UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Exchange Act")
For the quarterly period ended December 31, 1997
Commission File Number: 0-23126
RELIANCE BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3187176
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
585 Stewart Avenue, Garden City, New York 11530
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 222-9300
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
Yes [ X ] No [ ]
As of February 11, 1998, there were 9,640,683 shares of common stock, $.01 par
value, outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Consolidated Statements of Condition at December 31, 1997 and
June 30, 1997 (Unaudited)
Consolidated Statements of Operations for the Three and Six Months
Ended December 31, 1997 and 1996 (Unaudited)
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1997 and 1996 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
1
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---- ----
Assets
<S> <C> <C>
Cash and due from banks............................................................. $ 31,206 $ 29,565
Money market investments............................................................ 5,000 1,100
Debt and equity securities available-for-sale....................................... 32,757 26,909
Debt and equity securities held-to-maturity (estimated market value of
$43,149 and $46,152, respectively............................................. 42,679 46,026
Mortgage-backed securities available-for-sale....................................... 833,077 721,819
Mortgage-backed securities held-to-maturity (estimated market value of
$211,143 and $163,108, respectively........................................... 207,155 159,356
Loans receivable:
Mortgage loans................................................................. 796,544 775,612
Commercial loans............................................................... 52,470 --
Consumer and other loans....................................................... 142,063 138,891
Less allowance for loan losses............................................... (8,692) (5,182)
--------- -----------
Loans receivable, net.................................................. 982,385 909,321
Accrued interest receivable, net.................................................... 13,746 12,040
Office properties and equipment, net................................................ 15,706 14,089
Prepaid expenses and other assets................................................... 14,774 7,580
Mortgage servicing rights........................................................... 2,613 3,046
Excess of cost over fair value of net assets acquired............................... 61,217 45,463
Real estate owned, net.............................................................. 785 450
---------- -------------
Total assets........................................................... $ 2,243,100 $1,976,764
========== =========
Liabilities and Stockholders' Equity
Deposits............................................................................ $ 1,602,959 $1,436,037
FHLB advances....................................................................... 69,200 40,000
Securities sold under agreements to repurchase...................................... 326,001 311,913
Advance payments by borrowers for taxes and insurance............................... 6,671 9,017
Accrued expenses and other liabilities.............................................. 46,376 17,127
---------- ----------
Total liabilities...................................................... 2,051,207 1,814,094
---------- ---------
Commitments
Stockholders' Equity
Preferred Stock, $.01 par value, 4,000,000 shares
authorized; none issued........................................................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 10,750,820 shares issued; 9,634,027 and 8,776,337
outstanding, respectively....................................................... 108 108
Additional paid-in capital.......................................................... 116,683 105,871
Retained earnings, substantially restricted......................................... 96,268 89,660
Unrealized appreciation on securities
available-for-sale, net of taxes................................................. 4,505 1,705
Less:
Unallocated common stock held by ESOP............................................... (4,968) (5,382)
Unearned common stock held by RRP................................................... (1,106) (1,567)
Unearned common stock held by SERP.................................................. (209) (209)
Treasury stock, at cost (1,116,793 and 1,974,483 shares, respectively).............. (19,388) (27,516)
---------- -----------
Total stockholders' equity..................................................... 191,893 162,670
---------- ----------
Total liabilities and stockholders' equity.............................. $ 2,243,100 $1,976,764
========== =========
See accompanying notes to unaudited consolidated financial statements.
2
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three months ended Six months ended
December 31, December 31,
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
First mortgage loans....................................... 15,980 $ 14,085 31,727 $ 27,836
Commercial loans........................................... 1,190 -- 1,190 --
Consumer and other loans................................... 3,129 2,861 6,155 5,717
Mortgage-backed securities................................. 17,492 14,856 33,475 28,979
Money market investments................................... 164 223 280 348
Debt and equity securities................................. 1,311 1,164 2,622 2,269
------- ------- ------- -------
Total interest income................................... 39,266 33,189 75,449 65,149
------- ------- ------- -------
Interest expense:
Deposits................................................... 16,199 13,372 31,163 26,451
Borrowed funds............................................. 5,879 4,429 11,084 8,364
------- ------- ------- -------
Total interest expense.................................. 22,078 17,801 42,247 34,815
------- ------- ------- -------
Net interest income before provision
for loan losses ..................................... 17,188 15,388 33,202 30,334
Provision for loan losses.................................. 300 250 1,200 350
------- ------- ------- -------
Net interest income after provision for loan losses..... 16,888 15,138 32,002 29,984
------- ------- ------- -------
Non-interest income:
Loan fees and service charges.............................. 150 200 373 408
Other operating income..................................... 847 700 1,526 1,194
Income from Money Centers.................................. 570 -- 570 --
Condemnation award on joint venture........................ -- -- 1,483 --
Net gain on securities..................................... 125 122 3 106
------- ------- ------- -------
Total non-interest income............................... 1,692 1,022 3,955 1,708
------- ------- ------- -------
Non-interest expense:
Compensation and benefits.................................. 5,052 4,162 9,573 8,259
Occupancy and equipment.................................... 1,550 1,347 3,009 2,771
Federal deposit insurance premiums......................... 232 599 453 1,371
Advertising................................................ 308 279 704 617
Other operating expense.................................... 1,674 1,443 3,124 2,809
------- ------- ------- -------
Total general and administrative expenses............... 8,816 7,830 16,863 15,827
Real estate operations, net................................ (67) 117 158 221
Amortization of excess of cost over fair value
of net assets acquired.................................. 1,090 856 1,936 1,712
SAIF recapitalization charge............................... -- -- -- 8,250
------- ------- ------- -------
Total non-interest expense................................. 9,839 8,803 18,957 26,010
------- ------- ------- -------
Income before income taxes.................................... 8,741 7,357 17,000 5,682
Income tax expense ........................................... 3,854 3,478 7,372 3,207
------- ------- ------- ------
Net income.................................................... $ 4,887 $ 3,879 $ 9,628 $ 2,475
====== ====== ====== ======
Net income per common share:
Basic........................................ $ 0.54 $ 0.47 $ 1.12 $ 0.30
======= ====== ===== ======
Diluted...................................... $ 0.50 $ 0.44 $ 1.03 $ 0.27
======= ====== ===== ======
See accompanying notes to unaudited consolidated financial statements.
3
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six months ended
December 31,
------------
1997 1996
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income....................................................................... 9,628 $2,475
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses........................................................ 1,200 350
Provision for losses on real estate owned........................................ 80 150
Amortization of premiums, net.................................................... 651 431
Amortization relating to allocation and earned portion of stock plans............ 1,777 1,152
Amortization of excess of cost over fair value of net assets acquired............ 1,936 1,712
Amortization of mortgage servicing rights........................................ 433 404
Acquisition related tax benefits not previously recognized....................... -- 562
Depreciation and amortization.................................................... 770 683
Net gain on securities........................................................... (3) (106)
Net gain on loans sold........................................................... (3) (16)
Net gain on sale of real estate owned............................................ (53) (47)
Increase in accrued interest receivable.......................................... (625) (441)
(Increase) decrease in prepaid expense and other assets.......................... (3,549) 3,166
Increase in accrued expenses and other liabilities............................... 24,503 20,836
------- -------
Net cash provided by operating activities.................................... 36,745 31,311
------- -------
Cash flows from investing activities:
Principal repayments on loans, net of (originated and purchased loans)........... 1,205 (27,786)
Purchases of mortgage-backed securities available-for-sale....................... (271,365) (172,522)
Proceeds from sales of mortgage-backed securities available-for-sale............. 152,445 45,193
Purchases of mortgage-backed securities held-to-maturity......................... (67,242) --
Principal repayments from mortgage-backed securities............................. 109,127 53,341
Purchases of debt securities available-for-sale.................................. (9,994) (15,000)
Proceeds from call of securities................................................. 10,000 2,313
Proceeds from sales of debt securities available-for-sale........................ 2,699 3,028
Proceeds from maturities of debt securities...................................... -- 1,350
Purchases of premises and equipment.............................................. (998) (1,036)
Proceeds from loans sold......................................................... 1,724 4,607
Proceeds from sales of real estate owned......................................... 2,257 836
Cash and cash equivalents acquired in Continental Bank acquisition............... 9,106 --
-------- ---------
Net cash used in investing activities......................................... (61,036) (105,676)
-------- ---------
Cash flows from financing activities:
Increase in deposits............................................................. 30,150 26,406
Decrease in advance payments by borrowers for taxes and insurance................ (2,346) (1,151)
Proceeds from FHLB advances...................................................... 15,200 40,000
Repayment of FHLB advances....................................................... (6,825) (20,000)
Proceeds from reverse repurchase agreements...................................... 537,205 524,146
Repayment of reverse repurchase agreements....................................... (533,917) (496,759)
Purchases of treasury stock...................................................... (8,265) (5,908)
Net proceeds from issuance of common stock and exercise of stock options......... 1,258 410
Dividends paid................................................................... (2,628) (2,115)
-------- ---------
Net cash provided by financing activities..................................... 29,832 65,029
-------- ---------
Net increase (decrease) in cash and cash equivalents............................. 5,541 (9,336)
Cash and cash equivalents at beginning of year................................... 30,665 32,870
-------- ---------
Cash and cash equivalents at end of year......................................... $ 36,206 $ 23,534
======= =======
4
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
Six Months Ended
December 31,
------------
1997 1996
---- ----
(Unaudited)
Supplemental disclosures of cash flow information
Cash paid during the six months ended for:
<S> <C> <C>
Interest......................................................................... $ 40,552 $ 34,110
======= =======
Income taxes..................................................................... $ 175 $ 3,420
====== ========
Non-cash investing activities:
Transfers from loans to real estate owned........................................ $ 2,620 $ 480
====== =========
See accompanying notes to unaudited consolidated financial statements.
5
</TABLE>
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RELIANCE BANCORP, INC. and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Reliance Bancorp, Inc. (the "Company"), its direct
wholly-owned subsidiary Reliance Federal Savings Bank (the "Bank"), and
the subsidiaries of the Bank.
The unaudited consolidated financial statements included herein reflect
all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the six months
ended December 31, 1997 are not necessarily indicative of the results
of operations that may be expected for the entire fiscal year. Certain
information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These unaudited
consolidated financial statements should be read in conjunction with
audited consolidated financial statements and notes thereto, included
in the Company's 1997 Annual Report on Form 10-K.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS No. 128"). SFAS No.128 specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS")
for entities with publicly held common stock or potential common stock.
This statement simplifies the standard for computing EPS previously
found in Accounting Principles Board Opinion No. 15 ("APB No. 15"). It
replaces the presentation of primary EPS with a presentation of basic
EPS and the presentation of fully diluted EPS with a presentation of
diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. Potential common stock
due to the dilutive effect of stock options is computed using the
treasury stock method. 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. The
Company adopted SFAS No. 128 during the quarter ended December 31,
1997. The change from primary EPS to basic EPS resulted in a modest
increase in this EPS presentation but did not result in a change in the
EPS presentation from fully diluted to diluted EPS.
3. ACQUISITION
On October 17, 1997, Reliance Bancorp, Inc. completed its acquisition
of Continental Bank and its merger into Reliance Federal Savings Bank,
Reliance's wholly-owned subsidiary. In accordance with the terms of the
merger agreement, Reliance issued 1.10 shares of its common stock for
each outstanding common share of Continental for a total of 1,013,909
common shares which were issued from its treasury shares. The total
transaction value was approximately $24.0 million. The acquisition of
Continental Bank increased the total number of Reliance banking offices
to 30 and expanded its lending and deposit services to include
commercial banking services. In addition, the Bank also acquired five
money center check cashing operations which result in additional fee
income to the
6
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Bank. The Company accounted for the transaction using the purchase
method of accounting which resulted in excess of cost over the fair
value of net assets acquired ("goodwill") of $17.7 million which is
being amortized on a straight line basis over 15 years. As of the
completion of the acquisition, which was effected by merging the net
assets acquired into the Bank, the Bank continued to exceed each of its
regulatory capital requirements.
4. IMPACT OF NEW ACCOUNTING STANDARDS
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 owners". 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized on
November 16, 1993 at the direction of the Board of Directors of Reliance Federal
Savings Bank (the "Bank") for the purpose of becoming a holding company to own
all of the outstanding capital stock of the Bank upon its conversion from a
mutual to a stock form of organization. The stock conversion was completed on
March 31, 1994 which raised $103.6 million of net proceeds from the sale of
10,750,820 common shares. As of December 31, 1997, the Company had 9,634,027
shares outstanding, all of which were common shares.
The Company is headquartered in Garden City, New York and its primary business
currently consists of the operations of its wholly owned subsidiary, the Bank.
In addition to directing, planning and coordinating the business activities of
the Bank, the Company invests primarily in U.S. Government securities and
repurchase agreements. The Company has also expanded its operations with the
acquisition of three financial institutions. On January 11, 1996, the Company
completed its acquisition of Sunrise Bancorp, Inc. On August 11, 1995, the
Company completed the acquisition of Bank of Westbury. As discussed in Note 3,
on October 17, 1997 the Company acquired Continental Bank and merged its
operations into the Bank.
The Bank's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from
operations, principal repayments and borrowings, primarily in mortgage and
consumer loans, multi-family, commercial, commercial real estate, construction
loans and guaranteed student loans. In connection with the acquisition of
Continental Bank, the Bank now offers both secured and unsecured commercial
loans. 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 also operates five money center check cashing operations
which result in additional fee income to the Bank.
The Company's results of operations are dependent primarily on its net interest
income, which is the difference between the interest earned on its assets,
primarily its loan and securities portfolios, and its cost of funds, which
consists of the interest paid on its deposits and borrowings. The Company's net
income also is affected by its provision for loan losses as well as non-interest
income, general and administrative expenses, other non-interest expenses, and
income tax expense. General and administrative expenses consists primarily of
compensation and benefits, occupancy, federal deposit insurance premiums,
advertising and other general and administrative expenses. Other non-interest
expense consists of real estate operations, net, amortization of excess of cost
over fair value of net assets acquired and the SAIF recapitalization charge. The
earnings of the Company may also significantly be affected by general economic
and competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
Acquisition
On October 17, 1997, Reliance Bancorp, Inc. completed its acquisition of
Continental Bank and its merger into Reliance Federal Savings Bank, Reliance's
wholly-owned subsidiary. In accordance with the terms of the merger agreement,
Reliance issued 1.10 shares of its common stock for each outstanding common
share of Continental for a total of 1,013,909 common shares which were issued
from its treasury shares. The total transaction value was approximately $24.0
million. The acquisition of Continental Bank increased the total
8
<PAGE>
number of Reliance banking offices to 30 and expanded its lending and deposit
services to include commercial banking services. In addition, the Bank also
acquired five money center check cashing operations which result in additional
fee income to the Bank. The Company accounted for the transaction using the
purchase method of accounting which resulted in excess of cost over the fair
value of net assets acquired ("goodwill") of $17.7 million which is being
amortized on a straight line basis over 15 years. As of the completion of the
acquisition, which was effected by merging the net assets acquired into the
Bank, the Bank continued to exceed each of its regulatory capital requirements.
A summary of the net assets acquired (at their fair values) in the Continental
acquisition is as follows:
After the Close of Business
October 17, 1997
(In thousands)
Assets acquired:
Cash and cash equivalents $ 9,106
Investment securities 4,781
Mortgage-backed securities 78,295
Loans receivable, net 79,867
Other assets 5,297
-------
Total assets acquired 177,346
Liabilities assumed:
Deposits 137,011
Borrowed funds 31,625
Net deferred tax liability 374
Other liabilities 2,073
-------
Total liabilities assumed 171,083
Net assets acquired $ 6,263
Financial Condition
As of December 31, 1997, total assets were $2.2 billion, an increase of $266.3
million, or 13.5%, from June 30, 1997. The increase is primarily the result of
assets acquired from Continental Bank and increased purchases of mortgage-backed
securities. The mortgage-backed securities portfolio increased $159.1 million,
or 18.1%, from $881.2 million at June 30, 1997 to $1.0 billion at December 31,
1997, with the increase primarily due to increased purchases of private label
collateralized mortgage obligations offset by amortization and prepayments.
Loans receivable, net increased $73.1 million, or 8.0%, from $909.3 million at
June 30, 1997 to $982.4 million at December 31, 1997 due primarily to $79.9
million of loans acquired from Continental Bank.
Funding for the purchases of mortgage-backed securities was through a
combination of new deposit growth, borrowings and cash flows. Deposits increased
$166.9 million, or 11.6% during the six months ended December 31, 1997 as a
result of growth in new certificate of deposit products and $137.0 million of
deposits acquired from Continental Bank. Borrowings increased from $351.9
million at June 30, 1997 to $395.2
9
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million at December 31, 1997, an increase of $43.3 million, or 12.3%. The
increase is primarily due to $31.6 million of borrowings acquired from
Continental Bank.
Goodwill increased $15.8 million during the six months ended December 31, 1997
as a result of $17.7 of goodwill from the Continental Bank acquisition offset by
$1.9 million in amortization.
Treasury stock decreased from $27.5 million at June 30, 1997 to $19.4 million at
December 31, 1997 as a result of approximately 1.0 million shares issued to
purchase Continental Bank. Offsetting such decrease was the repurchase of
262,000 shares of its common stock at a total cost of $8.3 million. In addition,
additional paid in capital increased $10.8 million primarily as a result of
reissuing treasury shares at a greater value than they were originally
repurchased at.
Non-performing assets
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more on which the Bank is accruing interest at the dates
indicated and real estate owned. It is the Bank's policy to classify any loans,
or any portion thereof, determined to be uncollectible, in whole or in part, as
non-accrual loans. With the exception of guaranteed student loans, the Bank also
classifies as non-accrual loans all loans 90 days or more past due. When a loan
is placed on non-accrual status, the Bank ceases the accrual of interest owed
and previously accrued interest is charged against interest income.
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------
1997 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Non-accrual mortgage loans delinquent more than 90 days.................... $ 10,392 $ 14,262
Non-accrual commercial loans delinquent more than 90 days.................. 807 --
Non-accrual other loans delinquent more than 90 days....................... 203 188
-------- --------
Total non-accrual loans................................................ 11,402 14,450
Loans 90 days or more delinquent and still accruing........................ 350 277
-------- --------
Total non-performing loans................................................. 11,752 14,727
Total foreclosed real estate, net of related allowance for losses.......... 785 450
-------- -------
Total non-performing assets................................................ $ 12,537 $ 15,177
====== ======
Non-performing loans to total loans........................................ 1.19% 1.61%
Non-performing assets to total assets...................................... 0.56% 0.77%
Allowance for loan losses to non-performing loans.......................... 73.96% 35.18%
Allowance for loan losses to total loans................................... 0.88% 0.57%
</TABLE>
Non-performing loans totalled $11.8 million, or 1.19% of total loans at December
31, 1997, as compared to $14.7 million, or 1.61% of total loans at June 30,
1997. Non-performing loans at December 31, 1997 were comprised of $8.2 million
of loans secured by one- to-four family residences, $2.4 million of commercial
real estate loans, $807,000 of commercial loans and $350,000 of guaranteed
student loans. As a result of a decrease in non-performing loans and an
increased asset base, the non-performing assets to total assets ratio improved
to 0.56% at December 31, 1997 from 0.77% at June 30, 1997.
For the quarter ended December 31, 1997, the Company's loan loss provision was
$300,000 as compared to $250,000 in the prior year quarter. The Company
increased its provision for loan losses to continue to increase
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its loan loss coverage ratios. The Company's allowance for loan losses totalled
$8.7 million at December 31, 1997 as compared to $5.2 million at June 30, 1997
which represents a ratio of allowance for loan losses to non-performing loans
and to total loans of 73.96% and 0.88% and 35.18% and 0.57%, respectively. The
significant increase in these loan loss coverage ratios is the result of $2.7
million of allowances acquired from Continental Bank. For the quarter and six
months ended December 31, 1997, the Company experienced net charge-offs of
$3,000 and $434,000, respectively. Management believes the allowance for loan
losses at December 31, 1997 is adequate and sufficient reserves are presently
maintained to cover losses on any non-performing loans.
Impact of Legislation
Recapitalization of SAIF Fund. Legislation was signed into law during the
quarter ended December 31, 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 lowered SAIF assessments to 0 to 27
basis points effective January 1, 1997, a range comparable to that of BIF
members. However, SAIF members will continue to make the higher FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
Tax Bad Debt Reserves. Prior to calendar year ended December 31, 1996, the Bank
was allowed a special bad debt deduction based on the greater of the amount
calculated under the experience method or the percentage of taxable income
method. The statutory percentage under the latter method was 8% for federal tax
purposes.
The percentage of taxable income method was allowable only if the Bank
maintained at least 60% of its total assets in qualifying assets, as defined. If
qualifying assets fell below 60%, the Bank would have been required to recapture
its tax bad debt reserve into taxable income over a four-year period. The Bank's
qualifying assets as a percentage of total assets exceeded the 60% limitation as
of and during the fiscal years ended June 30, 1997 and 1996.
Under legislation enacted subsequent to June 30, 1996, the Bank is no longer
able to use the percentage of taxable income method for federal tax purposes,
but is permitted to deduct bad debts only as they occur and
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is additionally required to recapture (that is, take into taxable income) the
excess balance of its bad debt reserves as of December 31, 1995 over the balance
of such reserves as of December 31, 1987. However, such recapture requirements
are suspended for each of two successive taxable years beginning January 1, 1996
in which the Bank originates a minimum amount of certain residential loans based
upon the average of the principal amounts of such loans made by the Bank during
its six taxable years preceding January 1, 1996. As a result of this
legislation, the Bank will incur additional federal tax liability, but with no
impact on the Bank's results of operations. The New York State and New York City
tax laws have been amended to prevent a similar recapture of the Bank's bad debt
reserve, and to permit continued future use of the bad debt reserve methods, for
purposes of determining the Bank's New York State and New York City tax
liability.
Asset/Liability Management
One of the Bank's primary long-term financial objectives has been and will
continue to be to monitor the sensitivity of its earnings to interest rate
fluctuations by maintaining an appropriate matching of the maturities and
interest rate repricing characteristics of its assets and liabilities in
relation to the current and anticipated interest rate environment. In an effort
to realize this objective and minimize the Bank's exposure to interest rate
risk, the Bank emphasizes the origination of adjustable-rate mortgage ("ARM"),
consumer and commercial loans, shorter-term fixed rate multi-family, mortgage,
consumer and commercial loans and the purchase of shorter-term fixed rate and
adjustable-rate mortgage-backed securities. However, there can be no assurances
that the Bank will be able to originate adjustable rate loans or acquire
mortgage-backed securities with terms and characteristics which conform with the
Bank's underwriting standards, investment criteria or interest rate risk
policies.
The Company has attempted to limit its exposure to interest rate risk through
the origination and purchase of adjustable-rate mortgage loans ("ARMs") and
through purchases of adjustable-rate mortgage-backed and mortgage-related
securities and fixed rate mortgage-backed and mortgage-related securities with
short and medium-term average lives.
The actual duration of mortgage loans and mortgage-backed securities, can be
significantly impacted by changes in mortgage prepayment and market interest
rates. Mortgage prepayment rates will vary due to a number of factors, including
the regional economy in the area where the underlying mortgages were originated,
seasonal factors, demographic variables and the assumability of the underlying
mortgages. However, the largest determinants of prepayment rates are prevailing
interest rates and related mortgage refinancing opportunities. Management
monitors interest rate sensitivity so that adjustments in the asset and
liability mix, when deemed appropriate, can be made on a timely basis.
At December 31, 1997, $947.3 million, or 46.6%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $796.5 million, of which $421.9 million, or
53.0%, were adjustable-rate loans and $374.6 million, or 47.0%, were fixed-rate
loans. The Bank's commercial loan portfolio totalled $52.5 million, of which
$46.7 million, or 89.0%, were adjustable-rate loans and $5.8 million, or 11.0%,
were fixed-rate loans. In addition, at December 31, 1997, the Bank's consumer
loan portfolio totalled $142.1 million, of which $112.7 million, or 79.3%, were
adjustable-rate home-equity lines of credit and guaranteed student loans and
$29.4 million, or 20.7%, were fixed-rate home-equity and other consumer loans.
At December 31, 1997, the mortgage-backed securities held-to-maturity portfolio
totalled $207.2 million, of which $116.2 million, or 56.1%, of the
mortgage-backed portfolio were adjustable-rate securities and $91.0 million, or
43.9%, were fixed-rate securities. The mortgage-backed securities portfolio
classified as available-
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for-sale totalled $833.1 million of which $249.9 million, or 30.0%, were
adjustable rate securities and $583.2 million, or 70.0%, were fixed-rate
securities.
During the six months ended December 31, 1997, the Bank purchased approximately
$242.0 million of agency and private label collateralized mortgage obligations,
$52.3 million of 1 year agency adjustable and $44.3 million of 30 year fixed
rate mortgage-backed securities. In addition, during the six months ended
December 31, 1997 the Bank sold approximately $118.1 million of 15 year and 30
year mortgage-backed securities, $17.8 million of agency and private label
collateralized mortgage obligations and $16.5 million of adjustable-rate
securities. The Bank has continued to reposition its securities portfolio by
purchasing agency and private label collateral mortgage obligations in order to
increase the incremental yield of the portfolio as well as shorten the duration
of the securities portfolio. Management believes that these securities may
represent attractive alternatives relative to other investments due to the wide
variety of maturity, repayment, and interest rate options available. The Bank
has funded the purchase of these securities through a combination of internal
deposit growth and borrowings, primarily reverse repurchase agreements.
Comparison of Operating Results for the Three Months Ended December 31, 1997 and
1996.
General. Net income for the three months ended December 31, 1997 was $4.9
million, an increase of $1.0 million, from $3.9 million in the prior year
period. Net income for the quarter ended December 31, 1997 represents an
annualized return on average assets and average tangible equity of 0.89% and
15.87%, respectively as compared to 0.83% and 14.75% in the prior year period.
Interest Income. Interest income increased $6.1 million, or 18.3%, from $33.2
million for the three months ended December 31, 1996, to $39.3 million for the
three months ended December 31, 1997. The increase resulted from an increase of
$296.3 million, or 16.8%, in the average balance of interest-earning assets from
$1.8 billion for the 1996 period to $2.1 billion for the 1997 period and an
increase in the average yield of interest-earning assets from 7.52% in the prior
year period to 7.62%. The growth in interest-earning assets was directly
attributable to assets acquired from Continental Bank and the Bank's increased
purchases of mortgage-backed securities and increased originations of
multi-family loans. Interest income from mortgage loans increased $1.9 million,
or 13.5%, from $14.1 million for the 1996 period to $16.0 million for the 1997
period due to an $88.9 million, or 12.7%, increase in the average balance of
mortgage loans and a 6 basis point increase in the average yield on mortgage
loans from 8.08% for the 1996 period to 8.14% for the 1997 period. The increase
in the average balance of mortgage loans is primarily due to originations of
multi-family loans and assets acquired from Continental Bank. For the three
months ended December 31, 1997, interest income from mortgage-backed securities
increased $2.6 million, or 17.7%, from $14.9 million for the 1996 period to
$17.5 million for the 1997 period, primarily due to an increase of $164.2
million, or 19.4%, in the average balance of mortgage-backed securities offset
slightly by a decrease in the average yield on these securities of 3 basis
points from 7.00% for the 1996 period to 6.97% for the 1997 period. The increase
in the average balance of mortgage-backed securities is primarily due to
increased purchases of private label collateral mortgage obligations and
securities acquired from Continental Bank. Mortgage-backed securities generally
bear interest rates lower than loans. Accordingly, to the extent the demand for
loans which meet the Bank's underwriting standards remains low in the Bank's
primary market area and the Bank continues to increase its investment of
mortgage-backed securities, yields on interest-earning assets may tend to be
lower than if the Bank increased its investment of funds in loans.
Interest Expense. Interest expense for the three months ended December 31, 1997,
was $22.1 million, an increase of $4.3 million, or 24.0%, from $17.8 million for
the three months ended December 31, 1996. The increase in interest expense is
related to a $264.4 million, or 16.0%, increase in the average balance of
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interest-bearing liabilities from $1.7 billion for the 1996 period to $1.9
billion for the 1997 period and a 30 basis point increase in the cost of
interest-bearing liabilities from 4.30% for the 1996 period to 4.60% for the
1997 period. The increase in the average cost of interest-bearing liabilities
resulted primarily from a higher interest rate environment during the quarter
ended December 31, 1997. Interest expense on deposits increased $2.8 million, or
21.1%, from $13.4 million for the 1996 period to $16.2 million for the 1997
period, primarily as a result of a $200.8 million, or 14.7%, increase in the
average balance of deposits and by a 29 basis point increase in the average cost
of such deposits from 3.98% in the 1996 period to 4.27% in the 1997 period.
Interest expense on borrowed funds increased $1.5 million, or 32.7%, from $4.4
million for the 1996 period to $5.9 million for the 1997 period primarily due to
a $89.9 million, or 28.9%, increase in the average balance of borrowings from
$311.0 million in the 1996 period to $400.9 million for the 1997 period and an
18 basis point increase in the average cost of such borrowings from 5.69% in the
1996 period to 5.87% in the 1997 period. The Bank continues to use borrowings to
leverage its capital and fund asset growth. Borrowed funds, principally reverse
repurchase agreements and FHLB-NY advances, have been reinvested by the Bank in
mortgage-backed securities and loans leveraging the Bank's capital and improving
the return on tangible equity.
Net Interest Income. Net interest income was $17.2 million for the three months
ended December 31, 1997 as compared to $15.4 million for the three months ended
December 31, 1996, an increase of $1.8 million, or 11.7%. The increase in net
interest income was attributable to the growth in average interest-earning
assets to $2.1 billion for the quarter ended December 31, 1997 from $1.8 billion
for the quarter ended December 31, 1996. The growth in average interest-earning
assets was from increased investments in mortgage-backed securities, increased
originations of multi-family loans and assets acquired from Continental Bank.
Interest- bearing liabilities increased $264.4 million, or 16.0%, to $1.9
billion for the 1997 period from $1.7 billion for the 1996 period. As a result
of a flattening of the yield curve and the increased cost of interest-bearing
liabilities, the Bank's net interest spread declined from 3.22% to 3.02% and its
net interest margin declined from 3.49% to 3.34%. For the quarter ended December
31, 1997, the yield on interest-earning assets was 7.62% and the cost of
interest-bearing liabilities was 4.60% as compared to 7.52% and 4.30%,
respectively for the quarter ended December 31, 1996.
Provision for Loan Losses. The provision for loan losses totalled $300,000 for
the three months ended December 31, 1997 compared to $250,000 for the three
months ended December 31, 1996. The Company increased its provision for loan
losses during the quarter to continue to increase its loan loss coverage ratios.
Management believes that based upon information currently available that its
allowance for loan losses is adequate to cover future loan losses. However, if
general economic conditions and real estate values within the Bank's primary
lending area decline, the level of non-performing loans may increase resulting
in larger provisions for loan losses which, in turn, would adversely affect net
income.
Non-Interest Income. Non-interest income increased $670,000, or 65.6%, from $1.0
million for the quarter ended December 31, 1996 to $1.7 million for the quarter
ended December 31, 1997. The increase is mainly the result of fee income
generated from the newly acquired money center check cashing operations.
Non-Interest Expense. Non-interest expense totalled $9.8 million for the quarter
ended December 31, 1997, a $1.0 million, or 11.8%, increase from $8.8 million
recorded in the prior year quarter. The increase is mainly the result of higher
compensation expense, goodwill amortization and other expenses associated with
the Continental Bank acquisition, however, the general and administrative
expense to average assets ratio improved to 1.60% for the quarter ended December
31, 1997 from 1.68% in the prior year quarter. For the quarter ended December
31, 1997, compensation and benefits expense increased to $5.1 million, an
increase of $890,000, or 21.4%, from $4.2 million for the quarter ended December
31, 1996. The increase is due to
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the addition of banking offices, check cashing and commercial lending personnel
from the Continental Bank acquisition, higher benefit expenses and normal salary
adjustments. For the quarter ended December 31, 1997, ESOP and RRP expenses were
$889,000, an increase of $297,000, or 50.2%, from $592,000 recorded in the prior
year quarter. Occupancy and equipment expense increased $203,000, or 15.1%, from
$1.3 million for the quarter ended December 31, 1996 to $1.5 million for the
quarter ended December 31, 1997 due to costs associated with the operation of
two new banking offices and five check cashing facilities. Other operating
expenses increased $231,000, or 16.0%, from $1.4 million during the quarter
ended December 31, 1996 to $1.7 million for the quarter ended December 31, 1997
as a result of general expenses related to the addition of two new banking
offices and five check cashing facilities. Goodwill amortization increased
$234,000, or 27.3%, from $856,000 in the prior year quarter to $1.1 million
during the quarter ended December 31, 1997 as a result of amortization related
to the Continental Bank acquisition. Offsetting these increases was the
reduction of federal deposit insurance premiums of $367,000, or 61.3%, from
$599,000 recorded for the quarter ended December 31, 1996 to $232,000 for the
quarter ended December 31, 1997 due to the reduction in SAIF premiums.
Income Tax Expense. Income tax expense was $3.9 million for the quarter ended
December 31, 1997 representing an effective income tax rate of 44.1% as compared
to $3.5 million and an effective tax rate of 47.3% in the prior year. The Bank's
effective income tax rate is primarily affected by the amortization of excess of
cost over fair value of net assets acquired for which no tax benefit is provided
as well as associated tax benefits related to a subsidiary of the Bank.
Comparison of Operating Results for the Six Months Ended December 31, 1997 and
1996.
General. The Company reported net income of $9.6 million for the six months
ended December 31, 1997 as compared to $2.5 million for the six months ended
December 31, 1996. The lower net income in the prior year period was the result
of the $8.3 million SAIF charge.
Interest Income. Interest income increased $10.3 million, or 15.8%, from $65.1
million for the six months ended December 31, 1997 to $75.4 million for the six
months ended December 31, 1997. The increase in net interest income was
attributable to the growth in average interest-earning assets to $2.0 billion
for the six months ended December 31, 1997 from $1.7 billion for the six months
ended December 31, 1996. The growth in interest-earning assets was directly
attributable to assets acquired from Continental Bank, the Bank's increased
purchases of mortgage-backed securities and increased originations of
multi-family loans. Interest income from mortgage loans increased $3.9 million,
or 14.0%, from $27.8 million for the 1996 period to $31.7 million for the 1997
period due to a $84.7 million, or 12.1%, increase in the average balance of
mortgage loans and by a 13 basis point increase in the average yield on mortgage
loans from 8.03% for the 1996 period to 8.16% for the 1997 period. The increase
in the average balance of mortgage loans is due to the acquisition of mortgage
loans from Continental Bank as well as increased originations of multi-family
loans. For the six months ended December 31, 1997, interest income from
mortgage-backed securities increased $4.5 million, or 15.5%, from $29.0 million
for the 1996 period to $33.5 million for the 1997 period, primarily due to an
increase of $133.1 million, or 16.1%, in the average balance of mortgage-backed
securities and by a 6 basis points increase in the average yield on these
securities from 6.98% for the 1996 period to 7.04% for the 1997 period. The
increase in the average balance of mortgage-backed securities is primarily due
to increased purchases of shorter duration private label collateralized mortgage
obligations securities and securities acquired from Continental Bank.
Mortgage-backed securities generally bear interest rates lower than loans.
Accordingly, to the extent the demand for loans which meet the Bank's
underwriting standards remains low in the Bank's primary market area and the
Bank continues to increase its investment of mortgage-backed
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securities, yields on interest-earning assets may tend to be lower than if the
Bank increased its investment of funds in loans.
Interest Expense. Interest expense for the six months ended December 31, 1997,
was $42.2 million, an increase of $7.4 million, or 21.3%, from $34.8 million for
the six months ended December 31, 1996. The increase in interest expense is
related to a $216.7 million, or 13.3%, increase in the average balance of
interest-bearing liabilities and by a 30 basis point increase in the cost of
interest-bearing liabilities from 4.27% for the 1996 period to 4.57% for the
1997 period. The increase in the average cost of interest-bearing liabilities
resulted primarily from a higher interest rate environment during the six months
ended December 31, 1997. Interest expense on total deposits increased $4.7
million, or 17.8%, from $26.5 million for the 1996 period to $31.2 million for
the 1997 period, primarily as a result of a $151.1 million, or 11.1%, increase
in the average balance of deposits and by a 27 basis point increase in the
average cost of such deposits from 3.96% for the 1996 period to 4.23% for the
1997 period. Interest expense on borrowed funds increased $2.7 million, or
32.5%, from $8.4 million for the 1996 period to $11.1 million for the 1997
period. Borrowings averaged $377.4 million for the six months ended December 31,
1997, an increase of $81.0 million, or 27.3%, from $296.4 million for the six
months ended December 31, 1996. Borrowed funds, principally reverse repurchase
agreements and FHLB-NY advances have been reinvested by the Bank in
mortgage-backed securities and multi-family loans leveraging the Bank's capital
and improving the return on tangible equity.
Net Interest Income. Net interest income increased to $33.2 million for the six
months ended December 31, 1997, an increase of $2.9 million, or 9.5%, from $30.3
million for the six months ended December 31, 1996. The increase in net interest
income was attributable to the growth in average interest-earning assets to $2.0
billion for the six months ended December 31, 1997 from $1.7 billion for the six
months ended December 31, 1996. The growth in interest-earning assets was from
assets acquired from the Continental Bank acquisition and increased purchases of
mortgage-backed securities. As a result of a flattening of the yield curve and
the increased cost of interest-bearing liabilities, the Bank's net interest
spread declined from 3.25% for the six months ended December 31, 1996 to 3.07%
for the six months ended December 31, 1997 and its net interest margin declined
from 3.50% to 3.36%. The yield on interest-earning assets was 7.64% for the six
months ended December 31, 1997 and the cost of interest-bearing liabilities was
4.57% as compared to 7.52% and 4.27%, respectively for the six months ended
December 31, 1996.
Provision for Loan Losses. The provision for loan losses totalled $1.2 million
for the six months ended December 31, 1997 as compared to $350,000 for the six
months ended December 31, 1996. The Company established additional loan loss
reserves after analyzing non-performing loans as well as the need to increase
general valuation allowances on commercial real estate and multi-family loans.
Non-performing loans at December 31, 1997 were comprised of $8.2 million of
loans secured by one- to four-family residences, $2.4 million of commercial real
estate loans, $807,000 of commercial loans and $350,000 of guaranteed student
loans. The Company's allowance for loan losses totalled $8.7 million at December
31, 1997 which represents a ratio of allowance for loan losses to non-performing
loans and to total loans of 73.96% and 0.88%, respectively. The Company's
non-performing assets to total assets ratio was 0.56% at December 31, 1997. Net
charge-offs were $434,000 for the six months ended December 31, 1997. Management
believes that based upon information currently available, its allowance for loan
losses is adequate and sufficient reserves are presently maintained to cover
losses on any non-performing loans.
Non-Interest Income. Non-interest income increased $2.2 million, or 131.6%, from
$1.7 million for the six months ended December 31, 1996 to $3.9 million for the
six months ended December 31, 1997. The increase is mainly the result of a gain
from a condemnation award received from an inactive joint venture.
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Non-Interest Expense. Non-interest expense totalled $19.0 million for the six
months ended December 31, 1997 as compared to $26.0 million for the six months
ended December 31, 1996, a decrease of $7.0 million, or 27.1%. Non-interest
expense for the six months ended December 31, 1996 reflects a one-time charge of
$8.25 million for the Company's share of recapitalizing the Savings Association
Insurance Fund ("SAIF"). Excluding the effect of the SAIF charge, non-interest
expense for the six months ended December 31, 1996 would have been $17.8 million
and non-interest expense would have increased $1.2 million, or 6.7%. This
increase is mainly the result of higher compensation expense, goodwill
amortization and other occupancy costs associated with the Continental Bank
acquisition offset by a decrease in deposit insurance premiums. However, due to
the increased asset base the general and administrative expense to average
assets ratio improved from 1.73% for the six months ended December 31, 1996 to
1.61% for the six months ended December 31, 1997. For the six months ended
December 31, 1997, compensation and benefits expense increased $1.3 million, or
15.9%, to $9.6 million from $8.3 million for the six months ended December 31,
1996. The increase in compensation and benefits expense is due to the addition
of banking offices, check cashing and commercial lending personnel from the
Continental Bank acquisition, higher benefit expenses and normal salary
adjustments. For the six months ended December 31, 1997, ESOP and RRP expenses
were $1.8 million, an increase of $625,000, or 54.2%, from $1.2 million recorded
in the prior year six month period. Occupancy and equipment expense increased
$238,000, or 8.6%, from $2.8 million for the six months ended December 31, 1996
to $3.0 million for the six months ended December 31, 1997 due to costs
associated with the operation of two new banking offices and five check cashing
facilities. Other operating expenses increased $315,000, or 11.2%, from $2.8
million during the six months ended December 31, 1996 to $3.1 million for the
six months ended December 31, 1997 as a result of general expenses related to
the addition of two new banking offices and five check cashing facilities.
For the six months ended December 31, 1997, real estate operations, net was
$158,000 as compared to $221,000 in the prior year six month period. The
decrease is the result of a lower provision for REO losses during the six months
ended December 31, 1997. During the six months ended December 31, 1997, the Bank
established a provision for REO losses of $80,000 as compared to $150,000 in the
prior year six month period.
Income Tax Expense. Income tax expense was $7.4 million for the six months ended
December 31, 1997 and $3.2 million for the six months ended December 31, 1996.
The effective income tax rates were 43.4% for the 1997 period as compared to
56.4% for 1996 period. As a result of the SAIF charge amortization of excess of
cost over fair value of net assets acquired for which no tax benefit is provided
for represents a higher percentage of pre-tax income thereby increasing the
effective tax rate in the prior year period.
Liquidity And Capital Resources
The Company's current primary sources of funds are principal and interest
payments and sales of investments securities and dividends from the Bank.
Dividend payments to the Company from the Bank are subject to the profitability
of the Bank and by applicable laws and regulations. During the six months ended
December 31, 1997, the Bank made a dividend payment of $7.0 million to the
Company. The Company's liquidity is available to, among other things, support
future expansion of operations or diversification into other banking related
business, payments of dividends or repurchase its common stock.
On January 12, 1998, the Board of Directors approved the Company's sixth stock
repurchase plan. The Company has been authorized by its Board of Directors to
repurchase up to 500,000 of the Company's outstanding shares during the next
twelve months which shall commence upon the completion of the remaining 99,000
shares of the Company's fifth stock repurchase program which was announced in
April of 1997. As of December 31, 1997, 342,000 common shares have been
repurchased at a total cost of $10.1 million under the fifth stock repurchase
plan and approximately 99,000 shares remain to be repurchased. For the six
months ended December 31, 1997, the Company repurchased 262,000 shares for a
total cost of $8.3 million. As of
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December 31, 1997, the Company's cumulative total of treasury shares (net of
reissues for stock options exercised) was 1,116,793 at an aggregate cost of
$19.4 million.
On December 18, 1997, the Board of Directors declared a regular cash dividend of
$0.16 per common share for the quarter ending December 31, 1997. The dividend
was paid on January 16, 1998 to stockholders of record on January 2, 1998.
The Bank is required to maintain an average daily balance of liquid assets as a
percentage of net withdrawable deposit accounts plus short-term borrowings as
defined by OTS regulations. This liquidity requirement was 5.0% for fiscal 1997,
but is subject to change from time to time by the OTS to any amount within the
range of 4.0% to 10.0% depending on economic conditions and the savings flows of
member institutions. During the quarter ended December 31, 1997, the minimum
required liquidity ratio was changed to 4.0%. The Bank's liquidity ratio
averaged 5.26% for the six months ended December 31, 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 December 31, 1997,
assets qualifying for liquidity, including cash, US government obligations and
other eligible securities, totalled $97.3 million.
The Bank's primary sources of funds are principal and interest payments on
loans, mortgage-backed securities and investment securities, deposits, advances
from the FHLB-NY, borrowings under reverse repurchase agreements and sales of
mortgage-backed securities and loans. While maturities and scheduled
amortization of loans, mortgage-backed securities and investment securities are
predictable sources of funds, deposit flows and mortgage prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition. During the six months ended December 31, 1997, principal
payments on loans and mortgage-backed securities totalled $104.1 million and
$109.1 million, respectively, as compared to $73.3 million and $53.3 million,
respectively, in the prior year period. In addition, during the six months ended
December 31, 1997, the Bank sold $152.4 million of mortgage-backed securities.
At December 31, 1997, borrowings from the FHLB-NY and reverse repurchase
agreements totalled $395.2 million, an increase of $43.3 million, from $351.9
million at June 30, 1997. Deposits increased $166.9 million to $1.6 billion
during the six months ended December 31, 1997.
The primary investment activity of the Bank is the origination of mortgage loans
and consumer loans, and the purchase of mortgages and mortgage-backed
securities. During the six months ended December 31, 1997, the Bank originated
and purchased mortgage loans and consumer loans in the amount of $37.7 million
and $23.9 million, respectively. During the six months ended December 31, 1997,
the Bank purchased $338.6 million of mortgage-backed securities of which $271.4
million were classified as available-for-sale and $67.2 million were classified
as held-to-maturity.
At December 31, 1997, the Bank had outstanding loan commitments of $27.1
million, open home equity lines of credit of $55.4 million and $17.1 million of
commercial lines of credit. 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 December 31,
1997 totalled $693.4 million. Management believes that a significant portion of
such deposits will remain with the Bank.
At December 31, 1997, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 5.53%, 5.53% and 14.29%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
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Information Services Year 2000 Project
The Company has initiated a project to ensure that its computer systems are
addressed for problems associated with the year 2000 date change. Based upon the
project's current status, the Company believes that the costs associated with
ensuring year 2000 compliance will not materially affect the Company's future
operating results or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at June
30, 1997 in Exhibit 13.1 to the Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on September 29, 1997. There have been no
material changes in the Company's market risk at December 31, 1997 compared to
June 30, 1997. The following is an update of the discussion provided therein:
General. The Company's largest component of market risk continues to be interest
rate risk. Virtually all of this risk continues to reside at the Bank level. The
Bank still is not subject to foreign currency exchange or commodity price risk.
At December 31, 1997, neither the Company nor the Bank owned any trading assets,
nor did they utilize hedging transactions such as interest rate swaps and caps.
Assets, Deposit Liabilities and Wholesale Funds. There has been no material
change in the composition of assets, deposit liabilities and wholesale funds
from June 30, 1997 to December 31, 1997.
GAP Analysis. The one-year cumulative interest sensitivity gap as a percentage
of total assets falls within 7% of the level at June 30, 1997 utilizing the same
assumptions as at June 30, 1997.
The Bank's exposure to the risks of changing interest rates may be analyzed, in
part, by examining the extent to which its assets and liabilities are "interest
rate sensitive" and by monitoring the Bank's interest rate sensitivity "gap". An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest-earning
assets maturing or repricing exceeds the amount of interest-bearing liabilities
maturing or repricing within the same period. A gap is considered negative when
the amount of interest-bearing liabilities maturing or repricing exceed the
amount of interest-bearing assets maturing or repricing within the same period.
Accordingly, a positive gap may enhance net interest income in a rising rate
environment and reduce net interest income in a falling rate environment.
Conversely, a negative gap may enhance net interest income in a falling rate
environment and reduce net interest income in a rising rate environment.
At December 31, 1997, the Bank's estimated one year interest sensitivity "gap"
(the difference between interest-earning assets and interest-bearing liabilities
that reprice or mature within such period expressed as a percentage of total
assets) was a negative gap of $214.2 million , or (9.55)% of total assets at
December 31, 1997 as compared to a negative gap of $55.6 million, or (2.82)% of
total assets at June 30, 1997 and a negative gap of $18.6 million or (0.99)%, at
December 31, 1996. The prepayment rates for mortgage loans, mortgage-backed
securities and consumer loans are based upon the Bank's historical performance.
Interest Rate Risk Compliance. The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at June 30, 1997. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value at December
19
<PAGE>
31, 1997, compared to June 30, 1997, and the projected changes continue to fall
within the board approved limits at all levels of potential interest rate
volatility.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Holding Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on
November 19, 1997 (The Annual Meeting).
At the Annual Meeting, the shareholders of the Company elected
Raymond A. Nielsen, Douglas G. LaPasta and Peter F. Neumann as
directors of the Company each to serve for a three year term
and in any case, until the election and qualification of their
respective successors. In addition, the appointment of KPMG
Peat Marwick LLP as independent auditors of the Company for
its 1998 fiscal year.
The number of votes cast at the meeting as to each matter acted upon
were as follows:
(a) Election of Directors:
For Withheld
Raymond A. Nielsen 7,823,573 27,228
Douglas G. LaPasta 7,825,113 25,688
Peter F. Nuemann 7,824,173 26,628
(b) The ratification of the appointment of KPMG Peat Marwick LLP,
as independent auditors of Reliance Bancorp, Inc. for the
fiscal year ending June 30, 1998.
For: 7,805,353
Against: 35,880
Abstained: 9,568
Item 5. Other Information
Not applicable.
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation*
3.2 Bylaws*
11.0 Statement re Computation of Per Share Earnings
27.0 Financial Data Schedule 1
* Incorporated by reference into the Registrant's Statement of Form S-1, as
amended, originally filed on December 3, 1993.
1 Submitted only with filing in electronic format.
(b) Reports on Form 8-K
1) The Company filed Form 8-K on January 20, 1998,
which included a copy of the Company's press release
dated January 12, 1998 announcing its sixth stock
repurchase program.
2) The Company filed Form 8-K on October 21, 1997,
which included a copy of the press release dated
October 17, 1997 announcing the completion of the
acquisition of Continental Bank by Reliance Bancorp,
Inc.
22
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reliance Bancorp, Inc.
----------------------
(Registrant)
/s/ Raymond A. Nielsen 02/13/98 /s/ Paul D. Hagan 02/13/98
- ---------------------- -------- ------------------ --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
23
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands, except per share amount)
<S> <C> <C> <C> <C>
Net Income $ 4,887 $ 3,879 $ 9,628 $ 2,475
----- ----- ----- -----
Weighted average common shares outstanding 9,010 8,316 8,617 8,344
Basic earnings per common share $ 0.54 $ 0.44 $ 1.12 $ 0.27
===== ===== ===== =====
Weighted average common shares outstanding 9,010 8,316 8,617 8,344
Potential common stock due to dilutive
effect of stock options 786 510 792 503
----- ----- ----- -----
Total shares for diluted earnings per share 9,796 8,826 9,409 8,847
Diluted earnings per common share $ 0.50 $ 0.44 $ 1.02 $ 0.27
===== ===== ===== =====
24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary informtion extracted from the Form 10-Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 31206
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 865834
<INVESTMENTS-CARRYING> 249834
<INVESTMENTS-MARKET> 254292
<LOANS> 991077
<ALLOWANCE> 8692
<TOTAL-ASSETS> 2243100
<DEPOSITS> 1602959
<SHORT-TERM> 395201
<LIABILITIES-OTHER> 53047
<LONG-TERM> 0
0
0
<COMMON> 116791
<OTHER-SE> 75102
<TOTAL-LIABILITIES-AND-EQUITY> 2243100
<INTEREST-LOAN> 39072
<INTEREST-INVEST> 36097
<INTEREST-OTHER> 280
<INTEREST-TOTAL> 75449
<INTEREST-DEPOSIT> 31163
<INTEREST-EXPENSE> 42247
<INTEREST-INCOME-NET> 33202
<LOAN-LOSSES> 1200
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 18957
<INCOME-PRETAX> 17000
<INCOME-PRE-EXTRAORDINARY> 17000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9628
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 7.64
<LOANS-NON> 11402
<LOANS-PAST> 350
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5182
<CHARGE-OFFS> 550
<RECOVERIES> 116
<ALLOWANCE-CLOSE> 8692
<ALLOWANCE-DOMESTIC> 8692
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7573
</TABLE>
