and therefore are guaranteed by NYSHESC. The Bank will not
approve an Education Loan application for any course of study offered by any
school with a default ratio above 15.0% on the most recent Cohort Default Rate
Listing published by the United States Department of Education. Increased
competition for guaranteed student loans in general has resulted in reduced
origination activity by the Bank for such loans. At June 30, 1997, the Bank's
guaranteed student loans totalled $17.0 million, or 1.9% of total loans.
Additionally, the Bank offers loans fully secured by its deposit
accounts which, at June 30, 1997, totalled $5.5 million, or 0.6% of total loans.
The Bank offered other consumer loans in the form of home improvement, auto and
boat loans; however, the Bank currently offers only auto loans. At June 30,
1997, such loans totalled $4.3 million or 0.5% of total loans.
Loan Approval Procedures and Authority. Loan approval authority has
been granted by the Board of Directors to the Bank's Mortgage Loan Committee and
Consumer Loan Committee. For all mortgage loans originated by the Bank, upon
receipt of a completed loan application from a prospective borrower, a credit
report is ordered, certain other information is verified and, if necessary,
additional financial information is requested. An appraisal of the real estate
intended to secure the proposed loan is required and is currently performed by
Board approved independent fee appraisers. The Bank requires title insurance on
all mortgage loans, except for certain consumer loans secured by real estate.
Borrowers
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must also obtain hazard insurance and may be required to obtain flood insurance
prior to closing. Borrowers generally are required to advance funds on a monthly
basis together with each payment of principal and interest to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes and private mortgage insurance premiums, if required.
Delinquent Loans and Foreclosed Assets
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of specific steps to induce the borrower to cure
the delinquency and restore the loan to a current status.
The Bank's collection procedures applicable to mortgage loans include a
computerized delinquency notice being sent at the time a payment is over 15 days
past due, with a second notice being sent at the time payment becomes 30 days
past due. A personal letter is generally sent after the 40th day of delinquency.
In the event that payment is not received after the 60th day, a division
supervisor will be notified. Such supervisor will then order an inspection of
the property within the next week and assume control of the account within two
weeks. If personal contact is made with the borrower during inspection or any
time prior to foreclosure, the Bank will attempt to obtain full payment or work
out a repayment schedule with the borrower to avoid foreclosure. Foreclosure
notices are sent when a loan is 85-90 days delinquent. Foreclosure commences on
the 91st day of delinquency. Most loan delinquencies are cured within 90 days
and no legal action is taken.
The Bank's collection procedures applicable to home equity lines of
credit are generally similar to those discussed above; however, if an agreeable
resolution of the delinquency is not reached, a notice of intent to foreclose is
generally sent after the 45th day of delinquency and the matter is generally
transferred to the supervisor on the same day. As with mortgage loans,
foreclosures for home equity lines of credit commence on the 91st day of
delinquency.
With respect to delinquent payments on other loans (e.g., mini-home
equity loans, automobile loans, etc.), delinquency letters are sent to borrowers
at the end of 26 and 40 days. In the event such loans become delinquent 120 days
or more, the account is charged off and legal action is pursued.
Non-Accrual Loans. The following table sets forth information regarding
non-accrual loans and loans delinquent 90 days or more on which the Bank is
accruing interest at the dates indicated. It is the Bank's policy to classify
any loans, or any portion thereof, that have been determined to be
uncollectible, in whole or in part, as non-accrual loans. With the exception of
guaranteed student loans, the Bank also classifies as non-accrual loans all
loans 90 days or more past due. When a loan is placed on non-accrual status, the
Bank ceases the accrual of interest owed and previously accrued interest is
charged against interest income. During the fiscal years ended June 30, 1997,
1996, and 1995, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totalled $573,000,
$554,000, and $130,000, respectively. These amounts were not included in the
Bank's interest income for the respective periods.
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At June 30,
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1997 1996 1995 1994 1993
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(Dollars in thousands)
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Non-accrual mortgage loans delinquent
more than 90 days............................. $ 14,262 $ 12,277 $ 3,210 $ 2,666 $ 4,073
Non-accrual other loans delinquent
more than 90 days.......................... 188 352 -- 88 95
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Total non-accrual loans........................ 14,450 12,629 3,210 2,754 4,168
Loans 90 days or more delinquent
and still accruing.......................... 277 350 461 843 1,099
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Total non-performing loans..................... 14,727 12,979 3,671 3,597 5,267
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Total foreclosed real estate, net of
related allowance for losses............... 450 1,564 1,558 2,911 3,909
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Total non-performing assets.................... $ 15,177 $ 14,543 $ 5,229 $ 6,508 $ 9,176
======= ======= ====== ====== ======
Non-performing loans to total loans............ 1.61% 1.58% 1.10% 1.08% 1.43%
Non-performing assets to total assets.......... 0.77% 0.82% 0.56% 0.78% 1.25%
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The increase in non-performing loans is primarily the result of the
following four commercial real estate loans to two borrowers which became
non-performing during the year ended June 30, 1997.
At June 30, 1997, 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 mortgage on the property and a $550,000 second
mortgage building loan. As of June 30, 1997, the borrower was more than 90 days
delinquent on the first and second mortgage loans. The borrower had declared
bankruptcy and a bankruptcy trustee was appointed by the court and was operating
the property. Subsequent to year end, the property was sold by the bankruptcy
trustee to a subsidiary of the Bank which has taken possession of the property.
The Bank is presently marketing the property for sale and is in the process of
determining the fair value of the property.
At June 30, 1997, the Bank had two loans outstanding totalling $1.0
million secured by a funeral home in Westbury, NY. The loans were originated in
August 1995 in the form of a $580,000 first mortgage on the property and
$500,000 second mortgage building loan. As of June 30, 1997, the borrower has
$465,000 outstanding on the building loan. An appraisal dated March 1995, valued
the property at $1.7 million. As of June 30, 1997, the borrower is more than 90
days delinquent on the first and second mortgage loans. 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.
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Allowances for Losses on Loans, Investments in Real Estate
and Real Estate Owned.
The Bank's allowance for loan losses is established and maintained
through a provision for loan losses based on management's evaluation of the risk
inherent in the Bank's loan portfolio and the condition of the local economy in
the Bank's market areas. Such evaluation, which includes a review of all loans
on which full collectibility is not reasonably assured, considers among other
matters, the estimated fair market value of the underlying collateral, economic
and regulatory conditions, and other factors that warrant recognition of an
adequate loan loss allowance. The evaluation includes a system of ranges and
percentages as a supplemental measure for reviewing the adequacy of the
allowance for loan losses. Although management believes it uses the best
information available to make determinations with respect to the adequacy of the
Bank's allowance for loan losses, future adjustments may be necessary if
economic and other conditions differ from the economic and other conditions in
the assumptions used in making the initial determinations which such adjustments
could have an adverse impact on the earnings or financial condition of the
Company.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. The Bank's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the Office of
Thrift Supervision ("OTS") and the Federal Deposit Insurance Company ("FDIC"),
both of which can order the establishment of additional general or specific loss
allowances.
As a result of the declines in local and regional real estate market
values and the significant losses experienced by many financial institutions,
there has been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institutions by the OTS and the FDIC. While the Bank believes it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to materially increase at that time its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings at that time.
Investment Activities
General
As part of the present investment policy, the Bank deploys a large
portion of its investable funds into mortgage-backed securities, and to a lesser
extent, U.S. Government and agency obligations, and state and municipal debt
securities. The investment policy of the Bank, which is approved by the Board of
Directors and implemented by the Bank's Investment Committee as authorized by
the Board, is designed primarily to generate a favorable return for the Bank
without compromising the Bank's business objectives or incurring undue interest
rate or credit risk, and to provide and maintain liquidity for the Bank.
The Investment Committee, which is comprised of the Bank's President
and Chief Executive Officer, Executive Vice President - Treasurer, Senior Vice
President-Chief Financial Officer, and Vice President - Investment Officer,
meets as needed but not less than on a monthly basis to monitor the Bank's
investment transactions, to establish future investment strategies and to set
future spending parameters. The Board of Directors reviews the Bank's investment
policy on a quarterly basis and the Bank's investment activity on a monthly
basis. In establishing its investment strategies, the Committee considers
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the Bank's business and growth plans, its interest rate sensitivity "gap"
position, the local and national economic environment, the types of securities
to be held and other factors.
Although federally-chartered savings institutions have authority to
invest in various types of assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers acceptances, repurchase
agreements, loans of federal funds, and, subject to certain limits, corporate
securities, commercial paper and mutual funds, the Bank currently favors
mortgage-backed securities over other types of securities due to the Bank's
focus upon residential mortgage lending. Statement of Financial Accounting
Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No.115") requires that investments in securities are to be
classified in one of the following three categories and accounted for
accordingly: (1) trading securities; (2) securities available- for-sale; and (3)
securities held-to-maturity. Unrealized gains or losses on trading securities
would be included in the determination of net income. Unrealized gains and
losses on available-for-sale securities, which include, equity securities that
have readily determinable fair values are excluded from earnings and reported as
a separate component of equity, net of taxes. Upon the purchase of an investment
security, the Bank and the Company will make a determination as to the
classification of the security. However, the Bank and the Company currently do
not purchase securities with the intention of trading such securities, nor does
the Bank or the Company maintain trading portfolios.
Debt and Equity Securities
At June 30, 1997, the Bank's debt and equity securities portfolio
classified held-to-maturity totalled $46.0 million. The debt and equity
securities held-to-maturity portfolio consisted of $30.0 million in U.S.
Government agency obligations, $391,000 in municipal obligations and $15.7
million of FHLB stock. At June 30, 1997, the Bank's debt and equity securities
portfolio classified available-for-sale totalled $26.9 million. The Bank's debt
and equity securities available-for-sale portfolio consisted of $22.0 million in
U.S.
Government agency obligations, and $17,000 in marketable equity securities.
At June 30, 1997, the holding company's debt and equity securities
available-for-sale portfolio totalled $4.8 million and consisted of US Treasury
bills. At June 30, 1997, the Company had money market investments which
consisted of $1.1 million in repurchase agreements. The Bank's current
investment policy does not permit the Bank to invest in non-investment grade
bonds or high-risk mortgage derivatives.
Mortgage-Backed Securities
The Bank invests in mortgage-backed securities, including Real Estate
Mortgage Investment Conduits ("REMICs") and Collateralized Mortgage Obligations
("CMOs"), and utilizes such investments to complement its mortgage lending
activities in periods of low loan demand for the types of mortgage loans the
Bank originates to be held for investment in conformance with its underwriting
standards and interest rate risk policies, namely, ARM loans and shorter-term
fixed rate loans secured by one- to four-family properties and multi-family
loans. Investments in mortgage-backed securities involve a risk that actual
prepayments will exceed prepayments estimated over the life of the security
which may result in a loss of any premium paid for such instruments thereby
reducing the net yield on such securities. In addition, if interest rates
increase, the market value of such securities may be adversely affected.
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REMICs and CMOs are typically issued by a special purpose entity, which
may be organized in a variety of legal forms, such as a trust, a corporation or
a partnership. The entity aggregates pools of loans or pass-through securities,
which are used to collateralize the mortgage-related securities. Once combined,
the cash flows are divided into "tranches" or classes of individual securities,
thereby creating more predictable average lives for each security than the
underlying collateral. Accordingly, under this security structure, loan
principal and interest payments are allocated to a mortgage-related securities
class or classes structured to have priority until it has been paid off. It is
the policy of the Bank to limit its privately issued REMICs and CMOs to non-high
risk securities rated "AAA". As of June 30, 1997, the Bank's portfolio of REMICs
totalled $131.2 million of which $20.5 million were agency issued and $110.7
million were private issued.
The Bank purchases mortgage-backed securities in order to: (I) generate
positive interest rate spreads with minimal administrative expense; (ii) lower
its credit risk as a result of the guarantees provided by FHLMC, FNMA, and GNMA;
(iii) utilize these securities as collateral for borrowings; and (iv) increase
the liquidity of the Bank. The Bank has primarily invested in mortgage-backed
securities issued or sponsored by FNMA, FHLMC and GNMA and private issuers.
At June 30, 1997, mortgage-backed securities totalled $881.2 million,
or 44.6% of total assets, of which $159.4 million were classified as
held-to-maturity and $721.8 million were classified as available- for-sale. The
Bank increased its purchases of mortgage-backed securities available-for-sale as
part of its leveraging strategy in order to improve its return on equity. At
June 30, 1997, the mortgage-backed securities portfolio classified as
available-for-sale had an unrealized gain of $2.9 million. The market value of
all mortgage-backed securities totalled approximately $884.9 million at June 30,
1997.
As of June 30, 1997, $347.8 million, or 39.5%, of the Bank's
mortgage-backed securities portfolio carried adjustable rates repricing
annually. The portfolio had a weighted average interest rate yield of 7.20% at
June 30, 1997.
Sources of Funds
General. Deposits, loans and mortgage-backed securities principal and
interest payments, FHLB-NY advances and reverse repurchase agreements are the
primary sources of the Bank's funds for use in lending, investing and for other
general purposes. The Bank utilizes borrowings as part of its asset/liability
management strategy.
Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank presently offers passbook savings, demand
deposit, NOW, money market, and certificate accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates, pricing of deposits and competition. The Bank's deposits are
primarily obtained from areas surrounding its offices, and the Bank relies
primarily on marketing new products, service and long-standing relationships
with customers to attract and retain these deposits. The Bank does not use
brokers to obtain deposits, nor does it offer a negotiated rate on large dollar
deposits.
When management determines the levels of the Bank's deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings
and the rates charged on other sources of funds. The Bank has maintained a high
level of passbook, demand deposit and NOW accounts ("core deposits"), which has
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contributed to its low cost-of-funds. Passbook, demand deposits and NOW accounts
represented 37.4% of total deposits at June 30, 1997 as compared to 41.7% of
total deposits at June 30, 1996.
Borrowings. The Bank has utilized borrowed funds to grow, leveraging
the Bank's capital and improving the return on equity. Borrowed funds,
principally from the FHLB-NY and reverse repurchase agreements are utilized as a
source of funding in order to take advantage of favorable rates of interest in
comparison to its other sources of funds. The Bank's FHLB-NY advances are
generally secured by a blanket lien against the Bank's mortgage portfolio,
mortgage-backed and investment securities portfolios and the Bank's investment
in the stock of the FHLB-NY. The maximum amount that the FHLB-NY will advance
for purposes other than for meeting withdrawals, fluctuates from time to time in
accordance with the policies of the FHLB-NY. At June 30, 1997, total advances
from the FHLB-NY were $40.0 million. The Bank has also entered into reverse
repurchase agreements with nationally recognized primary securities dealers.
Reverse repurchase agreements are accounted for as borrowings and are secured by
the securities sold with agreements to repurchase. At June 30, 1997, borrowings
under reverse repurchase agreements totalled $311.9 million.
Subsidiary Activities
The Bank formed a number of subsidiaries in the mid-1980s to enter into
real estate-development joint ventures for the development of properties located
in the Bank's primary lending area, all of which are currently inactive. The
Bank does not currently intend to form any new subsidiaries or use any currently
inactive subsidiaries to enter into new real estate development projects.
However, the Bank currently uses one subsidiary to hold a foreclosed commercial
real estate property. The Bank maintains the following active subsidiaries.
RFS Insurance Agency Inc. RFS Insurance was organized by the Bank on
April 15, 1983 for the purpose of engaging in the sale of savers life insurance
issued by American International Life Insurance ("AILI") through its Savers Life
Insurance Program. AILI terminated this program on January 1, 1989; since that
time the Bank has originated no new policies and has only accepted renewals of
existing policies. The Bank currently offers the sale of non-deposit investment
products (annuities and mutual funds) to Bank customers through this subsidiary
and recognizes fee income from such sales.
Reliance Preferred Funding Corp. Reliance Preferred Funding Corp.("the
Subsidiary") was organized by the Bank on April 4, 1997 for the purpose of
engaging in a real estate investment trust ("REIT"). The purpose of this
subsidiary is to enhance and strengthen Reliance's capital position. The
Subsidiary would be poised to raise capital expeditiously in the event that
Reliance should need such capital (e.g., for a significant strategic transaction
or combination). In addition to such possible increased capital resulting from
any future public offering that the Subsidiary or Reliance may conduct, the
Subsidiary will promote greater retained earnings for Reliance and thereby will
serve to strengthen Reliance's capital position from an operational standpoint
as well. This is so for two reasons: (1) after transferring a portion of
Reliance's loan portfolio to the Subsidiary, Reliance may be better able to
isolate and effectively manage such assets in preparation of going to the
capital markets and (2) Reliance expects to receive favorable tax benefits from
the Subsidiary's continuing operations as a REIT.
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Personnel
As of June 30, 1997, the Bank had 320 full-time employees and 179
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation
General. The Company and the Bank will report their income on a
calendar year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. The Bank is being audited by the Internal Revenue
Service ("IRS") for the calendar years 1989 and 1990. The IRS has specifically
audited the items related to joint ventures losses and has submitted the
findings to a joint committee for further action. Based upon preliminary
discussions with the IRS, management of the Bank believes that any actions taken
by the IRS will not materially affect the financial condition and results of
operations of the Company and the Bank. In addition, the Bank of Westbury's tax
returns are being audited by New York State for the 1992, 1993 and 1994 tax
years. Based upon discussions with the New York State Department of Taxation and
Finance, these tax returns are being settled for an immaterial amount.
Tax Bad Debt Reserves. For calendar year ended December 31, 1995, the
Bank was allowed a special bad debt deduction based on the greater of the amount
calculated under the experience method or the percentage of taxable income
method. The statutory percentage under the latter method was 8% for 1995. 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, 1996 and 1995. The Bank used
the percentage of taxable income method in its 1995 tax return.
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.
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Distributions. To the extent that (I) the Bank's tax bad debt reserve
for losses on qualifying real property loans exceeds the amount that would have
been allowed under the experience method and (ii) the Bank makes "nondividend
distributions" to the Company that are considered to have been made from the
excess bad debt reserve, i.e., that portion, if any, of the balance of the
reserve for qualifying real property loans attributable to certain deductions
under the percentage of taxable income method, or the supplemental reserve for
losses on loans ("Excess Distributions"), then an amount based on the
distribution will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserves. Thus, any dividends to the Company that would
reduce amounts appropriated to the Bank's bad debt reserves and deducted for
federal income tax purposes would create a tax liability for the Bank.
The amount of additional taxable income created from an Excess
Distribution is an amount that when reduced by the tax attributable to the
income is equal to the amount of the distribution. Thus, if after the
Conversion, the Bank makes a "nondividend distribution", approximately one and
one-half times the amount so used would be includable in gross income for
federal income tax purposes, assuming a 35.0% corporate income tax rate
(exclusive of state and city taxes). See "Regulation and Supervision-Limitations
on Capital Distributions" for limits on the payment of dividends by the Bank.
The Bank does not intend to pay dividends that would result in a recapture of
any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the
"Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate
of 20.0%. Only 90.0% of AMTI can be offset by net operating loss carryovers.
AMTI is increased by an amount equal to 75.0% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). In addition, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Bank, whether or not
an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT. The Bank was subject to an environmental tax liability for
the tax year ended December 31, 1996 and 1995, which liability was not material.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70.0% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20.0% of the stock of a
corporation distributing a dividend, 80.0% of any dividends received may be
deducted.
State and Local Taxation
New York State and New York City Taxation. The Bank is subject to the
New York State Franchise Tax on Banking Corporations in an amount equal to the
greater of (I) 9.0% of "entire net income" allocable to New York State, during
the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 3.0% of "alternative
entire net income" allocable to New York State, (b) 0.01% of the value of the
Bank's assets allocable to New York State with certain modifications, or (c
)$250. Entire net income is similar to federal taxable income, subject to
certain
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modifications (including the addition of interest income on state and municipal
obligations, the partial exclusion of interest income on certain United States
Treasury, New York State, and New York City obligations, and an additional New
York State bad debt deduction). Alternative entire net income is equal to entire
net income without certain deductions which are allowable for the calculation of
entire net income. New York State also imposes a surcharge on the Franchise Tax
of Banking Corporations which includes the 17.0% Metropolitan Transportation
Business Tax Surcharge which currently applies to the Bank.
The Bank is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. Currently, New York City does
not impose surcharges applicable to the Bank.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination and
supervision by the Office of Thrift Supervision ("OTS"), as its chartering
agency, and the Federal Deposit Insurance Corporation ("FDIC"), as the deposit
insurer. The Bank is a member of the FHLB System and its deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or through legislation, could have a material adverse impact on the
Company, the Bank and their operations. The Company, as a savings and loan
holding company, is required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS and of the Securities and Exchange
Commission ("SEC") under the federal securities laws. Certain of the regulatory
requirements applicable to the Bank and to the Company are referred to below or
elsewhere herein.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by the Home Owner's Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act"). The HOLA and the FDI
Act were amended by the Financial Institution Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). FIRREA was enacted for the purpose of resolving problem
savings institutions, establishing a new thrift insurance fund, reorganizing the
regulatory structure applicable to savings institutions, and imposing bank-like
standards on savings institutions. FDICIA, among other things,
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requires that federal banking regulators intervene promptly when a depository
institution experiences financial difficulties, mandates the establishment of a
risk-based deposit insurance assessment system and requires imposition of
numerous additional safety and soundness operational standards and restrictions.
FIRREA and FDICIA both contain provisions affecting numerous aspects of the
operations and regulations of federally-insured savings banks and empower the
OTS and the FDIC, among other agencies, to promulgate regulations implementing
their provisions. The description of statutory provisions and regulations
applicable to savings institutions set forth in this document do not purport to
be a complete description of such statutes and regulations and their effects on
the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower. Unless
an exception applies, savings institutions may not make a loan or extend credit
to a single or related group of borrowers in excess of 15.0% of the Bank's
unimpaired capital and surplus. An additional amount may be lent, equal to 10.0%
of unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain financial instruments and
bullion, but does not include real estate. At June 30, 1997, there were two
borrowers each with aggregate loans totalling $9.3 million. These loans
represented the largest aggregate amount of loans to one borrower and were below
the Bank's loans to one borrower limit of $17.0 million at such date. At June
30, 1997, both of these borrowers were current.
QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender ("QTL") test. Under the QTL test, as modified by FDICIA, a savings
bank is required to maintain at least 65.0% of its "portfolio assets" (total
assets less ( I ) specified liquid assets up to 20.0% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities) on a monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
June 30, 1997, the Bank maintained 95.7% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice to the OTS, make
capital distributions during a calendar year equal to the greater of: ( I ) 100%
of its net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year; or
(ii) 75.0% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its regulatory requirements or the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an
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unsafe or unsound practice. In December 1994, the OTS proposed amendments to its
capital distribution regulation that would generally authorize the payment of
capital distributions without OTS approval provided that the payment does not
cause the institution to be undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At June 30, 1997, the
Bank was a Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10.0% depending upon economic conditions and the savings flows
of member institutions, and is currently 5.0%. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1.0%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less. The
OTS has recently proposed to lower the liquidity requirement from 5% to 4% and
eliminate the 1% short-term liquid asset requirement. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's average
liquidity and short-term liquidity ratios for June 30, 1997 were 5.29% and
1.65%, respectively, which exceeded the applicable requirements. The Bank has
never been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed as a percentage upon the savings institution's
total assets, including consolidated subsidiaries, as reported in the bank's
latest quarterly thrift financial report. The assessments paid by the Bank for
the fiscal year ended June 30, 1997, totalled $305,000.
Branching. The OTS regulations authorize federally chartered savings
associations to branch nationwide to the extent allowed by federal statute. This
permits federal savings and loan associations with interstate networks to
diversify more easily their loan portfolios and lines of business
geographically. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "satisfactory" CRA rating
in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in
certain transactions with related parties or "affiliates" (i.e., any company
that controls or is under common control with an institution, including the
Company and any non-savings institution subsidiaries) is limited by Sections 23A
and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of "covered
19
<PAGE>
transactions" (including extension of credit to, purchases of assets from or the
issuance of a guarantee, acceptance or letter of credit on behalf of affiliate)
with any individual affiliate to 10.0% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20.0% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally provides
that certain transactions with affiliates, (including loan, asset sales or
purchases, and any servicing, leases or other agreements) must be on terms and
under circumstances, including credit standards, that are substantially the same
or at least as favorable to the institution as those prevailing at the time for
comparable transactions with nonaffiliated companies. Notwithstanding Sections
23A and 23B, savings institutions are prohibited from lending to any affiliate
that is engaged in activities that are not permissible for bank holding
companies under Section 4 ( c ) of the Bank Holding Company Act ("BHC Act").
Further, no savings institution may purchase the securities of any affiliate
other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and principal shareholders (generally considered to be those owners controlling
or having the power to vote ten percent or more of any class of the Company's
stock) as well as entities controlled by such persons, are currently governed by
Sections 22(g) and 22(h) of the FRA, and the Federal Reserve Board's ("FRB")
Regulation O thereunder. Among other things, these regulations require such
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and may not involve more than the normal risk of
repayment. Recent legislation created an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to insiders based, in part, on the Bank's capital position and
requires certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has the
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to
20
<PAGE>
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans when such plans are required.
Capital Requirements. The OTS capital regulations require
savings institutions to meet three minimum capital standards: a 1.5% tangible
capital standard, a 3.0% leverage ratio (or core capital ratio) and an 8.0%
risk-based capital standard. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage (core) capital ratio (3% for institutions receiving the
highest rating on the CAMEL financial institution rating system), and, together
with the risk-based capital standard itself, a 4% Tier I risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
surplus, and minority interests in equity accounts of consolidated subsidiaries
less intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations also require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
FDICIA required that the OTS (and other federal banking agencies)
revise the risk-based capital standards, with appropriate transition rules, to
ensure that such standards take account of interest rate risk, concentration of
risk and the risks of nontraditional activities. The OTS regulations set forth
the methodology for calculating an interest rate risk component that would be
incorporated into the OTS risk- based capital regulations. A savings
institutions with "above normal" interest rate risk exposure must deduct from
total capital a portion of its capital to cover such interest rate risk for
purposes of calculating their risk-based capital requirements. A savings
institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200-basis point increase or decrease in
market interest rates (except when the 3-month Treasury bond equivalent yield
falls below 4.0%, then the decrease will be equal to one-half of that Treasury
rate) divided by the estimated economic value of the institution's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
institution whose measured interest rate risk exposure exceeds 2.0% must deduct
an interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2.0%,
multiplied by the estimated economic value of the bank's assets. That dollar
amount is deducted from an institution's total capital in calculating compliance
with its risk-based capital requirement. For the present time, the OTS has
deferred implementation of the interest-rate risk component. If the Bank had
21
<PAGE>
been subject to an interest-rate risk component as of June 30, 1997, the Bank
would not have been subject to any deduction from capital as a result of its
interest rate risk position.
At June 30, 1997, the Bank met each of its capital requirements. The
following table sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, and the Bank's historical amounts
and percentages at June 30, 1997.
At June 30, 1997
-------------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- - ------- - ------- -
Tangible...... $ 28,937 1.5% $ 107,967 5.6% $ 79,030 4.1%
Leverage...... $ 57,874 3.0% $ 107,967 5.6% $ 50,093 2.6%
Risk-based.... $ 59,670 8.0% $ 113,094 15.2% $ 53,424 7.2%
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF") (the
deposit insurance fund that covers most commercial bank deposits) are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between
22
<PAGE>
24 and 25 basis points. The BIF met the required reserve in 1995, whereas the
SAIF was not expected to meet or exceed the required level until 2002 at the
earliest. This situation was primarily due to the statutory requirement that
SAIF members make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under which
92% of BIF members paid an annual premium of only $2,000. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule applicable to SAIF member institutions of 23
to 31 basis points. As long as the premium differential continued, it may have
had adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank were placed at a substantial competitive disadvantage
to BIF members with respect to pricing of loans and deposits and the ability to
achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed
special one-time assessment on SAIF member institutions, including the Bank, the
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and is generally tax deductible. The SAIF Special Assessment
recorded by the Bank amounted to $8.25 million on a pre-tax basis and $4.9
million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO
bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF
deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.4 basis points. Full pro rata sharing of
the FICO payments between BIF and SAIF members will occur on the earlier of
January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act 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 the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. The FDIC also lowered the SAIF assessment schedule for the
third quarter of 1997 to 18 to 27 basis points. 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.
The Bank's assessment rate for fiscal 1997 ranged from 4 to 23 basis
points and the premium paid for this period was $1.8 million. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
23
<PAGE>
Thrift Rechartering Legislation. The Funds Act provides that the BIF
and SAIF will merge on January 1, 1999 if there are no more savings associations
as of that date. That legislation also required that the Department of Treasury
submit a report to Congress that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date under some bills, or they would automatically become
national banks. Under some proposals, converted federal thrifts would generally
be required to conform their activities to those permitted for the charter
selected and divestiture of nonconforming assets would be required over a two
year period, subject to two possible one year extensions. State chartered
thrifts would become subject to the same federal regulation as applies to state
commercial banks. A more recent bill passed by the House Banking Committee would
allow savings institutions to continue to exercise activities being conducted
when they convert to a bank regardless of whether a national bank could engage
in the activity. Holding companies for savings institutions would become subject
to the same regulation as holding companies that control commercial banks, with
a limited grandfather provision for savings and loan holding company activities.
The Bank is unable to predict whether such legislation would be enacted or the
extent to which the legislation would restrict or disrupt its operations.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 1997, of $15.7 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended June 30, 1997, 1996 and 1995,
dividends from the FHLB to the Bank amounted to $820,000, $725,000 and $502,000,
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would likely also be reduced. Further,
there can be no assurance that the impact of FDICIA and the FIRREA on the FHLBs
will not also cause a decrease in the value of the FHLB stock held by the Bank.
Federal Reserve System
The FRB regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves be maintained against aggregate transaction accounts as follows: For
accounts aggregating $49.3 million or less (subject to adjustment by the FRB)
the reserve requirement is 3.0%; and for accounts greater than $49.3 million,
the reserve requirement is $1.48 million plus 10.0% (subject to adjustment by
the FRB between 8.0% and 14.0%) against that portion of total transaction
accounts in
24
<PAGE>
excess of $49.3 million. The first $4.4 million of otherwise reservable balances
(subject to adjustments by the FRB) are exempted from the reserve requirements.
The Bank is in compliance with the foregoing requirements. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the HOLA, as amended. As such, the Company has
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the holding company's subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5.0%
of the voting stock of another savings institution or holding company without
prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
As a unitary savings and loan holding company (i.e., one that controls
only one thrift subsidiary), the Company generally will not be restricted under
existing banking laws as to the types of business activities in which it may
engage, provided that the Bank continues to be a QTL. See "Federal Savings
Institution Regulation - QTL Test" for a discussion of the QTL requirements.
Upon any nonsupervisory acquisition by the Company of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings institution by OTS, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior
approval of the OTS, and certain other activities authorized by OTS regulation,
and no multiple savings and loan holding company may acquire more than 5% of the
stock of a company engaged in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
25
<PAGE>
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (I) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that ( i ) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. This requirement would apply to acquisitions of the
Company's stock.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the
Exchange Act of 1934, as amended (the "Exchange Act"). The Company and its
officers and directors are subject to periodic reporting, proxy solicitation
regulations, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of 1933 (the "Securities
Act") of shares of the Common Stock issued in the Conversion does not cover the
resale of such shares. Shares of the Common Stock purchased by persons who are
not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of ( I ) 1.0% of the outstanding shares of the Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks. Provision may be made in the future by the Company to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances.
26
<PAGE>
STATISTICAL DATA
The detailed statistical data that follows is being presented in accordance with
Guide 3, prescribed by the Securities and Exchange Commission. This data should
be read in conjunction with the financial statements and related notes and the
discussion included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations incorporated herein by reference to the 1997
Annual Report to Stockholders included and as Exhibit 13.0 to this Form 10-K.
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest
Differential.
A, B. Page 16 of the Company's 1997 Annual Report presents the
distribution of assets, liabilities and stockholders' equity and
interest differential, under the caption "Analysis of Net Interest
Income" and is incorporated herein by reference.
C. Interest Differential
Page 17 of the Company's 1997 Annual Report presents the interest
differential under the caption "Rate/Volume Analysis" and is
incorporated herein by reference.
27
<PAGE>
A. Mortgage and Other Loan Activities
The following table sets forth the Bank's loan originations, loan purchases,
sales, and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period........................ $ 690,983 $ 224,841 $ 231,615
Mortgage loans originated:
One- to four-family......................... 39,370 38,557 10,913
Co-operatives............................... -- -- 86
Multi-family................................ 115,887 63,840 10,500
Construction................................ 6,417 4,159 12,589
Commercial real estate...................... 650 522 155
---------- -------- ---------
Total mortgage loans originated .......... 162,324 107,078 34,243
Mortgage loans purchased...................... 16,956 426,328 1,236
------ ------- --------
Total mortgage loans originated
and purchased .......................... 179,280 533,406 35,479
Transfer of mortgage loans
to real estate owned........................ (820) (1,450) (646)
Principal repayments.......................... (85,766) (59,984) (40,126)
Sales of loans................................ (7,275) (5,830) (1,481)
------- --------- ---------
At end of period......................... $ 776,402 $ 690,983 $ 224,841
======= ======== ========
Other loans (gross):
At beginning of period...................... $ 130,410 $ 108,653 $ 100,250
Other loans originated...................... 47,718 35,816 33,586
Other loans purchased....................... -- 23,489 --
Principal repayments........................ (40,013) (37,548) ( 25,183)
-------- --------- ----------
At end of period...................... $ 138,115 $ 130,410 $ 108,653
======= ======== ========
</TABLE>
28
<PAGE>
B. Loan Maturity and Repricing
The following table shows the maturity or period to repricing of the Bank's loan
portfolio at June 30, 1997. Loans that have adjustable rates are shown as being
due in the period during which the interest rates are next subject to change.
The table does not include prepayments or scheduled principal amortization.
Prepayments and scheduled principal amortization on loans totalled $125.8
million, $97.5 million and $65.3 million, respectively, for the years ended June
30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------------
Mortgage Loans
-----------------------------------------------------------
Commercial
One- to Multi- Real
four-family Co-operative family Estate Construction
----------- ------------ ------ ------ ------------
Amounts due: (In thousands)
<S> <C> <C> <C> <C> <C>
Within one year................... $ 191,472 $ 7,600 $ 190 $ 11,549 $ 1,440
After one year:
One to three years............. 14,063 498 11,045 8,312 --
Three to five years............ 30,051 14 102,878 1,919 --
Five to ten years.............. 131,176 104 40,667 191 --
Ten to twenty years............ 156,114 157 11,076 1,474 --
Over twenty years.............. 29,701 274 24,437 -- --
------- ----- ------- ------- ------
Total due after one year.......... 361,105 1,047 190,103 11,896 --
------- ----- ------- ------- ------
Total amounts due................. $ 552,577 $ 8,647 $ 190,293 $ 23,445 $ 1,440
======== ====== ======== ======= ======
Discounts, premiums and...........
deferred loan fees, net......
Allowance for loan losses...........
Loans receivable, net..........
<CAPTION>
At June 30, 1997
----------------------------------------------------------
Consumer and Other Loans
----------------------------------------------------------
Home
Equity Home
Lines of Equity Other Installment Total
Credit Loans Loans Commercial Receivable
------ ----- ----- ---------- ----------
(In thousands)
Amounts due:
<S> <C> <C> <C> <C> <C>
Within one year................... $ 91,782 $ 165 $ 18,971 $ 44 $ 323,213
After one year:
One to three years............. -- 1,970 5,014 6 40,908
Three to five years............ -- 4,841 1,846 8 141,557
Five to ten years.............. -- 9,427 415 -- 181,980
Ten to twenty years............ -- 3,102 35 489 172,447
Over twenty years.............. -- -- -- -- 54,412
-------- ------- ------- ---- -------
Total due after one year.......... -- 19,340 7,310 503 591,304
-------- ------- ------- ---- -------
Total amounts due................. $ 91,782 $ 19,505 $ 26,281 $ 547 914,517
======== ======== ======== =====
Discounts, premiums and...........
deferred loan fees, net...... (14)
Allowance for loan losses........... (5,182)
---------
Loans receivable, net.......... $ 909,321
=========
</TABLE>
The following table sets forth, at June 30, 1997, the dollar amount of all fixed
rate loans contractually due after June 30, 1997, and adjustable rate loans
repricing after June 30, 1997.
<TABLE>
<CAPTION>
Due After June 30, 1997
---------------------------------------------
Fixed Adjustable Total
----- ---------- -----
Mortgage loans: (In thousands)
<S> <C> <C> <C>
One- to four-family.................... $ 310,129 $ 50,976 $ 361,105
Co-operative........................... 549 498 1,047
Multi-family........................... 44,592 145,511 190,103
Commercial real estate................. 1,976 9,920 11,896
Consumer and other loans............... 26,650 -- 26,650
Installment commercial loans........... 503 -- 503
-------- -------- --------
Total loans............................... $ 384,399 $ 206,905 $ 591,304
========= ========= =========
</TABLE>
29
<PAGE>
C. Summary of Allowance for Loan Losses
The following table sets forth the Bank's allowances for loan,
investment in real estate and real estate owned losses at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance for loan losses:
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $ 4,495 $ 1,729 $ 1,417 $ 1,344 $ 1,110
Charge-offs:
One- to four-family........................... (184) (67) (54) (241) (14)
Multi-family.................................. -- -- -- -- --
Co-op......................................... -- (76) (28) (74) --
Commercial real estate........................ (107) -- -- -- --
Consumer and other loans...................... (15) (122) (31) (79) (54)
-------- ------- -------- -------- --------
Total charge-offs.......................... (306) (265) (113) (394) (68)
Recoveries:
Mortgage loans................................ 12 35 17 14 51
Consumer and other loans...................... 31 54 8 60 17
------- ------- -------- -------- -------
Total recoveries........................... 43 89 25 74 68
Allowances of acquired institutions.............. -- 2,217 -- -- --
Provision for loan losses........................ 950 725 400 393 234
------- ------ ------- ------- -------
Balance at end of the period..................... $ 5,182 $ 4,495 $ 1,729 $ 1,417 $ 1,344
====== ====== ====== ====== ======
Ratio of net charge-offs during the period
to average loans outstanding during
the period.................................... 0.03% 0.03% 0.03% 0.09% --
Ratio of allowance for loan losses to total
loans at the end of the period................ 0.57% 0.55% 0.52% 0.43% 0.37%
Ratio of allowance for loan losses to non-
performing loans at the end of the period..... 35.18% 34.63% 47.10% 39.38% 25.52%
Allowance for losses on investment
in real estate:
Balance at beginning of period................... $ -- $ -- $ -- $ -- $ 44,157
Charge-offs...................................... -- -- -- -- (44,157)
Provision for losses............................. -- -- -- -- --
------ ------ -------- ------ -----------
Balance at the end of the period................. $ -- $ -- $ -- $ -- $ --
====== ====== ======== ====== ===========
Allowance for losses on real estate owned:
Balance at beginning of period................... $ 768 $ 589 $ 632 $2,288 $ 416
Charge-offs...................................... (634) (384) (103) (2,740) (253)
Recoveries....................................... -- -- -- 11 --
Allowances of acquired institutions.............. -- 188 -- -- --
Provision for losses............................. 200 375 60 1,073 2,125
----- ----- ------ ------ -------
Balance at the end of the period................. $ 334 $ 768 $ 589 $ 632 $ 2,288
===== ===== ===== ===== ======
</TABLE>
30
<PAGE>
The following table sets forth the Bank's allocation of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable at the dates indicated. The portion of the allowance for loan losses
allocated to each loan category does not represent the total available for
future losses which may occur within the loan category since the total loan loss
reserve is a valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
% of Loans in % of Loans in % of Loans in
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to-four-family(1).............. $3,327 61.37% $ 3,336 70.46% $ 1,249 60.84%
Commercial real estate.............. 308 2.56 158 3.30 -- 0.68
Multi-family........................ 666 20.81 278 9.69 74 5.64
Construction........................ 89 0.16 47 0.67 -- 0.22
Consumer and other loans............ 792 15.10 676 15.88 406 32.62
------- -------- ----- ------ ----- -------
Total allowances............... $ 5,182 100.00% $ 4,495 100.00% $ 1,729 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
At June 30,
------------------------------------------------
1994 1993
--------------------- ----------------------
% of Loans in % of Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to-four-family(1).............. $ 1,073 65.73% $ 1,104 67.27%
Commercial real estate.............. -- 0.75 -- 1.14
Multi-family........................ -- 2.71 -- 3.13
Construction........................ -- 0.60 -- 0.23
Consumer and other loans............ 344 30.21 240 28.23
----- ----- ----- ------
Total allowances............... $ 1,417 100.00% $ 1,344 100.00%
====== ====== ====== ======
</TABLE>
(1) Includes allocations for co-op loans.
31
<PAGE>
D. Composition of Loan Portfolio
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and in percentages of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family..................... $ 552,577 60.42% $ 569,031 69.28% $ 194,290 58.26%
Co-operative............................ 8,647 0.95 9,687 1.18 8,774 2.63
Multi-family............................ 190,293 20.81 79,571 9.69 18,774 5.63
Commercial real estate.................. 23,445 2.56 27,134 3.30 2,258 0.68
Construction............................ 1,440 0.16 5,560 0.67 745 0.22
-------- ---- -------- ---- -------- ----
Total mortgage loans................ 776,402 84.90 690,983 84.12 224,841 67.42
------- ----- ------- ----- ------- -----
Consumer and other loans:
Home equity lines of credit............. 91,782 10.04 81,205 9.89 70,954 21.28
Guaranteed student loans................ 17,006 1.86 18,754 2.28 20,529 6.16
Home equity loans....................... 19,505 2.13 16,747 2.04 15,774 4.73
Loans on deposit accounts............... 5,514 0.60 5,782 0.70 980 0.29
Other loans............................. 4,308 0.47 7,922 0.97 416 0.12
------- ---- -------- ---- ----- ----
Total consumer and other loans......... 138,115 15.10 130,410 15.88 108,653 32.58
------- ----- ------- ----- ------- -----
Total loans............................. 914,517 100.0% 821,393 100.00% 333,494 100.00%
===== ====== ======
Discounts, premiums and
deferred loan fees, net................ (14) 848 315
Allowance for loan losses............... (5,182) (4,495) (1,729)
--------- --------- ---------
Total loans, net........................ $ 909,321 $ 817,746 $ 332,080
======== ======== ========
<CAPTION>
June 30,
---------------------------------------------
1994 1993
-------------------- -----------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C>
One- to four-family..................... $ 208,550 62.85% $ 236,798 64.50%
Co-operative............................ 9,567 2.88 10,163 2.77
Multi-family............................ 8,991 2.71 11,506 3.13
Commercial real estate.................. 2,504 0.75 4,183 1.14
Construction............................ 2,003 0.60 857 0.23
------- ---- ------- -----
Total mortgage loans................ 231,615 69.79 263,507 71.77
------- ----- ------- -----
Consumer and other loans:
Home equity lines of credit............. 61,338 18.48 59,513 16.21
Guaranteed student loans................ 22,924 6.91 24,871 6.77
Home equity loans....................... 14,334 4.32 16,661 4.54
Loans on deposit accounts............... 982 0.30 1,146 0.31
Other loans............................. 672 0.20 1,454 0.40
------ ----- ------ -----
Total consumer and other loans......... 100,250 30.21 103,645 28.23
------- ----- ------- -----
Total loans............................. 331,865 100.00% 367,152 100.00%
====== ======
Discounts, premiums and
deferred loan fees, net................ 272 105
Allowance for loan losses............... (1,417) (1,344)
--------- ---------
Total loans, net........................ $ 330,720 $ 365,913
======== ========
</TABLE>
32
<PAGE>
E. Money Market, Debt and Equity and Mortgage-Backed Securities Composition
Table.
The following table sets forth certain information regarding the carrying and
market values of the Company's money market investments and its portfolios of
debt and equity and mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
Amortized Market Carrying Market Carrying Market
Cost Value Value Value Value Value
Money Market Investments (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and repurchase agreements......... $ 1,100 $ 1,100 $ 10,450 $ 10,450 $ 2,700 $ 2,700
====== ====== ======= ======= ======= =======
Debt and Equity Securities
Held-to-Maturity:
United State Agency Obligations.................... $ 29,952 $ 30,042 $ 34,950 $ 34,612 $ -- $ --
United States Treasury Notes....................... -- -- -- -- 14,997 14,972
Obligations of New York State and
local municipalities............................ 391 427 391 435 1,394 1,412
FHLB stock......................................... 15,683 15,683 12,989 12,989 7,499 7,499
------- ------- ------ ------ ----- -----
Total debt and equity securities
held-to-maturity............................. $ 46,026 $ 46,152 $ 48,330 $ 48,036 $ 23,890 $ 23,883
======= ======= ======= ======= ======= =======
Available-for-Sale:
United States Agency Obligations.................. $ 22,036 $ 22,080 $ 10,319 10,227 $ -- $ --
United Sates Treasury Bills....................... 4,785 4,812 -- -- 10,531 10,547
United States Treasury Notes...................... -- -- 2,992 2,983 13,377 13,333
Marketable equity securities...................... 8 17 42 61 -- --
--------- -------- -------- -------- --------- ---------
Total debt and equity securities
available-for-sale........................... $26,829 $26,909 $ 13,353 $ 13,271 $ 23,908 $ 23,880
====== ====== ======= ======= ======= =======
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA............................................. $106,900 $109,978 $ 125,195 $ 125,700 $ 157,073 $ 160,939
FHLMC............................................ 12,963 13,139 14,967 15,005 188,611 186,727
FNMA............................................. 39,493 39,991 44,330 44,290 68,078 68,154
------ ------ -------- -------- -------- ------
Total mortgage-backed securities
held-to-maturity............................ $159,356 $163,108 $ 184,492 $184,995 $ 413,762 $ 415,820
======= ======= ======== ======= ======== ========
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA............................................. $233,572 $237,754 $ 170,142 $ 169,753 $ -- $ --
FHLMC............................................ 222,961 221,756 255,498 249,598 77,072 78,195
FNMA............................................. 131,066 131,085 172,863 169,944 25,845 26,258
REMICs:
Agency Issuance........................... 20,806 20,552 2,503 2,445 -- --
Private Issuance.......................... 110,481 110,672 -- -- -- --
------- ------- ------ ------ ------ ------
Total mortgage-backed securities
available-for-sale.......................... $718,886 $721,819 $ 601,006 $ 591,740 $ 102,917 $ 104,453
======= ======= ======== ======== ======== ========
</TABLE>
33
<PAGE>
F. Maturity Listing for Money Market Investments, Debt and Equity and
Mortgage-Backed Securities Portfolio
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's federal funds
sold and repurchase agreement, debt and equity securities and mortgage-backed
securities at June 30, 1997. There were no debt and equity, exclusive of
obligations of the U.S. Treasury securities, issued by any one entity with a
total carrying value in excess of 10.0% of retained earnings at June 30, 1997.
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------------------
One Year or Less One to Five Years
--------------------- ---------------------
Annualized Annualized
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Money Market Investments
Federal funds sold and repurchase agreement........ $ 1,100 5.65% $ -- --
====== ======
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations........ $ -- -- $ 9,952 6.13%
Obligations of New York State and local municipalities -- -- 391 7.89
FHLB stock......................................... -- -- -- --
------- -------
Total debt and equity securities held-to-maturity $ -- -- $ 10,343 6.20%
======= =======
Available-for-Sale:
United States Treasury Bills....................... $ 4,785 5.64% $ -- --
United States Government Agency Obligations........ 6,170 6.60 5,866 5.47%
Marketable Equities................................ -- -- -- --
------- -------
Total debt and equity securities available-for-sale $ 10,955 6.18% $ 5,866 5.47%
====== =======
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA............................................... $ 2 10.25% $ -- --
FHLMC.............................................. -- 7.00 -- --
FNMA............................................... -- -- -- --
------- -------
Total mortgage-backed securities held-to-maturity $ 2 10.05% $ -- --
======= =======
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA............................................... $ -- -- $ 235 7.52%
FHLMC.............................................. 9,307 6.00% 17,019 6.56
FNMA............................................... -- -- 29,250 6.34
REMICS:
Agency Issuance.................................. -- -- -- --
Private Issuance................................. -- -- -- --
------- -------
Total mortgage-backed securities available-for-sale $ 9,307 6.00% $ 46,504 6.43%
====== =======
<CAPTION>
At June 30, 1997
-----------------------------------------------
Five to Ten Years More Than Ten Years
---------------------- ------------------------
Annualized Annualized
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Money Market Investments
Federal funds sold and repurchase agreement........ $ -- -- $ -- --
====== =======
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations........ $ 20,000 7.47% $ -- --
Obligations of New York State and local municipalities -- -- -- --
FHLB stock......................................... -- -- 15,683 6.50%
------- -------
Total debt and equity securities held-to-maturity $ 20,000 7.47% $ 15,683 6.50%
======= =======
Available-for-Sale:
United States Treasury Notes....................... $ -- -- $ -- --
United States Government Agency Obligations........ 10,000 7.46% -- --
Marketable Equities................................ -- -- 8 --
------ -------
Total debt and equity securities available-for-sale $ 10,000 -- $ 8 2.29%
====== =======
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA............................................... $ -- -- $ 106,898 7.03%
FHLMC.............................................. 1,707 8.45% 11,256 7.08
FNMA............................................... -- -- 39,493 7.21
------ -------
Total mortgage-backed securities held-to-maturity $ 1,707 8.45% $ 157,647 7.08%
====== =======
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA............................................... $ 2,315 7.99% $ 231,022 7.54%
FHLMC.............................................. -- -- 196,635 7.26
FNMA............................................... -- -- 101,816 7.41
REMICS:
Agency Issuance.................................. -- -- 20,806 7.23
Private Issuance................................. -- -- 110,481 7.51
------- -------
Total mortgage-backed securities available-for-sale $ 2,315 7.99% $ 660,760 7.42%
====== =======
<CAPTION>
At June 30, 1997
------------------------------------------------
Total Securities
------------------------------------------------
(Dollars in thousands)
Annualized
Average Approx. Weighted
Life Amortized Market Average
(in years) Cost Value Yield
---------- ---- ----- -----
<S> <C> <C> <C> <C>
Money Market Investments
Federal funds sold and repurchase agreement........ 0.0 $ 1,100 $ 1,100 5.65%
====== ======
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations........ 7.0 $ 29,952 $ 30,042 7.02%
Obligations of New York State and local municipalities 2.9 391 427 7.89
FHLB stock......................................... -- 15,683 15,683 6.50
------- -------
Total debt and equity securities held-to-maturity 6.9 $ 46,026 $ 46,152 6.85
======= -------
Available-for-Sale:
United States Treasury Notes....................... 0.7 $ 4,785 $ 4,812 5.64
United States Government Agency Obligations........ 5.7 22,036 22,080 6.69
Marketable Equities................................ -- 8 17 7.21
------- -------
Total debt and equity securities available-for-sale -- $ 26,829 $ 26,909 6.50%
======= =======
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA............................................... 6.1 $ 106,900 $ 109,978 7.03%
FHLMC.............................................. 4.1 12,963 13,139 7.26
FNMA............................................... 5.1 39,493 39,991 7.21
------- -------
Total mortgage-backed securities held-to-maturity 5.7 $ 159,356 $ 163,108 7.09%
======= =======
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA............................................... 5.0 $ 233,572 $ 237,754 7.54%
FHLMC.............................................. 6.9 222,961 221,756 7.12
FNMA............................................... 5.0 131,066 131,085 7.18
REMICS:
Agency Issuance.................................. 4.8 20,806 20,552 7.23
Private Issuance................................. 3.4 110,481 110,672 7.51
------- -------
Total mortgage-backed securities available-for-sale 5.3 $ 718,886 $ 721,819 7.33%
======= =======
</TABLE>
34
<PAGE>
G. Deposit Activities
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Opening balance.................................. $ 1,345,626 $ 670,317 $ 587,221
Bank of Westbury deposits assumed................ -- 151,992 --
Sunrise Bancorp, Inc. deposits assumed........... -- 479,213 --
Excess of deposits............................... 36,272 1,679 61,084
Interest credited on deposits.................... 54,139 42,425 22,012
---------- ---------- --------
Ending balance................................... $ 1,436,037 $ 1,345,626 $ 670,317
========== ========== ========
Net increase in deposits......................... $ 90,411 $ 675,309 $ 83,096
======= ======== =======
Percentage increase.............................. 6.7% 100.7% 14.2%
</TABLE>
At June 30, 1997, the Bank has outstanding $51.3 million in
certificates of deposit accounts in amounts of $100,000 or more, maturing as
follows:
Weighted
Amount Average Rate
------ ------------
Maturity Period: (In thousands)
Three months or less................. $ 14,101 5.25%
Over three through six months........ 9,697 5.43
Over six through 12 months........... 7,063 5.56
Over 12 months....................... 20,398 6.18
------- -----
Total.......................... $ 51,259 5.70%
======= ====
35
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------------- ----------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Average of Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
--------- -------- -------- -------- -------- -------- ------- -------- -------
Dollars in thosands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts............. $ 441,921 32.01% 2.47% $ 353,617 33.43% 2.50% $ 236,047 38.09% 2.50%
Demand Deposits and
NOW accounts............... 102,119 7.39 1.10 58,576 5.54 1.95 25,275 4.08 1.90
-------- ------ ------- ----- ------- ----
Total passbook and Demand
Deposits nd NOW accounts... 544,040 39.40 2.21 412,193 38.97 2.42 261,322 42.17 2.44
-------- ------ -------- ------ ------- -----
Money market accounts......... 99,536 7.21 2.48 97,975 9.26 2.54 91,051 14.69 2.50
-------- ------ -------- ------ ------- -----
Certificate accounts:
31 days.................. 38 0.00 2.50 70 0.01 2.50 85 0.01 2.50
91 days.................. 34,775 2.52 4.82 23,655 2.24 4.79 2,565 0.41 3.31
4 months................ 880 0.06 4.28 447 0.04 4.31 317 0.05 2.80
6 months. .............. 126,700 9.18 5.19 78,709 7.44 5.08 46,687 7.53 4.24
9 months. .............. 65,202 4.72 5.15 55,401 5.24 5.49 17,732 2.86 5.83
12 months................ 144,536 10.47 5.12 145,466 13.76 5.07 81,499 13.15 4.58
15 months................ 44,691 3.24 5.32 60,638 5.73 6.22 31,777 5.13 6.32
18 months................ 59,993 4.35 5.45 79,042 7.47 6.14 38,857 6.27 5.38
18 month variable IRA.... -- -- -- -- -- -- 37 0.01 4.91
24 months................ 129,499 9.38 6.08 10,655 1.01 5.75 -- -- --
30 months................ 12,915 0.94 5.52 11,990 1.13 5.16 10,303 1.66 4.83
36 months................ 8,857 0.64 5.38 11,576 1.09 5.09 10,943 1.77 4.98
42 months................ 2,784 0.20 5.36 2,962 0.28 5.34 3,337 0.54 5.46
48 months................ 16,507 1.20 5.50 20,553 1.94 5.42 22,683 3.66 5.48
60 months................ 87,253 6.32 6.15 43,425 4.11 6.28 -- -- --
72 months................ -- -- -- -- -- -- 232 0.04 7.75
96 months................ -- -- -- -- -- -- 286 0.05 8.00
Other certificates............ 2,388 0.17 4.87 2,973 0.28 5.28 -- -- --
----------- ------- ----------- ------ -------- -------
Total certificates............ 737,018 53.39 5.47 547,562 51.77 5.48 267,340 43.14 5.04
---------- ------ ---------- ------ -------- ------
Total deposits................ $1,380,594 100.00% 3.95 $1,057,730 100.00% 4.02 $ 619,713 100.00% 3.57
========== ====== ========== ====== ======== ======
</TABLE>
36
<PAGE>
The following table presents, by rate categories, the balances of the
Bank's certificates of deposit accounts outstanding, interest rate categories,
at June 30, 1997, 1996 and 1995 and the remaining periods to maturity of
certificate deposit accounts outstanding at June 30, 1997.
<TABLE>
<CAPTION>
Period to maturity from
June 30, 1997 June 30,
--------------------------------------------- -------------------------------
One to Two to Over
Within Two Three Three
One Year Years Years Years 1997 1996 1995
-------- ----- ----- ----- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit accounts:
2.99% or less................ $ 588 $ 241 $ 322 $ 190 $ 1,341 $ 1,410 $ 837
3.00% to 3.99%............... -- -- -- -- -- 2,388 2,907
4.00% to 4.99%............... 64,974 472 3 -- 65,449 166,690 37,255
5.00% to 5.99%............... 435,874 48,509 6,776 17,107 508,266 362,920 160,180
6.00% to 6.99%............... 23,005 159,687 28,964 19,333 230,989 135,820 145,378
7.00% to 7.99%............... 250 -- 60 31 341 5,239 237
8.00% to 8.99%............... 16 206 6 -- 228 235 --
9.00% and greater............ -- 136 -- -- 136 134 142
-------- -------- ------- ------- -------- ------- -------
Total........................ $ 524,707 $ 209,251 $ 36,131 $ 36,661 $ 806,750 $ 674,836 $346,936
======== ======== ======= ======= ======== ======= =======
</TABLE>
H. Borrowings
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the fiscal years ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the
Year Ended June 30,
----------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
FHLB-NY advances:
Average balance outstanding................................. $ 22,519 $ 29,882 $ 95,554
Maximum amount outstanding at any
month-end during the period............................ 43,000 71,218 126,000
Balance outstanding at end of period....................... 40,000 3,000 40,000
Weighted-average interest rate during the period........... 5.61% 7.29% 6.00%
Weighted-average interest rate at end of period............ 5.58% 5.98% 7.60%
Reverse repurchase agreements:
Average balance outstanding................................. $288,845 $150,173 $ 10,103
Maximum amount outstanding at any
month-end during the period............................ 326,391 279,678 57,035
Balance outstanding at end of period....................... 311,913 263,160 57,035
Weighted-average interest rate during the period........... 5.63% 5.58% 6.09%
Weighted-average interest rate at end of period............ 5.78% 5.41% 6.04%
Total borrowings:
Average balance outstanding................................. $311,364 $180,055 $105,657
Maximum amount outstanding at any
month-end during the period............................ $351,913 282,678 183,035
Balance outstanding at end of period....................... $351,913 266,160 97,035
Weighted-average interest rate during the period........... 5.62% 5.87% 6.01%
Weighted-average interest rate at end of period............ 5.76% 5.42% 6.68%
</TABLE>
37
<PAGE>
Item 2. Properties
The Bank conducts its business through its administrative office and 28
full-service branch offices. Loan originations are processed at the
administrative office.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Date Date of Leasehold
Leased or Leased or Lease Improvements at
Location Owned Acquired Expiration(1) June 30, 1997
-------- ----- -------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Administrative Office:
585 Stewart Avenue
Garden City, NY 11530........................... Leased 1977 2002 $ 40
Banking Offices:
300 Garden City Plaza
Garden City, NY 11530
(Home Office).................................... Leased 1979 2004 --
983 Willis Avenue
Albertson, NY 11507............................. Owned 1965 -- 520
422 Hillside Avenue
Williston Park, NY 11596........................ Leased 1972 2017 266
380 Hillside Avenue(2)
Williston Park, NY 11596........................ Owned 1964 -- 210
570 Stewart Avenue
Bethpage, NY 11714.............................. Leased 1963 2008 34
341 Post Avenue
Westbury, NY 11590.............................. Owned 1995 -- 601
2530 Stewart Avenue
Westbury, NY 11590.............................. Owned 1995 -- 771
405 Jerusalem Avenue
Hicksville, NY 11801............................ Leased 1995 2005 17
2843 Jerusalem Avenue
North Bellmore, NY 11710........................ Leased 1995 2012 35
172 New Hyde Park Road
Franklin Square, NY 11010....................... Leased 1995 2020 29
215 Glen Cove Road
Carle Place, NY 11514........................... Leased 1995 1998 --
312 Conklin Street
Farmingdale, NY 11735........................... Owned 1996 -- 816
195 Merritt Road
South Farmingdale, NY 11735.................... Owned 1996 -- 1,266
1074 Old Country Road
Plainview, NY 11803............................. Owned 1996 -- 566
300 S. Wellwood Avenue
Lindenhurst, NY 11757........................... Owned 1996 -- 561
38
<PAGE>
Net Book Value
of Property or
Original Date Date of Leasehold
Leased or Leased or Lease Improvements at
Location Owned Acquired Expiration(1) June 30, 1997
-------- ----- -------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
(Continued)
1134 Deer Park Avenue
North Babylon, NY 11703......................... Leased 1996 1998 19
2087 Deer Park Avenue
Deer Park, NY 11729............................. Owned 1996 -- 580
2080 Deer Park Avenue(2)
Deer Park, NY 11729.............................. Owned 1996 -- 245
434 Union Boulevard
West Islip, NY 11795............................ Leased 1996 2004 1
340 Washington Avenue
North Brentwood, NY 11717...................... Owned/Leased(6) 1996 2014 236
742 Route 25 A
Kings Park, NY 11754............................ Leased 1996 2002 1
250 Smithtown Boulevard
Nesconset, NY 11767............................. Owned 1996 -- 491
245 Lake Avenue
St. James, NY 11780............................. Owned 1996 -- 497
335 Main Street
Farmingdale, NY 11735............................ Leased 1996 2000 --
375 Fulton Avenue
Farmingdale, NY 11735............................ Leased 1996 2002 --
233-15 Hillside Avenue
Queens Village, NY 11427........................ Owned 1961 -- 393
19-01 Utopia Parkway
Whitestone, NY 11357............................ Leased(4) 1976 2026 --
32-02 Francis Lewis Blvd
Flushing, NY 11358.............................. Owned 1957 -- 297
69-09 164th Street
Flushing, NY 11365.............................. Owned 1967 -- 720
204-12 Hillside Avenue(3)
Hollis, NY 11423................................ Owned/Leased 1954 2003 39
162-04 Jamaica Avenue
Jamaica, NY 11432............................... Leased(5) 1989 2001 531
216-26 Jamaica Avenue
Queens Village, NY 11428........................ Owned 1939 -- 68
-------
Total.................................. $ 9,850
======
(Footnotes on next page)
</TABLE>
39
<PAGE>
(1) Leased property includes all option periods.
(2) Drive-up facility.
(3) The Bank owns one half of the property and leases the other half.
(4) The Bank pays all real estate taxes on this property.
(5) This branch was originally owned by the Bank. The Bank has subsequently
sold the property and is now leasing it. The transaction is being treated
as a capital lease (sale/leaseback).
(6) The Bank owns the building and leases the land. Option to purchase the
land at the end of the last lease option.
Item 3. Legal Proceedings
The Bank is involved in various legal actions arising in the ordinary
course of its business which, in the aggregate, involve amounts which are
believed by management to be not material to the financial condition of the
Bank.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market and
quoted under the symbol "RELY". As of September 15, 1997, the Company had 1,000
stockholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
Information regarding the Company's common stock and its price for the 1997
fiscal year appears on page 55 of the 1997 Annual Report under the caption
"Stockholder Information" and is incorporated herein by this reference.
On September 18, 1996, the Company's Board of Directors adopted a
Stockholder Protection Rights Plan and declared a dividend of one preferred
share purchase right ("Right") for each outstanding share of common stock of the
Company. Each Right, initially, will entitle stockholders to buy a one
one-hundredth interest in a share of a new series of preferred stock of the
Corporation at an exercise price of $60.00, upon the occurrence of certain
events described in the Plan. Initially, Rights will not be exercisable and will
transfer with and only with the shares of common stock. The Rights will be
exercisable and separately transferable ten business days after a person or
group of persons acquires 10% or more of the common stock of Reliance Bancorp,
Inc. ("Acquiring Person") or a person or group of persons announces a tender
offer, the consummation of which would result in ownership by a person or group
of persons of 10% or more of Company common stock. Subject to certain
limitations, the Company's Board of Directors may reduce the 10% threshold.
If a person or group of persons becomes an Acquiring Person, each Right,
unless redeemed by the Board of Directors at a price of $0.01 per Right, will
entitle its holder (other than such person or member of such group) to purchase,
at the then-current exercise price of the Right, a number of shares of common
stock of Reliance Bancorp, Inc. having a market value equal to twice the
exercise price of the Right. Alternatively, at any time after an Acquiring
Person becomes such, but prior to the acquisition by such person of 50% or more
of the Company's common stock, the Board of Directors may, at its option, direct
the issuance of one share of common stock in exchange for each Right other than
those held by the Acquiring Person.
40
<PAGE>
The Rights dividend distribution was made payable to stockholders of record on
October 3, 1996. The Rights will expire ten years later on October 3, 2006. The
distribution of the Rights is not taxable to stockholders.
Item 6. Selected Financial Data
Information regarding selected financial data appears on page 10 of the
1997 Annual Report under the caption "Selected Financial Data" and is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 12 through 24 of the 1997
Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Asset/Liability
Management /Interest Rate Sensitivity Analysis" in the Annual Report is
incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data
Information regarding the financial statements and the Independent
Auditors' Report appears on pages 25 through 52 of the 1997 Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
Information regarding the directors and executive officers of the Company
appears on pages 4 through 13 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on November 19, 1997 under the caption
"Information With Respect to the Nominees, Continuing Directors, and Named
Executive Officers" and is incorporated herein by this reference.
Item 11. Executive Compensation
Information regarding executive compensation included under the caption
"Summary Compensation Table" appears on page 15 of the Company's Proxy Statement
for the Annual Meeting of Stockholders to be held on November 19, 1997 and is
incorporated herein by this reference.
41
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
appears on page 3 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 19, 1997 under the caption "Security Ownership
of Certain Beneficial Owners" and is incorporated herein by this reference.
Information regarding security ownership of management appears on pages 4
through 7 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 19, 1997 under the caption "Information with
Respect to the Nominees, Continuing Directors and Named Executive Officers" and
is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions
appears on page 21 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 19, 1997 under the caption "Transactions
With Certain Related Persons" and is incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 1997 and are
incorporated by this reference:
o Consolidated Statements of Condition at June 30, 1997 and 1996
o Consolidated Statements of Income for each of the years in the three
year period ended June 30, 1997
o Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three year period ended June 30, 1997
o Consolidated Statements of Cash Flows for each of the years in the
three year period ended June 30, 1997
o Notes to Consolidated Financial Statements
o Independent Auditors' Report
The remaining information appearing in the Annual Report to Stockholders
is not deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1997
1) The Company filed an 8-K on April 8, 1997 to report that on April 4,
1997, the Company announced its fifth stock repurchase plan. The Company
has been authorized by its Board of Directors to repurchase up to 5% of
the Company's 8,822,769 outstanding shares during the next twelve months.
2) The Company filed an 8-K on May 9, 1997 to report that on May 5, 1997,
the Company announced that it had entered into an agreement to acquire
Continental Bank.
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
3.1 Certificate of Incorporation of Reliance Bancorp, Inc. (1)
3.2 By-Laws of Reliance Bancorp, Inc. (1)
10.1(a) Reliance Federal Savings Bank Recognition and Retention
Plan for Officers and Employees (2)
10.1(b) Reliance Federal Savings Bank Recognition and Retention
Plans for Outside Directors (2)
10.2 Reliance Bancorp, Inc. 1994 Incentive Stock Option Plan(2)
10.3 Reliance Bancorp, Inc. 1994 Stock Option Plan for Outside
Directors (2)
10.4(a) Form of Reliance Bancorp, Inc. Employee Stock Ownership
Plan and Trust (1)
10.4(b) Form of Reliance Federal Savings Bank Employee Stock
Ownership Trust Agreement (1)
10.5 Form of Employment Agreement between Reliance Federal
Savings Bank and Certain Officers (1)
10.6 Form of Employment Agreement between Reliance Bancorp,
Inc. and Certain
Executive Officers (1)
10.7 Form of Change-in-Control Agreement between Reliance
Federal Savings Bank and Certain Officers (1)
10.8 Form of Change-in-Control Agreement among the Reliance
Bancorp, Inc. and Certain Officers (1)
10.9 Form of Reliance Federal Savings Bank Employee Severance
Compensation Plan (1)
10.10 Form of Reliance Federal Savings Bank Supplemental
Executive Retirement Plan (1)
10.11 ESOP Loan Commitment Letter and Form of ESOP Loan
Documents (1)
10.12 Form of Reliance Federal Savings Bank Outside Directors'
Consultation and Retirement Plan (1)
10.13 Form of Reliance Bancorp, Inc. Employment Agreement (3)
10.14 Reliance Bancorp, Inc. 1996 Stock Option Plan (4)
10.15 Reliance Bancorp, Inc. 1996 Stock Option Plan for Outside
Directors (4)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1997 Annual Report to Stockholders
21.0 Subsidiaries information incorporated herein by reference
to Part 1 - Subsidiaries
23.0 Consent of Independent Auditors
27.0 Financial Data Schedule
99.0 Proxy Statement for the Annual Meeting of
Stockholders to be held on November 19, 1997 (5)
99.1 Stockholders Protection Rights Agreement; dated as of
September 18, 1996 (6)
(Footnotes on next page)
42
<PAGE>
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, Registration No. 33-72476.
(2) Incorporated by reference into this document from the Exhibits to the 1994
Proxy Statement for the Annual Meeting of Stockholder held on November
9, 1994.
(3) Incorporated by reference into this document from the Exhibits to the
Form 10K for the fiscal year ended June 30, 1996, filed on September
30,1996.
(4) Incorporated by reference into this document from the Exhibits to the 1996
Proxy Statement for the Annual Meeting of Stockholders held on November
12, 1996.
(5) Pursuant to General Instruction G(3) to the Form 10K, the Proxy Statement
will be filed within 120 days of the Company's fiscal year end.
(6) Incorporated by reference into this document from the Exhibits filed
with the registration statement on Form 8-A, filed on September 27, 1996.
43
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Reliance Bancorp, Inc.
----------------------
(Registrant)
/s/ Raymond A. Nielsen September 17, 1997
---------------------- ------------------
Raymond A. Nielsen
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
NAME TITLE DATE
/s/ Raymond A. Nielsen President and September 17, 1997
- ----------------------- Chief Executive Officer ------------------
Raymond A. Nielsen
/s/ Paul D. Hagan Chief Financial Officer September 17, 1997
- ----------------- ------------------
Paul D. Hagan
/s/ Raymond L. Nielsen Chairman of the Board and September 17, 1997
- ---------------------- former Chief Executive Officer ------------------
Raymond L. Nielsen
/s/ Thomas G. Davis, Jr. Director September 17, 1997
- ------------------------ ------------------
Thomas G. Davis, Jr.
/s/ Conrad J. Gunther, Jr. Director September 17, 1997
- -------------------------- ------------------
Conrad J. Gunther, Jr.
/s/ Douglas G. LaPasta Director September 17, 1997
- ---------------------- ------------------
Douglas G. LaPasta
/s/ Donald LaPasta Director September 17, 1997
Donald LaPasta
/s/ Peter F. Neumann Director September 17, 1997
- -------------------- ------------------
Peter F. Neumann
/s/ J. William Newby Director September 17, 1997
- -------------------- ------------------
J. William Newby
44
<TABLE>
<CAPTION>
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended June 30,
----------------------
1997 1996
---- ----
(In thousands, except per share amount)
<S> <C> <C>
Net Income................................................. $ 10,936 $ 11,723
====== ======
Weighted average common shares outstanding................. 8,299 8,594
Common stock equivalents due to dilutive
effect of stock option................................. 516 323
------- -----
Total weighted average common shares and
equivalents outstanding................................ 8,815 8,917
===== =====
Earnings per common and common share equivalents........... $ 1.24 $ 1.31
===== =====
Total weighted average common shares and
equivalents outstanding................................ 8,815 8,917
Additional dilutive shares using ending period
market value versus average market value for
the period when utilizing the treasury stock
method regarding stock options......................... 229 29
------ ------
Total shares for fully dilutive earnings per share......... 9.044 8,946
===== =====
Fully diluted earnings per common and
common share equivalents............................... $ 1.21 $ 1.31
===== =====
</TABLE>
45
Reliance Bancorp, Inc. and Subsidiary
FINANCIAL SECTION
- -------------------------------------------------------------------------------
CONTENTS
---------------------------------------------------------------------
Selected Consolidated Financial and Other Data
of the Company.....................................................10
Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................12
Consolidated Statements of Condition as of
June 30, 1997 and 1996.............................................25
Consolidated Statements of Income for
the year ended June 30, 1997, 1996 and 1995........................26
Consolidated Statements of Changes in
Stockholders' Equity for the year ended
June 30, 1997, 1996 and 1995.......................................27
Consolidated Statements of Cash Flows for
the year ended June 30, 1997, 1996 and 1995........................28
Notes to Consolidated Financial Statements.........................30
Independent Auditors' Report.......................................53
Selected Consolidated Quarterly Financial Data.....................52
9
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Financial and Other Data of the Company
- -------------------------------------------------------------
(Dollars in thousands, except per share data)
Set forth below are the selected consolidated financial and other data of the
Company. This financial data is derived in part from, and it should be read in
conjunction with the Company's consolidated financial statements and related
notes.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------
Selected Financial Data: 1997 1996 1995 1994 1993
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets.............................................. $1,976,764 $1,782,550 $931,436 $830,501 $736,276
Loans Receivable, Net..................................... 909,321 817,746 332,080 330,720 365,913
Debt and Equity Securities Available-for-Sale............. 26,909 13,271 23,880 37,588 --
Debt and Equity Securities Held-to-Maturity............... 46,026 48,330 23,890 39,492 38,819
Mortgage-Backed Securities Available-for-Sale............. 721,819 591,740 104,453 -- --
Mortgage-Backed Securities Held-to-Maturity............... 159,356 184,492 413,762 394,199 304,490
Excess of Cost Over Fair Value
of Net Assets Acquired.................................. 45,463 49,429 -- -- --
Real Estate Owned, Net.................................... 450 1,564 1,558 2,911 3,909
Deposits.................................................. 1,436,037 1,345,626 670,317 587,221 600,278
FHLB Advances............................................. 40,000 3,000 40,000 78,000 65,000
Securities Sold Under Agreements to Repurchase............ 311,913 263,160 57,035 -- --
Total Stockholders' Equity (1)............................ 162,670 153,619 153,733 157,851 61,412
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
Selected Operating Data: 1997 1996 1995 1994 1993
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income........................................... $133,289 $100,372 $ 61,260 $ 47,224 $ 48,178
Interest Expense ......................................... 71,653 52,985 28,361 20,024 21,322
------ ------ ------ ------ ------
Net Interest Income ................................. 61,636 47,387 32,899 27,200 26,856
Less Provision for Loan Losses .......................... 950 725 400 393 234
------ ------ ------ ------ ------
Net Interest Income After Provision for
Loan Losses....................................... 60,686 46,662 32,499 26,807 26,622
Non-Interest Income:
Loan Fees and Service Charges............................. 683 826 269 260 234
Other Operating Income.................................... 2,557 1,606 841 859 960
Net Gain on Securities.................................... 172 678 147 -- --
------ ------ ------ ------ ------
Total Non-Interest Income............................ 3,412 3,110 1,257 1,119 1,194
------ ------ ------ ------ ------
Non-Interest Expense:
Compensation and Benefits................................. 16,509 13,395 9,562 7,068 6,534
Occupancy and Equipment................................... 5,719 4,481 2,462 2,336 2,252
Federal Deposit Insurance Premiums........................ 1,813 2,399 1,376 1,374 820
Advertising............................................... 1,168 1,152 1,158 670 658
Other Operating Expenses.................................. 5,778 4,169 3,039 2,366 2,078
------ ------ ------ ------ ------
Total General and Administrative Expenses............ 30,987 25,596 17,597 13,814 12,342
Real Estate Operations, Net............................... 383 579 (385) 1,080 3,598
Amortization of Excess of Cost Over Fair
Value of Net Assets Acquired............................ 3,404 1,928 -- -- --
SAIF Recapitalization Charge.............................. 8,250 -- -- -- --
------ ------ ------ ------ ------
Total Non-Interest Expense........................... 43,024 28,103 17,212 14,894 15,940
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle......... 21,074 21,669 16,544 13,032 11,876
Income Tax Expense........................................ 10,138 9,946 6,842 5,538 5,243
------ ------ ------ ------ ------
Income Before Cumulative Effect of
Change in Accounting Principle................... 10,936 11,723 9,702 7,494 6,633
Cumulative Effect of Change in
Accounting Principle (2)................................ -- -- -- 1,200 --
-- ------ ------ ----- ----- -----
Net Income........................................... $ 10,936 $ 11,723 $ 9,702 $ 8,694 $ 6,633
======== ======== ======= ======= =======
Earnings Per Share: (3) Primary........ $ 1.24 $ 1.31 $ 1.03 $ 0.22 N/A
======== ======== ======= ======= =======
Fully Diluted... $ 1.21 $ 1.31 $ 1.03 $ 0.22 N/A
======== ======== ======= ======= =======
</TABLE>
(See footnotes on following page)
10
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Financial and Other Data of the Company
- -------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
<S> <C> <C> <C> <C> <C>
Return on Average Assets (2)...................................... 0.58% 0.83% 1.08% 1.15% 0.97%
Return on Average Stockholders' Equity (2)(4)..................... 7.02 7.58 6.17 9.82 11.19
Return on Average Tangible Stockholders' Equity (2)(4)............ 10.10 9.18 6.17 9.82 11.19
Average Stockholders' Equity to Average Assets.................... 8.24 10.92 17.60 11.68 8.65
Stockholders' Equity to Total Assets.............................. 8.23 8.62 16.51 19.01 8.34
Tangible Stockholders' Equity to Tangible Assets.................. 6.07 6.01 16.51 19.01 8.34
Core Deposits to Total Deposits................................... 37.40 41.68 36.12 49.08 47.92
Net Interest Spread............................................... 3.22 3.17 3.11 3.36 3.77
Net Interest Margin (5)........................................... 3.47 3.52 3.77 3.69 4.03
General and Administrative Expenses to Average Assets............. 1.66 1.81 1.97 1.82 1.80
Operating Income to Average Assets (6)............................ 0.17 0.16 0.14 0.15 0.17
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities............................ 1.06X 1.09X 1.20X 1.12X 1.08X
Selected Financial Ratios, Excluding SAIF
Recapitalization Assessment
Return on Average Assets (2)...................................... 0.84% 0.83% 1.08% 1.15% 0.97%
Return on Average Stockholders' Equity (2)(4)..................... 10.12 7.58 6.17 9.82 11.19
Return on Average Tangible Stockholders' Equity (2)(4)............ 14.56 9.18 6.17 9.82 11.19
Asset Quality Ratios:
Non-Performing Loans to Total Loans (7)........................... 1.61% 1.58% 1.10% 1.08% 1.43%
Non-Performing Loans to Total Assets.............................. 0.75 0.73 0.39 0.43 0.72
Non-Performing Assets to Total Assets (8)........................ 0.77 0.82 0.56 0.78 1.25
Allowance for Loan Losses to Total Loans.......................... 0.57 0.55 0.52 0.43 0.37
Allowance for Loan Losses to Non-Performing Loans................. 35.18 34.63 47.10 39.38 25.52
Other Data:
Number of Deposit Accounts.................................... 164,121 164,368 68,617 63,416 67,143
Full-Service Banking Offices.................................. 28 28 11 11 11
</TABLE>
(1) For 1993, amount represents only retained earnings, substantially
restricted, and at June 30, 1997, 1996, 1995 and 1994 includes retained
earnings of $89.7 million $84.0 million, $76.2 million and $70.1 million,
respectively, substantially restricted.
(2) Reflects the cumulative effect of the Company's adoption of Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes," in
the fiscal year ended June 30, 1994.
(3) Earnings per share for fiscal year ended 1994 is based on net income from
March 31, 1994 to June 30, 1994.
(4) For purposes of these calculations, average stockholder's equity and
average stockholder's tangible equity exclude the effect of changes in the
unrealized appreciation (depreciation) on securities available-for-sale,
net of taxes.
(5) Calculation is based upon net interest income before provision for loan
losses divided by average interest-earning assets.
(6) Operating income represents total non-interest income less net gain on sale
of debt and equity securities.
(7) Non-performing loans consist of all loans 90 days or more past due and any
other loans, or any portion thereof, that have been determined to be
doubtful of collection.
(8) Non-performing assets consist of non-performing loans and real estate
owned.
11
<PAGE>
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
General
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized on
November 16, 1993 and is the holding company for Reliance Federal Savings Bank
(the "Bank"). On March 31, 1994, the Company issued 10,750,820 shares of common
stock at $10.00 per share raising total net proceeds of $103.6 million of which
$51.8 million was retained by the Company with the remaining net proceeds being
used by the Company to purchase all of the outstanding stock of the Bank.
The Company is headquartered in Garden City, New York and its primary business
currently consists of the operation of its wholly-owned subsidiary, the Bank. In
addition to directing, planning and coordinating the business activities of the
Bank, the Company currently invests primarily in U.S. Government securities and
repurchase agreements. In addition, the Company completed the acquisitions of
the Bank of Westbury, a Federal Savings Bank, in August 1995 and Sunrise
Bancorp, Inc. in January 1996, both of which were merged into the Bank. On May 5
1997, the Company announced its planned acquisition of Continental Bank. The
acquisition is subject to Continental Bank's stockholder approval and certain
regulatory approvals. The Company had no operations prior to March 31, 1994 and,
accordingly, the results of operations prior to that date reflect only those of
the Bank and its subsidiaries.
The Bank's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from
operations and borrowings, primarily in mortgage, multi-family and consumer
loans (primarily in the form of home equity loans and home equity lines of
credit, secured by one- to four-family, owner occupied, residential properties,
auto and guaranteed student loans), and to a lesser extent, commercial real
estate and construction loans. In addition, during periods in which the demand
for loans which meet the Bank's underwriting and interest rate risk standards
and policies is lower than the amount of funds available for investment, the
Bank invests in mortgage-backed securities, securities issued by the U.S.
Government and agencies thereof and other investments permitted by federal laws
and regulations.
The Company's results of operations are dependent primarily on interest income
from its securities investments and earnings of the Bank. The Bank's results of
operations are primarily dependent on its net interest income, which is the
difference between the interest earned on its assets, primarily its loan and
securities portfolios, and its cost of funds, which consists of the interest
paid on its deposits and borrowings. The Bank's net income also is affected by
its provision for loan losses as well as non-interest income, general and
administrative expense, other non-interest expense, and income tax expense.
General and administrative expense consists primarily of compensation and
benefits, occupancy expenses, federal deposit insurance premiums, advertising
expense and other general and administrative expenses. Other non-interest
expense consists of real estate operations, net, amortization of excess of cost
over the fair value of net assets acquired, and in fiscal 1997, a SAIF
recapitalization charge. The earnings of the Company and Bank are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Planned Acquisition of Continental Bank
On May 5, 1997, the Company announced that it had entered into a definitive
agreement to acquire Continental Bank ("Continental"), a commercial bank with 2
full service banking offices located in Nassau and Suffolk counties in Long
Island, New York, a commercial lending facility and 5 check cashing facilities
in Manhattan. Under the terms of the 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 $24.2 million. As of June 30, 1997, total
assets of Continental were $177.3 million, deposit were $136.2 million and total
stockholders' equity was $13.4 million. The merger is subject to the approval of
Continental shareholders, as well as certain regulatory approvals. The merger is
expected to be completed in the fourth quarter of calendar year 1997 and to be
accounted for under the purchase method of accounting.
12
<PAGE>
Financial Condition
Total assets increased $194.2 million, or 10.9%, from $1.8 billion at June 30,
1996 to $2.0 billion at June 30, 1997. The growth in assets was primarily
attributable to an increase in mortgage loans and mortgage-backed securities.
Mortgage loans increased $84.6 million, or 12.3%, from $691.0 million at June
30, 1996 to $775.6 million at June 30, 1997. The increase in mortgage loans is
primarily due to increased multi-family loan originations offset by
amortizations. The mortgage-backed securities portfolio increased $104.9
million, or 13.5%, from $776.2 million at June 30, 1996 to $881.2 million at
June 30, 1997 with the increase primarily due to increased purchases of private
label collateralized mortgage obligations classified as available-for-sale
offset by amortization and prepayments. As a result of these increased
purchases, mortgage-backed securities available-for-sale increased $130.1
million, or 22.0%, to $721.8 million at June 30, 1997, from $591.7 million at
June 30, 1996, however, mortgage-backed securities held-to-maturity decreased
$25.1 million, or 13.6%, from $184.5 million at June 30, 1996 to $159.4 million
at June 30, 1997 as a result of continued amortization of these securities. At
June 30, 1997, the unrealized appreciation on securities available-for-sale, net
of taxes was $1.7 as compared to unrealized depreciation of $5.3 million at June
30, 1996. The increased appreciation on the available-for-sale securities was
due to the lower interest rate environment at June 30, 1997 as compared to the
prior year end.
Funding for the purchases of mortgage-backed securities and loans was through a
combination of new deposit growth, borrowings and cash flows. Deposits increased
$90.4 million, or 6.7%, from $1.3 billion at June 30, 1996 to $1.4 billion at
June 30, 1997. The increase in deposits is mainly the result of growth in new
certificate of deposit products. Borrowings increased $85.8 million, or 32.2%,
from $266.2 million at June 30, 1996 to $351.9 million at June 30, 1997 as a
result of the Bank continuing to use borrowings to leverage its capital and fund
asset growth.
Non-performing loans increased $1.7 million, or 13.1% from $13.0 million, or
1.58% of total loans at June 30, 1996 to $14.7 million, or 1.61% of total loans
at June 30, 1997. The increase is primarily due to two large commercial real
estate loans which became non-performing during the year. Non-performing loans
at June 30, 1997 were comprised of $11.0 million of loans secured by one- to
four-family residences, $3.3 million of commercial real estate loans, $277,000
of guaranteed student loans and $188,000 of consumer loans. As a result of
decrease in real estate owned and an increased asset base, the Company's
non-performing assets to total assets ratio improved to 0.77% at June 30, 1997
from 0.82% at June 30, 1996. The Company's allowance for loan losses totalled
$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 35.18% and 0.57%,
respectively, as compared to 34.63% and 0.55%, respectively at June 30, 1996.
For the fiscal year ended June 30, 1997, the Company experienced net loan
charge-offs of $263,000 as compared to $176,000 in the prior year. The Company
continues to increase its 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. Management believes the allowance for loan
losses at June 30, 1997 is adequate and sufficient reserves are presently
maintained to cover losses on any non-performing loans.
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 saturates with
short- and medium-term average lives
13
<PAGE>
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 June 30, 1997, $873.6 million, or 48.7%, of the Bank's interest-earning
assets consisted of adjustable-rate loans and mortgage-backed securities. The
Bank's mortgage loan portfolio totalled $775.6 million, of which, $415.8
million, or 53.6%, were adjustable-rate loans and $359.8 million, or 46.4%, were
fixed-rate loans. In addition, at June 30, 1997, the Bank's consumer loan
portfolio totalled $138.9 million, of which, $109.9 million, or 79.2%, were
adjustable-rate home equity lines of credit and guaranteed student loans and
$28.9 million, or 20.8%, were fixed-rate home equity and other consumer loans.
At June 30, 1997, the mortgage-backed securities portfolio totalled $881.2
million of which $721.8 million was classified as available-for-sale and $159.4
million was classified as held-to- maturity. Of the $721.8 million classified as
available-for-sale, $244.2 million, or 33.8%, of the mortgage-backed portfolio
were adjustable-rate securities and $477.6 million, or 66.2%, were fixed-rate
securities. Of the $159.4 million classified as held-to-maturity, $103.6
million, or 65.0%, of the mortgage-backed portfolio were adjustable-rate
securities and $55.8 million, or 35.0%, were fixed-rate securities. The Bank
expects to continue to invest in shorter term fixed-rate and adjustable-rate
mortgage-backed securities to reduce credit risk as well as minimize exposure to
volatile interest rates. Recently, the Bank has purchased longer term fixed-rate
higher yielding mortgage-backed securities to offset the prepayment risk of
adjustable-rate securities during a falling interest rate environment. It should
be noted that adjustable-rate loans and mortgage-backed securities backed by ARM
loans initially bear rates of interest below that of comparable fixed rate loans
or mortgage-backed securities backed by fixed rate loans. Accordingly, increased
emphasis on adjustable-rate loans and mortgage-backed securities may, under
certain interest rate conditions, result in the Bank's yield on interest-earning
assets being lower than it could be if fixed rate loans were emphasized.
At June 30, 1997, the Bank's estimated one year interest sensitivity "gap" (the
difference between assets that reprice or mature within such period expressed as
a percentage of total assets) was a negative $55.6 million, or (2.82)%, of total
assets, based on the following table setting forth the interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1997. A gap is
considered positive when the amount of interest rate sensitive assets maturing
or repricing within a specified time frame exceeds the amount of interest rate
sensitive liabilities repricing or maturing within that same time period. A gap
is considered negative when interest rate sensitive liabilities maturing or
repricing within a specified time period exceeds the amount of interest rate
sensitive assets repricing or maturing within that same time period. In a rising
rate environment, an institution with a negative gap would generally be
expected, absent the effects of other factors, to experience a greater increase
in the cost of its liabilities relative to the yields of its assets and thus a
decrease in the institution's net interest income, whereas an institution with a
positive gap would generally be expected to experience the opposite results.
Conversely, during a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income while a positive gap would tend
to adversely affect net interest income.
Interest Rate Sensitivity Analysis
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997, which are anticipated
by the Bank, using certain assumptions based on its historical experience and
other data available to management, to reprice or mature in each of the future
time periods shown. This table does not necessarily indicate the impact of
general interest rate movements on the Bank's net interest income because the
actual repricing of various assets and liabilities is subject to customer
discretion and competitive and other pressures and, therefore, actual experience
may vary from that indicated.
14
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------------------------------------------
More Than
3 Months More Than More Than More Than
Months to 12 1 Year to 3 Years to 5 Years to More Than
or Less Months 3 Years 5 Years 10 Years 10 Years Total
------- ------ ------- ------- -------- -------- -----
Interest-Earning Assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans(1)(2).................... $ 78,994 $ 190,182 $ 137,207 $ 182,506 $ 138,799 $ 48,714 $ 776,402
Other Loans(1)(2)....................... 103,715 19,479 8,878 2,941 2,051 1,051 138,115
Mortgage-Backed Securities(3)(2)........ 205,471 256,890 140,716 79,433 103,229 86,355 872,094
Debt and Equity Securities(3)(2)........ 15,683 1,200 11,290 10,000 30,000 8 68,181
-- -- ------ ------ ------ ------ ------ ------ ------
Total Interest-Earning Assets....... 403,863 467,751 298,091 274,880 274,079 136,128 1,854,792
------- ------- ------- ------- ------- ------- ---------
Interest-Bearing Liabilities:
Passbook Accounts....................... 29,570 77,229 140,527 83,089 85,541 22,656 438,612
NOW Accounts............................ 3,364 9,416 20,716 15,484 23,031 6,006 78,017
Money Market Accounts................... 7,093 18,334 32,573 17,446 15,044 1,694 92,184
Certificate of Deposit Accounts(2)...... 229,270 294,539 244,981 36,726 -- -- 805,516
Borrowed Funds.......................... 178,468 79,945 33,500 60,000 -- -- 351,913
------- ------ ------ ------ -------
Total Interest-Bearing Liabilities.. 447,765 479,463 472,297 212,745 123,616 30,356 1,766,242
------- ------- ------- ------- ------- ------ ---------
Interest Rate Sensitivity Gap........... $ (43,902) $ (11,712) $ (174,206) $ 62,135 $ 150,463 $ 105,772 $ 88,550
========= ========= ========== ========== ========= ========= ========
Cumulative Interest Rate Sensitivity Gap $ (43,902) $ (55,614) $ (229,820) $ (167,685) $ (17,222) $ 88,550
========= ========= ========== ========== ========= =========
Cumulative Interest Rate Sensitivity Gap
as a Percentage of Total Assets.. (2.22)% (2.82)% (11.64)% (8.49)% (0.87)% 4.49%
Cumulative Net Interest-Earning Assets as
a Percentage of Cumulative
Interest-Bearing Liabilities..... 90.20% 94.00% 83.58% 89.60% 99.01% 105.01%
</TABLE>
(1) For purposes of the GAP analysis, mortgage and other loans are not reduced
for the allowance for loan losses and non-performing loans.
(2) For purposes of the GAP analysis, premiums, unearned discount, deferred loan
fees and purchase accounting adjustments are excluded.
(3) Mortgage-backed and debt and equity securities were shown excluding the
market value appreciation of $3.0 million on securities classified as
available-for-sale.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
limit adjustments to interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels may deviate significantly from those assumed in
calculating the table. Finally, the ability of borrowers to service their ARM
loans may decrease in the event of an interest rate increase. The table reflects
the estimates of management as to periods to repricing at particular points in
time. Among the factors considered, management monitors both current trends and
its historical repricing experience with respect to particular or similar
products. For example, the Bank has a number of deposit accounts, including
passbook savings, NOW accounts and money market accounts which, subject to
certain regulatory exceptions not relevant here, may be withdrawn at any time.
The Bank, based upon its historical experience, assumes that while all customers
in these account categories could withdraw their funds on any given day, they
will not do so, even if market interest rates were to change. As a result,
different assumptions may be used at different points in time.
The Bank's interest rate sensitivity is also monitored by management through the
use of a model which internally generates estimates of the change in net
portfolio value ("NPV") over a range of interest rate change scenarios. NPV is
the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The OTS also produces a similar analysis using its own model,
based upon data submitted on the Bank's quarterly Thrift Financial Reports, the
results of which may vary from the Bank's internal model primarily due to
differences in assumptions utilized between the Bank's internal model and the
OTS model, including estimated loan prepayment rates, reinvestment rates and
deposit decay rates. For purposes of the NPV table, prepayment speeds similar to
those used in the Gap table were used, reinvestment rates were those in effect
for similar products currently being offered and rates on core deposits were
modified to reflect recent trends. The following table sets forth the Bank's NPV
as of June 30, 1997, as calculated by the Bank.
15
<PAGE>
<TABLE>
<CAPTION>
Portfolio
Rates Net Portfolio Value Value of Assets
in Basis -------------------------------------- ------------------------
Points $ $ % NPV %
(Rate Shock) Amount Change Change Ratio Change (1)
------------ ------ ------ ------ ----- ----------
(Dollar in Thousands)
<S> <C> <C> <C> <C> <C>
200...................... 111,532 (42,668) (27.7) 5.87 (25.2)
100...................... 130,237 (23,963) (15.5) 6.75 (14.0)
Static................... 154,200 7.85
(100).................... 181,545 27,345 17.7 9.08 15.7
(200).................... 185,149 30,949 16.7 9.17 16.8
</TABLE>
- -----------
(1) Based on the portfolio value of the Bank's assets assuming no change in
interest rates.
As in the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volume of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on them.
The following table sets forth certain information relating to the Company's
consolidated statements of condition and the consolidated statements of income
for the years ended June 30, 1997, 1996, and 1995 and reflects the average
yields on assets and average cost of liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the fiscal years shown.
Average balances are derived from daily balances. The average balance of loans
receivable includes loans on which the Bank has discontinued accruing interest.
The yields and costs include fees, premiums and discounts which are considered
adjustments to yields.
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-Earning Assets:
Mortgage Loans, Net ................. $ 709,471 $ 56,948 8.03% $ 473,427 $ 39,073 8.25% $226,299 $17,701 7.82%
Consumer and Other Loans, Net ....... 133,965 11,525 8.60 121,565 10,942 9.00 104,754 9,540 9.11
Mortgage-Backed Securities (1) ...... 850,094 59,392 6.99 685,348 46,084 6.72 459,468 29,469 6.41
Money Market Investments ............ 11,590 618 5.33 17,349 991 5.71 14,590 804 5.51
Debt and Equity Securities (1) ...... 68,824 4,806 6.98 49,203 3,282 6.67 67,508 3,746 5.55
------ ----- ------ ----- ------ -----
Total Interest-Earning
Assets ................... 1,773,944 133,289 7.51 1,346,892 100,372 7.45 872,619 61,260 7.02
------- ------- ------
Non-Interest Earning Assets .......... 96,082 63,883 21,930
------ ------ ------
Total Assets.......... $1,870,026 $1,410,775 $894,549
========= ========= =======
Liabilities and Stockholders'Equity:
Interest-Bearing Liabilities:
Passbook Accounts ................... $ 441,922 10,937 2.47 $353,617 8,942 2.53 $236,047 5,926 2.51
NOW Accounts ........................ 80,121 1,041 1.30 58,576 1,161 1.98 25,275 485 1.92
Money Market Accounts ............... 99,536 2,493 2.50 97,975 2,515 2.57 91,051 2,283 2.51
Certificate of Deposit Accounts ..... 737,018 39,668 5.38 547,562 29,807 5.44 267,340 13,318 4.98
Borrowed Funds ...................... 311,363 17,514 5.62 180,055 10,560 5.87 105,657 6,349 6.01
------- ------ ---- ------- ------ ---- ------- ----- ----
Total Interest-Bearing
Liabilities ................ 1,669,960 71,653 4.29 1,237,785 52,985 4.28 725,370 28,361 3.91
Non-Interest Bearing Liabilities ..... 46,036 ------ 18,919 ------ 11,719 ------
------ ------ ------
Total Liabilities .......... 1,715,996 1,256,704 737,089
Stockholders' Equity ............... 154,030 154,071 157,460
------- ------- -------
Total Liabilities and
Stockholders' Equity. $1,870,026 $1,410,775 $894,549
========== ========== ========
Net Interest Income/Interest
Rate Spread (2) .................. $61,636 3.22% $47,387 3.17% $32,899 3.11%
======= ==== ====== ==== ======= =====
Net Interest-Earning Assets/
Net Interest Margin (3) .......... $ 103,984 3.47% $109,107 3.52% $147,249 3.77%
========== ==== ======== ==== ======== =====
Ratio of Interest-Earning Assets to
Interest-Bearing Liabilities ...... 1.06X 1.09X 1.20X
==== ==== ====
</TABLE>
(1) Includes securities available-for-sale.
(2) Net interest rate spread represents the difference between the average
yield on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (I) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1997 Year Ended June 30, 1996
Compared to Compared to
Year Ended June 30, 1996 Year Ended June 30, 1995
-------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
in Net Interest Income in Net Interest Income
-------------------------------- ---------------------------------
Due to Due to
------------------- -------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans, Net.................. $ 18,945 $ (1,070) $ 17,875 $ 20,347 $ 1,025 $ 21,372
Consumer and Other Loans, Net........ 1,083 (500) 583 1,518 (116) 1,402
Mortgage-Backed Securities........... 11,402 1,906 13,308 15,127 1,488 16,615
Money Market Investments............. (309) (64) (373) 156 31 187
Debt and Equity Securities........... 1,365 159 1,524 (1,133) 669 (464)
----- --- ----- ------ --- ----
Total........................... 32,486 431 32,917 36,015 3,097 39,112
------ --- ------ ------ ----- ------
Interest-Bearing Liabilities:
Passbook Accounts.................... 2,210 (215) 1,995 2,969 47 3,016
NOW Accounts......................... 350 (470) (120) 660 16 676
Money Market Accounts................ 43 (65) (22) 177 55 232
Certificate of Deposits Accounts..... 10,193 (332) 9,861 15,154 1,335 16,489
Borrowed Funds....................... 7,421 (467) 6,954 4,363 (152) 4,211
----- ---- ----- ----- ---- -----
Total........................... 20,217 (1,549) 18,668 23,323 1,301 24,624
------ ------ ------ ------ ----- ------
Net Change in Net Interest Income......... $ 12,269 $ 1,980 $ 14,249 $ 12,692 $ 1,796 $ 14,488
======== ======= ======== ======== ======= ========
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1997 and 1996.
General. Net income for fiscal 1997 was $10.9 million as compared to $11.7
million for fiscal 1996. The decrease in net income was the result of the SAIF
recapitalization assessment of $ 4.9 million, net of taxes, recorded in the
first quarter of fiscal 1997. Although net income decreased from the prior year,
net income, excluding the SAIF recapitalization assessment, would have been
$15.7 million for the year ended June 30, 1997 which represents an increase of
$4.1 million, or 34.5%, over net income for the year ended June 30, 1996.
Excluding the SAIF assessment, the return on average equity increased to 10.12%
for year ended June 30, 1997 from 7.58% for year ended June 30, 1996 and the
return on tangible equity increased to 14.56% for year ended June 30, 1997 from
9.18% for year ended June 30, 1996.
Interest Income. Interest income increased $32.9 million, or 32.8%, from $100.4
million for fiscal 1996 to $133.3 million for fiscal 1997. The increase resulted
primarily from a $427.1 million increase in average interest-earning assets from
$1.3 billion for fiscal 1996 to $1.8 billion for fiscal 1997 and from a slight
increase in the average yield of interest-earning assets from 7.45% in fiscal
1996 to 7.51% in fiscal 1997. The increase in the average interest-earning
assets was primarily due to assets acquired in the Sunrise Bancorp, Inc.
acquisition, increased purchases of mortgage-backed securities and increased
originations of multi-family loans. Interest income on mortgage-backed
securities increased $13.3 million, or 28.9%, from $46.1 million for fiscal 1996
to $59.4 million for fiscal 1997, primarily due to an increase of $164.7
million, or 24.0%, in the average balance of these securities, and an increase
in the average yield on these securities of 27 basis points from 6.72% for
fiscal 1996 to 6.99% for fiscal 1997 due to increased purchases of higher
yielding fixed-rate mortgage-backed securities and agency and private label
REMICs. Interest income from mortgage loans increased by $17.9 million, or
45.7%, due to a $236.0 million, or 49.9%, increase in the average balance of
mortgage loans offset by a 22 basis point decrease in the average yield on
mortgage loans from 8.25% for fiscal 1996 to 8.03% for fiscal 1997. The increase
in average mortgage loans was primarily due to loans acquired in the Sunrise
Bancorp, Inc. acquisition and increased originations of multi-family loans. The
decrease in the average yield resulted primarily from the downward repricing of
the Company's adjustable-rate loans and originations of lower yielding loans due
to the lower interest rate environment.
Interest Expense. Interest expense for fiscal 1997 was $71.7 million, an
increase of $18.7 million, or 35.2%, from $53.0 million in fiscal 1996. The
increase is primarily the result of a $432.2 million, or 34.9%, increase in the
average balance of interest-bearing liabilities from $1.2 billion for fiscal
1996 to $1.7 billion for fiscal 1997 and from
18
<PAGE>
a slight increase in the cost of interest-bearing liabilities from 4.28% for
fiscal 1996 to 4.29% for fiscal 1997. The increase in the average balance of
interest-bearing liabilities was primarily due to deposits acquired in the
Sunrise Bancorp, Inc. acquisition, new certificate deposits and additional
borrowings. Interest expense on total deposits increased $11.7 million, or
27.6%, from $42.4 million for fiscal 1996 to $54.1 million for fiscal 1997,
primarily as a result of a $300.9 million, or 28.4% increase in the average
balance of deposits from $1.1 billion in fiscal 1996 to $1.4 billion in fiscal
1997 offset by a slight decrease in the average cost of such deposits from 4.01%
in fiscal 1996 to 3.98% in fiscal 1997. The decrease in the average cost of
deposits resulted primarily from the Bank lowering rates on its core deposit
accounts offset by the Bank competitively raising interest rates on certificate
of deposit accounts to attract new deposits. The average balance of certificate
accounts increased $189.5 million, or 34.6%, from $547.6 million for fiscal 1996
to $737.0 million for fiscal 1997. In addition to the increase in the average
balance of certificates accounts, the average balance of core deposits also
increased $109.9 million, or 26.7%, from $412.2 million for fiscal 1996 to
$522.0 million for fiscal 1997. The increase relates to core deposits acquired
in the Sunrise Bancorp, Inc. acquisition, however, the core deposit ratio
decreased from 41.68% at June 30, 1996 to 37.40% at June 30, 1997. Interest
expense on borrowed funds increased $6.9 million, or 65.9%, from $10.6 million
for fiscal 1996 to $17.5 million for fiscal 1997. Borrowings averaged $311.4
million for fiscal 1997, an increase of $131.3 million, or 72.9%, from $180.1
million for fiscal 1996. The Company continues to utilize borrowed funds to
grow, leveraging the Bank's capital and improving the return on equity and
tangible equity. Borrowed funds, principally reverse repurchase agreements and
FHLB-NY advances, have been invested by the Company primarily in mortgage-backed
securities and multi-family loans.
Net Interest Income. Net interest income for fiscal 1997 increased $14.2
million, or 30.1%, from $47.4 million for fiscal 1996 to $61.6 million for
fiscal 1997. The increase in net interest income primarily relates to the
significant growth in the average balances of interest-earning assets and an
increase in the net interest spread. Average interest-earning assets increased
$427.1 million, or 31.7%, from $1.3 billion in fiscal 1996 to $1.8 billion in
fiscal 1997 while average interest-bearing liabilities increased $432.2 million,
or 34.9%, from $1.2 billion in fiscal 1996 to $1.7 billion in fiscal 1997. The
net interest rate spread increased from 3.17% for fiscal 1996 to 3.22% for
fiscal 1997 as a result of higher yielding loans acquired from the Sunrise
Bancorp, Inc. acquisition and increased yields on the mortgage-backed securities
portfolio. As a result of leveraging the Bank's capital with the Sunrise
Bancorp, Inc. acquisition, the net interest margin decreased from 3.52% in
fiscal 1996 to 3.47% in fiscal 1997 and the ratio of average interest-earning
assets to interest-bearing liabilities declined from 1.09X in fiscal 1996 to
1.06X in fiscal 1997.
Provision for Loan Losses. The provision for loan losses for fiscal 1997 was
$950,000, and increase of $225,000, or 31.0%, from $725,000 for fiscal 1996.
When determining the provision for loan losses, management assesses the risk
inherent in its loan portfolio based on information available to management at
such time relating to trends in the national and local economies, trends in the
real estate market and trends in the Company's level of non-performing loans and
assets and net charge-offs. Non-performing loans increased from $13.0 million at
the end of fiscal 1996 to $14.7 million at the end of fiscal 1997 and net
charge-offs increased from $176,000 for fiscal 1996 to $263,000 for fiscal 1997.
Management increased the provision for loan losses during fiscal 1997 due to its
assessment of the loan portfolio and to increase loan loss coverage on
non-performing loans. In addition, the Company has increased its origination of
multi-family loans which may possess a greater credit risk than one- to
four-family loans and requires greater general reserve levels. Management
believes that based upon information currently available its allowance for loan
losses is adequate to cover future loan losses. However, if general economic
conditions and real estate values within the Bank's primary lending area
decline, the level of non-performing loans may increase resulting in larger
provisions for loan losses which, in turn, would adversely affect net income.
Non-Interest Income. Non-interest income for fiscal 1997 increased $302,000, or
9.7%, from $3.1 million for fiscal 1996 to $3.4 million for fiscal 1997. The
increase in non-interest income is due to increased deposit fee income offset by
lower net gains on securities.
Non-Interest Expense. Non-interest expense totalled $43.0 million for the fiscal
year ended June 30, 1997 as compared to $28.1 million for the fiscal year ended
June 30, 1996, an increase of $14.9 million, or 53.1%. Included in non-interest
expense for the fiscal year ended June 30, 1997 is the special SAIF charge of
$8.25 million. Excluding the SAIF charge, non-interest expense increased $6.7
million, or 23.7%. The increase is mainly the result of banking office
personnel, goodwill amortization and other occupancy costs associated with the
Sunrise Bancorp, Inc. acquisition. Due to the increased asset base and the
operational efficiencies realized from the acquisition, the general
19
<PAGE>
and administrative expenses to average assets ratio improved from 1.81% for the
fiscal year ended June 30, 1996 to 1.66% for the fiscal year ended June 30,
1997. For the fiscal year ended June 30, 1997, compensation and benefits expense
increased to $16.5 million, an increase of $3.1 million, or 23.2%, from $13.4
million for the fiscal year ended June 30, 1996. 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. For the fiscal year ended June 30, 1997, ESOP and RRP expense was
$2.5 million as compared to $2.0 million in the prior year, an increase of
$485,000, or 23.8%. Occupancy and equipment expense increased $1.2 million, or
27.6%, from $4.5 million for the fiscal year ended June 30, 1996 to $5.7 million
for the fiscal year ended June 30, 1997 due to costs associated with the
operation of the eleven new banking offices as well as miscellaneous data
processing costs. Federal deposit premium expense decreased $586,000, or 24.4%,
from $2.4 million for fiscal year ended June 30, 1996 to $1.8 million for the
fiscal year ended June 30, 1997 due to the reduction in SAIF premiums as a
result of the recapitalization of the insurance fund. Other operating expenses
increased $1.6 million, or 38.6%, from $4.2 million during the fiscal year ended
June 30, 1996 to $5.8 million for the fiscal year ended June 30, 1997 primarily
as a result of general expenses related to the addition of eleven new banking
offices.
For the fiscal year ended June 30, 1997, real estate owned expenses were
$383,000, a decrease of $196,000, or 33.9%, from $579,000 in the prior year
period. The decrease in real estate owned expenses primarily relates to a lower
provision established during the fiscal year ended June 30, 1997. During the
fiscal year ended June 30, 1997, the Bank established a provision for REO losses
of $200,000 as compared to $375,000 in the prior year period.
During fiscal year 1997, the Bank recognized amortization of excess of cost over
fair value of net assets acquired of $3.4 million as compared to $1.9 in fiscal
1996. The amortization of cost over fair value of net assets acquired relates to
the Company accounting for the acquisitions of Bank of Westbury and Sunrise
Bancorp, Inc. using the purchase method.
Income Tax Expense. Income tax expense increased $192,000 million, or 1.9%, from
$9.9 million for fiscal 1996 to $10.1 million for fiscal 1997. The effective
income tax rate was 48.1% for fiscal 1997 as compared to 45.9% for fiscal 1996.
The increase in the effective tax rate primarily relates to no tax benefit
received for the amortization of excess of cost over fair value of net assets
acquired.
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995.
General. Net income for fiscal 1996 was $11.7 million, an increase of $2.0
million, or 20.8%, from $9.7 million for fiscal 1995. Net income for fiscal 1996
and fiscal 1995 represent a return on average assets of 0.83% and 1.08%,
respectively, and a return on average equity of 7.58% and 6.17%, respectively.
Interest Income. Interest income increased by $39.1 million, or 63.8%, from
$61.3 million for fiscal 1995, to $100.4 million for fiscal 1996. The increase
resulted primarily from a $474.3 million increase in average interest-earning
assets from $872.6 million for fiscal 1995 to $1.3 billion for fiscal 1996 and
from a 43 basis point increase in the average yield of interest-earning assets
from 7.02% in fiscal 1995 to 7.45% in fiscal 1996. The increase in the average
interest-earning assets was primarily due to assets acquired in the Bank of
Westbury and Sunrise Bancorp, Inc. acquisitions. Interest income on
mortgage-backed securities increased $16.6 million, or 56.4%, from $29.5 million
for fiscal 1995 to $46.1 million for fiscal 1996, primarily due to an increase
of $225.9 million, or 49.2%, in the average balance of these securities, and an
increase in the average yield on these securities of 31 basis points from 6.41%
for fiscal 1995 to 6.72% for fiscal 1996 due to upward repricing of these
assets. Mortgage-backed securities generally bear interest rates lower than
loans. Accordingly, to the extent the demand for loans which meet the Bank's
underwriting standard remains low and the Company continues to increase its
investments in mortgage-backed securities, yields on interest-earning assets may
tend to be lower than if loan demand were to be stronger. Interest income from
mortgage loans increased by $21.4 million, or 120.7%, due to a $247.1 million,
or 109.2%, increase in the average balance of mortgage loans and from a 43 basis
point increase in the average yield on mortgage loans from 7.82% for fiscal 1995
to 8.25% for fiscal 1996. The increase in the average mortgage loans was
primarily due to loans acquired in the Bank of Westbury and Sunrise Bancorp,
Inc. acquisitions and increased originations of multi-family loans. The increase
in the average yield resulted primarily from the upward repricing of the
Company's adjustable-rate loans and higher rates earned on the multi-family
loans.
20
<PAGE>
Interest Expense. Interest expense for fiscal 1996 was $53.0 million, an
increase of $24.6 million, or 86.8%, from the $28.4 million recorded for fiscal
1995. The increase is primarily the result of a $512.4 million, or 70.6%,
increase in the average balance of interest-bearing liabilities from $725.4
million for fiscal 1995 to $1.2 billion for fiscal 1996 and from a 37 basis
point increase in the cost of interest-bearing liabilities from 3.91% for fiscal
1995 to 4.28% for fiscal 1996. The increase in the average balance of
interest-bearing liabilities was primarily due to deposits acquired in the Bank
of Westbury and Sunrise Bancorp, Inc. acquisitions and additional borrowings.
Interest expense on total deposits increased $20.4 million, or 92.7%, from $22.0
million for fiscal 1995 to $42.4 million for fiscal 1996, primarily as a result
of a $426.3 million, or 68.8% increase in the average balance of deposits from
$619.7 million in fiscal 1995 to $1.0 billion in fiscal 1996 and from a 46 basis
point increase in the average cost of such deposits from 3.55% in fiscal 1995 to
4.01% in fiscal 1996. The increase in the average cost of deposits resulted
primarily from the Bank competitively raising interest rates on certificate of
deposit accounts to attract new deposits. The average balance of certificate
accounts increased $280.2 million, or 104.8%, from $267.3 million for fiscal
1995 to $547.6 million for fiscal 1996. In addition to the increase in the
average balance of certificates accounts, the average balance of core deposits
also increased $150.9 million, or 57.7%, from $261.3 million for fiscal 1995 to
$412.2 million for fiscal 1996. The increase relates to core deposits acquired
in the Bank of Westbury and Sunrise Bancorp, Inc. acquisitions which resulted in
the core deposit ratio increasing from 36.12% at June 30, 1995 to 41.68% at June
30, 1996. Interest expense on borrowed funds increased $4.2 million, or 66.3%,
from $6.3 million for fiscal 1995 to $10.6 million for fiscal 1996. Borrowings
averaged $180.0 million for fiscal 1996, an increase of $74.4 million, or 70.4%,
from the $105.7 million for fiscal 1995. The Company continues to utilize
borrowed funds to grow, leveraging the Bank's capital and improving the return
on equity. Borrowed funds, principally from the FHLB- NY and reverse repurchase
agreements, have been invested by the Company primarily in mortgage-backed
securities and multi-family loans.
Net Interest Income. Net interest income for fiscal 1996 increased $14.5
million, or 44.0%, from $32.9 million for fiscal 1995 to $47.4 million for
fiscal 1996. The increase in net interest income primarily relates to an
increase in the net interest spread coupled with the significant growth in the
average balances of interest-earning assets and interest-bearing liabilities.
The net interest rate spread increased from 3.11% for fiscal 1995 to 3.17% for
fiscal 1996 as a result of higher yielding loans acquired from the Bank of
Westbury and Sunrise Bancorp, Inc. acquisitions. Average interest-earning assets
increased $474.3 million, or 54.4%, from $872.6 million in fiscal 1995 to $1.3
billion in fiscal 1996 while average interest-bearing liabilities increased
$512.4 million, or 70.6%, from $725.4 in fiscal 1995 to $1.2 billion in fiscal
1996. As a result of leveraging the Bank's capital with the two acquisitions,
net interest margin decreased from 3.77% in fiscal 1995 to 3.52% in fiscal 1996.
In addition, the ratio of average interest-earning assets to interest-bearing
liabilities declined from 1.20X in fiscal 1995 to 1.09X in fiscal 1996.
Provision for Loan Losses. The provision for loan losses for fiscal 1996 was
$725,000, and increase of $325,000, or 81.3%, from $400,000 for fiscal 1995.
When determining the provision for loan losses, management assesses the risk
inherent in its loan portfolio based on information available to management at
such time relating to trends in the national and local economies, trends in the
real estate market and trends in the Company's level of non performing loans and
assets and net charge-offs. Non-performing loans increased from $3.7 million at
the end of fiscal 1995 to $13.0 million at the end of fiscal 1996 and net
charge-offs increased from $88,000 for fiscal 1995 to $176,000 for fiscal 1996.
Management increased the provision for loan losses during fiscal 1996 due to its
assessment of the loan portfolio and to increase loan loss coverage on
non-performing loans acquired from Sunrise Bancorp, Inc. and Bank of Westbury to
bring such reserves in line with Company policy. In addition, the Company has
increased its origination of multi-family loans which may possess a greater
credit risk than one- to four-family loans and requires greater general reserve
levels.
Non-Interest Income. Non-interest income for fiscal 1996 increased $1.9 million,
or 147.4%, from $1.2 million for fiscal 1995 to $3.1 million for fiscal 1996.
The increase in non-interest income relates to a gain of $678,000 in fiscal 1996
from the sale of mortgage-backed securities classified as available-for-sale in
order to fund the purchase of Sunrise Bancorp, Inc. In addition, the increase
relates to increased servicing income, deposit fee income and a recovery of
claim which was previously written off.
Non-Interest Expense. Non-interest expense totalled $28.1 million for the fiscal
year ended June 30, 1996 as compared to $17.2 million for the fiscal year ended
June 30, 1995, an increase of $10.9 million, or 63.3%. The increase is mainly
the result of banking office personnel, deposit insurance premiums, goodwill
amortization and other
21
<PAGE>
occupancy costs associated with the Sunrise Bancorp, Inc. and Bank of Westbury
acquisitions, however, the operating expense to average assets ratio decreased
from 1.97% for the fiscal year ended June 30, 1995 to 1.81% for the fiscal year
ended June 30, 1996 primarily due to the increased asset base and acquisition
related efficiencies. For the fiscal year ended June 30, 1996, compensation and
benefits expense increased to $13.4 million, an increase of $3.8 million, or
40.1%, from $9.6 million for the fiscal year ended June 30, 1995. The increase
in compensation and benefits expense is due to the addition of banking office
personnel from the Sunrise Bancorp, Inc. and Bank of Westbury acquisitions,
higher benefit expenses and normal salary adjustments. Occupancy and equipment
expense increased $2.0 million, or 82.0%, from $2.5 million for the fiscal year
ended June 30, 1995 to $4.5 million for the fiscal year ended June 30, 1996 due
to costs associated with the operation of the seventeen new banking offices as
well as miscellaneous data processing costs. For the fiscal year ended June 30,
1996, advertising totalled $1.2 million, the same as recorded for the fiscal
year ended June 30, 1995. The Company maintained the same level of newspaper
advertising for its Home Equity Line of Credit and deposit products as in the
prior year. Other operating expenses increased $1.2 million, or 37.2%, from $3.0
million during the fiscal year ended June 30, 1995 to $4.2 million for the
fiscal year ended June 30, 1996 as a result of general expenses related to the
addition of the seventeen new banking offices.
For the fiscal year ended June 30, 1996, real estate owned expenses were
$579,000 as compared to income of $385,000 in the prior year period. The
increase in real estate owned expenses primarily relates to the reduction in net
gains on the sale of real estate owned from $657,000 in fiscal 1995 to $19,000
in fiscal 1996. In addition, during the fiscal year ended June 30, 1996, the
Bank established a provision for REO losses of $375,000 as compared to $60,000
for the prior year period. Additional reserves on real estate owned were
established in order to facilitate the sale of such properties in the current
market place.
During fiscal year 1996, the Bank recognized amortization of excess of cost over
fair value of net assets acquired of $1.9 million as compared to no amortization
in fiscal 1995. The amortization of cost over fair value of net assets acquired
relates to the Company accounting for the acquisitions of Bank of Westbury and
Sunrise Bancorp, Inc. using the purchase method.
Income Tax Expense. Income tax expense increased $3.1 million, or 45.4%, from
$6.8 million for fiscal 1995 to $9.9 million for fiscal 1996. The effective
income tax rate was 45.9% for fiscal 1996 as compared to 41.4% for fiscal 1995.
The increase in the effective tax rate primarily relates to no tax benefit
received for the amortization of excess of cost over fair value of net assets
acquired and other employee benefit expenses.
Liquidity and Capital Resources
The Company's current primary sources of funds are principal and interest
payments and sales of securities available- for-sale and dividends from the
Bank. Dividend payments to the Company from the Bank are subject to the
profitability of the Bank and to applicable laws and regulations. During fiscal
year 1996 and 1995, the Bank did not make any dividend payments to the Company.
During fiscal 1997, the Bank made a dividend payment of $6.7 million to the
Company.
The Company's liquidity is also available to, among other things, support future
expansion of operations or diversification into other banking related business,
payments of dividends or repurchase its common stock. In this regard, the
Company declared cash dividends of $4,930,000, $3,924,000 and $3,641,000 during
fiscal year 1997, 1996 and 1995, respectively.
During fiscal 1995, the Company repurchased 998,930 shares at an aggregate cost
of $13,040,000. During fiscal 1996 the Company repurchased 260,776 shares at an
aggregate cost of $3,829,000. On April 4, 1997, the Company announced the
approval of its fifth five percent stock repurchase plan which allows the
Company to repurchase up to 441,138 common shares. As of June 30, 1997, 80,000
shares under this program were repurchased at an aggregate cost of $1,831,000.
During fiscal 1997, the Company repurchased 442,182 shares at an aggregate cost
of $8,113,000.
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed securities and debt and equity securities,
advances from the FHLB-NY and borrowings under reverse repurchase agreements and
loan sales. While maturities and scheduled amortization of loans,
mortgage-backed securities and debt
22
<PAGE>
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
5.29% and 1.65%, respectively, for the fiscal year ended June 30, 1997. The
Bank's short-term liquidity ratio was 2.33% at June 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 June 30, 1997,
assets qualifying for short-term liquidity, including cash and short term
investments, totalled $40.0 million.
The primary investment activity of the Bank is the origination of mortgage loans
and consumer loans, and the purchase of mortgage loans and mortgage-backed
securities. During the fiscal year ended June 30, 1997, the Bank originated and
purchased mortgage loans and consumer loans in the amount of $179.3 million and
$47.7 million, respectively. During the fiscal year ended June 30, 1997, the
Bank purchased $277.5 million of mortgage-backed securities all of which were
classified as available-for-sale and purchased as part of the Bank's growth
strategy. These activities were funded primarily by deposits, principal
repayments on loans and mortgage-backed securities and borrowings from the
FHLB-NY and reverse repurchase agreements. At June 30, 1997, borrowings from the
FHLB-NY and reverse repurchase agreements totalled $40.0 million and $311.9
million, respectively.
At June 30, 1997, the Bank had outstanding loan commitments of $26.7 million and
open lines of credit of $53.4 million. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less from
June 30, 1997 totalled $524.7 million. Management believes that a significant
portion of such deposits will remain with the Bank.
At June 30, 1997, the Bank exceeded each of the OTS capital requirements. The
Bank's tangible, core, and risked- based ratios were 5.60%, 5.60% and 15.16%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurements of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as the price of goods and services.
Impact of New Accounting Standards
During fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121), SFAS No. 122, "Accounting
for Mortgage Servicing Rights and SFAS No. 125, "Accounting for Transfer and
Servicing of Financial Asset and Extinguishment of Liabilities". The Company's
adoption of these accounting pronouncements did not have a material impact on
its financial condition or results of operation.
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
23
<PAGE>
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 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.
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 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 will be assessed a
FICO payment of 1.3 basis points, while SAIF deposits will pay an estimated 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 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.
24
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Condition
- ------------------------------------
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30,
--------------------
1997 1996
---- ----
Assets
<S> <C> <C>
Cash and Due from Banks............................................................. $ 29,565 $ 22,420
Money Market Investments............................................................ 1,100 10,450
Debt and Equity Securities Available-for-Sale....................................... 26,909 13,271
Debt and Equity Securities Held-to-Maturity (with estimated
market values of $46,152 and $48,036, respectively).............................. 46,026 48,330
Mortgage-Backed Securities Available-for-Sale....................................... 721,819 591,740
Mortgage-Backed Securities Held-to-Maturity (with estimated
market values of $163,108 and $184,995, respectively)............................ 159,356 184,492
Loans receivable:
Mortgage Loans................................................................. 775,612 690,967
Consumer and Other Loans....................................................... 138,891 131,274
Less Allowance for Loan Losses............................................... (5,182) (4,495)
------ ------
Loans Receivable, Net.................................................. 909,321 817,746
Accrued Interest Receivable, Net.................................................... 12,040 11,312
Office Properties and Equipment, Net................................................ 14,089 13,821
Prepaid Expenses and Other Assets................................................... 7,580 14,070
Mortgage Servicing Rights........................................................... 3,046 3,905
Excess of Cost Over Fair Value of Net Assets Acquired............................... 45,463 49,429
Real Estate Owned, Net.............................................................. 450 1,564
--- -----
Total Assets........................................................... $1,976,764 $1,782,550
========== ==========
Liabilities and Stockholders' Equity
Deposits............................................................................ $1,436,037 $1,345,626
FHLB Advances....................................................................... 40,000 3,000
Securities Sold Under Agreements to Repurchase...................................... 311,913 263,160
Advance Payments by Borrowers for Taxes and Insurance............................... 9,017 8,846
Accrued Expenses and Other Liabilities.............................................. 17,127 8,299
------ -----
Total Liabilities...................................................... 1,814,094 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; 8,776,337 and 9,128,739
Outstanding, Respectively........................................................ 108 108
Additional Paid-in Capital.......................................................... 105,871 104,041
Retained Earnings, Substantially Restricted......................................... 89,660 83,966
Net, Unrealized Appreciation (Depreciation) on Securities
Available-for-Sale, Net of Taxes................................................. 1,705 (5,281)
Less:
Unallocated Common Stock Held by ESOP............................................... (5,382) (6,210)
Unearned Common Stock Held by Recognition and Retention Plans (RRPs)................ (1,567) (2,392)
Common Stock Held by SERP, at Cost (11,021 shares).................................. (209) --
Treasury Stock, at Cost (1,974,483 and 1,622,081 shares, respectively).............. (27,516) (20,613)
------- -------
Total Stockholders' Equity..................................................... 162,670 153,619
------- -------
Total Liabilities and Stockholders' Equity.............................. $1,976,764 $1,782,550
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
25
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
- ---------------------------------
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1997 1996 1995
---- ---- ----
Interest Income:
<S> <C> <C> <C>
First Mortgage Loans............................................. $ 56,948 $39,073 $17,701
Consumer and Other Loans......................................... 11,525 10,942 9,540
Mortgage-Backed Securities....................................... 59,392 46,084 29,469
Money Market Investments......................................... 618 991 804
Debt and Equity Securities....................................... 4,806 3,282 3,746
----- ----- -----
Total Interest Income...................................... 133,289 100,372 61,260
Interest Expense:
Deposits......................................................... 54,139 42,425 22,012
Borrowed Funds................................................... 17,514 10,560 6,349
------ ------ -----
Total Interest Expense..................................... 71,653 52,985 28,361
Net Interest Income Before Provision for Loan Losses............. 61,636 47,387 32,899
Provision for Loan Losses............................................ 950 725 400
--- --- ---
Net Interest Income After Provision for Loan Losses.............. 60,686 46,662 32,499
------ ------ ------
Non-Interest Income:
Loan Fees and Service Charges.................................... 683 826 269
Other Operating Income........................................... 2,557 1,606 841
Net Gain on Securities........................................... 172 678 147
--- --- ---
Total Non-Interest Income.................................. 3,412 3,110 1,257
----- ----- -----
Non-Interest Expense:
Compensation and Benefits........................................ 16,509 13,395 9,562
Occupancy and Equipment.......................................... 5,719 4,481 2,462
Federal Deposit Insurance Premiums............................... 1,813 2,399 1,376
Advertising...................................................... 1,168 1,152 1,158
Other Operating Expenses......................................... 5,778 4,169 3,039
----- ----- -----
Total General and Administrative Expenses.................. 30,987 25,596 17,597
Real Estate Operations, Net...................................... 383 579 (385)
Amortization of Excess of Cost Over Fair Value
of Net Assets Acquired......................................... 3,404 1,928 --
SAIF recapitalization charge..................................... 8,250 -- --
----- ------ ------
Total Non-Interest Expense................................. 43,024 28,103 17,212
------ ------ ------
Income Before Income Taxes........................................... 21,074 21,669 16,544
Income Tax Expense .................................................. 10,138 9,946 6,842
------ ----- -----
Net Income .......................................................... $10,936 $11,723 $ 9,702
======= ======= =======
Net Income per Common Share:
Primary................................................. $ 1.24 $ 1.31 $1.03
======== ======== =====
Fully Diluted........................................... $ 1.21 $ 1.31 $ 1.03
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
- ----------------------------------------------------------
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Common Stock (Par Value: $.01):
Balance at Beginning and End of Year............................ $ 108 $ 108 $ 108
------- --------- ---------
Additional Paid in Capital:
Balance at Beginning of Year.................................... 104,041 103,655 103,479
Allocation of ESOP Stock and Earned Portion of RRPs............. 868 386 176
Common Stock Acquired by SERP................................... 209 -- --
Tax Benefits on Stock Plans..................................... 753 -- --
------- ------- -------
Balance at End of Year.......................................... 105,871 104,041 103,655
------- ------- -------
Retained Earnings, Substantially Restricted:
Balance at Beginning of Year.................................... 83,966 76,167 70,106
Net Income...................................................... 10,936 11,723 9,702
Dividends Declared.............................................. (4,930) (3,924) (3,641)
Loss on Reissuance of Treasury Stock............................ (312) -- --
------- ------ ------
Balance at End of Year.......................................... 89,660 83,966 76,167
------ ------ ------
Net Unrealized Appreciation (Depreciation) on
Securities Available-for-Sale, Net of Tax:
Balance at Beginning of Year.................................... (5,281) 839 (118)
Unrealized Appreciation on Securities Transferred from
Held-to-Maturity to Available-for-Sale....................... -- 1,144 --
Change in Net Unrealized Appreciation
(Depreciation), Net of Tax.................................... 6,986 (7,264) 957
------- ------- ------
Balance at End of Year.......................................... 1,705 (5,281) 839
------- ------- ------
Unallocated Common Stock Held by ESOP:
Balance at Beginning of Year.................................... (6,210) (7,038) (8,004)
Allocation of ESOP Stock........................................ 828 828 966
------- ------ -------
Balance at End of Year.......................................... (5,382) (6,210) (7,038)
------- ------- -------
Unearned Common Stock Held by RRPs:
Balance at Beginning of Year.................................... (2,392) (3,214) (3,976)
Earned Portion of RRPs.......................................... 825 822 762
------- ------- -------
Balance at End of Year.......................................... (1,567) (2,392) (3,214)
------- ------- -------
Supplemental Executive Retirement Plan:
Balance at Beginning of Year................................... -- -- --
Common Stock Acquired by SERP (11,021 shares).................. (209) -- --
------- ------ -------
Balance at End of Year......................................... (209) -- --
------- ------ -------
Treasury Stock:
Balance at Beginning of Year................................... (20,613) (16,784) (3,744)
Common Stock Purchased, at Cost (442,182, 260,776 and
998,930 shares).............................................. (8,113) (3,829) (13,040)
Exercise of Stock Options...................................... 1,210 -- --
------- -------- --------
Balance at End of Year......................................... (27,516) (20,613) (16,784)
------- -------- --------
Total Stockholders' Equity...................................... $ 162,670 $ 153,619 $ 153,733
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
- -------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net Income.................................................................. $ 10,936 $ 11,723 $ 9,702
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses................................................. 950 725 400
Provision for Losses on Real Estate Owned ................................ 200 375 60
Amortization of Premiums (Accretion of Discounts), Net.................... 1,448 (567) (1,459)
Net Gain on Securities.................................................... (172) (678) (147)
Expense Charge Relating to Allocation and Earned
Portions of Stock Plans............................................... 2,521 2,036 1,904
Amortization of Excess of Cost Over Fair Value of
Net Assets Acquired ................................................. 3,404 1,928 --
Amortization of Mortgage Servicing Rights................................. 859 240 --
Acquisition Related Tax Benefits not Previously Recognized................ 562 -- --
Depreciation and Amortization............................................. 1,417 1,027 467
Net Gain on Loans Sold.................................................... (28) (30) --
Net Gain on Sale of Real Estate Owned..................................... (56) (19) (657)
(Increase) Decrease in Accrued Interest Receivable....................... (728) 738 (1,657)
Decrease (Increase) in Prepaid Expenses and Other Assets.................. 3,174 3,037 (263)
Increase (Decrease) in Accrued Expenses and
Other Liabilities....................................................... 7,164 (6,413) 1,318
----- ------ -----
Net Cash Provided by Operating Activities............................ 31,651 14,122 9,668
------ ------ -----
Cash Flows From Investing Activities:
Originations and Purchased Loans, Net of Principal Repayments............... (101,583) (44,258) (3,820)
Purchases of Mortgage-Backed Securities Held-to-Maturity.................... -- (16,472) (63,894)
Purchases of Mortgage-Backed Securities Available-for-Sale.................. (277,483) (382,645) (105,654)
Proceeds from Sales of Mortgage-Backed Securities Available-for-Sale........ 59,810 180,590 --
Principal Repayments from Mortgage-Backed Securities........................ 123,823 148,059 47,586
Proceeds from Call of Debt Securities....................................... 7,313 21,800 --
Proceeds from Sales of Debt and Equity Securities Available-for-Sale........ 5,028 29,245 11,146
Purchases of Debt Securities Available-for-Sale............................. (19,715) -- (19,654)
Purchases of Debt and Equity Securities Held-to-Maturity.................... (5,007) (20,000) (1,296)
Proceeds from Maturities of Debt Securities................................. 1,350 28,100 40,338
Purchases of Premises and Equipment......................................... (1,734) (2,595) (1,610)
Proceeds from Loans Sold.................................................... 7,303 5,860 1,481
Proceeds from Sale of Real Estate Owned .................................... 1,899 1,715 2,572
Cash Paid for Bank of Westbury Net of Cash and Cash
Equivalents Acquired...................................................... -- (165) --
Cash Paid for Sunrise Bancorp, Inc. Net of Cash and
Cash Equivalents Acquired................................................. -- (94,259) --
------ ------ -----
Net Cash Used in Investing Activities................................. (198,996) (145,025) (92,805)
-------- -------- -------
</TABLE>
28
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows, Continued
- ------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1997 1996 1995
---- ---- ----
Cash Flows from Financing Activities:
<S> <C> <C> <C>
Increase in Deposits........................................................ $ 91,009 $ 44,558 $ 83,096
Increase (Decrease) in Advance Payments by Borrowers
for Taxes and Insurance.................................................. 171 (9,210) (12)
Proceeds from FHLB Advances................................................. 60,000 -- 344,000
Repayment of FHLB Advances.................................................. (23,000) (87,000) (382,000)
Proceeds from Reverse Repurchase Agreements................................. 1,177,298 824,727 98,694
Repayment of Reverse Repurchase Agreements.................................. (1,128,545) (618,602) (41,659)
Purchase of Treasury Stock.................................................. (8,113) (3,829) (13,040)
Net Proceeds from Issuance of Common Stock Upon
Exercise of Stock Options................................................ 898 -- --
Dividends Paid.............................................................. (4,578) (3,808) (2,707)
------ ------ ------
Net Cash Provided by Financing Activities............................. 165,140 146,836 86,372
------- ------- ------
Net (Decrease) Increase in Cash and Cash Equivalents........................ (2,205) 15,933 3,235
Cash and Cash Equivalents at Beginning of Year............................... 32,870 16,937 13,702
------ ------ ------
Cash and Cash Equivalents at End of Year..................................... $ 30,665 $ 32,870 $ 16,937
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest................................................................... $ 71,005 $ 50,847 $ 28,211
======== ======== ========
Income Taxes .............................................................. $ 4,745 $ 8,384 $ 5,965
======== ======== ========
Non-cash Investing Activities:
Transfers from Loans to Real Estate Owned................................... $ 929 $ 1,311 $ 622
======== ======== ========
Transfers of Mortgage-Backed Securities From Held-to-Maturity
to Available-for-Sale..................................................... $ -- $283,245 $ --
======== ======== ========
</TABLE>
Supplemental Information to the Consolidated Statement of Cash Flows Relating to
the Bank of Westbury and Sunrise Bancorp, Inc. Acquisitions
Non-cash investing and financing transactions relating to the Bank of Westbury
and Sunrise Bancorp, Inc. acquisitions not reflected in the Consolidated
Statement of Cash Flows for the year ended June 30, 1996 are listed below:
Fair Value of Assets Acquired, Excluding Cash and Cash
Equivalents Acquired........................................ $ 745,341
Liabilities Assumed............................................ (702,273)
Excess of Cost Over Fair Value of Net Assets Acquired.......... 51,356
------
Cash Paid for Bank of Westbury and Sunrise Bancorp, Inc.,
Net of Cash and Cash Equivalents Acquired................... $ 94,424
=========
See accompanying notes to consolidated financial statements.
29
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Reliance Bancorp, Inc. (the "Company")
and subsidiary conform to generally accepted accounting principles and to
general practice within the financial institution industry. The following is a
description of the more significant policies which the Company follows in
preparing and presenting its consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary Reliance Federal Savings Bank (the
"Bank"). All significant intercompany transactions and balances are eliminated
in consolidation.
As more fully discussed in Note 2, Reliance Bancorp Inc., a Delaware
corporation, was organized by the Bank for the purpose of acquiring all of the
capital stock of the Bank pursuant to the conversion of the Bank from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Company is subject to the financial reporting requirements of the
Securities and Exchange Act of 1934, as amended.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of condition and
income and expense for the years presented. Estimates that are susceptible to
change include the determination of the allowances for losses on loans and the
valuation of real estate acquired in connection with foreclosures.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, federal funds sold and repurchase agreements with an original
term to maturity of less than three months.
(C) Securities Available-for-Sale
The Company follows Statement of Financial Accounting Standards (SFAS) No.115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). SFAS No. 115 requires securities, including debt, equity and
mortgage-backed securities, classified as available-for-sale to be recorded at
estimated fair value with changes in unrealized gains or losses reported net of
tax as a separate component in stockholders' equity.
In accordance with an implementation guide for SFAS No. 115, released by the
Financial Accounting Standards Board (FASB) on November 15, 1995, the Bank
realigned its mortgage-backed securities portfolio in December 1995 by
transferring approximately $283.2 million from the held-to-maturity to the
available-for-sale category. The Bank realigned its mortgage-backed securities
portfolio in order to be more flexible and better positioned for managing the
portfolio under changing interest rates and other market conditions.
Debt securities are classified as available-for-sale when management intends to
hold the securities for indefinite periods of time or when the securities may be
utilized for tactical asset/liability management strategy and may be sold from
time to time to effectively manage interest rate exposure and resultant
prepayment risk and liquidity needs. Premiums and discounts are amortized or
accreted, respectively, using the level-yield method. Readily marketable equity
securities are also classified as available-for-sale. Gains or losses on the
sales of the securities are recognized when sold using the specific
identification method.
(d) Debt and Equity Securities Held-to-Maturity
Debt and equity securities classified as held-to-maturity are carried at cost
unless there is a permanent impairment of value, at which time they are valued
at the lower of cost or market value resulting in a new cost basis for the
security. The debt securities are adjusted for amortization of premiums and
accretion of discounts over the term of the security using the level-yield
method. The Company currently has the ability and intent to hold the debt
securities until maturity. Equity securities classified held-to-maturity are not
readily marketable.
30
<PAGE>
(e) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities. Mortgage-backed securities held-to-maturity are carried at current
unpaid principal balances, adjusted for unamortized premiums and unaccreted
discounts. Premiums are amortized and discounts are accreted to income over the
estimated life of the respective securities using the level-yield method. The
Company currently has the ability and intent to hold the securities until
maturity.
(f) Loans
Loans are stated at the principal amount outstanding, less unearned discounts
and net deferred loan origination fees, if applicable. Interest on loans not
made on a discounted basis is credited to income based on the principal amount
outstanding during the period. Unearned income on discounted loans originated by
the Bank, principally education loans, is recognized as income using the
level-yield method. Gains and losses on the sale of loans are determined using
the specific identification method.
Interest on loans is recognized on the accrual basis. Loans are placed on
nonaccrual status when principal or interest becomes 90 days or more past due
for mortgage loans and commercial loans and 120 days past due for other loans,
unless the obligation is both well secured and in the process of collection.
Accrued interest receivable previously recognized is reserved when a loan is
placed on nonaccrual status. Loans remain on nonaccrual status until principal
and interest payments are current or the obligation is considered both well
secured and in the process of collection. A loan is considered a troubled debt
restructuring when changes, such as reduction in interest rates or deferral of
interest or principal payments, are made to contractual terms due to a
borrower's weakened financial condition.
The Company defers loan origination fees on multi-family loans, less certain
direct costs, and subsequently recognizes them as an adjustment of the loan's
yield over the contractual life of the loan using the level-yield method or, in
the case of loans with below-market introductory rates, generally over the
applicable introductory period, using the interest method.
The Company follows SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS No. 114") and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures" ("SFAS No. 118"). Under SFAS No.
114 and SFAS No. 118, a loan is considered impaired when, based upon current
information and events, it is probable that a creditor will be unable to collect
all amounts due including principal and interest, according to the contractual
terms of the loan agreement. These statements require that impaired loans that
are within their scope be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or as a practical
expedient, at the loan's current observable market price, or the fair value of
the collateral if the loan is collateral dependent. The amount by which the
recorded investment of an impaired loan exceeds the measurement value is
recognized by creating a valuation allowance through a charge to the provision
for loan losses. Interest income received on impaired loans is recognized on a
cash basis.
(g) Allowance for Loan Losses
A provision for loan losses charged to income is reflected as an addition to a
valuation allowance which is netted against loans receivable. Management's
periodic evaluation of the adequacy of the valuation allowance considers the
Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations which may affect the borrower's ability to repay, estimated
value of the underlying collateral and the current real estate markets and
economic condition in the Bank's lending areas. In addition, the Bank's
regulators, as an integral part of their examination process, periodically
review the Bank's allowance for losses on loans and real estate. Accordingly,
the Bank may be required to take certain charge-offs and recognize additions to
the allowance based on the regulators' judgments concerning information
available to them during their examination.
(h) Office Properties and Equipment
Depreciation and amortization are provided on a straight-line method over the
estimated useful lives of the assets. The cost of leasehold improvements is
being amortized using the straight-line method over the shorter of the term of
the related leases or the estimated useful lives.
31
<PAGE>
(I) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired in the fiscal 1996
acquisitions of Bank of Westbury and Sunrise Bancorp, Inc. is amortized using
the straight line method over fifteen years. The excess of cost over the fair
value of net assets acquired is evaluated periodically by the Company for
impairment in response to changes in circumstances or events.
(j) Real Estate Owned
Real estate acquired through foreclosure are recorded at the lower of cost
(unpaid loan balance plus foreclosure costs) or fair market value at the time of
acquisition. The carrying value of individual properties is subsequently
adjusted to the extent it exceeds estimated fair market value less costs to
sell. Operating expenses of holding real estate, net of related income, are
charged against income as incurred. Gains on sales of real estate are recognized
when down payment and other requirements are met; otherwise such gains are
deferred and recognized on the installment method of accounting. Losses on the
disposition of real estate, including expenses incurred in connection with the
disposition, are charged to income. A valuation allowance is maintained through
provisions for real estate losses charged to income for any decrease in the fair
value of property less costs to sell, which is netted against real estate owned.
(k) Taxes on Income
The Company files a calendar-year Federal income tax return on a consolidated
basis with its subsidiary.
The Company follows SFAS No. 109, "Accounting for Income Taxes" which requires
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities. Under SFAS
No. 109, the effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
(l) Employee Benefits
The Bank's pension plan is non-contributory and covers substantially all
eligible employees. The plan conforms to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. The Bank's policy is to
accrue for all pension costs and to fund the maximum amount allowable for tax
purposes. Actuarial gains and losses that arise from changes in assumptions
concerning future events, used in estimating pension costs, are amortized over a
period that reflects the long range nature of pension expense.
The Company follows AICPA Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP 93-6") to account for the established
Employee Stock Ownership Plan ("ESOP"). SOP 93-6 requires that compensation
expense be recognized for shares committed to be released to directly compensate
employees equal to the fair value of the shares committed. In addition, SOP 93-6
requires that leveraged ESOP debt and related interest expense be reflected in
the employer's financial statements. The application of SOP 93-6 will result in
fluctuations in compensation expense as a result of changes in the fair value of
the Company's common stock; however, any such compensation expense fluctuations
will result in an offsetting adjustment to paid in capital.
Therefore, total capital will not be affected.
The Bank adopted SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123"). SFAS No. 123 applies to all transactions in which an entity acquires
goods or services by issuing equity instruments or by incurring liabilities
where the payment amounts are based on the entity's common stock price, except
for employee stock ownership plans. SFAS No. 123 established a fair value-based
method of accounting for stock-based compensation arrangements with employees,
rather than the intrinsic value-based method that is contained in Accounting
Principles Board Opinion No. 25, "Accounting fro Stock Issued to Employees"
("APB No. 25"). SFAS No. 123 does not require an entity to adopt the new fair
value-based method for purposes of preparing its basic financial statements.
While the SFAS No. 123 fair value-based method is considered by the Financial
Accounting Statements Board ("FASB") to be preferable to the APB No. 25 method,
an entity is allowed to continue to use the APB No. 25 method for preparing its
basic financial statements. The Company has chosen to continue to use the APB
No. 25 method, however, SFAS No. 123 requires presentation of pro forma net
income and earnings per share information, in the notes to the financial
statements, as if the fair value-based method had been adopted.
32
<PAGE>
The disclosure requirements are effective for financial statements for fiscal
years beginning after December 15, 1995; however, the pro forma disclosures are
required to include the effects of all awards granted in fiscal years that begin
after December 15, 1994. Pro forma disclosures for awards granted in the first
fiscal year beginning after December 15, 1994 need to be included whenever
financial statements for that fiscal year are presented for comparative purposes
with financial statements for a later fiscal year.
(m) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost.
(n) Earnings Per Share
Earnings per share is computed by dividing net income by the weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding, adjusted for the unallocated portion of shares held by the Employee
Stock Ownership Plan ("ESOP") in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-6. For the year ended
June 30, 1997, 1996 and 1995, fully-diluted weighted average common stock and
common stock equivalent shares outstanding (adjusted for unallocated ESOP
shares) was 9,044,000, 8,946,000 and 9,404,000, respectively. For the year ended
June 30, 1997, 1996 and 1995, primary weighted average common stock and common
stock equivalent shares outstanding (adjusted for unallocated ESOP shares) was
8,815,000, 8,917,000 and 9,387,000, respectively.
2. Stock Form of Ownership
On September 16, 1993, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of a
holding company. As part of the conversion, the Company was incorporated under
Delaware law on November 16, 1993. The Company completed its initial public
offering on March 31, 1994 and issued 10,750,820 shares of common stock
resulting in net proceeds of approximately $103,575,000. The Company retained
$51,787,500 of the net proceeds and used the remaining net proceeds to purchase
all of the outstanding stock of the Bank. The financial position and results of
operations of the Company as of and for the year ended June 30, 1997, 1996 and
1995 are presented in Note 20.
During fiscal 1995, the Company repurchased 998,930 shares at an aggregate cost
of $13,040,000. During fiscal 1996, the Company repurchased 260,776 shares at an
aggregate cost of $3,829,000. On April 4, 1997, the Company announced the
approval of its fifth five percent stock repurchase plan which allows the
Company to repurchase up to 441,138 common shares. As of June 30, 1997, 80,000
shares under this program were repurchased at an aggregate cost of $1,831,000.
During fiscal 1997, the Company repurchased 442,182 shares at an aggregate cost
of $8,113,000.
At the time of the conversion, the Bank established a liquidation account with a
balance equal to its retained earnings reflected in its statement of condition.
The balance in the liquidation account at June 30, 1997 and 1996 was
approximately $25,284,000 and $30,416,000, respectively. The liquidation account
will be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements, the
amount required for the liquidation account, or if such declaration and payment
would otherwise violate regulatory requirements. During fiscal 1997, the Company
declared cash dividends totalling $4,930,000.
33
<PAGE>
3. 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 York in a transaction which
was accounted for as a purchase. Assets acquired in the transaction, principally
loans and mortgage-backed securities aggregated $166.2 million, and liabilities
assumed, substantially all deposits, aggregated $156.6 million. The cost of the
acquisition was approximately $16.7 million in cash. 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.
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 acquisition was approximately $106.3 million in cash. Assets
acquired in the transaction, principally loans and mortgage-backed securities
aggregated $609.3 million and liabilities assumed, substantially all deposits
and borrowings, aggregated $545.7 million. The excess of cost over fair value of
net assets acquired in the transaction was $43.6 million, which is being
amortized on a straight line basis over 15 years.
The following summarizes the actual and unaudited projected amortization of
discounts and premiums relating to the fair market value adjustments and the
excess of cost over fair value of net assets acquired:
<TABLE>
<CAPTION>
Excess of Cost Total
Over Fair Value Net Discount Net Discount Net Net Net Decrease
of Net Assets (Premium (Premium) Premium Premium In Income
Acquired Securities Loans Other Assets Liabilities Before Taxes
-------- ---------- ----- ------------ ----------- ------------
(In thousands)
Amortization:
<S> <C> <C> <C> <C> <C> <C>
1996 Actual.................. $ (1,928) $ 89 $ 45 $ (116) $ 454 $ (1,456)
1997 Actual.................. (3,404) (90) (277) (314) 598 (3,487)
1998 Projected............... (3,384) (53) (336) (225) 467 (3,531)
1999 Projected............... (3,384) (101) (239) (203) 457 (3,470)
2000 Projected............... (3,384) (92) (151) (182) 300 (3,509)
Thereafter Projected......... (35,310) (170) 228 (1,369) 8 (36,613)
------- ---- --- ------ ----- -------
$(50,794) $(417) $(730) $(2,409) $ 2,284 $(52,066)
======== ===== ===== ======= ======= ========
</TABLE>
Planned Acquisition of Continental Bank
On May 5, 1997, the Company announced that it had entered into a definitive
agreement to acquire Continental Bank ("Continental"), a commercial bank with 2
full service banking offices located in Nassau and Suffolk counties in Long
Island, New York, a commercial lending facility and 5 check cashing facilities
in Manhattan. Under the terms of the 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 $24.2 million. As of June 30, 1997,
(unaudited), total assets of Continental were $177.3 million, deposit were
$136.2 million and total stockholders' equity was $13.4 million. The merger is
subject to the approval of Continental shareholders, as well as certain
regulatory approvals. The merger is expected to be completed in the fourth
quarter of calendar year 1997 and to be accounted for under the purchase method
of accounting.
34
<PAGE>
4. Money Market Investments
Money market investments generally have original maturities of three months or
less. The following presents the components of money market investments:
June 30,
------------------
1997 1996
---- ----
(In thousands)
Federal Funds Sold.............. $ -- $ 1,000
Repurchase Agreements........... 1,100 9,450
----- -----
Total Money Market Investments.. $1,100 $10,450
====== =======
The Company purchases securities under agreements to resell (repurchase
agreements). These agreements represent short-term loans and are reflected as an
asset in the consolidated statements of condition. The same securities are to be
resold at maturity of the repurchase agreements.
Securities purchased under repurchase agreements averaged $2,987,000 for the
year ended June 30, 1997 and $7,225,000 for the year ended June 30, 1996. The
maximum amount of such agreements outstanding at any month-end during the fiscal
year ended June 30, 1997 and 1996 was $8,500,000 and $11,000,000, respectively.
5. Debt and Equity Securities
A summary of the amortized cost and estimated market values of debt and equity
securities are as follows:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
---- ---- ---- -----
Held-to-Maturity: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government Agency Obligations.............................. $ 29,952 $ 90 $ -- $ 30,042
Obligations of New York State and
Local Municipalities......................................... 391 36 -- 427
FHLB Stock...................................................... 15,683 -- -- 15,683
------ ---- ---- ------
$ 46,026 $126 $ -- $ 46,152
======== === === ========
Available-for-Sale:
U.S. Government Agency Obligations.............................. $ 22,036 $ 59 $(15) $ 22,080
United States Treasury Bills.................................... 4,785 27 -- 4,812
Marketable Equity Securities.................................... 8 9 -- 17
------- ---- ----- --------
$ 26,829 $ 95 $(15) $ 26,909
======== ==== === ========
June 30, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
---- ---- ---- -----
<S> <C> <C> <C> <C>
U.S. Government Agency Obligations.............................. $34,950 $ -- $ (338) $ 34,612
Obligations of New York State and
Local Municipalities......................................... 391 44 -- 435
FHLB Stock...................................................... 12,989 -- -- 12,989
------ ------ ------ ------
$ 48,330 $ 44 $ (338) $ 48,036
======== ===== ====== ========
Available-for-Sale:
U.S. Government Agency Obligations.............................. $ 10,319 $ -- $ (92) $ 10,227
United States Treasury Notes.................................... 2,992 -- (9) 2,983
Marketable Equity Securities.................................... 42 19 -- 61
------- ----- ----- -------
$ 13,353 $ 19 $ (101) $ 13,271
======== ===== ====== ========
</TABLE>
35
<PAGE>
The amortized cost and estimated market value of debt and equity securities at
June 30, 1997 and 1996, by contractual maturity are shown below:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------------------------------------- -------------------------------------------
Held-to-maturity Available-for-sale Held-to-maturity Available-for-sale
-------------------- --------------------- -------------------- --------------------
Estimated Estimated Estimated Estimated
Amortized market Amortized market Amortized market Amortized market
cost value cost value cost value cost value
---- ----- ---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due in One Year or Less.... $ -- $ -- $ 10,955 $ 10,981 $ -- $ -- $ 6,334 $ 6,318
Due After One Year
Through Five Years....... 10,343 10,369 5,866 5,845 10,322 10,220 6,977 6,892
Due after Five Years
Through Ten Years........ 20,000 20,100 10,000 10,066 25,019 24,827 -- --
Equity Securities.......... 15,683 15,683 8 17 12,989 12,989 42 61
------ ------ - -- ------ ------ -- --
$ 46,026 $ 46,152 $ 26,829 $ 26,909 $ 48,330 $ 48,036 $13,353 $ 13,271
======== ======== ======== ======== ======== ======== ======= ========
</TABLE>
In fiscal 1997, 1996 and 1995, gross proceeds from the sale of debt and equity
securities available-for-sale totalled $5,028,000, $29,245,000 and $11,146,000,
respectively. For fiscal 1997, 1996 and 1995 gross realized gains totalled
$17,000, $20,000, and $153,000, respectively, and gross realized losses totalled
$16,000, $15,000 and $6,000, respectively.
6. Mortgage-Backed Securities
The amortized cost and estimated market values of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
---- ---- ---- -----
Held- to-Maturity: (In thousands)
Pass-through Certificates Guaranteed by:
<S> <C> <C> <C> <C>
GNMA.................................................... $ 106,900 $ 3,078 $ -- $ 109,978
FHLMC................................................... 12,963 176 -- 13,139
FNMA.................................................... 39,493 498 -- 39,991
------ --- ------ ------
$ 159,356 $ 3,752 $ -- $ 163,108
========= ======= ======= =========
Available-for-Sale:
Pass-through Certificates Guaranteed by:
GNMA.................................................... $ 233,572 $ 4,182 $ -- $ 237,754
FHLMC................................................... 222,961 1,378 (2,583) 221,756
FNMA.................................................... 131,066 1,326 (1,307) 131,085
REMICs:
Agency Issuance................................... 20,806 -- (254) 20,552
Private Issuance.................................. 110,481 191 -- 110,672
------- --- ------- -------
$ 718,886 $ 7,077 $(4,144) $ 721,819
========= ======= ======= =========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
---- ---- ---- -----
(In thousands)
Held- to-Maturity:
Pass-through Certificates Guaranteed by:
<S> <C> <C> <C> <C>
GNMA.................................................... $ 125,195 $ 511 $ (6) $ 125,700
FHLMC................................................... 14,967 38 -- 15,005
FNMA.................................................... 44,330 71 (111) 44,290
------ ---- ---- ------
$ 184,492 $ 620 $ (117) $ 184,995
Available-for-Sale:
Pass-through Certificates Guaranteed by:
GNMA.................................................... $ 170,142 $ 1,110 $ (1,499) $ 169,753
FHLMC................................................... 255,498 828 (6,728) 249,598
FNMA.................................................... 172,863 756 (3,675) 169,944
REMIC................................................... 2,503 -- (58) 2,445
----- ------ --- -----
$ 601,006 $ 2,694 $(11,960) $ 591,740
========= ====== ======== =========
</TABLE>
There were no sales of mortgage-backed securities during the fiscal year ended
June 30, 1995. In fiscal 1997 and 1996, gross proceeds from the sale of
mortgage-backed securities available-for-sale totalled $59,810,000 and
$180,590,000, respectively. Gross realized gains totalled $466,000 and
$1,881,000 and gross realized losses totalled $295,000 and $1,208,000,
respectively for fiscal 1997 and 1996.
7. Loans
Loans Receivable, Net are summarized as follows:
June 30,
----------------------
1997 1996
---- ----
Mortgage Loans: (In thousands)
One- to four-family........................ $ 552,577 $ 569,031
Co-op...................................... 8,647 9,687
Multi-family............................... 190,293 79,571
Commercial Real Estate..................... 23,445 27,134
Construction............................... 1,440 5,560
----- -----
776,402 690,983
Less:
Unearned Discount, Premiums and
Deferred Loan Origination Fees, Net........ (790) (16)
----- -----
Total Mortgage Loans.................. 775,612 690,967
------- -------
Consumer and Other Loans:
Home Equity Lines of Credit................ 91,782 81,205
Guaranteed Student Loans................... 17,006 18,754
Home Equity Loans.......................... 19,505 16,747
Loans on Deposit Accounts.................. 5,514 5,782
Other Loans................................ 4,308 7,922
----- -----
138,115 130,410
Net Deferred Loan Origination Costs........ 776 864
--- ---
Total Consumer and Other Loans........ 138,891 131,274
------- -------
Less:
Allowance for Loan Losses.................. (5,182) (4,495)
------ ------
$ 909,321 $ 817,746
========= =========
37
<PAGE>
June 30,
---------------------
1997 1996
---- ----
Commitments Outstanding: (In thousands)
Mortgage Loans........................ $ 26,214 $ 8,650
======== ========
Consumer and Other Loans.............. $ 509 $ 7,865
======== ========
Unused Lines of Credit................ $ 53,399 $ 45,044
======== ========
At June 30, 1997 and 1996, the Company had commitments to sell loans of $525,000
and $1,734,000, respectively. At June 30, 1997 and 1996, the Company had
commitments to purchase loans of $1,536,000 and $1,945,000, respectively.
The principal balance of loans in arrears three months or more:
June 30,
-----------------------------------
1997 1996
--------------- ----------------
No. of No. of
loans Amount loans Amount
----- ------ ----- ------
(Dollars in thousands)
One- to four-family Mortgages..... 120 $ 10,959 142 $ 11,538
Consumer and Other Loans.......... 71 465 77 702
Commercial Real Estate............ 9 3,303 3 739
--- ----- --- ---
200 $ 14,727 222 $ 12,979
=== ======== === ========
Interest income that would have been recorded under the original terms of loans
classified as non-accrual and interest income actually recognized are as
follows:
Year Ended June 30,
-----------------------
1997 1996 1995
---- ---- ----
(In thousands)
Interest Income that would have been Recorded..... $ 838 $ 622 $ 175
Interest Income Recognized........................ (265) (68) (45)
---- --- ---
Interest Income Foregone.......................... $ 573 $ 554 $ 130
====== ===== =====
In accordance with SFAS No. 114, the Company deems certain loans impaired when,
based upon current information and events, it is probable that the Company will
be unable to collect all amounts due, both principal and interest, according to
the contractual terms of the loan agreement. SFAS No. 114 generally does not
apply to large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment, such as one- to four-family mortgage loans and
consumer loans. Loans individually reviewed for impairment by the Company are
limited to multi-family loans, commercial loans, construction and land loans,
loans modified in a troubled debt restructuring and selected large one- to
four-family loans. Examples of measurement techniques utilized by the Company
include present value of expected future cash flows, the loan's market price if
one exists, and the estimated fair value of the collateral.
At June 30, 1997, the Company had four commercial real estate loans totalling
$2,913,000 with no related allowance which were considered impaired. At June 30,
1996, the Company had two commercial loans totalling $655,000 with no related
allowance which were considered impaired. The Company's average recorded
investment in impaired loans for the year ended June 30, 1997 and 1996 was
$1,934,000 and$493,000, respectively. The Company did not recognize any interest
income on impaired loans for the year ended June 30, 1997 and 1996.
The Bank generally originates fixed rate loans with terms greater than 15 years
for sale to FHLMC, FNMA or other secondary market investors. At June 30, 1997
and 1996, there were no fixed rate loans classified as held for sale.
Included in mortgage loans at June 30, 1997 and 1996 are $416,201,000 and
$354,551,000, respectively, of adjustable rate mortgage loans.
38
<PAGE>
Proceeds from the sale of first mortgage loans were $7,303,000, $5,860,000 and
$1,481,000 during the fiscal years ended June 30, 1997, 1996 and 1995,
respectively. Gross realized gains and losses resulting from sale of first
mortgage loans were as follows:
Year Ended June 30,
------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Gross Realized Gains......... $ 31 $ 34 $ 1
Gross Realized Losses........ (3) (4) (1)
----- ----- ----
$ 28 $ 30 $ --
==== ==== ====
The Bank services mortgage loans for investors which are not included in the
accompanying consolidated statements of condition. A summary of the principal
balance, custodial escrow, servicing income and number of loans serviced for
others by the Bank are as follows:
Year Ended June 30,
----------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Principal Balances............................ $ 410,229 $ 455,626 $ 32,367
========= ========= ========
Custodial Escrow.............................. $ 4,493 $ 6,980 $ 357
========== ========= ========
Servicing Income (Excludes MSR Amortization).. $ 1,399 $ 861 $ 120
========== ========= ========
Number of Loans............................... 6,842 7,497 333
===== ===== ===
Fees earned for servicing loans are reported as income when the related mortgage
payments are collected. MSRs are amortized as a reduction to loan service fee
income on a method that approximates the level-yield basis over the estimated
remaining life of the underlying mortgage loans. MSRs are carried at fair value
and impairment, if any, is recognized through a valuation allowance. For the
year ended June 30, 1997 and 1996, no impairment existed in the MSRs and as a
result, no valuation allowance was required.
MSR activity is summarized as follows:
Year Ended June 30,
-------------------
1997 1996
---- ----
(In thousands)
Balance at Beginning of the Year....................... $ 3,905 $ --
MSRs Acquired in Acquisitions of Bank of Westbury and
Sunrise Bancorp, Inc................................ -- 4,145
Amortization........................................... (859) (240)
------ ------
Balance at End of the Year............................. $ 3,046 $ 3,905
======= =======
8. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Year Ended June 30,
------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Balance at Beginning of the Year........ $ 4,495 $ 1,729 $ 1,417
Provision for Loan Losses............... 950 725 400
Allowances of Acquired Institutions..... -- 2,217 --
Charge-offs............................. (306) (265) (113)
Recoveries.............................. 43 89 25
------ ------- -------
Balance at End of the Year.............. $ 5,182 $ 4,495 $ 1,729
======= ======= =======
39
<PAGE>
9. Real Estate Owned
Real estate owned, net is summarized as follows:
June 30,
--------
1997 1996
---- ----
(In thousands)
One- to four-family Residences................... $ 365 $ 1,293
Co-ops........................................... 419 1,039
Allowance for Losses on Real Estate Owned........ (334) (768)
---- ----
$ 450 $ 1,564
===== =======
Results of operating real estate owned for the years ended June 30, 1997, 1996
and 1995 are summarized as follows:
Year Ended June 30,
------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Net Gain on Sale on Real Estate Owned........... $ 56 $ 19 $ 657
Net Expenses of Holding Property................ (239) (223) (212)
Provision for Losses............................ (200) (375) (60)
---- ---- ---
$ (383) $ (579) $ 385
====== ====== =====
Activity in the allowance for losses in real estate owned is summarized as
follows:
Year Ended June 30,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Balance at Beginning of the Year.............. $ 768 $ 589 $ 632
Provision for Losses.......................... 200 375 60
Allowance of Acquired Institutions............ -- 188 --
Charge-offs................................... (634) (384) (103)
---- ---- ----
Balance at End of the Year.................... $ 334 $ 768 $ 589
===== ===== =====
10. Accrued Interest Receivable
Accrued Interest Receivable, Net is summarized as follows:
June 30,
-------------------
1996 1997
---- ----
(In thousands)
Debt Securities..................................... $ 842 $ 657
Mortgage-Backed Securities.......................... 5,548 4,860
Loans Receivable, Net of Reserves for Uncollectible
Interest of $1,741 and $1,030, respectively....... 5,650 5,795
----- -----
$ 12,04 $ 11,312
======= ========
40
<PAGE>
11. Office Properties and Equipment
A summary of office properties and equipment, net is as follows:
June 30,
---------------------
1997 1996
---- ----
(In thousands)
Land............................................ $ 4,094 $ 4,094
Buildings....................................... 8,970 8,495
Furniture, Fixtures and Equipment............... 12,161 11,047
Leasehold Improvements.......................... 2,908 2,812
Capital Lease................................... 1,470 1,470
----- -----
Office Properties and Equipment, at Cost........ 29,603 27,918
Accumulated Depreciation and Amortization....... (15,514) (14,097)
------- -------
$ 14,089 $ 13,821
======== ========
In October 1989, the Bank sold a building used for a branch operation located in
Jamaica, New York for approximately $2.3 million, and subsequently leased back a
portion of the building to conduct the branch operation. The Bank received
approximately $2 million in cash from the transaction, after expenses of the
sale, which generated a gain of approximately $1.1 million. The gain has been
deferred and is being amortized over the twelve-year lease period. Deferred gain
on sale amounted to approximately $404,000, $497,000 and $590,000 at June 30,
1997, 1996 and 1995, respectively, and is included in accrued expenses and other
liabilities. The leaseback is recorded as a capital lease in the amount of
$1,470,000 at June 30, 1997 and 1996 (refer to the above table) and the related
obligation under capital leases of $673,000 and $802,000 at June 30, 1997 and
1996 is reflected in accrued expenses and other liabilities. The projected
annual lease payments amount to $215,000 per year (including interest) and total
$932,000 through the duration of the lease.
Depreciation and amortization of office properties and equipment, included in
occupancy and equipment expense, was approximately, $1,417,000, $1,027,000 and
$467,000 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively.
12. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Weighted Weighted
average average
rate Amount Percent rate Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW..................................... 1.00% $ 78,017 6% 2.17% $ 81,953 6%
Passbook................................ 2.40 438,612 31 2.50 458,524 34
Money Market............................ 2.40 92,184 6 2.64 109,953 8
Certificates of Deposit................. 5.61 806,750 56 5.40 674,836 50
Non-Interest Bearing
Demand Deposit........................ -- 20,474 1 -- 20,360 2
------ --- ------ ---
$ 1,436,037 100% $ 1,345,626 100%
=========== === =========== ===
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1997 1996
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Contractual Maturity of Certificates of Deposit Accounts:
<S> <C> <C> <C> <C>
Under 12 months............................................ $ 524,707 65% $ 482,653 72%
Over 12 months to 36 months................................ 245,382 30 130,406 19
Over 36 months............................................. 36,661 5 61,777 9
------ --- ------ ---
$ 806,750 100 $ 674,836 100%
========= === ========= ===
</TABLE>
The aggregate amount of certificates of deposit accounts with a minimum
denomination of $100,000 was approximately $51,259,000 and $36,017,000 at June
30, 1997 and 1996, respectively.
Interest expense on deposits is summarized as follows:
Year Ended June 30,
-----------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
NOW............................. $ 1,041 $ 1,161 $ 485
Passbook........................ 10,937 8,942 5,926
Money Market.................... 2,493 2,515 2,283
Certificates of Deposit......... 39,668 29,807 13,318
------ ------ ------
$ 54,139 $ 42,425 $ 22,012
======== ======== =========
On September 30, 1996, Congress passed, and the President signed, legislation
that recapitalized the Savings Association Insurance Fund (the "SAIF"). Under
the major provisions of the legislation, savings institutions, such as the Bank,
are being assessed a one-time assessment of 65.7 basis points per $100 of
insured SAIF deposits. The Company recorded a one-time charge of $8.25 million
during the first quarter of fiscal year 1997.
13. Borrowed Funds
The Bank was obligated for borrowings as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------------- --------------------
Weighted Weighted
average average
rate Amount rate Amount
----- ------ ----- --------
(Dollars thousands)
<S> <C> <C> <C> <C>
Advances from FHLB - NY (due 2002).... 5.58% $ 40,000 5.98% $ 3,000
Reverse Repurchase Agreements ........ 5.78% 311,913 5.41% 263,160
------- -------
$351,913 $266,160
======== ========
</TABLE>
Information concerning borrowings under reverse repurchase agreements is
summarized as follows:
<TABLE>
<CAPTION>
At or for the Year Ended
--------------------------------
June 30, 1997 June 30, 1996
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Average Balance during the Year.................................... $ 288,845 $ 150,173
Average Interest Rate during the Year.............................. 5.63% 5.58%
Maximum Month-end Balance during the Year.......................... $ 326,391 $ 279,678
Mortgage-Backed Securities Pledged as Collateral under Reverse
Repurchase Agreements at Year End:
Carrying Value................................................ $ 326,843 $ 284,124
Estimated Market Value........................................ $ 326,801 $ 277,652
</TABLE>
42
<PAGE>
Reverse repurchase agreements at June 30, 1997 have contractual maturities as
follows:
Year Ended
June 30, Amount
(In thousands)
1998 $ 258,413
1999 33,500
2000 --
2001 --
2002 20,000
------
$ 311,913
=========
As a member of the Federal Home Loan Bank System (FHLB), the Bank borrows from
the FHLB on a secured basis. Borrowings at June 30, 1997 and 1996 were secured
by a blanket lien over all assets equal to 110% of borrowings.
14. Income Taxes
The Company files a consolidated Federal income tax return on a calendar-year
basis. For calendar year ended December 31, 1995, the Bank was allowed a special
bad debt deduction based on the greater of the amount calculated under the
experience method or the percentage of taxable income method. The statutory
percentage under the latter method was 8% for 1995. 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, 1996 and 1995. The Bank used the percentage of
taxable income method in its 1995 tax return.
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 would be suspended
for each of two successive taxable years beginning January 1, 1996 in which the
Bank originates a minimum amount of certain residential loans based upon the
average of the principal amounts of such loans made by the Bank during its six
taxable years preceding January 1, 1996. As a result of this legislation, the
Bank will incur additional Federal tax liability, but with no impact on the
Bank's results of operations. The New York State 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 liabilities.
The Company files state and local tax returns on a calendar-year basis. State
and local taxes imposed on the Company consist of New York State franchise tax,
New York City Financial Corporation tax and Delaware franchise tax. The
Company's annual liability for New York State and New York City purposes is the
greater of a tax on income or an alternative tax based on a specified formula.
The Company's liability for Delaware franchise tax is based on the lesser of a
tax based on an authorized shares method or an assumed par value capital method;
however under either method, the Company's total tax will not exceed $150,000.
For the fiscal year ended June 30, 1997, 1996 and 1995, the Company's Delaware
franchise tax was based on the authorized shares method. The Company provided
for New York State and New York City taxes based on taxable income for the years
ended June 30, 1997, 1996 and 1995.
In connection with the acquisitions of the Bank of Westbury and Sunrise Bancorp,
Inc. a net deferred tax asset of $911,000 and a net deferred tax liability of
$2,285,000, respectively, were recognized for temporary differences between the
book basis and tax basis of assets and liabilities acquired.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1997 and
June 30, 1996 are presented below:
43
<PAGE>
<TABLE>
<CAPTION>
June 30 June 30,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Provisions for Losses on Loans and Real Estate Owned......... $ 325 $ --
Unrealized Loss on Available-for-Sale Securities............. -- 4,058
Deferred Fees................................................ 128 264
Deposits..................................................... 535 795
Other ....................................................... 183 600
--- ---
Total Deferred Tax Assets.................................... 1,171 5,717
----- -----
Deferred Tax Liabilities:
Provisions for Losses on Loans and Real Estate Owned......... -- 326
Mortgage Loans............................................... 680 950
Debt and Equity and Mortgage-Backed Securities............... 181 218
Office Properties and Equipment.............................. 830 690
Mortgage Servicing Rights.................................... 492 629
Unrealized Gain on Available-for-Sale Securities............. 1,299 --
Other........................................................ 487 261
--- ---
Total Deferred Tax Liabilities................................ 3,969 3,074
----- -----
Net Deferred Tax (Liability) Asset............................... $ (2,798) $ 2,643
======== =======
</TABLE>
The total income tax provision for the years ended June 30, 1997, 1996 and 1995
differs from the amount of tax provision that would result by applying the
statutory United States Federal income tax rate of 35% for fiscal 1997 and 1996
and 34% for fiscal 1995 to income before income taxes:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax Provision Statutory Rate........... $ 7,376 35.0% $ 7,584 35.0% $ 5,625 34.0%
Tax Exempt Interest on Municipal
Investments.......................... (11) (0.1) (23) (0.1) (73) (0.4)
Amortization of Excess of Cost Over
Fair Value of Net Assets Acquired.... 1,191 5.7 675 3.1 -- --
State and Local Income Tax, Net of
Federal Income Tax Benefit........... 1,228 5.8 1,684 7.8 1,114 6.7
Other, Net............................. 354 1.7 26 0.1 176 1.1
------ ----- ------ ----- ------ -----
Income Tax Expense ................. $10,138 48.1% $ 9,946 45.9% $ 6,842 41.4%
======= ==== ======= ==== ======= ====
</TABLE>
The components of the provision for income taxes for the years ended June 30,
1997, 1996 and 1995 are as follows:
Year Ended June 30,
-------------------------------
1997 1996 1995
---- ---- ----
Current: (In thousands)
Federal.................. $ 8,193 $ 6,858 $4,708
State and Local.......... 1,861 2,348 1,470
----- ----- -----
10,054 9,206 6,178
------ ----- -----
Deferred:
Federal.................. 56 497 446
State and Local.......... 28 243 218
------ ----- -----
84 740 664
----- ----- -----
$ 10,138 $ 9,946 $6,842
====== ===== =====
44
<PAGE>
15. Commitments
At June 30, 1997 the Company was obligated under a number of non-cancelable
operating leases on property used for banking purposes. Rental expense under
these leases for the fiscal years ended June 30, 1997, 1996 and 1995 is
approximately $1,048,000, $819,000 and $577,000, respectively. The projected
minimum annual rentals under the terms of these leases, exclusive of taxes and
other charges, are summarized as follows:
Amount
------
Year ended June 30: (In thousands)
1998............................... $ 1,070
1999............................... 990
2000............................... 853
2001............................... 709
2002............................... 685
Thereafter......................... 906
-----
$ 5,213
=======
The Bank is a party to financial instruments with off-balance sheet risk in
order to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of the
purchaser to a third party. The Bank, in connection with its service
corporations, at June 30, 1997 and 1996, has outstanding balances on letters of
credits of $500,000 and $500,000, respectively. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers (See note 7).
16. Retirement Plan
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated statements of condition:
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Vested Benefit Obligation........................................... $ 7,494 $ 6,933
Accumulated Benefit Obligation...................................... 7,596 7,000
===== =====
Plan Assets at Fair Value............................................ 8,825 8,435
Projected Benefit Obligation for Service Rendered to Date............ 9,365 8,655
----- -----
Plan Assets Less Than Projected Benefit Obligation................... (540) (220)
Unrecognized Net Asset Value Being Amortized over 15 Years........... (21) (26)
Unrecognized Prior Service Cost...................................... (58) (66)
Unrecognized Net Loss Due to Past Experience
Different from Assumptions Made and Changes in Assumptions........ 1,116 710
----- ---
Prepaid Pension Cost................................................. $ 497 $ 398
====== =======
</TABLE>
The components of net pension expense are as follows:
Year Ended June 30,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Service Cost-benefits Earned during the Year.... $ 327 $ 330 $ 282
Interest Cost on Projected Benefit Obligation... 627 553 502
Net Amortization and Deferral................... (290) 64 9
Actual Return on Plan Assets.................... (482) (778) (680)
---- ---- ----
Net Pension Expense............................. $ 182 $ 169 $ 113
===== ===== =====
45
<PAGE>
Year Ended June 30,
----------------------------
1997 1996 1995
---- ---- ----
Assumptions Used:
Weighted Average Discount Rate.................. 7.0% 7.0% 7.0%
Rate of Increase in Compensation Levels......... 5.0% 5.0% 5.0%
Expected Long-term Rate of Return on Assets..... 9.0% 9.0% 9.0%
In connection with the acquisitions of Bank of Westbury and Sunrise Bancorp,
Inc., their respective pension plans were terminated and are not included in the
above tables. All former employees of Bank of Westbury and Sunrise Bancorp,
Inc., remaining in the employment of the Company were eligible to participate in
the Company pension plan effective June 1, 1997.
17. Stock Benefit Plans
The following are the stock based benefit plans maintained by the Company:
Stock Option Plan
The Company maintains the 1994 and 1996 Stock Option Plans (the "Stock Option
Plans"). Under the Stock Option Plans, (which expire ten years from the date of
grant) stock options have been granted to the executive officers and officers of
the Company and its affiliate, the Bank. Each option entitles the holder to
purchase one share of the Company's common stock at an exercise price equal to
the fair market value of the stock at the date of grant. Options will be
exercisable in whole or in part over the vesting period. However, all options
become 100% exercisable in the event that the employee terminates his employment
due to death, disability, normal retirement, or in the event of a change in
control of the Bank or the Company. Simultaneous with the grant of these
options, the Personnel Committee of the Board of Directors granted "Limited
Rights" with respect to the shares covered by the options. Limited Rights
granted are subject to terms and conditions and can be exercised only in the
event of a change in control of the Company. Upon exercise of a limited right,
the holder shall receive from the Company a cash payment equal to the difference
between the exercise price of the option and the fair market value of the
underlying shares of common stock.
Stock Option Plan for Outside Directors
The Company maintains the 1994 and 1996 Stock Option Plans for Outside Directors
(the "Directors' Option Plans"). Each member of the Board of Directors who is
not an officer or employee of the Company or the Bank is granted non-statutory
option to purchase shares of the Company's common stock. Members of the Board of
Directors of the Company are granted options to purchase shares of the common
stock of the Company at an exercise price equal to the fair market value of the
stock at the date of grant. All of the options granted under the Directors'
Option Plan become exercisable over the vesting period and expire upon the
earlier of 10 years following the date of grant or one year following the date
the optionee ceases to be a director.
46
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of
--------------------------------------
Non- Non- Weighted
Incentive Statutory Qualified Average
Stock Stock Options to Exercise
Options Options Directors Price
------- ------- --------- -----
<S> <C> <C> <C> <C>
Options Reserved in Conversion................. 608,505 216,390 210,105 $ 10.00
======= ======= ======= =======
Balance Outstanding at June 30, 1994........... 608,505 216,390 196,650 $ 10.00
Granted........................................ -- -- -- --
Forfeited...................................... -- -- --
Exercised...................................... -- -- -- --
-------- ------- ------- ------
Balance Outstanding at June 30, 1995........... 608,505 216,390 196,650 10.00
Granted........................................ -- -- 6,727 15.25
Forfeited...................................... -- -- -- --
Exercised...................................... -- -- -- --
-------- ------- ------- ------
Balance Outstanding at June 30, 1996........... 608,505 216,390 203,377 10.03
Granted........................................ 70,398 213,402 40,500 18.22
Forfeited...................................... -- -- -- --
Exercised...................................... (48,780) (35,000) (6,000) 10.00
-------- ------- ------- ------
Balance Outstanding at June 30, 1997........... 630,123 394,792 237,877 $ 11.96
======= ======= ======= =======
Shares Exercisable at June 30, 1997............ 353,860 144,897 233,392 $ 11.02
======= ======= ======= =======
</TABLE>
Had compensation cost for the Company's three stock-based compensation plans
been determined consistent with SFAS No. 123 for awards made after July 1, 1995,
the Company's net income per common share would have been reduced to the pro
forma amounts indicated below for the years ended June 30:
1997 1996
---- ----
(Dollars in thousands, except per share data)
Net Income As Reported $10,936 $11,723
Pro forma 8,672 11,669
Net Income per Common Share:
Primary As Reported $1.24 $1.31
Pro forma 0.98 1.31
Fully Diluted As Reported $1.21 $1.31
Pro forma 0.96 1.31
The fair values of the share grants were estimated on the date of grant using
the Black-Scholes option - pricing model using the following assumptions in
fiscal 1997 and 1996: dividend yield of 3.00%; expected volatility of 16.64%;
risk- free interest rates of 6.249%; and expected option lives of 6 years.
Employees Stock Ownership Plan ("ESOP")
The Bank has established an ESOP for eligible employees. Full-time employees
employed with the Bank as of January 1, 1993, and full-time employees of the
Company or the Bank employed after such date who have been credited with at
least 1,000 hours during a twelve-month period and who have attained age 21 are
eligible to participate.
The ESOP borrowed $8,280,000 from the Company and used the funds to purchase
828,000 shares of the Company's common stock issued in the Conversion. The loan
is repaid principally from the Bank's discretionary contributions
47
<PAGE>
to the ESOP over a 10 year period. At June 30, 1997 and 1996, the loan had an
outstanding balance of $5,622,000 and $6,472,000, respectively, and an interest
rate of 8.50% and 8.25%, respectively. Interest expense for the obligation was
$502,000 and $588,000, respectively, for the year ended June 30, 1997 and 1996.
Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is paid. Contributions to the ESOP and
shares released from the loan collateral in an amount proportional to the
repayment of the ESOP loan is allocated among participants on the basis of
compensation, as described in the plan, in the year of allocation. Benefits
generally become 100% vested after five years of credited service. However, in
the event of a change in control, as defined in the plan, any unvested portion
of benefits shall vest immediately. Forfeitures are reallocated among
participating employees, in the same proportion as contributions. Benefits are
payable upon death, retirement, disability, or separation from service based on
vesting status and share allocations made.
As of June 30, 1997, 248,400 shares were allocated to participants and 41,400
shares were committed to be released. As shares are released from collateral,
the shares become outstanding for earnings per share computations. As of June
30, 1997 and 1996, the fair market value of the 538,200 and 621,000 unearned
shares, respectively, was $15,845,000 and $9,703,000, respectively.
Recognition and Retention Plans and Trusts (RRPs")
The Bank maintains a Recognition and Retention Plan for Officers and a
Recognition and Retention Plan for Outside Directors (the "RRPs"). The purpose
of the RRPs is to provide executive officers, officers, and directors of the
Bank with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Bank. The RRPs acquired an aggregate
of 414,000 shares of the Company's common stock in the Conversion of which
410,895 shares have been awarded to Officers and Directors (327,715 at the time
of the Conversion and 83,180 thereafter). On June 19, 1996, 1,552 shares were
awarded to a new director. The additional 1,552 shares have been reserved for
future awards to directors. Such amounts represent deferred compensation and
have been accounted for as a reduction of stockholders' equity. Awards vest at a
rate of 20% per year for directors and officers, commencing one year from the
date of award. Awards become 100% vested upon termination of employment due to
death, disability, or following a change in control of the Bank or the Company.
The Company recorded compensation expenses for the ESOP and RRP of $2.5 million,
$2.0 million, and $1.9 million, respectively, for the year ended June 30, 1997,
1996 and 1995.
18. Regulatory Matters
Federal regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5% of total assets, a 3% core capital ratio and an 8%
risk-based capital ratio. The OTS prompt corrective action standards effectively
establish a minimum 2% tangible capital ratio, a minimum 4% leverage ratio
(core) capital ratio and a minimum 4% Tier 1 risked based capital ratio. As of
June 30, 1997 and 1996, the Bank was in compliance with the regulatory capital
requirements.
Additionally, under prompt corrective action regulations, the regulators have
adopted rules, which require them to take action against undercapitalized
institutions, based upon five categories of capitalization: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized",
and "critically undercapitalized". The rules adopted generally provide that an
insured institution whose risk-based capital ratio is 10% or greater, Tier 1
risk- based capital is 6% or greater, and leverage ratio is 5% or greater is
considered a "well capitalized" institution. As of June 30, 1997, 1996 and 1995,
the Bank is considered a "well capitalized" institution.
Dividend payments to the Company from the Bank are subject to the profitability
of the Bank and by applicable laws and regulations. During fiscal 1997, the Bank
made a $6.7 million dividend payment to the Company. During fiscal 1996 and
1995, the Bank did not make any dividend payments to the Company.
48
<PAGE>
The following table sets forth the required ratios and amounts and the Bank's
actual capital amounts and ratios at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- ---- --------- ---- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible......... $ 28,937 1.5% $ 107,967 5.6% $ 79,030 4.1%
Leverage......... 57,874 3.0 107,967 5.6 50,093 2.6
Risk-based....... 59,670 8.0 113,094 15.2 53,424 7.2
<CAPTION>
June 30, 1996
--------------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- ---- --------- ---- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible......... $ 26,118 1.5% $ 97,470 5.6% $ 71,352 4.1%
Leverage......... 52,236 3.0 97,470 5.6 45,234 2.6
Risk-based....... 55,478 8.0 101,911 14.7 46,433 6.7
</TABLE>
19. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No.
107"), requires disclosure of estimated fair value information for the Company's
financial instruments. Fair values are most commonly derived from quoted market
prices available in the formal trading marketplaces. In many cases, the
Company's financial instruments are not bought or sold in formal trading
marketplaces. Accordingly, in cases where quoted market prices are not
available, fair values are derived or estimated based on a variety of valuation
techniques. These techniques are sensitive to the various assumptions and
estimates used and the resulting fair value estimates may be materially affected
by minor variations in those assumption or estimates. In that regard, it is
likely that amounts different from the fair value estimates would be realized by
the Company in immediate settlement of the financial instruments.
SFAS No. 107 excludes certain financial instruments as well as all nonfinancial
instruments from fair value disclosure. Accordingly, the fair values presented
do not represent the Company's fair value as a going concern. In addition, the
differences between the carrying amounts and the fair values presented may not
be realized since the Company generally intends to hold these financial
instruments to maturity and realize their recorded value.
SFAS No. 107 provides minimal guidance and no limitations with regard to
assumptions and estimates to be used. Therefore, while disclosure of estimated
fair values is required, the fair value amounts presented in the financial
statements do not represent the underlying value of the Company, nor do they
provide any basis for comparison of the value of this Company with similar
companies.
49
<PAGE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
On Balance Sheet:
Cash and Due from Banks.............................. $ 29,565 $ 29,565 $ 22,420 $ 22,420
Money Market Investments............................. 1,100 1,100 10,450 10,450
Debt and Equity Securities Available-for-Sale........ 26,909 26,909 13,271 13,271
Debt and Equity Securities Held-to-Maturity.......... 46,026 46,152 48,330 48,036
Mortgage-Backed Securities Available-for-Sale........ 721,819 721,819 591,740 591,740
Mortgage-Backed Securities Held-to-Maturity.......... 159,356 163,108 184,492 184,995
Loans Receivable, Net................................ 909,321 910,671 817,746 814,988
Mortgage Servicing Rights............................ 3,046 3,797 3,905 4,555
Deposits............................................. 1,436,037 1,432,234 1,345,626 1,342,419
Borrowed Funds....................................... 351,913 349,499 266,160 265,867
Off Balance Sheet:
Outstanding Commitments.............................. 80,122 80,122 61,559 61,559
Letters of Credit.................................... 500 500 500 500
</TABLE>
Methods and assumptions used to produce fair value are stated below:
Cash and Due from Banks
The carrying amounts reported in the consolidated statements of condition
approximate the assets' fair values.
Money Market Investments
The carrying amounts of federal funds sold and repurchase agreements approximate
their fair values because these investments all mature in three months or less.
Debt, Equity and Mortgage-Backed Securities
Fair values for debt, equity and mortgage-backed securities are based on
published market or securities dealers' estimated prices.
Loans
Fair value estimates are calculated for pools of loans with similar
characteristics. The loans are first segregated by type, such as 1-4 family
residential, other residential, commercial, construction, and consumer, and then
further segregated into fixed and adjustable rate categories.
Fair value is estimated by discounting expected future cash flows. Expected
future cash flows are based on contractual cash flows, adjusted for prepayments.
Prepayment estimates are based on a variety of factors including the Bank's
experience with respect to each loan category, the effect of current economic
and lending conditions, and regional statistics for each loan category, if
available. The discount rates used are based on market rates for new loans of
similar type and purpose, adjusted, when necessary, for factors such as
servicing cost, credit risk, and term.
As mentioned previously, this technique of estimating fair value is extremely
sensitive to the assumptions and estimates used. While management has attempted
to use assumptions and estimates which are the most reflective of the loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than those determined in formal trading marketplaces. As such,
readers are again cautioned in using this information for purposes of evaluating
the financial condition and/or value of the Company in and of itself or in
comparison with any other company.
50
<PAGE>
Mortgage Servicing Rights
The fair value is estimated based upon a valuation which stratifies the mortgage
servicing portfolio based upon the predominate risk characteristics of the
underlying cash flows utilizing current market assumptions regarding discount
rates, prepayment speeds, delinquency rates, etc.
Other Receivables and Payables
The carrying amounts of short-term receivables and payables, including accrued
interest approximate their fair values.
Deposits
SFAS No. 107 stipulates that the fair values of deposits with no stated
maturity, such as demand deposits, savings, NOW accounts and money market
accounts, are equal to the amount payable on demand. The relative insensitivity
of the majority of these deposits to interest rate changes creates a significant
inherent value which is not reflected in the fair value reported.
The fair value of certificates of deposit are based on discounted contractual
cash flows using rates which approximate the rates offered by the Company for
deposits of similar remaining maturities.
Other Borrowings
Fair value estimates are based on discounting contractual cash flows using rates
which approximate the rates offered for borrowings of similar remaining
maturities.
Outstanding Commitments
Fair value of commitments outstanding are estimated based on the fees that would
be charged for similar agreements, considering the remaining term of the
agreement, the rate offered and the creditworthiness of the parties.
20. Parent-Only Financial Information
The following condensed statements of condition at June 30, 1997 and 1996 and
condensed statements of income and cash flows for the years ended June 30, 1997,
1996 and 1995 for Reliance Bancorp, Inc. (parent company only) reflects the
Company's investment in its wholly-owned subsidiary, the Bank, using the equity
method of accounting.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CONDITION
June 30,
---------------------------
1997 1996
--------- --------
(In thousands)
<S> <C> <C>
ASSETS
Cash.............................................................. $ 470 $ 361
Money Market Investments.......................................... 1,100 9,450
Debt Securities Available-for-Sale................................ 4,811 --
ESOP Loan Receivable.............................................. 5,622 6,472
Other Assets...................................................... 633 909
Investment in Reliance Federal Savings Bank....................... 151,772 137,680
------- -------
Total Assets.............................................. $164,408 $154,872
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued Expenses.................................................. $ 1,738 $ 1,253
Stockholders' Equity.............................................. 162,670 153,619
------- -------
Total Liabilities and Stockholders' Equity................ $164,408 $154,872
======== ========
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year Ended June 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest Income - Securities and Repurchase Agreements.......... $ 230 $ 958 $ 1,804
Interest Income - ESOP Loan Receivable.......................... 502 588 655
--- --- ---
Total Interest Income................................... 732 1,546 2,459
Cash Dividends from the Bank.................................... 6,700 -- --
Other Operating Income.......................................... -- 3 --
Other Operating Expense......................................... (521) (551) (497)
---- ---- ----
Income Before Income Taxes and Equity in Undistributed
Earnings of the Bank......................................... 6,911 998 1,962
Provision for Income Taxes...................................... 90 445 810
----- --- ----
Income before Equity in Undistributed
Earnings of the Bank........................................ 6,821 553 1,152
Equity in Undistributed Earnings of Reliance
Federal Savings Bank........................................ 4,115 11,170 8,550
----- ------ -----
Net Income...................................... $10,936 $11,723 $ 9,702
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended June 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net Income...................................................... $ 10,936 $ 11,723 $ 9,702
Equity in Undistributed Earnings of the Bank ................... (4,115) (11,170) (8,550)
Accretion of Discounts.......................................... (70) -- (906)
Net Gain on Sale of Securities.................................. -- (3) --
Decrease (Increase) in Other Assets............................. 544 (73) (491)
Increase (Decrease) in Accrued Expenses......................... 122 52 (107)
--- -- ----
Net Cash Provided by (Used in) Operating Activities........ 7,417 529 (352)
----- --- ----
Cash Flows from Investing Activities:
Purchase of Debt Securities Available-for-Sale.................. (4,715) -- (19,654)
Maturities of Debt Securities Available-for-Sale................ -- -- 23,300
Proceeds from Sales of Debt Securities Available-for-Sale....... -- 23,883 11,146
Principal Payments on ESOP Loan Receivable...................... 850 831 977
Payments for Investments in Subsidiary.......................... -- (9,673) --
------ ------ ------
Net Cash (Used in) Provided by Investing Activities......... (3,865) 15,041 15,769
------ ------ ------
Cash Flows from Financing Activities:
Purchase of Treasury Stock...................................... (8,113) (3,829) (13,040)
Net Proceeds from Issuance of Common Stock
Upon Exercise of Stock Options............................... 898 -- --
Dividends Paid.................................................. (4,578) (3,808) (2,707)
------ ------ ------
Net Cash Used in Financing Activities...................... (11,793) (7,637) (15,747)
------- ------ -------
Net (Decrease) Increase in Cash and Cash Equivalents............ (8,241) 7,933 (330)
Cash and Cash Equivalents at Beginning of Year.................. 9,811 1,878 2,208
----- ----- -----
Cash and Cash Equivalents at the End of Year.................... $ 1,570 $ 9,811 $ 1,878
======= ======= =======
</TABLE>
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
[LOGO] KPMG Peat Marwick LLP
Certified Public Accountants
One Jericho Plaza
Jericho, NY 11753
To the Board of Directors and Stockholders of
Reliance Bancorp, Inc.,
We have audited the accompanying consolidated statements of condition of
Reliance Bancorp, Inc. and subsidiary as of June 30, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended June 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Reliance Bancorp,
Inc. and subsidiary as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Jericho, New York
July 24, 1997
53
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Quarterly Financial Data
- ----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Fiscal 1997 Quarter Ended
--------------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Interest Income............................................. $ 31,960 $ 33,189 $ 33,596 $ 34,544
Interest Expense............................................ 17,014 17,801 17,904 18,934
------ ------ ------ ------
Net Interest Income......................................... 14,946 15,388 15,692 15,610
Provision for Loan Losses................................... 100 250 300 300
------ ------ ------ ------
Net Interest Income after Provision for Loan Losses......... 14,846 15,138 15,392 15,310
Non-Interest Income......................................... 686 1,022 897 807
General and Administrative Expense.......................... (7,997) (7,830) (7,539) (7,621)
Real Estate Operations, net................................. (104) (117) (114) (48)
Amortization of Excess of Cost Over Fair Value
of Net Assets Acquired.................................... (856) (856) (846) (846)
SAIF Recapitalization Charge................................ (8,250) -- -- --
------ ------ ------ ------
Income (Loss) Before Provision for Income Taxes............. (1,675) 7,357 7,790 7,602
Income Tax Expense (Benefit)................................ (271) 3,478 3,667 3,264
------ ------ ------ ------
Net Income (Loss)........................................... $ (1,404) $ 3,879 $ 4,123 $ 4,338
======== ======= ======= =======
Primary Earnings (Loss) Per Share........................... $ (0.17) $ 0.44 $ 0.46 $ 0.49
======== ======= ======= =======
Fully Diluted Earnings (Loss) Per Share .................... $ (0.17) $ 0.44 $ 0.46 $ 0.48
======== ======= ======= =======
<CAPTION>
Fiscal 1996 Quarter Ended
--------------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Interest Income........................................... $18,956 $21,132 $29,156 $31,128
Interest Expense.......................................... 9,862 11,197 15,601 16,325
------ ------ ------ ------
Net Interest Income....................................... 9,094 9,935 13,555 14,803
Provision for Loan Losses................................. 100 100 425 100
------ ------ ------ ------
Net Interest Income after Provision for Loan Losses....... 8,994 9,835 13,130 14,703
Non-Interest Income....................................... 316 389 1,405 1,000
General and Administrative Expense........................ (5,097) (5,390) (7,286) (7,823)
Real Estate Operations, net............................... (48) (16) (366) (149)
Amortization of Excess of Cost Over Fair Value
of Net Assets Acquired.................................. (86) (130) (856) (856)
------ ------ ------ ------
Income Before Provision for Income Taxes.................. 4,079 4,688 6,027 6,875
Income Tax Expense........................................ 1,719 2,048 2,904 3,275
------ ------ ------ ------
Net Income................................................ $ 2,360 $ 2,640 $ 3,123 $ 3,600
======= ======= ======= =======
Fully Diluted Earnings Per Share ......................... $ 0.26 $ 0.30 $ 0.35 $ 0.40
======= ======= ======= =======
</TABLE>
54
<PAGE>
RELIANCE BANCORP, INC.
- ----------------------
BOARD OF DIRECTORS
Raymond L. Nielsen
Chairman of the Board and
former Chief Executive Officer
Raymond A. Nielsen
Chief Executive Officer
and President
Thomas G. Davis, Jr.
Retired - President and Director
Institutional Mortgage Investors
Management Corp.
Donald LaPasta
Retired - Chairman of the Board
and Chief Executive Officer
Reliance Federal Savings Bank
Douglas G. LaPasta
Principal of Stonehill
Management Consultants
Conrad J. Gunther, Jr.
Vice President
Allied Coverage Corp.
Peter F. Neumann
Retired President
Bradley & Parker
Flynn-Neumann Agency, Inc.
J. William Newby
Owner/President
Beacon Mortgage Company
EXECUTIVE OFFICERS
Raymond A. Nielsen
Chief Executive Officer
and President
Paul D. Hagan
Senior Vice President and
Chief Financial Officer
Gerald M. Sauvigne
Executive Vice President and
Treasurer
John F. Traxler
Vice President
Investment Officer
Joseph F. Lavelle
Senior Vice President
Retail Banking Division
and Corporate Secretary
RELIANCE FEDERAL SAVINGS BANK*
- ------------------------------
EXECUTIVE OFFICERS
* Executive officers of Reliance Bancorp, Inc.
also serve as executive officers
of Reliance Federal Savings Bank.
VICE PRESIDENTS
Dorothy J. Brown
Human Resources
John C. Correll
Home Mortgage
Frank A. Dreiss, Jr.
Data Processing
John J. Hogan
Marketing
James F. Kramer
Controller
William J. McKenna
Loan Servicing
Jeannette Sabatelli
Consumer Credit
Frances Secondo
Internal Audit
Kevin J. Talty
Mortgage Originations
ASSISTANT VICE PRESIDENTS
John F. Brackx
Joseph C. Byrne
Christine V. Gerber
Diane M. Holland
Russell M. Kerstein
Steven F. Leibow
John J. Martingale
Francis J. McHale, Jr.
Stephen Plezia
Ronald K. Session
55
<PAGE>
RELIANCE BANCORP, INC.
- ----------------------
BANKING OFFICES
QUEENS
- ------------------------------
Auburndale
32-02 Francis Lewis Boulevard
Flushing, New York 11358
Mary Wright
AVP - Branch Manager
Hillcrest
69-09 164th Street
Flushing, New York 11365
Carol Murray
AVP - Branch Manager
Hollis
204-12 Hillside Avenue
Hollis, New York 11423
Pat Klos
AVP - Branch Manager
Jamaica
162-04 Jamaica Avenue
Jamaica, NY 11432
Ruby Griffin
AVP - Branch Manager
Queens Village
216-26 Jamaica Avenue
Queens Village, New York 11428
Maureen Milo
Branch Manager
Whitestone
19-01 Utopia Parkway
Whitestone, New York 11357
Beverly Bent
Branch Manager
Winchester
233-15 Hillside Avenue
Queens Village, New York 11427
Margaret Modesti
AVP - Branch Manager
NASSAU
- ------------------------------
Albertson
983 Willis Avenue
Albertson, New York 11507
Hope Scorcia
AVP - Branch Manager
Bethpage
570 Stewart Avenue
Bethpage, New York 11714
Joanne Alexander
AVP - Branch Manager
Carle Place
215 Glen Cove Road
Carle Place, New York 11514
Farmingdale
312 Conklin Street
Farmingdale, New York 11735
Thomas Rose
AVP - Branch Manager
South Farmingdale
195 Merritt Road
So. Farmingdale, New York 11735
Rosemary Demeo
AVP - Branch Manager
Franklin Square
172 New Hyde Park Road
Franklin Square, New York 11010
Janet Heck
Branch Manager
Hicksville
405 Jerusalem Avenue
Hicksville, New York 11801
Jacqueline Harrison
Branch Manager
North Bellmore
2843 Jerusalem Avenue
North Bellmore, New York 11710
Anne Marie Richartz
Branch Manager
Plainview
1074 Old Country Road
Plainview, New York 11803
Sandra McGrath
Branch Manager
<PAGE>
RELIANCE BANCORP, INC.
BANKING OFFICES, Continued
Roosevelt Field
300 Garden City Plaza
Garden City, New York 11530
Jean Hahn
Branch Manager
Salisbury
2530 Stewart Avenue
Westbury, New York 11590
Lucille Rocco
AVP - Branch Manager
Westbury
341 Post Avenue
Westbury, New York 11590
Sandra McGrath
Branch Manager
Williston Park
422 Hillside Avenue
Williston Park, New York 11596
Dennis Holzbaur
AVP - Branch Manager
S U F F O L K
- -------------
Deer Park
2087 Deer Park Avenue
Deer Park, New York 11729
Emil Savoia
AVP - Branch Manager
Kings Park
742 Route 25 A
Kings Park, New York 11754
Rosemarie DiPiano
Branch Manager
Lindenhurst
300 S. Wellwood Avenue
Lindenhurst, New York 11757
Richard Griesche
Branch Manager
Nesconset
250 Smithtown Boulevard
Nesconset, New York 11767
Catherine Maidhof
Branch Manager
North Babylon
1134 Deer Park Avenue
North Babylon, New York 11703
Anthony Ferrante
Branch Manager
North Brentwood
340 Washington Avenue
North Brentwood, New York 11717
Richard Morrison
Branch Manager
St. James
245 Lake Avenue
St. James, New York 11780
Doreen Midili
Branch Manager
West Islip
434 Union Boulevard
West Islip, New York 11795
Lisa Guariglia
Branch Manager
<PAGE>
S T O C K H O L D E R I N F O R M A T I O N
ADMINISTRATIVE OFFICES
585 Stewart Avenue
Garden City, New York 11530
ANNUAL MEETING OF SHAREHOLDERS Annual Meeting of Shareholders is scheduled to be
held on November 19, 1997 at the Long Island Marriott Hotel and Conference
Center. A notice of the meeting, a proxy statement and a proxy form are included
with this mailing to stockholders of record as of October 10, 1997. All
shareholders are welcome to attend.
STOCK LISTING INFORMATION
Reliance Bancorp, Inc.'s common stock is traded on the National Association of
Securities Dealers Automated Quotation/National Market Securities (NASDAQ/NMS)
under the symbol "RELY". Daily quotations are included in the NASDAQ national
market stock tables published in leading dailies and other business
publications.
INVESTOR RELATIONS
Shareholders, investors and analysts interested in additional information about
Reliance Bancorp, Inc. are invited to contact:
Paul D. Hagan
Senior Vice President
Chief Financial Officer
585 Stewart Avenue
Garden City, New York 11530
(516) 222-9300
Copies of the Company's earnings releases and financial publications, including
the annual report on Form 10-K filed with the Securities and Exchange Commission
are available without charge by writing to Helen V. Tolentino at the
Administrative Offices, or visit our website at http://www.reliance-federal.com.
STOCK TRANSFER AGENT AND REGISTRAR Shareholders wishing to change the name,
address, or ownership of stock, to report lost certificates or to consolidate
accounts are asked to contact the Company's stock registrar and transfer agent
directly:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1-800-368-5948
STOCK PRICE INFORMATION
Shares of the common stock were made available to qualified subscribers at
$10.00 per share during the initial offering. The tables show the reported high
and low sales prices of the common stock during fiscal 1997 and 1996.
1997
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
High..........$19.50 $19.50 $25.38 $29.44
Low...........$15.63 $17.50 $18.63 $22.00
1996
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
High..........$14.75 $15.25 $16.13 $16.50
Low...........$13.19 $13.13 $14.13 $14.50
As of July 31, 1997, the Company had approximately 1,000 shareholders of record,
not including the number of persons or entities holding stock in nominee or
street name through various brokers and banks.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
1 Jericho Plaza
Jericho, New York 11753
COUNSEL
Berkman, Henoch, Peterson & Peddy
777 Zeckendorf Boulevard
Garden City, New York 11530
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
58
INDEPENDENT AUDITORS' CONSENT
----------------------------
[LOGO] KPMG Peat Marwick LLP
Certified Public Accountants
One Jericho Plaza
Jericho, NY 11753
To the Stockholders and Board of Directors
Reliance Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-81278 and 333-20379) on Form S-8 of Reliance Bancorp, Inc of our report dated
July 24, 1997, relating to the consolidated statements of financial condition of
Reliance Bancorp, Inc. and subsidiary as of June 30, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended June 30, 1997,
which report is incorporated by reference to the June 30, 1997 Annual Report on
Form 10-K of Reliance Bancorp, Inc..
/s/ KPMG Peat Marwick LLP
Jericho, New York
September 29, 1997
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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