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, 1998
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
Incorporation or Organization) Identification No.)
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, 1998 the aggregate market value of the shares of common
stock of the registrant outstanding was $240,542,578 excluding the 498,237
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, 1998, which was $27.75 as reported in
the Wall Street Journal on September 16, 1998. The number of shares of the
registrant's common stock outstanding as of September 15, 1998 was 9,166,438
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 10, 1998 and the Annual Report to
Stockholders for fiscal year 1998 are incorporated herein by reference - Parts
II and III.
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FORM 10-K CROSS REFERENCE INDEX
Page
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PART I ..............................................................................................................3
Item 1. Business...........................................................................................3
General............................................................................................3
Completion of Acquisition of Continental Bank......................................................3
Market Area and Competition........................................................................4
Lending Activities.................................................................................5
Delinquent Loans and Foreclosed Assets.............................................................9
Allowances for Losses on Loans, Investments in Real Estate and Real Estate Owned..................10
Investment Activities.............................................................................11
General ..................................................................................11
Debt and Equity Securities.................................................................12
Mortgage-Backed Securities.................................................................12
Sources of Funds..................................................................................13
Subsidiary Activities.............................................................................14
Personnel.........................................................................................15
FEDERAL, STATE AND LOCAL TAXATION............................................................................15
Federal Taxation..................................................................................15
State And Local Taxation..........................................................................16
REGULATION AND SUPERVISION...................................................................................17
General...........................................................................................17
Federal Savings Institution Regulation............................................................18
Federal Home Loan Bank System.....................................................................23
Federal Reserve System............................................................................24
Holding Company Regulation........................................................................24
Federal Securities Laws...........................................................................25
Item 2. Properties........................................................................................37
Item 3. Legal Proceedings.................................................................................39
Item 4. Submission of Matters to a Vote of Security Holders...............................................39
PART II .............................................................................................................40
Item 5. Market for the Company's Common Equity and Related Stockholder Matters............................40
Item 6. Selected Financial Data...........................................................................40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................40
Item 8. Financial Statements and Supplementary Data.......................................................40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............40
PART III .............................................................................................................41
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 ...................................41
Item 13. Certain Relationships and Related Transactions....................................................41
PART IV .............................................................................................................41
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................41
1. Financial Statements.......................................................................41
2. Financial Statement Schedules..............................................................41
Signatures............................................................................................................43
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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.
In addition to directing, planning and coordinating the business
activities of the Bank, the Company invests primarily in U.S. Government
securities, corporate debt and equity securities and repurchase agreements. In
addition, the Company completed its acquisitions of Bank of Westbury, a Federal
Savings Bank, in August 1995, Sunrise Bancorp Inc., in January 1996 and
Continental Bank ("Continental"), a commercial bank, in October 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, commercial, consumer (primarily home equity
lines of credit, home equity loans, auto and guaranteed student loans),
commercial real estate and construction loans. In the past, the Bank has also
invested in loans secured by cooperative units ("co-op loans") but in recent
years has discontinued its origination activities in this area. 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 Bank also operates five
Money Center check cashing operations which generate additional fee income for
the Bank.
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, 1998, the Company had total assets of $2.5 billion.
Completion of Acquisition of Continental Bank
On October 17, 1997, the Company completed the acquisition of Continental, a
commercial bank with two full service banking offices located in Nassau and
Suffolk counties in Long Island, New York, a commercial lending facility and
five Money Center check cashing facilities in Manhattan. In accordance with the
terms of the merger, Reliance issued 1.10 shares of its common stock for each
outstanding common share of Continental. The cost of the acquisition was
approximately $24.4 million. 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
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the net assets acquired into the Bank, the Bank continued to exceed each of its
regulatory capital requirements.
Market Area and Competition
The Bank has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank's deposit gathering area is primarily
concentrated in the communities surrounding its full service banking offices in
the New York City Borough of Queens and the New York State Counties of Nassau
and Suffolk. The Bank's primary lending area extends beyond its deposit
gathering area to the New York City Boroughs of Brooklyn, Staten Island,
Manhattan and the Bronx and the New York State County of Westchester.
The greater New York metropolitan area has historically benefitted from having a
large number of corporate headquarters and a diversity of financial service
industries. The New York State counties of Nassau and Suffolk have also
continued to benefit from a large and well-developed suburban market, well
educated employment base and a diversity of industrial, service and high
technology businesses. After a prolonged period of decline, which was marked by
layoffs in the financial services and defense industries and corporate
relocations and downsizings, the economy in the greater New York metropolitan
area performed well during fiscal 1998. Durable goods, retail trade and the
service sector are driving economic growth in the suburbs, while financial
services and securities industries are responsible for growth in New York City.
In addition, the pool of skilled labor, access to international markets and the
growing media industry in the area have kept the region one of the most
attractive in the country. The healthy economy has also benefitted the greater
New York metropolitan area office market where the overall and class A office
vacancy rates have significantly declined. This decline in the vacancy rate kept
asking rents for all types of space on the upswing. The improved economic
environment is also evident in the Long Island, New York area, which is
experiencing a rebound in its residential, commercial and industrial real estate
markets not seen in a number of years. The residential real estate market in the
greater New York metropolitan area was also favorably impacted during fiscal
year 1998 by increased demand for housing during the period of low unemployment
and generally low stable interest rates.
During fiscal year 1998, much of the stimulation in the greater New York
metropolitan area commercial real estate market was from purchases made by real
estate investment trusts ("REITs"). Recently, investor confidence in REITs has
eroded which may curtail purchases and adversely affect values of commercial
real estate.
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 commercial banks, savings banks, credit unions, savings and loan
associations and mortgage banking companies. Its most direct competition for
deposits has historically come from savings and loan associations, savings
banks, commercial banks and credit unions. The Bank faces additional competition
for deposits from short-term money market funds and other corporate and
government securities funds, as well as from other financial institutions such
as brokerage firms and insurance companies. Competition may also increase as a
result of the lifting of federal restrictions on the interstate banking
operations for financial institutions and the entrance of non-depository
financial institutions into the industry through the formation and acquisition
of thrift institutions.
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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, 1998,
consisted of a variety of commercial, consumer and other loans, primarily
secured and unsecured commercial, guaranteed student loans, auto and loans on
deposit accounts.
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, 1998, $500.3 million, or 51.1% of the Bank's total loan
portfolio consisted of one- to four-family residential and co-op loans loans, of
which $205.2 million, or 41.0%, 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 and specified lifetime caps. The Bank's ARM loans
typically carry an initial interest rate below the fully-indexed rate for the
loan. However, to recognize the credit risks associated with ARM loans offered
at initial discounts below market interest rates, the Bank generally underwrites
its one-year ARM loans assuming a rate equal to 200 basis points over the
initial discount rate. For ARM loans with longer adjustment periods, and
therefore, less risk due to the longer period for the borrower's's income to
adjust to anticipated higher future payments, the Bank underwrites the loans
using
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the initial rate, which may be discounted. 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, 1998, $295.1 million, or 59.0%,
of the Bank's one- to four-family residential mortgage loan portfolio consisted
of fixed rate 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.
For fiscal 1998, originations of multi-family loans totalled $60.7
million as compared to $115.9 million in fiscal 1997 and $63.8 million in fiscal
1996. The Bank increased its emphasis on originations of 5 year ARM loans with
terms of up to 15 years and amortizations up to 30 years. These ARM loans may
carry an initial interest rate which is less than the fully indexed rate for the
loan. These ARM loans are originated on a point basis and no-point basis.
Presently, the Bank's interest rates on 5 year ARM loans fluctuate based upon a
spread above the weekly average 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.
During fiscal 1998, the Bank originated commercial real estate loans
totalling $1.1 million as compared to $650,000 for fiscal 1997 and $522,000 for
fiscal 1996. 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.
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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, 1998, the Bank's multi-family loans, consisting of 221
loans, totalled $243.1 million, or 24.8% of the Bank's total loan portfolio.
Commercial property loans, consisting of 208 loans, totalled $43.6 million, or
4.5% of the Bank's total loan portfolio. At June 30, 1998, all multi-family
loans were current and performing in accordance with their terms. At June 30,
1998, the Bank had seven commercial real estate loans totalling $2.1 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, 1998, construction loans
totalled $4.9 million or 0.50% of total loans. In addition, as of June 30, 1998,
the Bank has outstanding commitments to fund construction loans in the amount of
$12.7 million, of which $4.9 million has been disbursed.
Commercial Lending. A key management objective is to maintain the
quality of the commercial loan portfolio, substantially all of which was
acquired in the Continental Bank acquisition. This objective is achieved by
maintaining high underwriting standards coupled with regular evaluation of the
creditworthiness of and the designation of lending limits for each borrower. The
portfolio strategies seek to avoid concentrations by industry or loan size in
order to minimize credit exposure and to originate loans in markets with which
it is familiar. At June 30, 1998, the Bank's commercial loans, consisting of 462
loans, totalled $49.9 million, or 5.1% of the Bank's total loan portfolio. Loans
in this category are typically made to small and medium sized businesses and
range between $25,000 and $5 million. The primary source of repayment is from
the borrower's operating profits and cash flows. Based on underwriting
standards, loans may be secured in whole or in part by collateral such as liquid
assets, accounts receivable, equipment, inventory or real property.
Consumer and Other Lending. The Bank currently offers three general
types of consumer loans consisting of: (1) home equity lines of credit, (2) home
equity loans and (3) guaranteed student loans. The Bank offers adjustable rate
home equity lines of credit secured by one- to four-family owner-occupied
properties (including condominiums) which serve as the primary residence of the
borrower. Co-op units do not qualify as security for such loans. The Bank's home
equity line of credit loans include a standard home equity line of credit, which
may be secured only by a first or second mortgage on the underlying property,
and a mini-home equity line of credit, which may be secured by any recorded
mortgage on the
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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. The maximum total debt permitted to
encumber a property varies based upon the loan-to-value ratio. When the loan
balance plus any prior liens is: (1) $400,000 or less, the maximum loan-to-value
ratio is 80%, (2) greater than $400,000 but $500,000 or less, the maximum
loan-to-value ratio is 70%, (3) greater than $500,000 but $650,000 or less, the
maximum loan-to-value ratio is 65%, and (4) greater than $650,000 but $750,000
or less, the maximum loan-to-value ratio is 60%. 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.
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
80%.
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, 1998, the Bank's
guaranteed student loans totalled $15.3 million, or 1.6% of total loans.
Additionally, the Bank offers loans fully secured by its deposit
accounts which, at June 30, 1998, totalled $5.4 million, or 0.55% of total
loans. The Bank offered other consumer loans in the form of home improvement,
auto, overdraft checking and boat loans; however, the Bank currently offers only
auto and overdraft checking loans. At June 30, 1998, such loans totalled $3.6
million or 0.36% 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, Commercial
Loan and Consumer Loan Committees. For all mortgage loans originated by the
Bank, upon receipt of a completed loan application from a prospective borrower,
a credit report is ordered, certain other information is verified and, if
necessary, additional financial information is requested. An appraisal of the
real estate intended to secure the proposed loan is required and is currently
performed by Board approved independent fee appraisers. The Bank requires title
insurance on all mortgage loans, except for certain consumer loans secured by
real estate. Borrowers must also obtain hazard insurance and may be required to
obtain flood insurance prior to closing. Borrowers generally are required to
advance funds on a monthly basis together with each payment of
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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.
As part of the Bank's collection procedures applicable to commercial
loans, telephone contact is initiated and continued until the delinquency is
cured. If payment remains uncollected, a demand for satisfaction is sent by the
45th day. If contact is made with the borrower at any time prior to 90 days
delinquent, the Bank attempts to obtain full payment or work out a repayment
schedule with the borrower to avoid legal action. All loans more than 90 days
delinquent are sent to an attorney for collection.
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, 1998,
1997, and 1996, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totalled $799,000,
$573,000, and $554,000, respectively. These amounts were not included in the
Bank's interest income for the respective periods.
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At June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans delinquent
more than 90 days............................. $ 8,218 $ 14,262 $ 12,277 $ 3,210 $ 2,666
Non-accrual commercial loans delinquent
more than 90 days............................. 567 -- -- -- --
Non-accrual other loans delinquent
more than 90 days.......................... 316 188 352 -- 88
------- -------- -------- -------- -------
Total non-accrual loans........................ 9,101 14,450 12,629 3,210 2,754
Loans 90 days or more delinquent
and still accruing.......................... 201 277 350 461 843
------ ------- ------- ------ ------
Total non-performing loans..................... 9,302 14,727 12,979 3,671 3,597
----- ------ ------ ----- -----
Total foreclosed real estate, net of
related allowance for losses............... 755 450 1,564 1,558 2,911
------- ------- ------ ------ ------
Total non-performing assets.................... $ 10,057 $ 15,177 $ 14,543 $ 5,229 $ 6,508
====== ====== ====== ===== =====
Non-performing loans to total loans............ 0.95% 1.61% 1.58% 1.10% 1.08%
Non-performing assets to total assets.......... 0.40% 0.77% 0.82% 0.56% 0.78%
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At June 30, 1998, 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, 1998, the borrower has
$465,000 outstanding on the building loan. An appraisal dated July 1, 1998,
valued the property at $1.4 million. As of June 30, 1998, 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 inability of the borrower to restructure
the loan, the Bank commenced foreclosure proceedings. Subsequently, the borrower
declared bankruptcy and a trustee was appointed by the bankruptcy court and is
presently operating the property.
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
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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, where reviewing the Bank's loan portfolio, will not request the
Bank to materially increase its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings.
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 Company deploys a large portion of its investable funds into corporate debt
and equity 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 Company'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 Company's investment activity on a monthly
basis. In establishing its investment strategies, the Committee considers the
Bank's business and growth plans, its interest rate 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. 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.
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Debt and Equity Securities
At June 30, 1998, the Bank's debt and equity securities portfolio
classified held-to-maturity totalled $40.2 million. The debt and equity
securities held-to-maturity portfolio consisted of $22.5 million in U.S.
Government agency obligations, $390,000 in municipal obligations and $17.3
million of FHLB stock. At June 30, 1998, the Bank's debt and equity securities
portfolio classified as available-for-sale totalled $110.5 million. The Bank's
debt and equity securities available-for-sale portfolio consisted of $81.2
million in corporate debt securities and $29.3 million in U.S. Government agency
obligations. The Bank's current investment policy does not permit the Bank to
invest in non-investment grade bonds or high-risk mortgage derivatives.
At June 30, 1998, the Company's debt and equity securities
available-for-sale portfolio totalled $24.4 million and consisted of $22.0
million of corporate debt securities and $2.4 million of equity securities. At
June 30, 1998, the Company had money market investments which consisted of $9.5
million in repurchase agreements.
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.
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, 1998, the Bank's portfolio of REMICs
totalled $614.1 million of which $181.3 million were agency issued and $432.8
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, 1998, mortgage-backed securities totalled $1.2 billion, or
47.9% of total assets, of which $249.3 million were classified as
held-to-maturity and $940.3 million were classified as available-
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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, 1998, the mortgage-backed securities portfolio
classified as available-for-sale had an unrealized gain of $7.1 million. The
market value of all mortgage-backed securities totalled approximately $1.2
billion at June 30, 1998.
As of June 30, 1998, $262.8 million, or 22.1%, of the Bank's
mortgage-backed securities portfolio carried adjustable rates repricing
annually. The adjustable rate portfolio had a weighted average interest rate
yield of 7.25% at June 30, 1998.
Sources of Funds
General. Deposits, loans and mortgage-backed securities principal and
interest payments, FHLB-NY advances and reverse repurchase agreements are the
primary sources of the Bank's funds for use in lending, investing and for other
general purposes. The Bank utilizes borrowings as part of its asset/liability
management strategy.
Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank presently offers passbook savings, demand
deposit, NOW, money market, and certificate accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates, pricing of deposits and competition. The Bank's deposits are
primarily obtained from areas surrounding its offices, and the Bank relies
primarily on marketing new products, service and long-standing relationships
with customers to attract and retain these deposits. The Bank does not use
brokers to obtain deposits, nor does it offer a negotiated rate on large dollar
deposits.
When management determines the levels of the Bank's deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings
and the rates charged on other sources of funds. The Bank has maintained a high
level of passbook, demand deposit and NOW accounts ("core deposits"), which has
contributed to its low cost-of-funds. Passbook, demand deposits and NOW accounts
represented 36.9% of total deposits at June 30, 1998 as compared to 37.4% of
total deposits at June 30, 1997.
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, 1998, total advances
from the FHLB-NY were $182.1 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, 1998, borrowings
under reverse repurchase agreements totalled $398.1 million.
The Company has utilized borrowed funds to obtain capital to improve Bank
capital ratios and fund asset growth. On April 29, 1998, Reliance Capital Trust
I, a trust formed under the laws of the State of Delaware (the " Capital
Trust"), issued $50 million of 8.17% capital securities. The Holding Company is
the owner of all the beneficial interests represented by common securities of
the Trust. The Trust exists
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for the sole purpose of issuing the Trust securities (comprised of the capital
securities and the common securities) and investing the proceeds thereof in the
8.17% junior subordinated deferrable interest debentures issued by the Holding
Company on April 23, 1998 which are scheduled to mature on May 1, 2028. Interest
on the capital securities is payable in semiannual installments, commencing on
November 1, 1998. The Trust securities are subject to mandatory redemption (i)
in whole, but not in part upon repayment in full, at the stated maturity of the
junior subordinated debentures at a redemption price equal to the principal
amount of, plus accrued interest on, the junior subordinated debentures,(ii) in
whole, but not in part, at any time prior to May 1, 2008, contemporaneously with
the occurrence and continuation of a special event, defined as a tax event or
regulatory capital event, at a special event redemption price equal to the
greater of 100% of the principal amount of the junior subordinated debentures or
the sum of the present values of the principal amount and premium payable with
respect to an optional redemption of the junior subordinated debentures on the
initial optional repayment date to and including the initial optional prepayment
date, discounted to the prepayment date plus accrued and unpaid interest
thereon, and (iii) in whole or in part, on or after May 1, 2008,
contemporaneously with the optional prepayment by the Corporation of the junior
subordinated debentures at a redemption price equal to the optional prepayment
price. Subject to prior required regulatory approval, the junior subordinated
debentures are redeemable during the 12-month periods beginning on or after May
1, 2008 at 104.085% of the principal amounts outstanding, declining ratably each
year thereafter to 100%, plus accrued and unpaid interest thereon to the date of
redemption. Deferred issuance costs in the amount of $1.0 million, are being
amortized over ten years and are included in Prepaid Expenses and Other Assets
in the Company's Consolidated Statement of Condition as of June 30, 1998.
Subsidiary Activities
The Bank formed a number of subsidiaries in the mid-1980s to enter into
real estate-development joint ventures for the development of properties located
in the Bank's primary lending area, all of which are currently inactive. The
Bank does not currently intend to form any new subsidiaries or use any currently
inactive subsidiaries to enter into new real estate development projects. The
Bank maintains the following active subsidiaries.
RFS Insurance Agency Inc. RFS Insurance was organized by the Bank on
April 15, 1983 and currently offers the sale of non-deposit investment products
(annuities and mutual funds) to Bank customers 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 the
subsidiary is to enhance and strengthen the Bank's capital position. The
Subsidiary is poised to raise capital expeditiously in the event that the Bank
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 the Bank may conduct, the
Subsidiary promotes greater retained earnings for the Bank and thereby
strengthens the Bank's capital position from an operational standpoint as well.
This is so for two reasons: (1) after transferring a portion of the Bank's loan
portfolio to the Subsidiary, the Bank may be better able to isolate and
effectively manage such assets in preparation of going to the capital markets
and (2) the Bank expects to receive favorable tax benefits from the Subsidiary's
continuing operations as a REIT.
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Personnel
As of June 30, 1998, the Bank had 353 full-time employees and 182
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 report their income on a calendar
year basis using the accrual method of accounting and are subject to Federal
income taxation in the same manner as other corporations. 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 Company and the Bank have not been audited by the Internal Revenue
Service during the last five years.
Tax Bad Debt Reserves. Prior to the enactment of the Small Business Job
Protection Act of 1996 (the "1996 Act"), on August 20, 1996, for federal income
tax purposes, thrift institutions such as the Bank, were permitted under Section
593 of the Code ("IRC 593"), to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, within specified limitations,
be deducted in arriving at taxable income. Similar deductions for additions to
the Bank's bad debt reserves were permitted under the New York State Franchise
Tax and the New York City Financial Corporation Tax. Under the 1996 Act, the
Bank, as a "large bank" (one with assets having an adjusted base of more than
$500 million), is unable to make additions to its tax bad debt reserves, is
permitted to deduct bad debts only as they occur and is required to recapture
the excess of the balance of its bad debt reserves (other than the supplemental
reserve) as of December 31, 1995 over the balance of such reserves as of
December 31, 1987 (or over a lesser amount if the Bank's loan portfolio
decreased since December 31, 1987). However, under the 1996 Act, such recapture
requirements were suspended for each of the two successive taxable years
beginning January 1, 1996, in which the Bank originates a minimum amount of
certain residential loans during such years that is not less than the average of
the principal amounts of such loans made by the Bank during its six taxable
years preceding January 1, 1996.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the amount distributed 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, as calculated for federal income tax
purposes, 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 will not constitute nondividend distributions
and, therefore, will not be included in the Bank's income. The amount of
additional taxable income created from a nondividend distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Thus, approximately one and one-half times the nondividend
distribution would be includable in gross income for federal income tax
purposes, assuming a 35% federal corporate income tax rate.
Corporate Alternative Minimum Tax. In addition to the regular income tax,
corporations (including savings and loan associations) generally are subject to
an alternative minimum tax ("AMT") in
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an amount equal to 20% of alternative minimum taxable income ("AMTI") to the
extent the AMT exceeds the corporation's regular tax. AMTI is regular taxable
income as modified by certain adjustments and increased by certain tax
preference items. AMTI includes an amount equal to three-quarters of the excess
of adjusted current earnings over such specially computed AMTI. 90% of AMTI can
be offset by net operating loss carryovers. The AMT is available as a credit
against future regular income tax. The Company does not expect to be subject to
the AMT.
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% 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% of the stock of a
corporation distributing a dividend, 80% of any dividends received may be
deducted.
State And Local Taxation
New York State Taxation. The Bank is subject to New York State
Franchise Tax on net income or one of several alternative bases, whichever
results in the highest tax. The Company and Bank will file a combined tax return
in the same manner as other corporations with some exceptions, including the
Bank's reserve for bad debts as discussed below. New York State passed
legislation that incorporated the former provisions of IRC 593 into New York
State tax law. The impact of this legislation enabled the Bank to defer the
recapture of the New York State tax bad debt reserves that would have otherwise
occurred as a result of the federal amendment to IRC 593. The legislation also
enabled the Bank to continue to utilize the reserve method for computing its bad
debt deduction. The following discussion of the reserve for bad debts is
intended only as a summary and does not purport to be a comprehensive
description of the New York State tax rules applicable to the Bank or the
Company.
Bad Debt Deduction. Federally chartered savings banks, such as the
Bank, which meet certain definition tests primarily relating to their assets and
the nature of their business ("qualifying thrifts") are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. The Bank will be a qualifying thrift only if, among other requirements,
at least 60% of its assets are assets described in Section 1453(h)(1) of the New
York State Tax Law (the "60% Test"). The Bank presently satisfies the 60% Test.
Although there can be no assurance that the Bank will satisfy the 60% Test in
the future, management believes that this level of qualifying assets can be
maintained by the Bank. The Bank's deduction for additions to its bad debt
reserve with respect to qualifying loans may be computed using the experience
method or a percentage equal to 32% of the Bank's taxable income, computed with
certain modifications, without regard to the Bank's actual loss experience, and
reduced by the amount of any addition permitted to the reserve for
non-qualifying loans ("NYS Percentage of Taxable Income Method"). The Bank's
deduction with respect to non-qualifying loans must be computed under the
experience method which is based on the qualifying thrift's actual loss
experience. Under the experience method, the amount of a reasonable addition, in
general, equals the amount necessary to increase the balance of the bad debt
reserve at the close of the taxable year to the greater of (i) the amount that
bears the same ratio to loans outstanding at the close of the taxable year as
the total net bad debts sustained during the current and five preceding taxable
years bears to the sum of the loans outstanding at the close of those six years,
or (ii) the balance of the bad debt reserve at the close of the base year
(assuming that the loans outstanding have not declined since then). The "base
year" for these purposes is the last taxable year beginning before the NYS
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percentage of income bad debt deduction was taken. Any deduction for the
addition to the reserve for non-qualifying loans reduces the taxable addition to
the reserve for qualifying real property loans calculated under the NYS
Percentage of Taxable Income Method. Each year the Bank reviews the most
favorable way to calculate the deduction attributable to an addition to the bad
debt reserve. The amount of the addition to the reserve for losses on qualifying
real property loans under the NYS Percentage of Taxable Income Method cannot
exceed the amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding at the end of the
taxable year. Also, if the qualifying thrift uses the NYS Percentage of Taxable
Income Method, then the qualifying thrift's aggregate addition to its reserve
for losses on qualifying real property loans cannot, when added to the addition
to the reserve for losses on non-qualifying loans, exceed the amount by which
(i) 12% of the amount that the total deposits or withdrawable accounts of
depositors of the qualifying thrift at the close of the taxable year exceeded
(ii) the sum of the qualifying thrift's surplus, undivided profits and reserves
at the beginning of such year.
New York City Taxation. 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. In
this connection, legislation was enacted regarding the use and treatment of tax
bad debt reserves that is substantially similar to the New York State
legislation described above. A significant portion of the Bank's entire net
income for New York City purposes is allocated outside the jurisdiction which
has the effect of significantly reducing the New York City taxable income of the
Bank.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted 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 OTS, as its chartering agency, and the 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 under the Home Owners' Loan Act, as
amended (the "HOLA"), 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.
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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.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDI Act") and the regulations issued to implement those statutes. These laws
and regulations delineate the nature and extent of the activities in which
federal associations may engage. In particular, many types of lending
authorities for federal associations, e.g., commercial, nonresidential real
property and consumer loans, are limited to a specified percentage of the
institution's capital assets.
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, 1998, there were two
borrowers each with aggregate loans totalling $12.0 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 $23.1 million at such date. At June
30, 1998, 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, a savings bank is required to
either 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, 1998, the Bank maintained 89.2% 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.
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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 unsafe or unsound practice. At June 30, 1998,
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 4.0%. Monetary penalties may be imposed
for failure to meet these liquidity requirements. The Bank's average liquidity
for the year ended June 30, 1998 was 8.0% 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, 1998, totalled $329,000.
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 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
19
<PAGE>
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 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.
20
<PAGE>
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% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS (and other federal banking agencies) has revised the risk-based
capital standards to ensure that such standards take account of interest rate
risk. 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 a capital deduction
based on the interest-rate risk component. If the Bank had been subject to an
interest-rate risk component as of June 30, 1998, the Bank would not have been
subject to any deduction from capital as a result of its interest rate risk
position.
21
<PAGE>
At June 30, 1998, 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, 1998.
At June 30, 1998
----------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- - ------- - ------- -
Tangible......... $35,825 1.5 145,337 6.1 $109,512 4.6
Leverage......... $71,650 3.0 145,337 6.1 $73,687 3.1
Risk-based....... $80,724 8.0 154,245 15.3 $73,521 7.3
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 on Deposit Accounts. The FDIC has established a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. Under the risk-based assessment system, the average assessment rate
paid by institutions insured under the SAIF was increased. Under the risk- based
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information as of the reporting
period ending seven months before the assessment period, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC also
assigns an institution to one
22
<PAGE>
of three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial conditions and the risk posed to the deposit insurance funds (which
may include, if applicable, information provided by the institution's state
supervisor). An institution's assessment rate depends on the capital category
and supervisory category to which it is assigned. Under the risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. As a result of the recapitalization of the SAIF in
1996 after the enactment of the Deposit Funds Insurance Act of 1996, the FDIC
reduced the assessment rates for deposit insurance for SAIF-assessable deposits
for fiscal 1998 to a range of 0 to 27 basis points. The assessment rate for the
Company's SAIF-assessable deposits for fiscal 1998 was 0 basis points. In
addition, SAIF-assessable deposits are also subject to assessments for payments
on the bonds issued in the late 1980s by the Financing Corporation (the "FICO"
bonds) to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation. The Company's total expense in fiscal 1998 for the assessment for
deposit insurance and the FICO payments was $921,000, which was a substantial
reduction from the total amount of $1.8 million paid in fiscal 1997.
Thrift Rechartering Legislation. The Funds Act provides that the Bank
Insurance Fund (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 of
Representatives would not affect the federal thrift charter, but would subject
unitary savings and loan holding companies to the same activities restrictions
applicable to multiple savings and loan holding companies existing on or applied
for by March 31, 1998 would be grandfathered. 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, 1998, of $17.3 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.
23
<PAGE>
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, 1998, 1997 and 1996,
dividends from the FHLB to the Bank amounted to $1.2 million, $820,000 and
$725,000, 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 $47.8 million or less (subject to adjustment by the FRB)
the reserve requirement is 3.0%; and for accounts greater than $47.8 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 excess of $47.8 million. The first $4.7 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 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.
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 non-supervisory 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
24
<PAGE>
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 5.0% of the stock of a company engaged in
impermissible activities.
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 or pursuant to the
Company's employee stock benefit plans does not cover the resale of such shares.
Shares purchased or acquired 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. Shares acquired from the Company that are deemed
to be restricted under the definition of that term in Rule 144, must be held for
a period of at least one year before they may be publicly resold. A 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.
25
<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 1998
Annual Report to Stockholders included 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 12 of the Company's 1998 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 13 of the Company's 1998 Annual Report presents the interest
differential under the caption "Rate/Volume Analysis" and is
incorporated herein by reference.
26
<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,
-----------------------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period.................................. $776,402 $690,983 $224,841
Mortgage loans originated:
One- to four-family................................... 38,783 39,370 38,557
Multi-family.......................................... 60,715 115,887 63,840
Construction.......................................... 4,491 6,417 4,159
Commercial real estate................................ 1,066 650 522
------- --------- ---------
Total mortgage loans originated .................... 105,055 162,324 107,078
Mortgage loans purchased (1)............................ 32,656 16,956 426,328
------- ------- -------
Total mortgage loans originated
and purchased .................................... 137,711 179,280 533,406
Transfer of mortgage loans
to real estate owned.................................. (3,491) (820) (1,450)
Principal repayments.................................... (110,300) (85,766) (59,984)
Sales of loans.......................................... (8,429) (7,275) (5,830)
--------- -------- ---------
At end of period................................... $791,893 $776,402 $690,983
======= ======= =======
Commercial loans (gross):
At beginning of period................................ $ -- $ -- $ --
Asset based loans originated.......................... 106,660 -- --
Other commercial loans originated.................... 18,744 -- --
Commercial loans purchased (1)....................... 55,842 -- --
Principal repayments.................................. (131,359) -- --
--------- ---------- ----------
At end of period................................ $49,887 $ -- $ --
====== ========= ==========
Other loans (gross):
At beginning of period................................ $138,115 $130,410 $108,653
Other loans originated................................ 46,726 47,718 35,816
Other loans purchased (1)............................. 706 -- 23,489
Principal repayments.................................. (48,335) (40,013) (37,548)
-------- -------- ---------
At end of period................................ $137,212 $138,115 $130,410
======= ======= =======
(1) For fiscal year 1998, mortgage loans, commercial loans and consumer loans
include $26.1 million, $55.8 million and $706,000, respectively, of loans
acquired from the Continental acquisition.
27
<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, 1998. 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 $290.0
million, $125.8 million and $97.5 million, respectively, for the years ended
June 30, 1998, 1997 and 1996.
At June 30, 1998
--------------------------------------------------------------------------
Mortgage Loans Commercial
---------------------------------------------------- ------------------
Comm-
ercial Other
One- to Co- Multi- Real Const- Asset Comm-
four-family operative family Estate ruction Based ercial
----------- --------- ------ ------ ------- ----- ------
Amounts due: (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Within one year................. $154,360 $6,818 $ 473 $19,914 $4,879 $ 21,339 $22,655
After one year:
One to three years........... 17,013 108 56,568 11,278 -- -- 1,938
Three to five years.......... 25,600 -- 93,837 1,966 -- -- 1,597
Five to ten years............ 124,960 118 75,122 9,183 -- -- 2,083
Ten to twenty years.......... 135,080 202 8,400 1,283 -- -- 275
Over twenty years............ 35,791 270 8,670 -- -- -- --
------- ----- ------ ------- ------ ------- -------
Total due after one year........ 338,444 698 242,597 23,710 -- -- 5,893
------- ----- ------- ------ ------ ------- -----
Total amounts due............... 492,804 7,516 243,070 43,624 4,879 21,339 28,548
======= ===== ======= ====== ===== ====== ======
At June 30, 1998
-------------------------------------------
Consumer and Other Loans
------------------------------
Home
Equity Home
Lines of Equity Other Total
Credit Loans Loans Receivable
------ ----- ----- ----------
(In thousands)
Amounts due:
<S> <C> <C> <C> <C>
Within one year................. $93,862 $231 $16,863 $341,394
After one year:
One to three years........... -- 1,665 4,681 93,251
Three to five years.......... -- 5,756 2,390 131,146
Five to ten years............ -- 8,359 332 220,157
Ten to twenty years.......... -- 3,039 34 148,313
Over twenty years............ -- -- -- 44,731
------- ------- ------- ------
Total due after one year........ -- 18,819 7,437 637,598
------- ------ ----- -------
Total amounts due............... 93,862 19,050 24,300 978,992
====== ====== ====== =======
Discounts, premiums and
deferred loan fees, net.... (254)
Allowance for loan losses......... (8,941)
-------
Loans receivable, net........ $969,797
=======
The following table sets forth, at June 30, 1998, the dollar amount of all fixed
rate loans contractually due after June 30, 1999, and adjustable rate loans
repricing after June 30, 1999.
Due After June 30, 1999
------------------------------------
Fixed Adjustable Total
----- ---------- -----
Mortgage loans: (In thousands)
One- to four-family............ $293,834 $44,610 $338,444
Co-operative................... 594 104 698
Multi-family................... 50,676 191,921 242,597
Commercial real estate......... 14,622 9,088 23,710
Commercial loans............... 5,893 -- 5,893
Consumer and other loans....... 26,256 -- 26,256
------ -- ------
Total loans....................... $391,875 $245,723 $637,598
======= ======= =======
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<PAGE>
C. Summary of Allowance for Losses
The following table sets forth the Bank's allowances for loan and real
estate owned losses at the dates indicated.
Year Ended June 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period................... $5,182 $4,495 $1,729 $1,417 $1,344
Charge-offs:
One- to four-family........................... (696) (184) (67) (54) (241)
Co-op......................................... -- -- (76) (28) (74)
Commercial real estate........................ -- (107) -- -- --
Commercial.................................... (19) -- -- -- --
Consumer and other loans...................... (58) (15) (122) (31) (79)
------ -------- ------- -------- --------
Total charge-offs.......................... (773) (306) (265) (113) (394)
Recoveries:
Mortgage loans................................ 101 12 35 17 14
Commercial.................................... 21 -- -- -- --
Consumer and other loans...................... 15 31 54 8 60
------ ------- ------- -------- --------
Total recoveries........................... 137 43 89 25 74
Allowances of acquired institutions.............. 2,745 -- 2,217 -- --
Provision for loan losses........................ 1,650 950 725 400 393
----- ------- ------ ------- -------
Balance at end of the period..................... $8,941 $5,182 $4,495 $1,729 $1,417
===== ===== ===== ===== =====
Ratio of net charge-offs during the period
to average loans outstanding during
the period.................................... 0.07% 0.03% 0.03% 0.03% 0.09%
Ratio of allowance for loan losses to total
loans at the end of the period................ 0.91% 0.57% 0.55% 0.52% 0.43%
Ratio of allowance for loan losses to non-
performing loans at the end of the period..... 96.12% 35.18% 34.63% 47.10% 39.38%
Allowance for losses on real estate owned:
Balance at beginning of period................... $334 $768 $589 $632 $2,288
Charge-offs...................................... (304) (634) (384) (103) (2,740)
Recoveries....................................... -- -- -- -- 11
Allowances of acquired institutions.............. -- -- 188 -- --
Provision for losses............................. 93 200 375 60 1,073
---- ---- ---- ---- -----
Balance at the end of the period................. $123 $334 $768 $589 $632
==== === === === ===
29
<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.
At June 30,
-------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ------------------------
% 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)............. $3,457 51.10% $3,327 61.37% $3,336 70.46%
Commercial real estate............. 340 4.46 308 2.56 158 3.30
Multi-family....................... 851 24.83 666 20.81 278 9.69
Construction....................... 29 0.50 89 0.16 47 0.67
Commercial loans................... 3,390 5.10 -- -- -- --
Consumer and other loans........... 874 14.01 792 15.10 676 15.88
------ ------ ------ ------- ----- ------
Total allowances.............. $8,941 100.00% $5,182 100.00% $4,495 100.00%
===== ====== ===== ====== ===== ======
At June 30,
-------------------------------------------------
1995 1994
--------------------- -----------------------
% 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)............. $1,249 60.84% $1,073 65.73%
Commercial real estate............. -- 0.68 -- 0.75
Multi-family....................... 74 5.64 -- 2.71
Construction....................... -- 0.22 -- 0.60
Commercial loans................... -- -- -- --
Consumer and other loans........... 406 32.62 344 30.21
----- ------- ----- ------
Total allowances.............. $1,729 100.00% $1,417 100.00%
===== ====== ===== ======
(1) Includes allocations for co-op loans.
30
<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.
June 30,
-------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- --------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
Mortgage loans: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family....................... $492,804 50.33% $552,577 60.42% $569,031 69.28%
Co-op..................................... 7,516 0.77 8,647 0.95 9,687 1.18
Multi-family.............................. 243,070 24.83 190,293 20.81 79,571 9.69
Commercial real estate.................... 43,624 4.46 23,445 2.56 27,134 3.30
Construction.............................. 4,879 0.50 1,440 0.16 5,560 0.67
-------- ----- -------- ----- -------- -----
Total mortgage loans.................. 791,893 80.89 776,402 84.90 690,983 84.12
------- ----- ------- ----- ------- -----
Commercial loans:
Asset based loans......................... 21,339 2.18 -- -- -- --
Other commercial loans.................... 28,548 2.92 -- -- -- --
------ ----- -------- ---- -------- ----
Total commercial loans................ 49,887 5.10 -- -- -- --
------ ----- -------- ---- -------- ----
Consumer and other loans:
Home equity lines of credit............... 93,862 9.59 91,782 10.04 81,205 9.89
Guaranteed student loans.................. 15,262 1.56 17,006 1.86 18,754 2.28
Home equity loans......................... 19,050 1.95 19,505 2.13 16,747 2.04
Loans on deposit accounts................. 5,416 0.55 5,514 0.60 5,782 0.70
Other loans............................... 3,622 0.36 4,308 0.47 7,922 0.97
-------- ----- ------- ----- -------- -----
Total consumer and other loans....... 137,212 14.01 138,115 15.10 130,410 15.88
------- ----- ------- ----- ------- -----
Total loans............................... 978,992 100.0% 914,517 100.0% 821,393 100.00%
===== ===== ======
Discounts, premiums and
deferred loan fees, net.................. (254) (14) 848
Allowance for loan losses................. (8,941) (5,182) (4,495)
-------- --------- ---------
Total loans, net.......................... $969,797 $909,321 $817,746
======= ======= =======
June 30,
--------------------------------------------
1995 1994
------------------- ------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
Mortgage loans: (Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family....................... $194,290 58.26% $ 208,550 62.85%
Co-op..................................... 8,774 2.63 9,567 2.88
Multi-family.............................. 18,774 5.63 8,991 2.71
Commercial real estate.................... 2,258 0.68 2,504 0.75
Construction.............................. 745 0.22 2,003 0.60
------- ----- ------- -----
Total mortgage loans.................. 224,841 67.42 231,615 69.79
------- ----- ------- -----
Commercial loans:
Asset based loans......................... -- -- -- --
Other commercial loans.................... -- -- -- --
------- ----- ------ ----
Total commercial loans................ -- -- -- --
------- ----- ------ ----
Consumer and other loans:
Home equity lines of credit............... 70,954 21.28 61,338 18.48
Guaranteed student loans.................. 20,529 6.16 22,924 6.91
Home equity loans......................... 15,774 4.73 14,334 4.32
Loans on deposit accounts................. 980 0.29 982 0.30
Other loans............................... 416 0.12 672 0.20
-------- ----- --------- -----
Total consumer and other loans....... 108,653 32.58 100,250 30.21
------- ----- ------- -----
Total loans............................... 333,494 100.00% 331,865 100.00%
====== ======
Discounts, premiums and
deferred loan fees, net.................. 315 272
Allowance for loan losses................. (1,729) (1,417)
-------- ---------
Total loans, net.......................... $332,080 $330,720
======= =======
31
<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:
At June 30,
------------------------------------------------------------------------
1998 1997 1996
------------------- ---------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Money Market Investments
Federal funds sold and
repurchase agreements.......................... $9,500 $9,500 $1,100 $1,100 $10,450 $10,450
===== ===== ===== ===== ====== ======
Debt and Equity Securities
Held-to-Maturity:
United States Agency Obligations................ $22,493 $22,786 $29,952 $30,042 $34,950 $34,612
Obligation of New York State.................... 390 417 391 427 391 435
FHLB stock...................................... 17,306 17,306 15,683 15,683 12,989 12,989
------- ------- ------- ------- ------ ------
Total debt and equity securities
held-to-maturity.......................... $40,189 $40,509 $46,026 $46,152 $48,330 $48,036
====== ====== ====== ====== ====== ======
Available-for-Sale:
United States Agency Obligations............... $29,031 $29,290 $22,036 $22,080 $10,319 $10,227
Corporate Obligations.......................... 103,070 103,167 -- -- -- --
United States Treasury Bills................... -- -- 4,785 4,812 -- --
United States Treasury Notes................... -- -- -- -- 2,992 2,983
Marketable equity securities................... 2,419 2,450 8 17 42 61
-------- ------- --------- -------- -------- --------
Total debt and equity securities
available-for-sale........................ $134,520 $134,907 $26,829 $26,909 $13,353 $13,271
======= ======= ====== ====== ====== ======
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA.......................................... $78,106 $80,232 $106,900 $109,978 $125,195 $125,700
FHLMC......................................... 10,304 10,571 12,963 13,139 14,967 15,005
FNMA.......................................... 33,949 34,908 39,493 39,991 44,330 44,290
REMICs:
Agency Issuance........................ 53,021 52,799 -- -- -- --
Private Issuance....................... 73,879 73,822 -- -- -- --
------ ------ ---------- --------- ----------- ----------
Total mortgage-backed securities
held-to-maturity......................... $249,259 $252,332 $159,356 $163,108 $184,492 $184,995
======= ======= ======= ======= ======= =======
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA.......................................... $187,562 $190,247 $233,572 $237,754 $170,142 $169,753
FHLMC......................................... 118,982 120,677 222,961 221,756 255,498 249,598
FNMA.......................................... 140,597 142,183 131,066 131,085 172,863 169,944
REMICs:
Agency Issuance........................ 128,113 128,272 20,806 20,552 2,503 2,445
Private Issuance....................... 358,033 358,968 110,481 110,672 -- --
------- ------- ------- ------- --------- -------
Total mortgage-backed securities
available-for-sale....................... $933,287 $940,347 $718,886 $721,819 $601,006 $591,740
======= ======= ======= ======= ======= =======
32
<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 repurchase
agreement, debt and equity securities and mortgage-backed securities at June 30,
1998. 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, 1998.
At June 30, 1998
----------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
---------------------- -------------------- -------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Money Market Investments
<S> <C> <C> <C> <C>
Repurchase agreement................................. $9,500 5.80% $ -- --% $ -- --%
===== ==== ==== ==== ==== ====
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations.......... $2,493 5.53% $ -- --% $20,000 7.47%
Obligation of New York State......................... -- 390 7.89 -- --
FHLB stock........................................... -- -- -- -- -- --
------- ------ ----- ------- -------- ------
Total debt and equity securities held-to-maturity $2,493 5.53% $390 7.89% $20,000 7.47%
===== ==== === ==== ====== ====
Available-for-Sale:
United States Government Agency Obligations.......... $5,892 5.41% $9,995 6.67% $13,144 7.43%
Corporate Bonds...................................... -- -- 8,471 9.93 -- --
Marketable Equity Securities......................... -- -- -- -- -- --
------- ------- ------- ------ -------- ------
Total debt and equity securities available-for-sale $5,892 5.41% $18,466 8.16% $13,144 7.43%
===== ==== ====== ==== ====== ====
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA................................................. $ -- --% $ -- --% $2,364 6.50%
FHLMC................................................ -- -- -- -- 1,262 8.45
FNMA................................................. -- -- -- -- 14,604 7.33
REMICS:
Agency Issuance .................................. -- -- -- -- -- --
Private Issuance.................................. -- -- -- -- -- --
---- ---- ---- ---- -------- -----
Total mortgage-backed securities held-to-maturity $ -- --% $ -- --% $18,230 7.30%
==== ==== ==== ==== ====== ====
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA................................................. $ -- --% $133 7.42% $4,981 8.01%
FHLMC................................................ 5,106 5.55 9,732 7.19 7,544 7.23
FNMA................................................. -- -- 23,525 6.35 4,439 7.21
REMICS:
Agency Issuance.................................... -- -- -- -- -- --
Private Issuance................................... -- -- -- -- -- --
------ ----- ------- ------ --------- ------
Total mortgage-backed securities available-for-sale $5,106 5.55% $33,390 6.60% $16,964 7.46%
===== ==== ====== ==== ====== ====
At June 30, 1998
-------------------------------------------------------------
More Than Ten Years Total Securities
--------------------- --------------------------------------
Annualized Annualized
Weighted Average Approx. Weighted
Amortized Average Life Amortized Market Average
Cost Yield (in years) Cost Value Yield
------ ------- -------- ------- ------ ------
(Dollars in thousands)
Money Market Investments
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreement................................. $ -- --% -- $9,500 $9,500 5.80%
==== ==== ==== ===== ===== ====
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations.......... $ -- --% 7.2 $22,493 $22,786 7.25%
Obligation of New York State......................... -- -- 2.9 390 417 7.89
FHLB stock........................................... 17,306 6.50 -- 17,306 17,306 6.50
------ ---- ---- ------ ------ ----
Total debt and equity securities held-to-maturity $17,306 6.50% 7.1 $40,189 $40,509 6.94%
====== ==== === ====== ====== ====
Available-for-Sale:
United States Government Agency Obligations.......... $ -- --% 5.1 $29,031 $29,290 6.76%
Corporate Bonds...................................... 94,599 6.68 27.3 103,070 103,167 6.94
Marketable Equity Securities......................... 2,419 2.29 -- 2,419 2,450 2.29
------ ---- ---- ------- -------- ----
Total debt and equity securities available-for-sale $97,018 6.57% 22.5 $134,520 $134,907 6.82%
====== ==== ==== ======= ======= ====
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA................................................. $75,742 7.14% 3.0 $78,106 $80,232 7.12%
FHLMC................................................ 9,042 7.09 3.3 10,304 10,571 7.25
FNMA................................................. 19,345 7.05 3.8 33,949 34,908 7.17
REMICS:
Agency Issuance .................................. 53,021 6.62 3.5 53,021 52,799 6.62
Private Issuance.................................. 73,879 6.95 2.9 73,879 73,822 6.95
------- ---- --- ------- ------- ----
Total mortgage-backed securities held-to-maturity $231,029 6.95% 3.2 $249,259 $252,332 6.98%
======= ==== === ======= ======= ====
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA................................................. $182,448 7.58% 3.2 $187,562 $190,247 7.59%
FHLMC................................................ 96,600 7.51 3.9 118,982 120,677 7.38
FNMA................................................. 112,633 7.34 3.5 140,597 142,183 7.17
REMICS:
Agency Issuance.................................... 128,113 6.74 3.4 128,113 128,272 6.74
Private Issuance................................... 358,033 6.98 3.1 358,033 358,968 6.98
------- ---- --- ------- ------- ----
Total mortgage-backed securities available-for-sale $877,827 7.17% 3.3 $933,287 $940,347 7.15%
======= ==== === ======= ======= ====
33
<PAGE>
G. Deposit Activities
The following table presents the deposit activity of the Bank for the
periods indicated.
Years Ended June 30,
----------------------------------------------
1998 1997 1996
------------ ------------- ------------
(In thousands)
<S> <C> <C> <C>
Opening balance............................................... $ 1,436,037 $ 1,345,626 $ 670,317
Bank of Westbury deposits assumed............................. -- -- 151,992
Sunrise Bancorp, Inc. deposits assumed........................ -- -- 479,213
Continental Bank deposits assumed............................. 137,011 -- --
(Withdrawals) in Excess of deposits........................... (8,182) 36,272 1,679
Interest credited on deposits................................. 63,432 54,139 42,425
-------- ---------- ----------
Ending balance................................................ $ 1,628,298 $ 1,436,037 $ 1,345,626
========= ========= =========
Net increase in deposits...................................... $ 192,261 $ 90,411 $ 675,309
======= ====== =======
Percentage increase........................................... 13.4% 6.7% 100.7%
At June 30, 1998, the Bank has outstanding $78.1 million in
certificates of deposit accounts in amounts of $100,000 or more, maturing as
follows:
Weighted
Amount Average Rate
------ ------------
Maturity Period: (In thousands)
<S> <C> <C>
Three months or less.......................................... $21,617 5.26%
Over three through six months................................. 11,597 5.41
Over six through 12 months.................................... 31,945 5.73
Over 12 months................................................ 12,893 6.07
------
Total................................................... $78,052 5.61
======
34
<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.
Year ended June 30,
-----------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Average of Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ------ -------- -------- ------- --------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts................... $435,844 28.06% 2.40% $441,921 32.01% 2.47% $353,617 33.43% 2.50%
Demand Deposits and
NOW accounts..................... 140,977 9.08 0.89 102,119 7.39 1.10 58,576 5.54 1.95
------- ----- ------- ----- ------ -----
Total passbook and Demand
Deposits and NOW accounts.......... 576,821 37.14 2.03 544,040 39.40 2.21 412,193 38.97 2.42
------- ----- ------- ----- ------- -----
Money market accounts............... 93,715 6.03 2.40 99,536 7.21 2.48 97,975 9.26 2.54
------- ----- ------- ----- ------- -----
Certificate accounts:
31 days....................... -- -- -- 38 0.00 2.50 70 0.01 2.50
91 days....................... 31,767 2.05 4.73 34,775 2.52 4.82 23,655 2.24 4.79
4 months..................... 795 0.05 4.20 880 0.06 4.28 447 0.04 4.31
6 months..................... 223,876 14.41 5.34 126,700 9.18 5.19 78,709 7.44 5.08
9 months..................... 15,134 0.97 5.10 65,202 4.72 5.15 55,401 5.24 5.49
12 months...................... 196,139 12.63 5.47 144,536 10.47 5.12 145,466 13.76 5.07
15 months...................... 15,128 0.97 4.88 44,691 3.24 5.32 60,638 5.73 6.22
18 months...................... 37,022 2.38 5.30 59,993 4.35 5.45 79,042 7.47 6.14
24 months...................... 233,293 15.02 6.04 129,499 9.38 6.08 10,655 1.01 5.75
30 months...................... 10,657 0.69 5.50 12,915 0.94 5.52 11,990 1.13 5.16
36 months...................... 7,578 0.49 5.55 8,857 0.64 5.38 11,576 1.09 5.09
42 months...................... 2,431 0.16 5.50 2,784 0.20 5.36 2,962 0.28 5.34
48 months...................... 13,090 0.84 5.74 16,507 1.20 5.50 20,553 1.94 5.42
60 months...................... 82,156 5.29 6.15 87,253 6.32 6.15 43,425 4.11 6.28
Other certificates.................. 13,709 0.88 5.54 2,388 0.17 4.87 2,973 0.28 5.28
-------- ----- --------- ------ --------- -----
Total certificates.................. 882,775 56.83 5.60 737,018 53.39 5.47 547,562 51.77 5.48
-------- ----- -------- ----- -------- -----
Total deposits...................... $1,553,311 100.00% 4.08 $1,380,594 100.00% 3.95 $1,057,730 100.00% 4.02
========= ====== ========= ===== ========= ======
35
<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, 1998, 1997 and 1996 and the remaining periods to maturity of
certificate deposit accounts outstanding at June 30, 1998.
Period to maturity from
June 30, 1998 June 30,
---------------------------------------------- ----------------------------------
One to Two to Over
Within Two Three Three
One Year Years Years Years 1998 1997 1996
-------- ----- ----- ----- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit accounts:
2.99% or less................ $363 $292 $96 $1,308 $2,059 $1,341 $1,410
3.00% to 3.99%............... -- -- -- -- -- -- 2,388
4.00% to 4.99%............... 171,878 3 -- -- 171,881 65,449 166,690
5.00% to 5.99%............... 439,067 44,497 14,240 15,613 513,417 508,266 362,920
6.00% to 6.99%............... 186,211 37,819 15,039 7,674 246,743 230,989 135,820
7.00% to 7.99%............... -- 73 32 6 111 341 5,239
8.00% to 8.99%............... 202 6 -- -- 208 228 235
9.00% and greater............ 139 -- -- -- 139 136 134
------- ------ ------ ------ ------- ------- -------
Total........................ $797,860 $82,690 $29,407 $24,601 $934,558 $806,750 $674,836
======= ====== ====== ====== ======= ======= =======
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:
At or For the
Year Ended June 30,
---------------------------------------
1998 1997 1996
------- ------- -------
FHLB-NY advances: (In thousands)
<S> <C> <C> <C>
Average balance outstanding.......................................... $84,920 $22,519 $29,882
Maximum amount outstanding at any
month-end during the period..................................... 182,136 43,000 71,218
Balance outstanding at end of period................................ 182,136 40,000 3,000
Weighted-average interest rate during the period.................... 5.58% 5.61% 7.29%
Weighted-average interest rate at end of period..................... 5.49% 5.58% 5.98%
Reverse repurchase agreements:
Average balance outstanding.......................................... $309,618 $288,845 $150,173
Maximum amount outstanding at any
month-end during the period..................................... 398,070 326,391 279,678
Balance outstanding at end of period................................ 398,070 311,913 263,160
Weighted-average interest rate during the period.................... 5.79% 5.63% 5.58%
Weighted-average interest rate at end of period..................... 5.64% 5.78% 5.41%
Company Obligated Mandatorily Redeemable Capital Securities:
Average balance outstanding.......................................... $8,876 $ -- $ --
Maximum amount outstanding at any
month-end during the period...................................... 50,000 -- --
Balance outstanding at end of period................................ 50,000 -- --
Weighted-average interest rate during the period.................... 8.17% --% --%
Weighted-average interest rate at end of period..................... 8.17% --% --%
Total borrowings:
Average balance outstanding.......................................... $403,414 $311,364 $180,055
Maximum amount outstanding at any
month-end during the period..................................... 630,206 351,913 282,678
Balance outstanding at end of period................................ 630,206 351,913 266,160
Weighted-average interest rate during the period.................... 5.80% 5.62% 5.87%
Weighted-average interest rate at end of period..................... 5.80% 5.76% 5.42%
36
<PAGE>
Item 2. Properties
The Bank conducts its business through its administrative office and 30
full-service branch offices. Loan originations are processed at the
administrative office.
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, 1998
------------ ------- ---------- ------------- --------------
(In thousands)
Administrative Office:
585 Stewart Avenue
<S> <C> <C> <C> <C>
Garden City, NY 11530............................. Leased 1977 2002 $ 36
Banking Offices:
300 Garden City Plaza
Garden City, NY 11530
(Home Office)...................................... Leased 1979 2004 2
118 Seventh Street
Garden City, NY 11530............................. Leased 1997 2008 3
983 Willis Avenue
Albertson, NY 11507............................... Owned 1965 -- 575
422 Hillside Avenue
Williston Park, NY 11596.......................... Leased 1972 2017 249
380 Hillside Avenue(2)
Williston Park, NY 11596.......................... Owned 1964 -- 203
570 Stewart Avenue
Bethpage, NY 11714................................ Leased 1963 2008 30
341 Post Avenue
Westbury, NY 11590................................ Owned 1995 -- 591
2530 Stewart Avenue
Westbury, NY 11590................................ Owned 1995 -- 757
405 Jerusalem Avenue
Hicksville, NY 11801.............................. Leased 1995 2005 6
2843 Jerusalem Avenue
North Bellmore, NY 11710.......................... Leased 1995 2012 31
172 New Hyde Park Road
Franklin Square, NY 11010......................... Leased 1995 2020 28
215 Glen Cove Road
Carle Place, NY 11514............................. Leased 1995 1998 --
37
<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, 1998
------------ ------- ---------- ------------- --------------
(In thousands)
(Continued)
312 Conklin Street
Farmingdale, NY 11735............................. Owned 1996 -- $ 795
195 Merritt Road
South Farmingdale, NY 11735...................... Owned 1996 -- 1,330
1074 Old Country Road
Plainview, NY 11803............................... Owned 1996 -- 560
300 S. Wellwood Avenue
Lindenhurst, NY 11757............................. Owned 1996 -- 663
1134 Deer Park Avenue
North Babylon, NY 11703........................... Leased 1996 1998 18
1383 Deer Park Avenue
North Babylon, NY 11703........................... Owned 1997 -- 1,081
2087 Deer Park Avenue
Deer Park, NY 11729............................... Owned 1996 -- 567
2080 Deer Park Avenue(2)
Deer Park, NY 11729................................ Owned 1996 -- 262
434 Union Boulevard
West Islip, NY 11795.............................. Leased 1996 2004 1
340 Washington Avenue
North Brentwood, NY 11717......................... Owned/Leased(6) 1996 2014 249
742 Route 25 A
Kings Park, NY 11754.............................. Leased 1996 2002 10
250 Smithtown Boulevard
Nesconset, NY 11767............................... Owned 1996 -- 491
245 Lake Avenue
St. James, NY 11780............................... Owned 1996 -- 499
335 Main Street
Farmingdale, NY 11735.............................. Leased 1996 2000 12
375 Fulton Avenue
Farmingdale, NY 11735.............................. Leased 1996 2002 --
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, 1998
------------ ------- ---------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
(Continued)
233-15 Hillside Avenue
Queens Village, NY 11427.......................... Owned 1961 -- $ 375
19-01 Utopia Parkway
Whitestone, NY 11357.............................. Leased(4) 1976 2026 --
32-02 Francis Lewis Blvd
Flushing, NY 11358................................ Owned 1957 -- 333
69-09 164th Street
Flushing, NY 11365................................ Owned 1967 -- 734
204-12 Hillside Avenue(3)
Hollis, NY 11423.................................. Owned/Leased 1954 2003 34
162-04 Jamaica Avenue
Jamaica, NY 11432................................. Leased(5) 1989 2001 408
216-26 Jamaica Avenue
Queens Village, NY 11428.......................... Owned 1939 -- 108
-------
Total.................................... $ 11,041
======
</TABLE>
- -------------------
(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
39
<PAGE>
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 16, 1998, the Company had 1,100
stockholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
Information regarding the Company's common stock and its price for the 1998
fiscal year appears on page 57 of the 1998 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.
The Rights dividend distribution was made 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 5 of the 1998
Annual Report under the caption "Selected Consolidated Financial and Other Data
of the Company" 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 7 through 21 of the 1998
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 /Market Risk and 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 22 through 52 of the 1998 Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
40
<PAGE>
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 9 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on November 10, 1998 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 pages 14 and 15 of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on November 10, 1998
and is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
appears on page 3 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 10, 1998 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 10, 1998 under the caption "Information with
Respect to the Nominees, Continuing Directors and Named Executive Officers" and
is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions
appears on page 19 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 10, 1998 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, 1998 and are
incorporated by this reference:
o Consolidated Statements of Condition at June 30, 1998 and 1997
o Consolidated Statements of Income for each of the years in the three
year period ended June 30, 1998
o Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three year period ended June 30, 1998
o Consolidated Statements of Cash Flows for each of the years in the
three year period ended June 30, 1998
o Notes to Consolidated Financial Statements
o Independent Auditors' Report
o Selected Consolidated Quarterly Financial Data (Unaudited) for
each of the years in the two year period ended June 30, 1998.
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.
41
<PAGE>
(b) Reports on Form 8-K filed during the last quarter of 1998
1) The Company filed an 8-K on April 16, 1998, and announced its third
quarter fiscal year 1998 results. For the quarter and nine month
ended March 31, 1998, the Company reported net income of $4.7 million
and $14.3 million, respectively. As of March 31, 1998, total assets
were $2.2 billion, deposits were $1.6 billion and total stockholders'
equity was $193.8 million.
(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 Reliance Bancorp, Inc. By-Laws (1)
10.1(a) Reliance Federal Savings Bank Recognition and Retention Plan for
Officers and Employees (2)
10.1(b) Amended and Restated Reliance Federal Savings Bank 1994
Recognition and Retention Plans for Outside Directors (filed
herewith)
10.2 Reliance Bancorp, Inc. 1994 Incentive Stock Option Plan (2)
10.3 Amended and Restated Reliance Bancorp, Inc. 1994 Stock Option Plan
for Outside Directors (filed herewith)
10.4(a) Form of Reliance Federal Savings Bank Employee Stock Ownership
Plan (1)
10.4(b) Form of Reliance Federal Savings Bank Employee Stock Ownership
Trust Agreement (1)
10.5 Form of [Three/Two Year] Employment Agreement between Reliance
Federal Savings Bank and Certain Officers (1)
10.6 Form of [Three/Two Year] Employment Agreement between Reliance
Bancorp, Inc. and Certain Executive Officers (1)
10.7 Form of Reliance Federal Savings Bank Change-in-Control Agreement
10.8 Form of Reliance Bancorp, Inc. Change-in-Control Agreement
10.9 Form of Reliance Federal Savings Bank Severance Compensation
Plan (1)
10.10 Form of Reliance Federal Savings Bank Supplemental Executive
Retirement Plan (1)
10.11 Draft 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. Five Year Employment Agreement (3)
10.14 Reliance Bancorp, Inc. 1996 Incentive Stock Option Plan ,
Amended and Restated as of February 19, 1997 (filed herewith)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1998 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 10, 1998 (5)
99.1 Stockholder Protection Rights Agreement, dated as of September
18, 1996 (6)
- ----------------------
(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, filed on October 7, 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, filed on October 11, 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.
42
<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 16, 1998
---------------------- ------------------
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 16, 1998
- ---------------------------- ------------------
Raymond A. Nielsen Chief Executive Officer
/s/ Paul D. Hagan Chief Financial Officer September 16, 1998
- ---------------------------- ------------------
Paul D. Hagan
/s/ Raymond L. Nielsen Chairman of the Board and September 16, 1998
- ---------------------------- ------------------
Raymond L. Nielsen former Chief Executive Officer
/s/ Thomas G. Davis, Jr. Director September 16, 1998
- ---------------------------- ------------------
Thomas G. Davis, Jr.
/s/ Conrad J. Gunther, Jr. Director September 16, 1998
- ---------------------------- ------------------
Conrad J. Gunther, Jr.
/s/ Douglas G. LaPasta Director September 16, 1998
- ---------------------------- ------------------
Douglas G. LaPasta
/s/ Donald LaPasta Director September 16, 1998
- ---------------------------- ------------------
Donald LaPasta
/s/ Peter F. Neumann Director September 16, 1998
- ---------------------------- ------------------
Peter F. Neumann
/s/ J. William Newby Director September 16, 1998
- ---------------------------- ------------------
J. William Newby
43
<TABLE>
<CAPTION>
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended June 30,
-----------------------
1998 1997
---- ----
(In thousands, except
per share amount)
<S> <C> <C>
Net Income...................................................... $ 18,729 $ 10,936
====== ======
Weighted average common shares outstanding...................... 8,890 8,299
Basic earnings per common share................................. $ 2.11 $ 1.32
==== ====
Weighted average common shares outstanding...................... 8,890 8,299
Dilutive shares using average market value for
the period when utilizing the treasury stock
method regarding stock options.............................. 535 425
------ ------
Total shares for diluted earnings per share..................... 9,425 8,724
===== =====
Diluted earnings per common and
common share equivalents.................................... $ 1.99 $ 1.25
==== ====
44
</TABLE>
EXHIBIT 10.1(b)
AMENDED AND RESTATED
RELIANCE FEDERAL SAVINGS BANK
1994 RECOGNITION AND RETENTION PLAN
FOR OUTSIDE DIRECTORS
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.01 Reliance Federal Savings Bank hereby establishes the Recognition
and Retention Plan (the "Plan") upon the terms and conditions hereinafter stated
in this Recognition and Retention Plan.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to recognize and retain Outside
Directors of experience and ability by providing such persons with a proprietary
interest in the Company as compensation for their contributions to the Bank and
its Affiliates and as an incentive to make such contributions and to promote the
Bank's growth and profitability in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" means (i) a member of a controlled group of
corporations of which the Holding Company is a member or (ii) an unincorporated
trade or business which is under common control with the Holding Company as
determined in accordance with Section 414(c) of the Internal Revenue code of
1986, as amended (the "Code"), and the regulations issued thereunder. For
purposes hereof, a "controlled group of corporations" shall mean a controlled
group of corporations as defined in Section 1563(a) of the Code determined
without regard to Section 1563(a)(4) and (e)(3)(C).
3.02 "Bank" means Reliance Federal Savings Bank.
1
<PAGE>
3.03 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under the Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Bank and may be changed from time to time
by similar written notice to the Board. In the absence of a written designation,
the Beneficiary shall be the Recipient's surviving spouse, if any or if none,
his estate.
3.04 "Board" means the Board of Directors of the Bank.
3.05 "Common Stock" means shares of the common stock, $.01 par value per
share, of the Company.
3.06 "Company" shall mean Reliance Bancorp, Inc.
3.07 "Conversion" means the conversion of the Bank from the mutual to the
stock form of organization and the acquisition of the Bank by the Company.
3.08 "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an Outside Director to perform the
work customarily assigned to him. Additionally, a medical doctor selected or
approved by the Board of Directors must advise the Board that it is either not
possible to determine when such Disability will terminate or that it appears
probable that such Disability will be permanent during the remainder of said
participant's lifetime.
3.09 "Outside Director" means a member of the Board of Directors of the
Bank or the Company, who is not also an Employee.
3.10 "Plan Share Award" means a right granted under this Plan to earn Plan
Shares.
3.11 "Plan Shares" means shares of Common Stock held in the Trust and
issued or issuable to a Recipient pursuant to the Plan.
3.12 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.13 "Recipient" means an Outside Director who receives a Plan Share Award
under the Plan.
3.14 "Retirement" means the termination of service from the Board of
Directors of the Bank and/or the Company following written notice to the Board
as a whole of such Outside Director's intention to retire or retirement as
determined by the Bank's bylaws.
3.15 "Trust" means a trust established by the Board in connection with this
Plan to hold Plan assets for the purposes set forth herein.
2
<PAGE>
3.16 "Trustee" means that person or persons and entity or entities
approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to
any of the Plan assets for the purposes set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role of the Board. The Plan Administrator shall be appointed or
approved by, and will serve at the pleasure of, the Board. The Board may in its
discretion from time to time remove, replace or add any Trustees. The Board
shall have all of the powers allocated to it in this and other Sections of the
Plan.
4.02 Limitation on Liability. No member of the Board or Trustee(s)
shall be liable for any determination made in good faith with respect to the
Plan or any Plan Shares or Plan Share Awards granted under it. If a member of
the Board or any Trustee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Bank shall
indemnify such member against expense (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in the best interests of the Bank and its
Affiliates and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Bank shall contribute to
the Trust an amount sufficient to purchase up to 101,430 shares of Common Stock.
No contributions by Outside Directors shall be permitted. The Trustee may hold
and commingle contributions to the Plan and earnings thereon with the assets of
any other Recognition and Retention Plan maintained by the Bank.
5.02 Initial Investment. Any amounts held by the Trust prior to the
conversion of the Bank from a mutual to a stock savings Bank shall be invested
by the Trustee in such interest-bearing account or accounts at the Bank as the
Trustee shall determine to be appropriate.
5.03 Investment of Trust Assets Upon the Conversion; Creation of Plan
Share Reserve. Upon the Conversion, the Trustee shall invest all of the Trust's
assets exclusively in Common Stock except as otherwise provided below; provided,
however, that the Trust shall not invest in more than 101,430 shares of Common
Stock which shall constitute the "Plan Share Reserve." In the event that all or
a portion of the designated number of the shares of Common Stock are not
available for purchase by the Trust in the Conversion, the Trustee in accordance
with applicable rules and regulations shall purchase shares of Common Stock in
the open market or, in the alternative, shall
3
<PAGE>
purchase authorized but unissued shares of the Common Stock from the Company
sufficient to fund the Plan Share Reserve. Any earnings received with respect to
Common Stock held in the Reserve shall be held in an interest bearing account.
Any earnings received with respect to Common Stock subject to a Plan Share Award
shall be held in an interest bearing account on behalf of the individual
Recipient.
5.04 Effect of Allocations and Forfeitures Upon Plan Share Reserves.
Upon the allocation of Plan Share Awards under Section 6.02, the Plan Share
Reserve shall be reduced by the number of Shares subject to the Awards so
allocated. Any Shares subject to an Award which may not be earned because of a
forfeiture by the Recipient pursuant to Section 7.01 shall be returned (added)
to the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Outside Directors of the Bank and its Affiliates are
eligible to receive Plan Share Awards.
6.02 Allocations.
(a) Each Outside Director serving in such capacity as of the
date of the Bank's Conversion shall be granted a Plan Share Award of 19,665 Plan
Shares (0.19% of the total number of shares of Common Stock issued in the
conversion) (the "Fixed Award").
(b) If additional shares are available under the Plan after
satisfying the awards granted in Section 6.02(a) above, the Board of Directors
of the Bank may grant additional Plan Share Awards to Outside Directors. The
terms and conditions of the Plan Share Awards will be set forth in an Award
Agreement executed by the Bank and the Plan Share Award recipient.
6.03 Form of Allocation. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Award has been
granted, the recipient shall be notified in writing of the grant of a Plan Share
Award. Such notice shall include the number of Plan Shares covered by the Award,
and the terms upon which the Plan Shares subject to the Award may be earned. The
Bank shall maintain records as to all grants of Plan Share Awards under the
Plan.
4
<PAGE>
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Plan Shares subject to an Award granted
pursuant to Section 6.02(a) herein shall be earned by a Recipient at the rate of
twenty percent (20%) annually of the aggregate number of shares covered by the
Award commencing one year from the date of grant for awards made to Outside
Directors serving in such capacity at the time of the Conversion. . If an
Outside Director who is not renominated, reelected or otherwise discontinues
service on the Board prior to earning all Plan Shares subject to an Award for
any reason (except as specifically provided in Subsections (b) and (c) below),
the Recipient shall forfeit the right to earn any Shares subject to the Award
which have not theretofore been earned. Plan Shares subject to an Award granted
pursuant to Section 6.02(b) herein shall vest in accordance with the terms and
conditions set forth in each recipient's Award Agreement.
In determining the number of Plan Shares which are earned, fractional
shares shall be rounded down to the nearest whole number, provided that such
fractional shares shall be aggregated and earned, on the fifth anniversary of
the date of grant.
(b) Exception for Terminations Due to Death or Disability.
Notwithstanding the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Recipient whose service with the
Bank or an Affiliate terminates due to death or Disability, shall be deemed
earned as of the Recipient's last day of service with the Bank or an Affiliate.
Provided, however, that if the Recipients' last day of service results from
Disability within one year of the date of Conversion, the shares earned by the
Recipient may not be disposed of by the Recipient during the one-year period
following the Conversion.
(c) Exception for Terminations After a Change in Control.
Notwithstanding the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Recipient who is not renominated
or reelected to serve on the Board of Directors of the Bank or the Company
following a Change in Control of the Bank or Company shall be deemed earned as
of the Recipient's last day of service as an Outside Director with the Bank or
an Affiliate. A "Change in Control of the Bank or the Company" is defined as a
Change in Control of a nature that: (i) would be required to be reported in
response to Item 1 of the current report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the
Company within the meaning of the Home Owners' Loan Act of 1933, as amended and
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes
5
<PAGE>
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Company representing
20% or more of the combined voting power of the Bank's or the Company's
outstanding securities except for any securities of the Bank purchased by the
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any tax qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the
association or the Company or similar transaction occurs in which the Bank or
the Company is not the resulting entity; or (D) a proxy statement soliciting
proxies from shareholders of the Company, by someone other than the current
management of the Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or Bank or similar
transaction with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to the plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Bank or the Company shall be distributed; or (E) a tender offer is made for 20%
or more of the voting securities of the Bank or the Company.
(d) Revocation for Misconduct. Notwithstanding anything herein
to the contrary, any Plan Share Award, or portion thereof, previously awarded
under this Plan, to the extent Plan Shares have not been delivered thereunder to
the Recipient, whether or not yet earned, will be automatically revoked,
rescinded and terminated in the case of an Outside Director who is discharged
from the Board of Directors for cause (as hereinafter defined), or who is
discovered after termination of service to have engaged in conduct that would
have justified termination for cause. "Cause" is defined as personal dishonesty,
willful misconduct, any breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, or the willful violation of any
law, rule or regulation (other than traffic violations or similar offenses)
which results in a material loss to the Bank or a final cease and desist order.
7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Recipient
or Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an amount
attributable to any cash dividends and a number of shares of Common Stock equal
to any stock dividends declared and paid with respect to a share of Common Stock
between the date the relevant Plan Share Award was granted and the date the Plan
Shares are being distributed. There shall also be distributed an appropriate
amount of net earnings, if any, of the Trust with respect to any dividends so
paid out.
6
<PAGE>
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided
in Subsection (b) below, Plan Shares shall be distributed to the Recipient or
his Beneficiary, as the case may be, as soon as practicable after they have been
earned.
(b) Form of Distribution. All Plan Shares, together with any
shares representing stock dividends, shall be distributed in the form of Common
Stock. One share of Common Stock shall be given for each Plan Share earned and
payable. Payments representing accumulated dividends (and earnings thereon)
shall be made in cash or Common Stock.
(c) Taxes. The Trustee may deduct from any payment or
distribution made under this Plan sufficient amounts of shares of Common Stock
to cover any applicable tax obligations incurred as a result of vesting of Plan
Share Awards. If this Plan is qualified under 17 C.F.R. ss. 240.16b-3 under the
Exchange Act, then any deduction for taxes shall comply with 17 C.F.R.
ss. 240.16b-3.
7.04 Voting of Plan Shares. After a Plan Share Award has been granted,
the Recipient shall be entitled to direct the Trustee as to the voting of the
Plan Shares which are covered by the Plan Share Award and which have not yet
been earned and distributed to him pursuant to Section 7.03. All shares of
Common Stock held by the Trust as to which Recipients are not entitled to
direct, or have not directed, the voting, shall be voted by the Trustee in the
same proportion as Plan Shares which have been awarded and voted.
ARTICLE VIII
MISCELLANEOUS
8.01 Adjustments for Capital Changes. In the event of any change in the
outstanding shares of Common Stock of the Company by reason of any stock
dividend or split, recapitalization, merger, consolidation, spin-off,
reorganization, combination or exchange of shares, or other similar corporate
change, or other increase or decrease in such shares effected without receipt or
payment of consideration by the Company, the number of Plan Shares available for
issuance pursuant to the Plan shall automatically be adjusted and the number of
shares to which any Plan Share Award relates shall automatically be adjusted to
prevent dilution or enlargement of the rights granted to the Recipient under the
Plan.
8.02 Nontransferable. Plan Share Awards and rights to Plan Shares shall
not be transferable by a Recipient, and during the lifetime of the Recipient,
Plan Shares may only be earned by and paid to the Recipient who was notified in
writing of the Award by the Bank pursuant to Section 6.03.
8.03 Right to Serve as a Director. Neither the Plan nor any grant of a
Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee or
the Bank in connection with the Plan
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shall create any right on the part of any Outside Director to continue to serve
as an Outside Director of the Bank or an Affiliate thereof, or the Company.
8.04 Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by a Plan Share Award, except as expressly provided in Sections 7.02 and
7.04 above, prior to the time said Plan Shares are actually distributed to him
or her.
8.05 Governing Law. The Plan and Trust shall be governed by the laws of
the State of Delaware to the extent not pre-empted by the laws of the United
States.
8.06 Effective Date. This Plan is effective as of the effective date of
the Conversion of the Bank from the mutual to capital stock from of
organization. Following Conversion, the Plan shall be presented to stockholders
of the Company for ratification for purposes of (i) obtaining favorable
treatment under Section 16(b) of the Securities Exchange Act of 1934; and (ii)
maintaining (if listed) listing on the Nasdaq National Market; provided,
however, that the failure to obtain shareholder ratification will not affect the
validity of the Plan and the Plan Share Awards thereunder.
8.07 Compliance with Section 16. If this Plan is qualified under 17
C.F.R. ss.240.16b-3 of the Exchange Act Rules, with respect to persons subject
to Section 16 of the Exchange Act, transactions under this Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the Plan fails to so comply, it
shall be deemed null and void, to the extent permitted by law.
8.08 Term of Plan. This Plan shall remain in effect until the earlier
of (1) 21 years from the Effective Date, (2) termination of the Plan by a
majority of the outstanding shares of the Common Stock entitled to vote;
provided, however, no such termination shall without the consent of the affected
Recipients' rights under a previously granted Plan Share Award or (3) the
distribution of all assets of the Trust. Termination of the Plan shall not
affect any Plan Share Awards previously granted, and such Awards shall remain
valid and in effect until they have been earned and paid, or by their terms
expire or are forfeited.
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IN WITNESS WHEREOF, the Bank established this Plan which was
executed by its duly authorized executive officer , effective as of the 31st day
of March, 1994 and is amended and restated as of June 17, 1998.
By:
Attest:
- -------------------------------
9
EXHIBIT 10.3
AMENDED AND RESTATED
RELIANCE BANCORP, INC.
1994 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
I. Purpose
The purpose of the Reliance Bancorp, Inc. (the "Holding Company") 1994
Stock Option Plan for Outside Directors of the Holding Company and its
affiliates, including the outside directors of Reliance Federal Savings Bank
(the "Bank") (the "Directors' Option Plan" or the "Plan") is to promote the
growth and profitability of the Holding Company and the Bank by providing
outside directors of the Holding Company and its affiliates with an incentive to
achieve long-term objectives of the Holding Company and to attract and retain
non-employee directors of outstanding competence by providing such outside
directors with an opportunity to acquire an equity interest in the Holding
Company.
II. Grant of Options
(a) Initial and Subsequent Grants.
(i) Each outside director (for purposes of this Directors'
Option Plan, the term "Outside Director" shall mean a member of the Board of
Directors of the Holding Company or any of its affiliates not also serving as a
full-time employee of the Holding Company or any of its affiliates), who is
serving in such capacity on the date of the Holding Company's initial public
offering and at the effective date of this Directors' Option Plan, is hereby
granted non-statutory stock options to purchase 39,330 shares of the common
stock of the Holding Company ("Common Stock"), subject to adjustment as provided
in Section IV hereof.
(ii) Additional grants of non-statutory stock options may be
made to each outside director under this Plan by the committee administering the
Plan (the "Committee"). The Committee shall consist of the entire Board of
Directors or two or more members of the Board of Directors who are "Non-employee
Directors" as that term is defined in Rule 16b-3(b)(3)(i), as promulgated by the
Securities and Exchange Commission, under the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
(iii) The purchase price per share of the Common Stock
deliverable upon the exercise of each non-statutory stock option granted
pursuant to Section II(a)(i) shall be the initial public offering price of the
Common Stock sold in connection with the conversion of the Bank to the stock
form. The effective date of these initial grants shall be the effective date of
the Directors' Option Plan as defined in Section V hereof ("Effective Date").
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(iv) The purchase price per share of the Common Stock
deliverable upon the exercise of each Non-statutory Stock Option granted
pursuant to Section II(a)(ii) shall be the Fair Market Value of the Common Stock
on the date of grant.
(b) Ineligibility. An option under the Directors' Option Plan shall not
be granted to any Outside Director who at any previous time was an employee of
either the Holding Company or the Bank and in such capacity was eligible to
receive any options to purchase Common Stock.
(c) Fair Market Value. For purposes of the Directors' Option Plan, when
used in connection with Common Stock on a certain date, Fair Market Value means
the average of the bid and ask prices of the Common Stock as reported by the
National Association of Securities Dealers Automated Quotation System (as
published by the Wall Street Journal, if published) on the effective date of the
grant, or if the Common Stock was not traded on such date, on the next preceding
day on which the Common Stock was traded thereon. For purposes of the grant of
options in the Conversion as defined in Section V hereof, Fair Market Value
shall mean the initial public offering price of the Common Stock ($10.00 per
share).
III. Terms and Conditions
(a) Option Agreement. Each option shall be evidenced by a written
option agreement between the Holding Company and the recipient specifying the
number of shares of Common Stock that may be acquired through its exercise and
containing such other terms and conditions which are not inconsistent with the
terms of this grant.
(b) Vesting. Each option granted pursuant to Section II(a)(i) hereof
shall become exercisable in three annual installments of thirty three and
one-third percent (331/3%). Options granted pursuant to Section II(a)(ii) shall
vest in accordance with the terms and conditions set forth in each recipient's
Option Award Agreement.
(c) Manner of Exercise. The option when exercisable may be exercised
from time to time, in whole or in part, by delivering a written notice of
exercise to the Chief Executive Officer of the Holding Company signed by the
recipient. Such notice is irrevocable and must be accompanied by full payment of
the exercise price (as determined in Section II(a) hereof) in cash or shares of
previously acquired Common Stock of the Holding Company at the Fair Market Value
of such shares determined on the exercise date by the manner described in
Section II(c) above.
(d) Transferability. Each option granted hereby may be exercised only
by the recipient to whom it is issued, or in the event of the Outside Director's
death, his or her personal representative(s) or designee(s), heir(s) or
devisee(s) pursuant to the terms of Section III(e) hereof or as otherwise
provided by Rule 16(b)-3 of the Securities Exchange Act of 1934, as amended.
(e) Termination of Service. Upon the termination of a recipient's
service for any reason other than disability, retirement, failure to be
are-elected at any annual meeting of shareholders at which the recipient has
been nominated, the occurrence of a Change in Control, death or removal
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for cause, the participant's stock options shall be exercisable only as to those
shares which were immediately purchasable by the recipient at the date of
termination.
In the event of death or disability of any recipient, all stock options
held by such recipient, whether or not exercisable at such time, shall become
immediately exercisable by the recipient or the recipient's legal
representatives or beneficiaries. Upon termination of the recipient's service
due to retirement, failure to be are-elected or a Change in Control occurs, all
stock options held by such recipient, whether or not exercisable at such time,
shall become immediately exercisable. However, shares of Common Stock acquired
through the exercise of options granted under Section II(a) may not be sold or
otherwise disposed of for a period of one year from the date of grant of the
option.
For purposes of this plan the following terms are defined:
(i) "Change in Control" of the Bank or Holding Company shall
mean an event of a nature that; (1) would be required to be reported in
response to Item 1 of the current report on Form 8-K, as in effect on
the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (2) results in a Change
in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended and the Rules and Regulations
promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided, that in
applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (3) without limitation such a Change
in Control shall be deemed to have occurred at such time as (A) any
"person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Holding Company representing 20% or more of the Bank's
or the Holding Company's outstanding securities except for any
securities of the Bank purchased by the Holding Company in connection
with the conversion of the Bank to the stock form and any securities
purchased by any tax-qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board; or (C) a
plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or
similar transaction occurs in which the Bank or Holding Company is not
the resulting entity; or (D) a proxy statement soliciting proxies from
shareholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a
plan of reorganization, merger or consolidation of the Holding Company
or Bank or similar transaction with one or more corporations as a
result of which the outstanding shares of the class of securities then
subject to the plan or transaction are exchanged for or converted into
cash or property or securities
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not issued by the Bank or the Holding Company shall be distributed; or
(E) a tender offer is made for 20% or more of the voting securities of
the Bank or the Holding Company.
(ii) "Disability" means the permanent and total inability by
reason of mental or physical infirmity, or both, of an outside director
to perform the work customarily assigned to him. Additionally, a
medical doctor selected or approved by the Board of Directors must
advise the Board that it is either not possible to determine when such
disability will terminate or that it appears probable that such
disability will be permanent during the remainder of said recipient's
lifetime.
(iii) "Retirement" means the termination of service from the
Board of Directors of the Bank and/or the Holding Company following
written notice to the Board of Directors as a whole of such Director's
intention to retire or retirement as determined by the Bank's bylaws.
(iv) "Removal for Cause" means the removal of the Outside
Director based upon personal dishonesty, willful misconduct, any breach
of fiduciary duty involving personal profit, intentional failure to
perform stated duties, or the willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) which
results in a material loss to the Holding Company or any of its
affiliates.
(f) Termination of Option. Options shall expire upon the earlier of (i)
one hundred and twenty (120) months following the date of grant, or (ii) one (1)
year following the date on which the Outside Director ceases to serve in such
capacity for any reason other than removal for cause in accordance with the
Holding Company's Certificate of Incorporation and applicable law. Provided,
however, that if the recipient's service on the Board of Directors is terminated
for any reason other than being removed for cause prior to the date the Plan is
presented to the shareholders of the Holding Company for ratification, the stock
options may not be exercised prior to the date of the shareholders' meeting
regarding such ratification but shall remain exercisable for a period of one
year from the date of such meeting. If the Outside Director dies before fully
exercising any portion of an option then exercisable, such options may be
exercised by such Outside Director's beneficiary, personal representative(s),
heir(s) or devisee(s) at any time within the one (1) year period following his
or her death; provided, however, that in no event shall the options be
exercisable more than one hundred and twenty (120) months after the date of its
grant. If the Outside Director fails to be renominated or are-elected, all
options awarded to him shall become immediately exercisable. If the Outside
Director is removed for cause, all options awarded to him shall expire upon such
removal.
IV. Common Stock Subject to the Directors' Option Plan
The shares which shall be issued and delivered upon exercise of options
granted under the Directors' Option Plan may be either authorized and unissued
shares of Common Stock or authorized and issued shares of Common Stock held by
the Holding Company as treasury stock. The number of shares of Common Stock
reserved for issuance under the Directors' Option Plan shall not exceed 210,105
shares of the Common Stock of the Holding Company, par value $.01 per share,
subject to
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adjustments pursuant to this Section IV. Any shares of Common Stock subject to
an option which for any reason either terminates unexercised or expires, shall
again be available for issuance under the Directors' Option Plan.
In the event of any change or changes in the outstanding Common Stock
of the Holding Company by reason of any stock dividend or split,
recapitalization, reorganization, merger, consolidation, spin-off, combination
or any similar corporate change, or other increase or decrease in such shares
effected without receipt or payment of consideration by the Holding Company, the
number of shares of Common Stock which may be issued under this Directors'
Option Plan, the number of shares of Common Stock subject to options granted
under this Directors' Option Plan and the option price of such options, shall be
automatically adjusted to prevent dilution or enlargement of the rights granted
to recipient under the Directors' Option Plan.
V. Effective Date of the Plan; Shareholder Ratification
The Directors' Option Plan after adoption by the Board of Directors
shall become effective upon the conversion of the Bank from the mutual to
capital stock form of ownership and the acquisition of the Association by the
Holding Company (the "Conversion"). Following Conversion, the Directors' Option
Plan shall be presented to shareholders of the Holding Company for ratification
for purposes of (i) obtaining favorable treatment under Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (ii)
maintaining listing on the Nasdaq National Market; provided, however, that the
failure to obtain shareholder ratification shall not affect the validity of this
Plan and the options granted hereunder.
VI. Taxes.
There may be deducted from each distribution of Common Stock under the
Plan sufficient amounts of shares of Common Stock to cover for any applicable
tax obligations incurred as a result of the exercise of options under the Plan.
If this Plan is qualified under 17 C.F.R. ss. 240.16b-3 under the Exchange Act,
then any deduction for taxes shall comply with 17 C.F.R. ss. 240.16b-3.
VII. Termination of the Plan
The right to grant options under the Directors' Option Plan will
terminate automatically upon the earlier of ten years after the Effective Date
of the Plan or the issuance of 210,105 shares of Common Stock (the maximum
number of shares of Common Stock reserved for under this Plan) subject to
adjustment pursuant to Section IV hereof. A majority of the outstanding shares
of the Common Stock entitled to vote is required to terminate the Directors'
Option Plan for any other reason; provided, however, no such termination shall,
without the consent of the affected recipient, affect such recipient's rights
under a previously granted option.
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VIII. Amendment of the Plan
The Directors' Option Plan may be amended from time to time by the
Board of Directors of the Holding Company provided that Section II and III
hereof shall not be amended more than once every six months other than to
comport with the Internal Revenue Code of 1986, as amended, or the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
Except as provided in Section IV hereof, rights and obligations under any option
granted before an amendment shall not be altered or impaired by such amendment
without the written consent of the optionee. If the Directors' Option Plan
becomes qualified under 17 C.F.R. ss.240.16(b)-3 ("Rule 16(b)-3") of the rules
and regulations promulgated under the Securities Exchange Act of 1934 and an
amendment would require shareholder approval under such Rule 16(b)-3 to retain
the Plan's qualification, then subject to the discretion of the Board of
Directors of the Holding Company, such amendment shall be presented to
shareholders for ratification, provided, however, that the failure to obtain
shareholder ratification shall not affect the validity of this Plan as so
amended and the options granted thereunder.
IX. Applicable Law
The Plan will be administered in accordance with the laws of the State
of Delaware.
X. Compliance with Section 16
If this Plan is qualified under Rule 16b-3 transactions under this Plan
are intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the Exchange Act. To the extent that any provision of the Plan
fails to so comply, such provision shall be deemed null and void, to the extent
permitted by law.
IN WITNESS WHEREOF, Reliance Bancorp, Inc. established this Plan which
was executed by its duly authorized executive officer and effective as of the
31st day of March, 1994 and is amended and restated as of June 17, 1998.
By:
Attest:
- -------------------------------
6
EXHIBIT 10.14
RELIANCE BANCORP, INC.
1996 INCENTIVE STOCK OPTION PLAN
AMENDED AND RESTATED AS OF FEBRUARY 19, 1997
1. DEFINITIONS.
(a) "Affiliate" means (i) a member of a controlled group of corporations of
which the Holding Company is a member or (ii) an unincorporated trade or
business which is under common control with the Holding Company as determined in
accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended,
(the "Code") and the regulations issued thereunder. For purposes hereof, a
"controlled group of corporations" shall mean a controlled group of corporations
as defined in Section 1563(a) of the Code determined without regard to Section
1563(a)(4) and (e)(3)(C).
(b) "Alternate Option Payment Mechanism" refers to one of several methods
available to a Participant to fund the exercise of a stock option set out in
Section 12. These mechanisms include: broker assisted cashless exercise and
stock for stock exchange.
(c) "Award" means any grant of benefits pursuant to Section 3 hereof.
(d) "Bank" means Reliance Federal Savings Bank.
(e) "Board of Directors" or "Board" means the board of directors of the
Holding Company.
(f) "Change in Control" means a change in control of the Bank or Holding
Company of a nature that: (i) would be required to be reported in response to
Item 1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); or (ii) results in a Change in Control within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA") and the Rules
and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided that, in applying
the definition of change in control as set forth under such rules and
regulations, the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding securities except for any securities of the Bank
purchased by the Holding Company and any securities purchased by any tax
qualified employee benefit plan of the Holding Company or the Bank; or (B)
individuals who constitute the Board on the date hereof
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(the "Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least seventy-five percent
(75%) of the directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the same
Nominating Committee serving under an Incumbent Board, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board;
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or Holding Company is not the resulting
entity; or (D) a solicitation of shareholders of the Holding Company, by someone
other than the current management of the Holding Company, seeking stockholder
approval of a plan of reorganization, merger or consolidation of the Holding
Company or Bank or similar transaction with one or more corporations, as a
result of which the outstanding shares of the class of securities then subject
to the plan are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company; or (E) a tender offer is made for
20% or more of the voting securities of the Bank or the Holding Company.
(g) "Committee" means a committee consisting of at least two members of
the Board of Directors who are defined as Outside Directors, all of whom are
"Non-Employee Directors" as such term is defined under Rule 16b-3 under the
Exchange Act as promulgated by the Securities and Exchange Commission.
(h) "Common Stock" means the Common Stock of the Holding Company, par
value, $.01 per share or any stock exchanged for shares of Common Stock pursuant
to Section 17 hereof.
(i) "Date of Grant" means the effective date of an Award.
(j) "Directors' Awards" means awards of Non-statutory Stock Options to
Outside Directors pursuant to the terms of Section 10.
(k) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a Participant to perform the work
customarily assigned. Additionally, a medical doctor selected or approved by the
Board of Directors must advise the Committee that it is either not possible to
determine when such Disability will terminate or that it appears probable that
such Disability will be permanent during the remainder of said Participant's
lifetime.
(l) "Dividend Adjustment Right" means the adjustment of the number of
shares subject to an option and/or the Exercise Price of an option and/or the
right to receive an amount of cash based upon the terms set forth in Section 9.
(m) "Effective Date" means July 17, 1996, the effective date of the
Plan.
(n) "Employee" means any person who is currently employed by the
Holding Company or an Affiliate, including officers, but such term shall not
include Outside Directors.
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(o) "Exercise Price" means the purchase price per share of Common Stock
deliverable upon the exercise of each Option in order for the option to be
exchanged for shares of Common Stock.
(p) "Extraordinary Dividend" means a distribution to shareholders by
the Holding Company of earnings or capital in excess of either (i) current
earnings or (ii) the weighted average cost of funds of the Bank for the period
in which the dividend is paid, as determined for this purpose by the Committee.
(q) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the average of the high and low bid prices of the
Common Stock as reported by the Nasdaq National Market ("Nasdaq") (as published
by the Wall Street Journal, if published) on such date or if the Common Stock
was not traded on such date, on the next preceding day on which the Common Stock
was traded thereon or the last previous date on which a sale is reported. If the
Common Stock is not reported on the Nasdaq, the Fair Market Value of the Common
Stock is the value so determined by the Committee in good faith.
(r) "Holding Company" means Reliance Bancorp, Inc.
(s) "Incentive Stock Option" means an Option granted by the Committee
to a Participant, which Option is designated by the Committee as an Incentive
Stock Option pursuant to Section 7.
(t) "Limited Right" means the right to receive an amount of cash based
upon the terms set forth in Section 8.
(u) "Non-statutory Stock Option" means an Option granted by the
Committee to a Participant pursuant to Section 6, which is not designated by the
Committee as an Incentive Stock Option or which is redesignated by the Committee
under Section 7 as a Non-Statutory Stock Option. All options granted to Outside
Directors pursuant to Section 10 shall be Non-statutory Stock Options.
(v) "Option" means the right to buy a fixed amount of Common Stock at
the Exercise Price within a limited period of time designated as the term of the
option as granted under Sections 6 and 7 of the Plan.
(w) "Outside Director" means a member of the Board of Directors of the
Holding Company or its Affiliates, who is not also an Employee.
(x) "Participant" means any Employee who holds an outstanding Award
under the terms of the Plan.
(y) "Retirement" with respect to a Participant means termination of
employment which constitutes retirement under any tax qualified plan maintained
by the Holding Company or the Bank. However, "Retirement" will not be deemed to
have occurred for purposes of this Plan if a Participant
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continues to serve on the Board of Directors of the Holding Company or its
Affiliates even if such Participant is receiving benefits under any
tax-qualified retirement plan of the Holding Company or its Affiliates. With
respect to an Outside Director, "Retirement" means the termination of service
from the Board of Directors of the Holding Company or its Affiliates following
written notice to the Board as a whole of such Outside Director's intention to
retire or retirement as determined by the Holding Company or applicable
Affiliate's bylaws, except that an Outside Director shall not be deemed to have
"Retired" for purposes of the Plan in the event he continues to serve as a
consultant or advisory director to the Holding Company or any of its Affiliates.
(z) "Termination for Cause" shall mean termination because of a
material loss to the Holding Company or one of its subsidiaries caused by the
Participant's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation, (other than traffic violations
or similar offenses) or final cease and desist order. No act, or the failure to
act, on Participant's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its affiliates.
2. ADMINISTRATION.
(a) The Plan as regards Options shall be granted and administered by
the Committee. The Committee is authorized, subject to the provisions of the
Plan, to establish such rules and regulations as it deems necessary for the
proper administration of the Plan and to make whatever determinations and
interpretations in connection with the Plan it deems necessary or advisable. All
determinations and interpretations made by the Committee shall be binding and
conclusive on all Participants and on their legal representatives and
beneficiaries.
(b) The grant of Non-statutory Stock Options to Outside Directors are
made herein by the terms of this Plan. Actual transference of any Non-statutory
Stock Options to Outside Directors requires no, nor allows any, discretion by
the Committee.
3. TYPES OF AWARDS.
The following Awards may be granted under the Plan:
(a) Non-statutory Stock Options;
(b) Incentive Stock Options;
(c) Limited Rights;
(d) Dividend Adjustment Rights; and
(e) Directors Awards
as described below in paragraphs 6 through 10 of the Plan.
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4. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 17, the maximum number of
shares reserved hereby for purchase pursuant to the exercise of Options and
Option-related Awards granted under the Plan is 450,000 shares of which Options
to purchase 315,000 shares are reserved for grants to Employees and Options to
purchase 135,000 shares are reserved for grants to Outside Directors. These
shares of Common Stock subject to Options which may be awarded hereunder may be
either authorized but unissued shares or authorized shares previously issued and
reacquired by the Holding Company. To the extent that Options are granted under
the Plan, the shares underlying such Options will be unavailable for any other
use including future grants under the Plan except that, to the extent that
Options terminate, expire, are forfeited or are cancelled without having been
exercised (in the case of Limited Rights, exercised for cash), new Options may
be made with respect to these shares.
5. ELIGIBILITY.
All Employees shall be eligible to receive Options under the Plan.
Outside Directors shall only be eligible to receive Non-statutory Stock Options
under the Plan under Section 10 of this Plan. An Outside Director who is a
former Employee may, however, continue to hold unexercised or unvested Awards
granted while such person was an Employee.
6. NON-STATUTORY STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan, from time to
time, grant Non-statutory Stock Options to Employees and, upon such terms and
conditions as the Committee may determine, grant Non-statutory Stock Options in
exchange for and upon surrender of previously granted Awards under this Plan.
Non-statutory Stock Options granted under this Plan are subject to the following
terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock
Option shall be determined by the Committee on the date the option is granted.
Such Exercise Price shall not be less than 100% of the Fair Market Value of the
Common Stock on the Date of Grant. Common Stock underlying such Non-statutory
Stock Options may be purchased only upon full payment of the Exercise Price or
upon operation of an Option Exercise Alternative set out in Section 12 of the
Plan.
(b) Terms of Options. Non-Statutory Stock Options may in the discretion
of the Committee be granted at any time and subject to any conditions allowed
under this Plan. The term during which each Non-statutory Stock Option may be
exercised shall be determined by the Committee, but in no event shall a
Non-statutory Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. Unless otherwise determined by the Committee, Non-
statutory Stock Options shall become exercisable six months subsequent to the
Date of Grant; provided, however, that all options shall become fully vested and
exercisable upon the Participant's termination due to death, Disability,
Retirement or in the event of a Change in Control. The Common Stock comprising
each installment may be purchased in whole or in part at any time during
5
<PAGE>
the term of such Non-statutory Stock Option after such Non-Statutory Stock
Option becomes exercisable. The Committee may, in its sole discretion,
accelerate the time at which any Non-statutory Stock Option may be exercised in
whole or in part. The acceleration of any Non- statutory Stock Option under the
authority of this paragraph will create no right, expectation or reliance on the
part of any other Participant or that certain Participant regarding any other
unaccelerated Non-statutory Stock Options.
(c) The terms and conditions of any Non-statutory Stock Options shall
be evidenced by an agreement (the "NSO Agreement") which such NSO Agreement will
be subject to the terms and conditions of the Plan.
(d) Termination of Employment. Notwithstanding any provisions set forth
herein or contained in any NSO Agreement relating to an award of an Option, in
the event of termination for reasons other than for death, Disability,
Retirement or Change in Control or Termination for Cause, only those options
exercisable at the time of termination may be exercised and only for a period of
one year after such termination. In the event of the Participant's termination
of service for death, Disability, Retirement or in the event of a Change in
Control, all options shall become exercisable and may be exercised for a period
of one year after such termination. In the event of Termination for Cause, all
rights under the Participant's Non-Statutory Stock Options shall expire
immediately upon termination.
7. INCENTIVE STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan, from time to
time, grant Incentive Stock Options to Employees. Incentive Stock Options
granted pursuant to the Plan shall be subject to the following terms and
conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock Option
shall be not less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. However, if at the time an Incentive Stock Option is granted to a
Participant, the Participant owns Common Stock representing more than 10% of the
total combined voting securities of the Holding Company (or, under Section
424(d) of the Code, is deemed to own Common Stock representing more than 10% of
the total combined voting power of all classes of stock of the Holding Company,
by reason of the ownership of such classes of stock, directly or indirectly, by
or for any brother, sister, spouse, ancestor or lineal descendent of such
Participant, or by or for any corporation, partnership, estate or trust of which
such Participant is a shareholder, partner or beneficiary), ("10% Owner"), the
Exercise Price per share of Common Stock deliverable upon the exercise of each
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Date of Grant. Shares may be purchased only upon payment
of the full Exercise Price or upon operation of an Option Exercise Alternative
set forth in Section 12 of the Plan.
(b) Amounts of Incentive Stock Options. Incentive Stock Options may be
granted to any Employee in such amounts as determined by the Committee; provided
that the amount granted is consistent with the terms of Section 422 of the Code.
In the case of a stock option intended to
6
<PAGE>
qualify as an Incentive Stock Option, the aggregate Fair Market Value
(determined as of the time the Option is granted) of the Common Stock with
respect to which Incentive Stock Options granted are exercisable for the first
time by the Participant during any calendar year (under all plans of the
Participant's employer corporation and its parent and subsidiary corporations)
shall not exceed $100,000. The provisions of this Section 7(b) shall be
construed and applied in accordance with Section 422(d) of the Code and the
regulations, if any, promulgated thereunder. To the extent an Award of an
Incentive Stock Option under this Section 7 exceeds this $100,000 limit, the
portion of the Award of an Incentive Stock Option in excess of such limit shall
be deemed a Non-statutory Stock Option. The Committee shall have discretion to
redesignate Stock Options granted as Incentive Stock Options as Non-statutory
Stock Options. Such Non-statutory Stock Options shall be subject to Section 6 of
the Plan.
(c) Terms of Incentive Stock Options. Incentive Stock Options may in
the discretion of the Committee be granted at any time and subject to any
conditions allowed under this Plan. The term during which each Incentive Stock
Option may be exercised shall be determined by the Committee, but in no event
shall an Incentive Stock Option be exercisable in whole or in part more than 10
years from the Date of Grant. If at the time an Incentive Stock Option is
granted to a Participant who is a 10% Owner, the Incentive Stock Option granted
to such Participant shall not be exercisable after the expiration of five years
from the Date of Grant. No Incentive Stock Option granted under this Plan is
transferable except by will or the laws of descent and distribution and is
exercisable in his lifetime only by the Participant to whom it is granted.
Unless otherwise determined by the Committee, Incentive Stock Options
shall become exercisable six months subsequent to the Date of Grant; provided,
however, that all options shall become fully vested and exercisable upon the
Participant's termination due to death, Disability, Retirement or Change in
Control. The shares comprising each installment may be purchased in whole or in
part at any time during the term of such Incentive Stock Option after such
installment becomes exercisable. The Committee may, in its sole discretion,
accelerate the time at which any Incentive Stock Option may be exercised in
whole or in part. To the extent that such acceleration, through the operation of
law, destroys incentive treatment under the Code, then such accelerated Stock
Option shall be deemed to be a Non-Statutory Stock Option. The acceleration of
any Incentive Stock Option under the authority of this paragraph will create no
right, expectation or reliance on the part of any other Participant or that
certain Participant regarding any other unaccelerated Incentive Stock Options.
(d) The terms and conditions of any Incentive Stock Option shall be
evidenced by an agreement (the "Incentive Stock Option Agreement") which such
Incentive Stock Option Agreement will be subject to the terms and conditions of
the Plan.
(e) Termination of Employment. Unless otherwise determined by the
Committee, upon the termination of a Participant's service for any reason other
than death, Disability, Retirement or Change in Control the Participant's
Incentive Stock Options shall be exercisable only as to those shares that were
immediately exercisable by the Participant at the date of termination and only
for a period of three months following termination; provided, however, that, in
the event that the
7
<PAGE>
Committee extends the exercisability of any Incentive Stock Options beyond three
months following termination, such Incentive Stock Options shall be treated as
Non-Statutory Stock Options. In the event of the termination of a Participant's
service due to death, Disability, Retirement or in the event of a Change in
Control, all of the Participant's Incentive Stock Options shall become
exercisable for a period of one year after such termination. Notwithstanding,
any Incentive Stock Options are exercised more than three months after the
Participant's terminations, such Options shall be treated as Non-Statutory Stock
Options. In the event of Termination for Cause all rights under the
Participant's Incentive Stock Options shall expire immediately upon termination.
In the event of Disability, the period for exercise is one year from termination
of employment.
(g) Compliance with Code. The Incentive Stock Options granted under
this Section 7 of the Plan are intended to qualify as "incentive stock options"
within the meaning of Section 422 of the Code, but the Holding Company makes no
warranty as to the qualification of any option as an incentive stock option
within the meaning of Section 422 of the Code. All Incentive Stock Options that
do not so quality shall be treated as Non-statutory Stock Options.
8. LIMITED RIGHTS.
Simultaneously with the grant of any Option to an Employee or Outside
Director, the Committee may grant a Limited Right with respect to all or some of
the shares covered by such Option. Limited Rights granted under this Plan are
subject to the following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable
in whole or in part before the expiration of six months from the Date of Grant
of the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control.
The Limited Right may be exercised only when the underlying
Option is eligible to be exercised, and only when the Fair Market Value of the
underlying shares on the day of exercise is greater than the Exercise Price of
the underlying Option.
Upon exercise of a Limited Right, the underlying Option shall
cease to be exercisable. Upon exercise or termination of an Option, any related
Limited Rights shall terminate. The Limited Rights may be for no more than 100%
of the difference between the purchase price and the Fair Market Value of the
Common Stock subject to the underlying option. The Limited Right is transferable
only when the underlying option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall
promptly receive from the Holding Company an amount of cash or some other
payment alternative found in Section 11, equal to the difference between the
Exercise Price of the underlying option and the Fair Market Value of the Common
Stock subject to the underlying Option on the date the Limited Right is
exercised, multiplied by the number of shares with respect to which such Limited
Right is being exercised. Payments shall be less an applicable tax withholding
as set forth in Section 18.
8
<PAGE>
9. DIVIDEND ADJUSTMENT RIGHT
Simultaneously with the grant of any Option under this Plan, the
Committee may grant a Dividend Adjustment Right. Upon the payment of an
Extraordinary Dividend, the Committee may grant to the holder of a Dividend
Adjustment Right a payment from the Holding Company of an amount of cash equal
to the amount of the Extraordinary Dividend paid on one share of Common Stock,
multiplied by the number of shares of Common Stock subject to the underlying
Option
10. DIRECTORS' AWARDS
Awards to Outside Directors under this Plan ("Directors' Awards) are
made in the form of Non-statutory Stock Options. Directors' Awards shall be made
subject to the following terms and conditions:
(a) Initial Grant of Directors' Awards. Each Outside Director who is
serving on the Board of Directors on the Effective Date of this Plan shall
receive Non-statutory Stock Options for 6,750 shares of Common Stock, each with
a Dividend Adjustment Right pursuant to Section 9, which shall be granted as of
the Effective Date of the Plan.
(b) Continuing Grant of Directors' Awards. Any Outside Director
currently serving on the Board of Directors as of the Effective Date of the Plan
who continues to serve as a Director on July 1, 1997 and July 1, 1998, shall be
granted Options for 6,750 shares on each respective date pursuant to the terms
fixed by the Committee.
(c) Grants to Subsequent Outside Directors. To the extent Options to
purchase shares are available for grant under the Plan, due to such Options not
being reserved for granting under paragraphs (a) and (b) of this Section 10 or
due to forfeiture of Options previously awarded to Outside Directors, the
Committee shall have the authority to grant such available Options to Outside
Directors in amounts and with terms as determined by the Committee.
The terms and conditions of any Director Award will be evidenced by an
agreement which shall be subject to the terms and conditions of the Plan.
(d) Exercise Price. The Exercise Price of each Non-statutory Stock
Option awarded to an Outside Director shall equal the Fair Market Value of the
Common Stock on the date of the grant of the Option. Shares may be purchased
only upon full payment of the Exercise Price or upon operation of an Option
Exercise Alternative set forth in Section 12 of the Plan.
(e) Terms of Non-statutory Stock Options Award to Directors. Unless
otherwise determined by the Committee, Non-Statutory Stock Options granted to
Outside Directors shall become exercisable six months subsequent to the Date of
Grant. The term during which each Non-statutory Stock Option awarded to a
director may be exercised shall be 10 years from the Date of Grant. The shares
comprising each installment may be purchased in whole or in part at any time
during the term of such Non-statutory Stock Option.
9
<PAGE>
(f) Death, Disability, Retirement or Change in Control of a Director.
All Stock Options shall be fully vested and exercisable upon death, Disability,
Retirement or Change in Control.
(g) Forfeiture. If the service of an Outside Director as a member of
the Board is terminated for any other reason than death, Disability, Retirement
or Change in Control, all unvested Stock Options shall be forfeited immediately
upon such termination and the Outside Director shall have no further rights with
respect to such Directors' Award.
11. PAYOUT ALTERNATIVES
Payments due to a Participant upon the exercise or redemption of an
Award, may be made under the following terms and conditions:
(a) Discretion of the Committee. The Committee has the sole discretion
to determine the form of payment (whether monetary, Common Stock, a combination
of payout alternatives or otherwise) it shall use in making distributions or
payments for all Options. If the Committee requests any or all Participants to
make an election as to form of payment or distribution, it shall not be
considered bound by the election.
(b) Payment in the form of Common Stock. Any shares of Common Stock
tendered in satisfaction of an obligation arising under this Plan shall be
valued at the Fair Market Value of the Common Stock at the time of the
distribution. The Committee may use Common Stock in Treasury or may direct the
market purchase of such Common Stock to satisfy its obligations under this Plan.
12. OPTION EXERCISE ALTERNATIVES
The Committee has sole discretion to determine the form of payment it
will accept for the exercise of an Option. The Committee may indicate acceptable
forms in the Incentive Stock Option or Non-statutory Stock Option Agreement
covering such Options or may reserve its decision until the time of exercise. No
Option is to be considered exercised until payment in full is accepted by the
Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by certified
check.
(b) Borrowed Funds. To the extent permitted by law, the Committee may
permit all or a portion of the exercise price of an Option to be paid through
borrowed funds.
(c) Exchange of Common Stock. (i) The Committee may, in its sole
discretion, permit payment by the tendering of previously acquired shares of
Common Stock.
10
<PAGE>
(ii) Any shares of Common Stock tendered in payment of the
exercise price of an Option shall be valued at the Fair Market Value of the
Common Stock on the date prior to the date of exercise.
13. GRANTS IN THE EVENT OF A CHANGE IN CONTROL
(a) In the event of a Change in Control, Options then available for
grant under this Plan pursuant to Section 4 shall be automatically granted among
those current Employees and current Outside Directors who have previously been
granted Options under this Plan, as of the date of the Change in Control. The
number of shares subject to Options to be granted to each such individual
pursuant to this Section 13 shall be determined by multiplying the number of
Options to purchase shares of Common Stock then available for grant to Employees
and Outside Directors, respectively, pursuant to Section 4 by a fraction, the
numerator of which is the number of Options to purchase shares of Common Stock
previously granted to that individual under this Plan, and the denominator of
which is the total number of Options to purchase shares of Common Stock
previously granted to all Employees, in the case of an Employee, and all current
Outside Directors, in the case of an Outside Director, under this Plan.
(b) The Exercise Price for any option granted pursuant to Section 13
shall be the average of the Exercise Price of each share of Common Stock, as
adjusted pursuant to Section 17, subject to an Option granted under this Plan to
the respective Employee or Outside Director prior to the Change in Control.
(c) All Options granted pursuant to Section 13 shall be 100% vested and
exercisable upon the Change in Control and shall remain exercisable for a period
of 10 years from the date of grant.
14. RIGHTS OF A SHAREHOLDER: NONTRANSFERABILITY.
(a) No Participant or Outside Director shall have any rights as a
shareholder with respect to any shares of Common Stock covered by an Option
until the date of issuance of a stock certificate for such Common Stock. Nothing
in this Plan or in any Option granted confers on any person any right to
continue in the employ or service of the Holding Company or its Affiliates or
interferes in any way with the right of the Holding Company or its Affiliates to
terminate a Participant's services as an officer or other employee at any time.
(b) No Option shall be transferred, assigned, hypothecated, or disposed
of in any manner by a Participant or Outside Director other than by will or the
laws of intestate succession; provided, however, that with respect to a
Non-qualified Stock Option, the Committee or full Board may, in their sole
discretion, permit transferability if such transfer is, in the determination of
the Committee or full Board, for valid estate planning purposes and such
transfer is permitted under the Code and Rule 16b-3 promulgated under the
Exchange Act. For the purposes of this section a transfer for valid estate
planning purposes includes, but is not limited to: (a) a transfer to revocable
intervivos trust as to which the Participant or Outside Director is both the
settlor and trustee, or (b) a transfer
11
<PAGE>
for no consideration to: (i) any member of the Participant's or Outside
Director's Immediate Family, (ii) any trust solely for the benefit of members of
the Participant's or Outside Director's Immediate Family, (iii) any partnership
whose only partners are members of the Participant's or Outside Director's
Immediate Family, and (iv) any limited liability corporation or corporate entity
whose only members or equity owners are members of the Participant's or Outside
Director's Immediate Family. For purposes of this Section 14, "Immediate Family"
includes, but is not necessarily limited to, a Participant's or Outside
Director's spouse, children, and grandchildren.
(c) Nothing contained in this Section 14 shall be construed to require
the Committee or full Board to give its approval to any transfer of an Option or
portion thereof, and approval to transfer any Option or portion thereof does not
mean that such approval will be given for the transfer of any other Option or
portion of an Option. The transferee of any Option shall be subject to all of
the terms and conditions applicable to such Option immediately prior to the
transfer and shall be subject to the rules and regulations proscribed by the
Committee or full Board with respect to such Option. The Committee or the full
Board may limit the amount of any Option, whether as to number or percentage of
underlying shares, for which permission to transfer is otherwise granted.
15. AGREEMENT WITH GRANTEES.
Each Option will be evidenced by a written agreement ("Agreement"),
executed by the Participant or Outside Director and the Holding Company or its
Affiliates that describes the terms and conditions for receiving the Option
including the date of Option, the Exercise Price if any, the term or other
applicable periods, and other terms and conditions as may be required or imposed
by the Plan, the Board of Directors, tax law consideration or applicable
securities law.
16. DESIGNATION OF BENEFICIARY.
A Participant or Outside Director may, with the consent of the
Committee, designate a person or persons to receive, in the event of death, any
Option to which the Participant would then be entitled. Such designation will be
made upon forms supplied by and delivered to the Holding Company and may be
revoked in writing. If a Participant or Outside Director fails effectively to
designate a beneficiary, then the Participant's or Outside Director's estate
will be deemed to be the beneficiary.
17. ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend, split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, the Committee will make such
adjustments to previously granted Awards, to prevent dilution or enlargement of
the rights of the Participant or Outside Director, including any or all of the
following:
12
<PAGE>
(a) adjustments in the aggregate number or kind of shares of
Common Stock or other securities that may underlie future
Options under the Plan;
(b) adjustments in the aggregate number or kind of shares of
Common Stock or other securities underlying Options already
made under the Plan;
(c) adjustments in the purchase price of outstanding Incentive
and/or Non-statutory Stock Options, or any Limited Rights
attached to such Options.
No such adjustments may, however, materially change the value of
benefits available to a Participant or Outside Director under a previously
granted Option. All awards under this Plan shall be binding upon any successors
or assigns of the Holding Company.
18. TAX WITHHOLDING.
Awards under this Plan shall be subject to tax withholding to the
extent required by any governmental authority. If this Plan meets the
requirements under 17 C.F.R. ss.240.16b-3 under the Exchange Act ("Rule 16b-3"),
then any withholding shall comply with Rule 16b-3 or any amendment or successive
rule.
19. AMENDMENT OF THE PLAN.
The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, prospectively or retroactively; provided
however, that provisions governing grants of Options and Limited Rights, unless
permitted by the rules promulgated to Section 16(b) of the Exchange Act, shall
not be amended more than once every six months other than to comport with the
Internal Revenue Code or the Employee Retirement Income Security Act, if
applicable.
No such termination, modification or amendment may affect the rights of
a Participant or Outside Director under an outstanding Option without the
written permission of such Participant or Outside Directors.
20. APPROVAL OF SHAREHOLDERS.
The Plan shall be presented to shareholders for approval for purposes
of: (i) obtaining favorable treatment under Section 16(b) of the Securities
Exchange Act; (ii) obtaining preferential tax treatment for Incentive Stock
Options; and (iii) maintaining listing on Nasdaq National Market. The failure to
obtain shareholder approval will not effect the validity or effectiveness of the
Plan and the Options granted hereunder, provided, however, that if the Plan is
not approved by stockholders, the Board of Directors may, in its sole
discretion, terminate the Plan and rescind any Options granted hereunder and, to
the extent the Board of Directors does not exercise its discretion to terminate
the Plan, any Incentive Stock Options granted shall be deemed to be
Non-Statutory Stock Options.
13
<PAGE>
21. TERMINATION OF THE PLAN.
The right to grant Options under the Plan will terminate upon the
earlier of (i) ten (10) years after the Effective Date or (ii) the issuance of
Common Stock or (iii) the exercise of Options, or related Limited Rights
equivalent to the maximum number of shares reserved under the Plan as set forth
in Section 4. The Board of Directors has the right to suspend or terminate the
Plan at any time, provided that, except as to termination of the Plan or
rescission of awards pursuant to Section 20 hereof, no such action will, without
the consent of a Participant or Outside Director, adversely affect his vested
rights under a previously granted Option.
22. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the state
of Delaware.
23. COMPLIANCE WITH SECTION 16.
If this Plan is qualified under Rule 16b-3 (or any successor rule),
with respect to persons subject to Section 16 of the Exchange Act, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act. To the extent any provisions of
the Plan or action by the Committee fail to so comply, such provisions shall be
deemed null and void, to the extent permitted by law and deemed advisable by the
Committee.
24. DELEGATION OF AUTHORITY
The Committee may delegate all authority for: the determination of
forms of payment to be made by or received by the Plan; the execution of
Agreements; the determination of Fair Market Value; the determination of all
other aspects of administration of the plan to the executive officer(s) of the
Holding Company or Reliance Federal Savings Bank ("Bank"). The Committee may
rely on the descriptions, representations, reports and estimate provided to it
by the management of the Holding Company or the Bank for determinations to be
made pursuant to the Plan.
14
<PAGE>
IN WITNESS WHEREOF, Reliance Bancorp, Inc. established this Plan,
effective as of the 17th day of July, 1996 and amended and restated as of
January 21, 1997, with this Amended and Restated Plan to be executed by a
designee of the Board of Directors its duly corporate seal to be affixed and
duly attested.
[CORPORATE SEAL] RELIANCE BANCORP, INC.
ADOPTED BY THE BOARD OF DIRECTORS:
July 17, 1996 By: ______________________________
Date Raymond L. Nielsen
Chairman of the Board of Directors
For the Board of Directors
APPROVED BY STOCKHOLDERS:
November 12, 1996 By: ______________________________
Date Robert F. Pelosi
Secretary
AMENDED AND RESTATED BY ACTION OF THE BOARD OF DIRECTORS:
February 19, 1997 By: ______________________________
Date Raymond L. Nielsen
Chairman of the Board of Directors
For the Board of Directors
15
RELIANCE BANCORP, INC. AND SUBSIDIARY
FINANCIAL SECTION
- -------------------------------------------------------------------
CONTENTS
- -------------------------------------------------------------------
Selected Consolidated Financial and Other Data
of the Company..................................................5
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................7
Consolidated Statements of Condition as of
June 30, 1998 and 1997........................................22
Consolidated Statements of Income for
the years ended June 30, 1998, 1997 and 1996..................23
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
June 30, 1998, 1997 and 1996..................................24
Consolidated Statements of Cash Flows for
the years ended June 30, 1998, 1997 and 1996..................25
Notes to Consolidated Financial Statements.......................27
Independent Auditors' Report.....................................52
Selected Consolidated Quarterly Financial Data...................53
4
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Financial and Other Data of the Company
- -------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
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.
At June 30,
------------------------------------------------------------
Selected Financial Data: 1998 1997 1996 1995 1994
- ----------------------- ------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Total Assets..................................................... $2,485,729 $1,976,764 $1,782,550 $931,436 $830,501
Loans Receivable, Net............................................ 969,797 909,321 817,746 332,080 330,720
Debt and Equity Securities Available-for-Sale.................... 134,907 26,909 13,271 23,880 37,588
Debt and Equity Securities Held-to-Maturity...................... 40,189 46,026 48,330 23,890 39,492
Mortgage-Backed Securities Available-for-Sale.................... 940,347 721,819 591,740 104,453 --
Mortgage-Backed Securities Held-to-Maturity...................... 249,259 159,356 184,492 413,762 394,199
Excess of Cost Over Fair Value of Net Assets Acquired............ 58,936 45,463 49,429 -- --
Real Estate Owned, Net........................................... 755 450 1,564 1,558 2,911
Deposits......................................................... 1,628,298 1,436,037 1,345,626 670,317 587,221
Borrowed Funds................................................... 630,206 351,913 266,160 97,035 78,000
Total Stockholders' Equity....................................... 194,864 162,670 153,619 153,733 157,851
Year Ended June 30,
-----------------------------------------------------------
Selected Operating Data: 1998 1997 1996 1995 1994
- ----------------------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Interest Income.................................................. $153,819 $133,289 $100,372 $ 61,260 $ 47,224
Interest Expense ................................................ 86,828 71,653 52,985 28,361 20,024
------ ------ ------ ------- -------
Net Interest Income......................................... 66,991 61,636 47,387 32,899 27,200
Less Provision for Loan Losses................................... 1,650 950 725 400 393
------ ------- ------- ------- -------
Net Interest Income After Provision for Loan Losses......... 65,341 60,686 46,662 32,499 26,807
Non-Interest Income:
Loan Fees and Service Charges.................................... 1,047 683 826 269 260
Other Operating Income........................................... 3,452 2,557 1,606 841 859
Income from Money Centers........................................ 1,882 -- -- -- --
Condemnation Award on Joint Venture.............................. 1,483 -- -- -- --
Net (Loss) Gain on Securities.................................... (5) 172 678 147 --
------- ------- ------ ------ ------
Total Non-Interest Income................................... 7,859 3,412 3,110 1,257 1,119
------- ------- ------ ------ ------
Non-Interest Expense:
Compensation and Benefits........................................ 20,297 16,509 13,395 9,562 7,068
Occupancy and Equipment.......................................... 6,531 5,719 4,481 2,462 2,336
Federal Deposit Insurance Premiums............................... 921 1,813 2,399 1,376 1,374
Advertising...................................................... 1,202 1,168 1,152 1,158 670
Other Operating Expenses......................................... 6,274 5,778 4,169 3,039 2,366
------ ------- ------- ------- ------
Total General and Administrative Expenses................... 35,225 30,987 25,596 17,597 13,814
Real Estate Operations, Net...................................... 218 383 579 (385) 1,080
Amortization of Excess of Cost Over Fair
Value of Net Assets Acquired................................... 4,218 3,404 1,928 -- --
SAIF Recapitalization Charge..................................... -- 8,250 -- -- --
------- ------- ------- ------- ------
Total Non-Interest Expense.................................. 39,661 43,024 28,103 17,212 14,894
------- ------- ------- ------- ------
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle................ 33,539 21,074 21,669 16,544 13,032
Income Tax Expense............................................... 14,810 10,138 9,946 6,842 5,538
------- ------- ------- ------- ------
Income Before Cumulative Effect of
Change in Accounting Principle.......................... 18,729 10,936 11,723 9,702 7,494
Cumulative Effect of Change in Accounting Principle (1).......... -- -- -- -- 1,200
------- ------- ------- ------- ------
Net Income.................................................. $ 18,729 $ 10,936 $ 11,723 $ 9,702 $ 8,694
====== ====== ====== ===== =====
Earnings Per Share: (2) Basic........................... $ 2.11 $ 1.32 $ 1.36 $ 1.04 $ 0.22
Diluted......................... $ 1.99 $ 1.25 $ 1.32 $ 1.03 $ 0.22
(See footnotes on following page)
5
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Financial and Other Data of the Company
- -------------------------------------------------------------
At or for the Year Ended June 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Performance Ratios:
<S> <C> <C> <C> <C> <C>
Return on Average Assets (1)...................................... 0.86% 0.58% 0.83% 1.08% 1.15%
Return on Average Stockholders' Equity (1)(3)..................... 10.42 7.02 7.58 6.17 9.82
Return on Average Tangible Stockholders' Equity (1)(3)............ 15.14 10.10 9.18 6.17 9.82
Average Stockholders' Equity to Average Assets.................... 8.45 8.24 10.92 17.60 11.68
Stockholders' Equity to Total Assets.............................. 7.84 8.23 8.62 16.51 19.01
Tangible Stockholders' Equity to Tangible Assets.................. 5.60 6.07 6.01 16.51 19.01
Core Deposits to Total Deposits................................... 36.91 37.40 41.68 36.12 49.08
Net Interest Spread............................................... 2.98 3.22 3.17 3.11 3.36
Net Interest Margin (4)........................................... 3.28 3.47 3.52 3.77 3.69
General and Administrative Expenses to Average Assets............. 1.62 1.66 1.81 1.97 1.82
Operating Income to Average Assets (5)............................ 0.29 0.17 0.16 0.14 0.15
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities............................ 1.07X 1.06X 1.09X 1.20X 1.12X
Selected Financial Ratios, Excluding SAIF
Recapitalization Assessment
Return on Average Assets (1)...................................... 0.86% 0.84% 0.83% 1.08% 1.15%
Return on Average Stockholders' Equity (1)(3)..................... 10.42 10.12 7.58 6.17 9.82
Return on Average Tangible Stockholders' Equity (1)(3)............ 15.14 14.56 9.18 6.17 9.82
Asset Quality Ratios:
Non-Performing Loans to Total Loans (6)........................... 0.95% 1.61% 1.58% 1.10% 1.08%
Non-Performing Loans to Total Assets.............................. 0.37 0.75 0.73 0.39 0.43
Non-Performing Assets to Total Assets (7)........................ 0.40 0.77 0.82 0.56 0.78
Allowance for Loan Losses to Total Loans.......................... 0.91 0.57 0.55 0.52 0.43
Allowance for Loan Losses to Non-Performing Loans................. 96.12 35.18 34.63 47.10 39.38
Other Data:
Number of Deposit Accounts........................................ 169,071 164,121 164,368 68,617 63,416
Full-Service Banking Offices...................................... 30 28 28 11 11
</TABLE>
(1) 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.
(2) Earnings per share for fiscal year ended 1994 is based on net income from
March 31, 1994 to June 30, 1994.
(3) For purposes of these calculations, average stockholders' equity and average
stockholders' tangible equity exclude the effect of changes in the unrealized
appreciation (depreciation) on securities available-for-sale, net of taxes.
(4) Calculation is based upon net interest income before provision for loan
losses divided by average interest-earning assets.
(5) Operating income represents total non-interest income less (plus) net gain
(loss) on sale of securities and condemnation award on joint venture.
(6) 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.
(7) Non-performing assets consist of non-performing loans and real estate owned.
6
<PAGE>
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,
corporate debt securities and repurchase agreements. In addition, the Company
completed the acquisitions of the Bank of Westbury, a Federal Savings Bank, in
August 1995, Sunrise Bancorp, Inc., in January 1996 and Continental Bank, a
commercial bank, in October 1997, which were all merged 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,
consumer, multi-family, commercial, commercial real estate, construction and
guaranteed student loans. In connection with the acquisition of Continental
Bank, the Bank now offers both secured and unsecured commercial 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 Bank also
operates, as a result of the Continental Bank acquisition, five check cashing
("Money Centers") operations which result in additional fee income to the Bank.
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 one-time
pre-tax 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.
Completion of Acquisition of Continental Bank
On October 17, 1997, the Company completed the acquisition of Continental Bank
("Continental"), a commercial bank with two full service banking offices located
in Nassau and Suffolk counties in Long Island, New York, a commercial lending
facility and five check cashing facilities in Manhattan. Under the terms of the
merger, Reliance issued 1.10 shares of its common stock for each outstanding
common share of Continental. The cost of the acquisition was approximately $24.4
million. 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.
Financial Condition
As of June 30, 1998, total assets were $2.5 billion, an increase of $509.0
million, or 25.7%, from $2.0 billion at June 30, 1997. Mortgage-backed
securities increased $308.4 million, or 35.0%, from $881.2 million at June 30,
1997 to $1.2 billion at June 30, 1998, with the increase primarily due to
securities acquired from Continental Bank and increased purchases of private
label collateralized mortgage obligations offset by amortization and
prepayments. Investment securities increased
7
<PAGE>
$102.2 million, or 140.1%, from $72.9 million at June 30, 1997 to $175.1 million
at June 30, 1998, as the Company deployed some of the proceeds from the capital
securities issued in April 1998 into investment securities. Loans receivable,
net increased $60.5 million, or 6.7%, from $909.3 million at June 30, 1997 to
$969.8 million at June 30, 1998 as a result of increased multi-family lending
and from commercial loans acquired from Continental Bank.
Funding for the purchases of mortgage-backed securities, investments securities
and loans was obtained through a combination of new deposit growth, borrowings,
proceeds from the trust preferred securities and cash flows. Deposits increased
$192.3 million, or 13.4% during the fiscal year ended June 30, 1998 as a result
of growth in new certificate of deposit products and deposits acquired from
Continental Bank. Borrowings increased from $351.9 million at June 30, 1997 to
$630.2 million at June 30, 1998, an increase of $278.3 million, or 79.1%. The
increase in borrowings is attributable to additional leveraging of the statement
of condition and the proceeds from the trust preferred securities. The Bank has
been using borrowings to leverage its capital and fund asset growth.
Treasury stock decreased from $27.5 million at June 30, 1997 to $24.0 million at
June 30, 1998 as a result of the issuance of approximately 1 million shares to
purchase Continental Bank partially offset by additional purchases.
Non-performing assets
Non-performing loans totalled $9.3 million, or 0.95% of total loans at June 30,
1998, as compared to $14.7 million, or 1.61% of total loans at June 30, 1997.
Non-performing loans at June 30, 1998 were comprised of $6.4 million of loans
secured by one- to four-family residences, $2.1 million of commercial real
estate loans, $567,000 of commercial loans and $208,000 of guaranteed student
and other 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 0.40% at June 30, 1998 from 0.77% at June 30, 1997.
For the fiscal year ended June 30, 1998, the Company's loan loss provision was
$1.7 million as compared to $950,000 in the prior year period. The Company
increased its provision for loan losses to continue to increase its loan loss
coverage ratios, particularly in light of increased multi-family lending and
commercial loans acquired from Continental Bank. The Company's allowance for
loan losses totalled $8.9 million at June 30, 1998 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 96.12% and 0.91% and 35.18% and
0.57%, respectively. The significant increase in the loan loss coverage ratios
is the result of $2.7 million of allowances acquired from Continental Bank and
the lower level of non-performing loans. For the fiscal year ended June 30,
1998, the Company experienced net charge-offs of $636,000, as compared to
$263,000 in the prior year period. Management believes the allowance for loan
losses at June 30, 1998 is adequate, and sufficient reserves are presently
maintained to cover losses on 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"),
commercial and consumer loans, shorter-term fixed rate multi-family, mortgage,
commercial and consumer loans and the purchase of shorter-term fixed rate and
adjustable-rate mortgage-backed securities. However, there can be no assurances
that the Bank will be able to originate adjustable-rate loans or acquire
mortgage-backed securities with terms and characteristics which conform with the
Bank's underwriting standards, investment criteria or interest rate risk
policies.
The Company has attempted to limit its exposure to interest rate risk through
the origination and purchase of adjustable-rate mortgage loans ("ARMs") and
through purchases of adjustable-rate mortgage-backed and mortgage-related
securities and fixed rate mortgage-backed and mortgage-related securities with
short- and medium-term average lives. In the most recent fiscal year, the Bank
has not been able to originate a significant amount of ARM's due to customer
preference for fixed rate loans. 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
8
<PAGE>
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, 1998, $841.3 million, or 41.2%, of the Bank's interest-earning
assets consisted of adjustable-rate loans and mortgage-backed securities. The
Bank's mortgage loan portfolio totalled $791.0 million, of which, $425.3
million, or 53.8%, were adjustable-rate loans and $365.7 million, or 46.2%, were
fixed-rate loans. In addition, at June 30, 1998, the Bank's consumer loan
portfolio totalled $137.9 million, of which, $110.4 million, or 80.1%, were
adjustable-rate home equity lines of credit and guaranteed student loans and
$27.5 million, or 19.9%, were fixed-rate home equity and other consumer loans.
At June 30, 1998, the Bank's commercial loan portfolio totalled $49.9 million of
which $42.8 million, or 85.8% were adjustable rate loans and $7.1 million, or
14.2% were fixed rate loans. At June 30, 1998, the mortgage-backed securities
portfolio totalled $1.2 billion of which $940.3 million was classified as
available-for-sale and $249.3 million was classified as held-to-maturity. Of the
$940.3 million classified as available-for-sale, $187.0 million, or 15.7% of the
total mortgage-backed portfolio, were adjustable-rate securities and $753.3
million, or 63.3%, were fixed-rate securities. Of the $249.3 million classified
as held-to-maturity, $75.8 million, or 6.4% of the total mortgage-backed
portfolio, were adjustable-rate securities and $173.5 million, or 14.6%, 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.
Market Risk and Interest Rate Sensitivity Analysis
The Company's primary component of market risk is interest rate volatility. The
Company's net interest income, the primary component of its net income, is
subject to substantial risk due to changes in interest rates or changes in
market yield curves, particularly if there is a substantial variation in the
timing between the repricing of the Company's assets and the liabilities which
fund them. The Company seeks to manage this risk by monitoring and controlling
the variation in repricing intervals between its assets and liabilities. To a
lesser extent, the Company also monitors its interest rate sensitivity by
analyzing the estimated changes in market value of its assets and liabilities
assuming various interest rate scenarios. As previously discussed, there are a
variety of factors which influence the repricing characteristics and market
values of any given asset or liability. The matching of the repricing
characteristics of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution'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, either by its contractual terms, or based upon
certain assumptions made by management, within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated to mature or reprice within a specific time
period and the amount of interest-bearing liabilities anticipated to mature or
reprice within that same time period. A gap is considered positive when the
amount of interest rate sensitive assets maturing or repricing within a specific
time frame exceeds the amount of interest rate sensitive liabilities maturing or
repricing within that same time frame. Conversely, a gap is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
within a specific time frame exceeds the amount of interest rate sensitive
assets maturing or repricing within that same time frame. In a rising interest
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 costs 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. 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, 1998, the Company's
interest-bearing liabilities maturing or repricing within one year exceeded net
interest-earning assets maturing or repricing within the same time period by
$213.7 million, representing a negative cumulative one-year gap of 8.60% of
total assets. This compares to interest-bearing liabilities maturing or
repricing within one year exceeding net interest-earning assets maturing or
repricing within the same time period by $55.6 million, representing a negative
cumulative one-year gap of 2.82% of total assets at June 30, 1997.
9
<PAGE>
The following table ("the Gap table") sets forth the amount of interest-earning
assets and interest-bearing liabilities outstanding at June 30, 1998, that are
anticipated by the Company 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. Except as stated below, the amount of assets
and liabilities shown which reprice or mature during a particular period was
determined in accordance with the earlier of the term to repricing or the
contractual terms of the asset or liability. Prepayment assumptions have been
applied in estimating the repricing of the Company's mortgage loans and
mortgage-backed securities. The estimated rates of prepayment assumed for loans
and mortgage-backed securities are based upon coupon rates. The Company utilized
deposit withdrawal assumptions for its deposit decay rate. For passbook
accounts, NOW accounts and money market accounts, such assumed rates were 15%,
18% and 20%, respectively. The assumptions used may not be indicative of future
withdrawals of deposits or prepayments of loans and mortgage-backed securities.
The Gap table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the actual repricing
dates of various assets and liabilities are subject to customer discretion and
competitive and other pressures. Callable features of certain assets and
liabilities, in addition to the foregoing, may cause actual experience to vary
from that indicated. Included in this table are $135.4 million of callable
investment securities, classified according to their call dates. Of such
securities, $38.2 million, $10.0 million, $0, $5.0 million, $0, and $82.2
million are callable in the "Up to One Year", "One to Two Years", "Two to Three
Years", "Three to Four Years", "Four to Five Years", and "Over Five Years"
categories, respectively. Also included in this table are $324.0 million of
callable borrowings, classified according to their call dates. Of such
borrowings, $135.0 million, $89.0 million, $20.0 million, $0, $ 30.0 million and
$50.0 million are callable in the "Up to One Year", "One to Two Years", "Two to
Three Years", "Three to Four Years", "Four to Five Years", and "Over Five Years"
categories, respectively.
10
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------------------------------------------
Up to One to Two to Three to Four to Over
One Two Three Four Five Five Fair
Year Years Years Years Years Years Total Value
---- ----- ----- ----- ----- ----- ----- -----
Interest-Earning Assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans(1)(2)..................... $ 342,781 $ 113,941 $ 114,359 $ 81,134 $ 56,989 $ 82,689 $ 791,893 $795,362
Commercial Loans(1)(2)................... 43,040 1,455 1,028 739 504 3,121 49,887 51,056
Other Loans(1)(2)........................ 123,963 5,341 2,810 1,617 974 2,281 136,986 137,806
Mortgage-Backed Securities(2)(3)......... 509,670 172,096 122,526 90,500 67,749 214,764 1,177,305 1,192,679
Money Market Investments................. 9,500 -- -- -- -- -- 9,500 9,500
Debt and Equity Securities(2)(3)......... 133,645 390 -- -- 8,000 32,925 174,960 175,416
-------- ------- -------- -------- -------- -------- -------- --------
Total Interest-Earning Assets........ 1,162,599 293,223 240,723 173,990 134,216 335,780 2,340,531 2,361,819
Interest-Bearing Liabilities:
Passbook Accounts........................ 65,447 53,000 45,576 111,349 85,639 82,734 443,745 443,745
NOW Accounts............................. 17,408 14,520 12,114 25,347 18,614 16,952 104,955 104,955
Money Market Accounts.................... 54,884 37,931 -- -- -- -- 92,815 92,815
Certificate of Deposit Accounts(2)....... 797,335 82,389 29,502 17,446 7,120 -- 933,792 936,347
Borrowed Funds........................... 441,206 89,000 20,000 -- 30,000 50,000 630,206 631,407
-------- ------- ------- -------- ------- ------- -------- -------
Total Interest-Bearing Liabilities... 1,376,280 276,840 107,192 154,142 141,373 149,686 2,205,513 2,209,269
--------- ------- ------- ------- ------- ------- --------- ---------
Interest Rate Sensitivity Gap............ $ (213,681) $ 16,383 $ 133,531 $ 19,848 $ (7,157) $ 186,094 $ 135,018
========= ====== ======= ====== ======= ======= =======
Cumulative Interest Rate Sensitivity Gap. $ (213,681)$ (197,298) $ (63,767) $ (43,919) $ (51,076) $ 135,018
========= ========= ======== ======== ======== =======
Cumulative Interest Rate Sensitivity Gap as
a Percentage of Total Assets...... (8.60)% (7.94)% (2.57)% (1.77)% (2.06)% 5.43%
Cumulative Net Interest-Earning Assets as
a Percentage of Cumulative Interest-
Bearing Liabilities............... 84.47% 88.07% 96.38% 97.71% 97.52% 106.12%
</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 discounts, 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 $7.4 million on
securities classified as available-for-sale.
Certain shortcomings are inherent in the method of analysis presented in the Gap
table. For example, although certain assets and liabilities may have similar
contractual maturities or periods to repricing, they may react in different ways
to changes in market interest rates. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Additionally, certain
assets, such as ARMs, have contractual features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Finally,
the ability of borrowers to service their ARMs or other loan obligations may
decrease in the event of an interest rate increase. The Gap table reflects the
estimates of management as to periods to repricing at a particular point in
time. Among the factors considered are current trends and historical repricing
experience with respect to similar products. For example, the Company has a
number of deposit accounts, including savings, NOW accounts, and money market
which, subject to certain regulatory exceptions not relevant here, may be
withdrawn at any time. The Company, 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
change. As a result, different assumptions may be used at different points in
time.
The Company's interest rate sensitivity is also monitored by management through
analysis of the change in the net portfolio value ("NPV"). NPV is defined as the
net present value of the expected future cash flows of an entity's assets and
liabilities and, therefore, hypothetically represents the market value of an
institution's net worth. Increases in the market value of assets will increase
the NPV whereas decreases in market value of assets will decrease the NPV.
Conversely, increases in the market value of liabilities will decrease NPV
whereas decreases in the market value of liabilities will increase the NPV. The
changes in market value of assets and liabilities due to changes in interest
rates reflect the interest sensitivity of those assets and liabilities as their
values are derived from the characteristics of the asset or liability (i.e.
fixed rate, adjustable rate, caps, floors) relative to the interest rate
environment. For example, in a rising interest rate environment the fair market
value of a fixed rate asset will decline, whereas the fair market value of an
adjustable rate asset, depending on its repricing characteristics, may not
decline. The NPV ratio, under any interest rate scenario, is defined as the NPV
in that scenario divided by the market value
11
<PAGE>
of assets in the same scenario. This analysis, referred to in the NPV table,
initially measures percentage changes from the value of projected NPV in a given
rate scenario, and then measures interest rate sensitivity by the change in the
NPV ratio, over a range of interest rate change scenarios. 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
Company's internal model primarily because of differences in assumptions
utilized between the Company'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 and deposit decay rates similar to
those used in the Gap table were used. The NPV table is based on simulations
which utilize institution specific assumptions with regard to future cash flows,
including customer options such as loan prepayments, period and lifetime caps,
puts and calls, and deposit withdrawal estimates. The NPV table uses discount
rates derived from various sources including, but not limited to, treasury yield
curves, thrift retail certificate of deposit curves, national and local
secondary mortgage markets, brokerage security pricing services and various
alternative funding sources.
Specifically, for mortgage loans receivable, the discount rates used were 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. The
discount rates used for certificates of deposit and borrowings were based on
rates which approximate the rates offered by the Company for deposits and
borrowings of similar remaining maturities. The table calculates the NPV at a
flat rate scenario by computing the present value of cash flows of interest
earning assets less the present value of interest bearing liabilities. Certain
assets, including fixed assets and real estate held for development, are assumed
to remain at book value (net of valuation allowance) regardless of interest rate
scenario. Other non-interest earning assets and non-interest bearing liabilities
such as deferred fees, unamortized premiums, goodwill and accrued expenses and
other liabilities are excluded from the NPV calculation. The following table
sets forth the Bank's NPV as of June 30, 1998, as calculated by the Bank, for
instantaneous and sustained changes in interest rates relative to the NPV in an
unchanging interest rate environment.
Changes in Interest Portfolio
Rates in Basis Net Portfolio Value Value of Assets
Points ---------------------------- ------------------
(Rate Shock) $ $ % NPV %
Amount Change Change Ratio Change
Dollar in Thousands)
200................. 111,367 (58,160) (34.3) 4.68 32.0
100................. 144,566 (24,961) (14.7) 5.96 13.4
0................... 169,527 -- -- 6.88 --
(100)............... 181,460 11,933 7.0 7.29 (5.9)
(200)............... 182,282 12,755 7.5 7.28 (5.7)
As with the Gap table, certain shortcomings are inherent in the methodology used
in the above interest rate risk measurements. Modeling of changes in NPV
requires 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 assumes that the composition of the
Company'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 immediate and is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. In addition, prepayment estimates and other
assumptions within the model are subjective in nature, involve uncertainties
and, therefore, cannot be determined with precision. Accordingly, although the
NPV measurements in theory, may provide an indication of the Company's interest
rate risk exposure at a particular point in time, such measurements are not
intended to and do not provide for a precise forecast of the effect of changes
in market interest rates on the Company's net portfolio value 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.
12
<PAGE>
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, 1998, 1997, and 1996 and reflects the average
yields on assets and average cost of liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the fiscal years shown.
Average balances are derived from daily balances. The average balance of loans
receivable includes loans on which the Bank has discontinued accruing interest.
The yields and costs include fees, premiums and discounts which are considered
adjustments to yields.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage Loans, Net............... $785,119 $63,573 8.10% $709,471 $ 56,948 8.03% $473,427 $ 39,073 8.25%
Commercial Loans, Net............. 33,087 3,916 11.84 -- -- -- -- -- --
Consumer and Other Loans, Net..... 140,479 12,130 8.63 133,965 11,525 8.60 121,565 10,942 9.00
Mortgage-Backed Securities (1).... 986,567 67,185 6.81 850,094 59,392 6.99 685,348 46,084 6.72
Money Market Investments.......... 11,126 615 5.53 11,590 618 5.33 17,349 991 5.71
Debt and Equity Securities (1).... 87,791 6,400 7.29 68,824 4,806 6.98 49,203 3,282 6.67
------- ------- --------- -------- ------- --------
Total Interest-Earning Assets.... 2,044,169 153,819 7.52 1,773,944 133,289 7.51 1,346,892 100,372 7.45
------- --------- ---------
Non-Interest Earning Assets.......... 134,093 96,082 63,883
--------- --------- ---------
Total Assets................. $2,178,262 $1,870,026 $1,410,775
========= ========= =========
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Passbook Accounts................ $435,844 10,439 2.40 $441,922 10,937 2.47 $353,617 8,942 2.53
NOW Accounts..................... 95,663 1,257 1.31 80,121 1,041 1.30 58,576 1,161 1.98
Money Market Accounts............ 93,715 2,249 2.40 99,536 2,493 2.50 97,975 2,515 2.57
Certificate of Deposit Accounts.. 882,775 49,487 5.60 737,018 39,668 5.38 547,562 29,807 5.44
Borrowed Funds................... 403,414 23,396 5.80 311,363 17,514 5.62 180,055 10,560 5.87
-------- ------- -------- ------- ------- -------
Total Interest-Bearing
Liabilities............... 1,911,411 86,828 4.54 1,669,960 71,653 4.29 1,237,785 52,985 4.28
--------- --------- ---------
Non-Interest Bearing Liabilities.... 82,853 46,036 18,919
--------- --------- ---------
Total Liabilities........... 1,994,264 1,715,996 1,256,704
Stockholders' Equity................ 183,998 154,030 154,071
--------- --------- -------
Total Liabilities and
Stockholders' Equity...... $2,178,262 $1,870,026 $1,410,775
========= ========= =========
Net Interest Income/Interest
Rate Spread (2)................... $ 66,991 2.98% $ 61,636 3.22% $ 47,387 3.17%
====== ==== ====== ==== ====== ====
Net Interest-Earning Assets/
Net Interest Margin (3)........... $132,758 3.28% $103,984 3.47% $ 109,107 3.52%
======= ---- ======= ==== ======= ====
Ratio of Interest-Earning Assets to
Interest-Bearing Liabilities....... 1.07X 1.06X 1.09X
(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.
13
<PAGE>
Year Ended June 30, 1998 Year Ended June 30, 1997
Compared to Compared to
Year Ended June 30, 1997 Year Ended June 30, 1996
--------------------------------- ------------------------------------
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.................. $6,124 $501 $6,625 $18,945 $(1,070) $17,875
Commercial Loans, Net................ 3,916 -- 3,916 -- -- --
Consumer and Other Loans, Net........ 565 40 605 1,083 (500) 583
Mortgage-Backed Securities........... 9,353 (1,560) 7,793 11,402 1,906 13,308
Money Market Investments............. (25) 22 (3) (309) (64) (373)
Debt and Equity Securities........... 1,373 221 1,594 1,365 159 1,524
------ ------ ------ ------ ---- ------
Total........................... 21,306 (776) 20,530 32,486 431 32,917
------ ------- ------ ------ ---- ------
Interest-Bearing Liabilities:
Passbook Accounts.................... (163) (335) (498) 2,210 (215) 1,995
NOW Accounts......................... 208 8 216 350 (470) (120)
Money Market Accounts................ (145) (99) (244) 43 (65) (22)
Certificate of Deposits Accounts..... 8,137 1,682 9,819 10,193 (332) 9,861
Borrowed Funds....................... 5,307 575 5,882 7,421 (467) 6,954
------ ----- ------ ------- ------- ------
Total........................... 13,344 1,831 15,175 20,217 (1,549) 18,668
------ ----- ------ ------ ------ ------
Net Change in Net Interest Income......... $7,962 $(2,607) $5,355 $12,269 $1,980 $14,249
===== ====== ===== ====== ===== ======
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1998 and 1997
General. Net income for fiscal 1998 was $18.7 million as compared to $10.9
million for fiscal 1997. Net income for fiscal 1997 reflects a one time pre-tax
charge to income of $8.25 million for the Company's share of recapitalizing the
Savings Association Insurance Fund ("SAIF"). The following discussion reflects
the results of operations exclusive of the SAIF recapitalization charge.
General Comparison Exclusive of the SAIF Recapitalization Charge. Net income
increased $3.0 million, or 18.8% from $15.7 million for fiscal 1997 to $18.7
million for fiscal 1998. Return on average equity increased to 10.42% for fiscal
1998 from 10.12% for fiscal 1997 and return on average tangible equity increased
to 15.14% for fiscal 1998 from 14.56% for fiscal 1997. Diluted earnings per
share rose to $1.99 for fiscal 1998 as compared to diluted earnings per share of
$1.81 for fiscal 1997.
Interest Income. Interest income increased $20.5 million, or 15.4%, from $133.3
million for fiscal 1997 to $153.8 million for fiscal 1998. The increase resulted
primarily from a $270.2 million increase in average interest-earning assets from
$1.8 billion for fiscal 1997 to $2.0 billion for fiscal 1998 and from a slight
increase in the average yield of interest-earning assets from 7.51% in fiscal
1997 to 7.52% in fiscal 1998. The increase in the average interest-earning
assets was primarily due to assets acquired in the Continental Bank acquisition,
increased purchases of mortgage-backed securities and increased originations of
multi-family loans. Interest income on mortgage-backed securities increased $7.8
million, or 13.1%, from $59.4 million for fiscal 1997 to $67.2 million for
fiscal 1998, primarily due to an increase of $136.5 million, or 16.1%, in the
average balance of these securities, offset by an 18 basis point decrease in the
average yield on these securities from 6.99% for fiscal 1997 to 6.81% for fiscal
1998. Interest income on mortgage loans increased $6.6 million, or 11.6% from
$56.9 million in fiscal 1997 to $63.5 million in fiscal 1998, primarily due to
an increase of $75.6 million in the average balance of mortgage loans, and a
slight 7 basis point increase in the average yield on mortgage loans from 8.03%
for fiscal 1997 to 8.10% for fiscal 1998. The increase in the average balance of
mortgage loans was primarily due to loans acquired in the Continental Bank
acquisition and increased originations of multi-family loans.
14
<PAGE>
Interest Expense. Interest expense for fiscal 1998 was $86.8 million, an
increase of $15.2 million, or 21.2%, from $71.6 million in fiscal 1997. The
increase is primarily the result of a $241.5 million, or 14.5%, increase in the
average balance of interest-bearing liabilities from $1.7 billion for fiscal
1997 to $1.9 billion for fiscal 1998 and from a 25 basis point increase in the
cost of interest-bearing liabilities from 4.29% for fiscal 1997 to 4.54% for
fiscal 1998. The increase in the average balance of interest-bearing liabilities
was primarily due to deposits acquired in the Continental Bank acquisition, new
certificate deposits and additional borrowings. Interest expense on total
deposits increased $9.3 million, or 17.2%, from $54.1 million for fiscal 1997 to
$63.4 million for fiscal 1998, primarily as a result of a $149.4 million, or
11.0% increase in the average balance of deposits from $1.4 billion in fiscal
1997 to $1.5 billion in fiscal 1998 and a 23 basis point increase in the average
cost of such deposits from 3.98% in fiscal 1997 to 4.21% in fiscal 1998. The
average balance of certificate accounts increased $145.8 million, or 19.8%, from
$737.0 million for fiscal 1997 to $882.8 million for fiscal 1998. In addition to
the increase in the average balance of certificate accounts, the average balance
of interest-bearing core deposits also increased $9.5 million, or 1.8%, from
$522.0 million for fiscal 1997 to $531.5 million for fiscal 1998. The increase
in average core deposits relates to deposits acquired from Continental Bank.
Interest expense on borrowed funds increased $5.9 million, or 33.6%, from $17.5
million for fiscal 1997 to $23.4 million for fiscal 1998. The average balance of
borrowed funds increased $92.0 million, or 29.6% to $403.4 million for fiscal
1998 as compared to $311.4 million for fiscal 1997. The increase in borrowings
is attributable to additional leveraging of the balance sheet and the proceeds
from the trust preferred securities. The Bank had been using borrowings to
leverage its capital and fund asset growth.
Net Interest Income. Net interest income for fiscal 1998 increased $5.4 million,
or 8.7%, from $61.6 million for fiscal 1997 to $67.0 million for fiscal 1998.
The increase in net interest income primarily relates to the significant growth
in the average balances of interest-earning assets offset by a decrease in the
net interest spread. Average interest-earning assets increased $270.2 million,
or 15.2%, from $1.8 billion in fiscal 1997 to $2.0 billion in fiscal 1998 while
average interest-bearing liabilities increased $241.5 million, or 14.5%, from
$1.7 billion in fiscal 1997 to $1.9 billion in fiscal 1998. The net interest
rate spread declined by 24 basis points from 3.22% for fiscal 1997 to 2.98% for
fiscal 1998 as a result of increased costs of interest bearing liabilities. As a
result of further leveraging of the Bank's capital, the net interest margin
decreased from 3.47% in fiscal 1997 to 3.28% in fiscal 1998. As a result of the
Continental acquisition, the ratio of average interest-earning assets to
interest-bearing liabilities increased slightly from 1.06X in fiscal 1997 to
1.07X in fiscal 1998.
Provision for Loan Losses. The provision for loan losses for fiscal 1998 was
$1.65 million, an increase of $700,000, or 73.7%, from $950,000 for fiscal 1997.
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,
assets and net charge-offs. Non-performing loans decreased from $14.7 million at
the end of fiscal 1997 to $9.3 million at the end of fiscal 1998 and net
charge-offs increased from $263,000 for fiscal 1997 to $636,000 for fiscal 1998.
Management increased the provision for loan losses during fiscal 1998 due to its
assessment of the loan portfolio and to increase loan loss coverage on
non-performing loans. Additionally, during fiscal 1998, the Company increased
its origination of multi-family loans and as a result of the Continental
acquisition, the Company began to originate commercial loans. Multi-family loans
and commercial loans may possess a greater credit risk than one- to four-family
loans and require 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 1998 increased $4.4 million,
or 130.3%, from $3.4 million for fiscal 1997 to $7.8 million for fiscal 1998,
due to a gain from a condemnation award received from an inactive joint venture,
fee income generated from the check cashing operations acquired from Continental
Bank and increased deposit fee income.
Non-Interest Expense. Non-interest expense totalled $39.7 million for fiscal
1998 as compared to $43.0 million for fiscal 1997, a decrease of $3.3 million,
or 7.8%. Included in non-interest expense for fiscal 1997 is the special SAIF
pre-tax charge of $8.25 million. Excluding the SAIF charge, non-interest expense
increased $4.9 million, or 14.1%.The increase is mainly the result of banking
office personnel, goodwill amortization and other expenses associated with the
Continental Bank acquisition offset by a decrease in deposit insurance premiums.
Due to the
15
<PAGE>
increased asset base and the operational efficiencies realized from the
acquisition, the general and administrative expenses to average assets ratio
improved from 1.66% for the fiscal year ended June 30, 1997 to 1.62% for fiscal
1998. For fiscal 1998, compensation and benefits expense increased to $20.3
million, an increase of $3.8 million, or 23.0%, from $16.5 million for fiscal
1997. The increase in compensation and benefits expense is due to the addition
of banking office personnel from the Continental Bank acquisition, higher
benefit expenses and normal salary adjustments. For fiscal 1998, ESOP and RRP
expense was $3.7 million as compared to $2.5 million in the prior year, an
increase of $1.2 million, or 46.9%. Occupancy and equipment expense increased
$812,000, or 14.2%, from $5.7 million for fiscal 1997 to $6.5 million for fiscal
1998 due to costs associated with the operation of two new banking offices and
five check cashing facilities. Federal deposit premium expense decreased
$892,000, or 49.2%, from $1.8 million for fiscal 1997 to $921,000 for fiscal
1998 due to the reduction in SAIF. Other operating expenses increased $496,000,
or 8.6%, from $5.8 million during fiscal 1997 to $6.3 million for fiscal 1998
primarily as a result of general expenses related to the addition of two new
banking offices and five check cashing facilities.
For fiscal 1998, expenses related to real estate operations, net was $218,000, a
decrease of $165,000, or 43.1%, from $383,000 in the prior year period. The
decrease is the result of a lower provision for REO losses during the fiscal
year ended June 30, 1998. During fiscal 1998, the Bank established a provision
for REO losses of $93,000 as compared to $200,000 in the prior year period.
During fiscal 1998, the Bank recognized amortization of excess of cost over fair
value of net assets acquired of $4.2 million as compared to $3.4 million in
fiscal 1997. The amortization of cost over fair value of net assets acquired
relates to the Company accounting for the acquisitions of Bank of Westbury,
Sunrise Bancorp, Inc. and Continental Bank using the purchase method of
accounting.
Income Tax Expense. Income tax expense increased $4.7 million, or 46.1%, from
$10.1 million for fiscal 1997 to $14.8 million for fiscal 1998. The effective
income tax rate was 44.2% for fiscal 1998 as compared to 48.1% for fiscal 1997.
The decrease in the effective tax rate primarily relates to certain tax benefits
associated with the operations of a subsidiary of the Bank, offset by an
increase in amortization of excess of cost over fair value of net assets
acquired, which provides no tax benefit.
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 $4.8 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
16
<PAGE>
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 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.
17
<PAGE>
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 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 million 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 of accounting.
Income Tax Expense. Income tax expense increased $192,000, 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.
Liquidity and Capital Resources
The Company's current primary sources of funds are principal and interest
payments, sales of securities available-for- sale, borrowings 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
1998 and 1997, the Bank made dividend payments of $14.0 million and $6.7
million, respectively, to the Company. During fiscal year 1996, the Bank did not
make any dividend payments to the Company.
On April 29, 1998, the Company completed a $50 million private placement of
8.17% capital securities (the "Capital Securities") due May 1, 2028. The
securities were issued by the Company's recently formed unit, Reliance Capital
Trust I. The securities were sold in an offering under Rule 144A and Regulation
D of the Securities Act of 1933. Proceeds of the issue were invested by Reliance
Capital Trust I in junior subordinated debentures issued by the Company. The
Capital Securities are guaranteed by the Company. Net proceeds from the sale of
the debentures were used for general corporate purposes.
The Company's liquidity is also available to, among other things, support future
expansion of operations or diversification into other banking related business,
pay dividends or repurchase its common stock. In this regard, the Company
declared cash dividends of $6.0 million, $4.9 million, and $3.9 million during
fiscal years 1998, 1997 and 1996, respectively.
18
<PAGE>
On February 9, 1998, the Company completed its fifth five percent stock
repurchase plan repurchasing 440,973 shares at an aggregate cost of $13.4
million. On January 12, 1998, the Company announced its sixth stock repurchase
plan to repurchase up to 500,000 of the Company's outstanding shares. As of June
30, 1998, 100,000 shares under this program were repurchased at an aggregate
cost of $3.7 million. During fiscal years 1998, 1997 and 1996, the Company
repurchased total shares of 460,973, 442,182 and 260,776, respectively, at an
aggregate cost of $15.3 million, $8.1 million and $3.8 million, respectively.
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 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 as a
percentage of net withdrawable deposit accounts plus short-term borrowings as
defined by OTS regulations. The minimum required liquidity is currently 4.0%.
The Bank's liquidity ratio averaged 8.0% for the year ended June 30, 1998.
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, 1998,
assets qualifying for liquidity, including cash, US government obligations and
other eligible securities, totalled $171.7 million.
The primary investment activity of the Bank is the origination of mortgage,
commercial and consumer and loans, and the purchase of mortgage loans and
mortgage-backed securities. During the fiscal year ended June 30, 1998, the Bank
originated and purchased mortgage loans, commercial and consumer loans in the
amount of $106.4 million, $140.6 million and $46.7 million, respectively. During
the fiscal year ended June 30, 1998, the Bank purchased $770.9 million of
mortgage-backed securities of which $623.7 million and $147.2 million,
respectively, were classified as available-for-sale and held-to-maturity 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, reverse repurchase agreements and
proceeds from Capital Securities. At June 30, 1998, borrowings from the FHLB-NY
and reverse repurchase agreements totalled $182.1 million and $398.1 million,
respectively.
At June 30, 1998, the Bank had outstanding loan commitments of $40.4 million and
commercial and consumer open lines of credit of $22.6 million and $53.4 million,
respectively. 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, 1998 totalled $797.9
million. Management believes that a significant portion of such deposits will
remain with the Bank.
At June 30, 1998, the Bank exceeded each of the OTS capital requirements. The
Bank's tangible, core, and risked- based ratios were 6.1%, 6.1% and 15.3%,
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.
19
<PAGE>
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board ( "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". 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 SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". 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.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits" an amendment of FASB Statements No.
87, "Employer's Accounting for Pensions", No. 88, "Employer's Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions". SFAS No. 132 revises employer's disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. Rather, it standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, No. 88, and No. 106, were issued. The
statement suggests combined formats for presentation and restatement for earlier
periods of pension and other postretirement benefit disclosures. As the
requirements of SFAS No. 132 are disclosure-related, its implementation will
have no impact on the Company's financial condition or results of operations.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective prospectively for the
Company on July 1, 1999. SFAS No. 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the Statement, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows or foreign currencies. If the
hedge exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedge item attributable to the risk being hedged.
If the hedged exposure is a cash flow exposure, the effective portion of the
gain or loss on the derivative instrument is reported initially as a component
of other comprehensive income (outside earnings) and subsequently reclassified
into earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness as well as the ineffective
portion of the gain or loss is reported in earnings immediately. Accounting for
foreign currency hedges is similar to the accounting for fair value and cash
flow hedges. If the derivative instrument is not designated as a hedge, the gain
or loss is recognized in
20
<PAGE>
earnings in the period of change. The Company has not determined the impact that
SFAS No. 133 will have on its financial statements.
Impact of the Year 2000 Issue
The Year 2000 Issue centers on the inability of computer systems to recognize
the year 2000. Many existing computer programs and systems were originally
programmed with six digit dates that provided only two digits to identify the
calendar year in the date field, without considering the upcoming change in the
century. With the impending millennium, these programs and computers will
recognize "00" as the year 1900 rather than the year 2000. Like most financial
service providers, the Company and its operations may be significantly affected
by the Year 2000 Issue due to the nature of financial information. Software,
hardware, and equipment both within and outside the Company's direct control and
with whom the Company electronically or operationally interfaces (e.g. third
party vendors providing data processing, information system management,
maintenance of computer systems, and credit bureau information) are likely to be
affected. Furthermore, if computer systems are not adequately changed to
identify the Year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on the date field
information, such as interest, payment or due dates and other operating
functions, will generate results which could be significantly misstated, and the
company could experience a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition, under
certain circumstances, failure to adequately address the Year 2000 Issue could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Year
2000 Issue could result in a significant adverse impact on the Company's
products, services and competitive condition.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue will be mitigated without causing a
material adverse impact on the operations of the Company. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have an impact on the operations of the Company. At this
time, management does not believe that the impact and any resulting costs will
be material.
Monitoring and managing the Year 2000 project will result in additional direct
and indirect costs to the Company. Direct costs include potential charges by
third party software vendors for product enhancements, costs involved in testing
software products for year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced.Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products and implementing any necessary contingency plans. The
Company does not believe that such costs will have a material effect on results
of operations. Both direct and indirect costs of addressing the Year 2000 Issue
will be charged to earnings as incurred. Such costs have not been material to
date, however the Company expects to incur approximately $200,000 in Year 2000
related expenses.
Presently, the Company does not have a formal contingency plan in the event that
its computer software and hardware vendors are not Year 2000 compliant. Based
upon our discussions with our computer software and hardware vendors, they have
indicated that they are performing testing and will be Year 2000 compliant.
However, the Company will monitor the progress of its vendors to determine if a
formal contingency plan is necessary and take all steps necessary to become Year
2000 compliant with all computer software programs and hardware.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this Annual Report includes certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
21
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Condition
------------------------------------
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
---- ----
Assets
<S> <C> <C>
Cash and Due from Banks............................................................. $37,596 $29,565
Money Market Investments............................................................ 9,500 1,100
Debt and Equity Securities Available-for-Sale....................................... 134,907 26,909
Debt and Equity Securities Held-to-Maturity (with estimated
market values of $40,509 and $46,152, respectively).............................. 40,189 46,026
Mortgage-Backed Securities Available-for-Sale....................................... 940,347 721,819
Mortgage-Backed Securities Held-to-Maturity (with estimated
market values of $252,332 and $163,108, respectively)............................ 249,259 159,356
Loans receivable:
Mortgage Loans................................................................. 790,951 775,612
Commercial Loans............................................................... 49,887 --
Consumer and Other Loans....................................................... 137,900 138,891
Less Allowance for Loan Losses............................................... (8,941) (5,182)
-------- --------
Loans Receivable, Net.................................................. 969,797 909,321
Accrued Interest Receivable, Net.................................................... 14,958 12,040
Office Properties and Equipment, Net................................................ 15,436 14,089
Prepaid Expenses and Other Assets................................................... 11,732 7,580
Mortgage Servicing Rights........................................................... 2,317 3,046
Excess of Cost Over Fair Value of Net Assets Acquired............................... 58,936 45,463
Real Estate Owned, Net.............................................................. 755 450
--------- ---------
Total Assets........................................................... $2,485,729 $1,976,764
========= =========
Liabilities and Stockholders' Equity
Deposits............................................................................ $1,628,298 $1,436,037
Borrowed Funds...................................................................... 630,206 351,913
Advance Payments by Borrowers for Taxes and Insurance............................... 9,806 9,017
Accrued Expenses and Other Liabilities.............................................. 22,555 17,127
--------- ---------
Total Liabilities...................................................... 2,290,865 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; 9,564,988 and 8,776,337
Outstanding, Respectively........................................................ 108 108
Additional Paid-in Capital.......................................................... 117,909 105,871
Retained Earnings, Substantially Restricted......................................... 102,305 89,660
Net Unrealized Appreciation on Securities
Available-for-Sale, Net of Taxes................................................. 4,212 1,705
Less:
Unallocated Common Stock Held by ESOP............................................... (4,554) (5,382)
Unearned Common Stock Held by Recognition and Retention Plans (RRPs)................ (713) (1,567)
Common Stock Held by SERP, at Cost (15,454 and 11,021 shares, respectively)......... (373) (209)
Treasury Stock, at Cost (1,185,832 and 1,974,483 shares, respectively).............. (24,030) (27,516)
--------- ---------
Total Stockholders' Equity..................................................... 194,864 162,670
-------- --------
Total Liabilities and Stockholders' Equity.............................. $2,485,729 $1,976,764
========= =========
See accompanying notes to consolidated financial statements.
22
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
- ---------------------------------
(Dollars in thousands, except per share amounts)
Year Ended June 30,
-----------------------------------
1998 1997 1996
-------- -------- -------
Interest Income:
<S> <C> <C> <C>
First Mortgage Loans........................................... $ 63,573 $ 56,948 $39,073
Commercial Loans............................................... 3,916 -- --
Consumer and Other Loans....................................... 12,130 11,525 10,942
Mortgage-Backed Securities..................................... 67,185 59,392 46,084
Money Market Investments....................................... 615 618 991
Debt and Equity Securities..................................... 6,400 4,806 3,282
------- ------- -------
Total Interest Income.................................... 153,819 133,289 100,372
------- ------- -------
Interest Expense:
Deposits....................................................... 63,432 54,139 42,425
Borrowed Funds................................................. 23,396 17,514 10,560
------ ------ ------
Total Interest Expense................................... 86,828 71,653 52,985
------ ------ ------
Net Interest Income Before Provision for Loan Losses........... 66,991 61,636 47,387
Provision for Loan Losses.......................................... 1,650 950 725
------ ------ ------
Net Interest Income After Provision for Loan Losses............ 65,341 60,686 46,662
------ ------ ------
Non-Interest Income:
Loan Fees and Service Charges.................................. 1,047 683 826
Other Operating Income......................................... 3,452 2,557 1,606
Income from Money Centers...................................... 1,882 -- --
Condemnation Award on Joint Venture............................ 1,483 -- --
Net (Loss) Gain on Securities.................................. (5) 172 678
------- ----- -----
Total Non-Interest Income................................ 7,859 3,412 3,110
------ ----- -----
Non-Interest Expense:
Compensation and Benefits...................................... 20,297 16,509 13,395
Occupancy and Equipment........................................ 6,531 5,719 4,481
Federal Deposit Insurance Premiums............................. 921 1,813 2,399
Advertising.................................................... 1,202 1,168 1,152
Other Operating Expenses....................................... 6,274 5,778 4,169
------ ------ ------
Total General and Administrative Expenses................ 35,225 30,987 25,596
Real Estate Operations, Net.................................... 218 383 579
Amortization of Excess of Cost Over Fair Value
of Net Assets Acquired....................................... 4,218 3,404 1,928
SAIF Recapitalization Charge................................... -- 8,250 --
------ ------- ------
Total Non-Interest Expense............................... 39,661 43,024 28,103
------ ------- ------
Income Before Income Taxes......................................... 33,539 21,074 21,669
Income Tax Expense ................................................ 14,810 10,138 9,946
------ ------- -------
Net Income ........................................................ $18,729 $10,936 $11,723
====== ====== ======
Net Income per Common Share:
Basic................................................. $ 2.11 $ 1.32 $ 1.36
Diluted............................................... $ 1.99 $ 1.25 $ 1.32
See accompanying notes to consolidated financial statements.
23
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
- ----------------------------------------------------------
(Dollars in thousands, except share amounts)
Year Ended June 30,
---------------------------------------
1998 1997 1996
---- ---- ----
Common Stock (Par Value: $.01):
<S> <C> <C> <C>
Balance at Beginning and End of Year........................... $108 $108 $108
--- --- ---
Additional Paid in Capital:
Balance at Beginning of Year................................... 105,871 104,041 103,655
Net Gain from Reissuance of treasury stock principally for
Continental Bank acquisition............................... 7,903 -- --
Allocation of ESOP Stock and Earned Portion of RRPs............ 2,023 868 386
Common Stock Acquired by SERP.................................. 164 209 --
Tax Benefits on Stock Plans.................................... 1,948 753 --
------- ------- -------
Balance at End of Year......................................... 117,909 105,871 104,041
------- ------- -------
Retained Earnings, Substantially Restricted:
Balance at Beginning of Year................................... 89,660 83,966 76,167
Net Income..................................................... 18,729 10,936 11,723
Dividends Declared............................................. (6,044) (4,930) (3,924)
Loss on Reissuance of Treasury Stock........................... (40) (312) --
-------- ------- ------
Balance at End of Year......................................... 102,305 89,660 83,966
------- ------ ------
Net Unrealized Appreciation (Depreciation) on
Securities Available-for-Sale, Net of Tax:
Balance at Beginning of Year................................... 1,705 (5,281) 839
Unrealized Appreciation on Securities Transferred from
Held-to-Maturity to Available-for-Sale...................... -- -- 1,144
Change in Net Unrealized Appreciation
(Depreciation), Net of Tax................................... 2,507 6,986 (7,264)
----- ----- ------
Balance at End of Year......................................... 4,212 1,705 (5,281)
----- ----- -------
Unallocated Common Stock Held by ESOP:
Balance at Beginning of Year................................... (5,382) (6,210) (7,038)
Allocation of ESOP Stock....................................... 828 828 828
------- ------- -------
Balance at End of Year......................................... (4,554) (5,382) (6,210)
------- ------- -------
Unearned Common Stock Held by RRPs:
Balance at Beginning of Year................................... (1,567) (2,392) (3,214)
Earned Portion of RRPs......................................... 854 825 822
----- ------- -------
Balance at End of Year......................................... (713) (1,567) (2,392)
----- ------- -------
Common Stock Held by Supplemental Executive Retirement Plan:
Balance at Beginning of Year.................................. (209) -- --
Common Stock Acquired by SERP (4,433 and 11,021 shares)....... (164) (209) --
----- ----- -----
Balance at End of Year........................................ (373) (209) --
----- ----- -----
Treasury Stock:
Balance at Beginning of Year.................................. (27,516) (20,613) (16,784)
Reissuance of stock for Continental Bank acquisition
(1,013,909 shares)...................................... 14,711 -- --
Common Stock Purchased, at Cost (460,973, 442,182 and
260,776 shares).............................................. (15,269) (8,113) (3,829)
Exercise of Stock Options..................................... 4,044 1,210 --
-------- ------- -------
Balance at End of Year........................................ (24,030) (27,516) (20,613)
-------- -------- --------
Total Stockholders' Equity..................................... $194,864 $162,670 $153,619
======= ======= =======
See accompanying notes to consolidated financial statements.
24
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
- -------------------------------------
(Dollars in thousands)
Year Ended June 30,
------------------------------------
1998 1997 1996
---- ---- ----
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net Income.................................................................. $ 18,729 $ 10,936 $ 11,723
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses................................................. 1,650 950 725
Provision for Losses on Real Estate Owned ................................ 93 200 375
Amortization of Premiums (Accretion of Discounts), Net.................... 2,755 1,448 (567)
Net Loss (Gain) on Securities............................................. 5 (172) (678)
Expense Charge Relating to Allocation and Earned
Portions of Stock Plans............................................... 3,705 2,521 2,036
Amortization of Excess of Cost Over Fair Value of
Net Assets Acquired ................................................. 4,218 3,404 1,928
Amortization of Mortgage Servicing Rights................................. 729 859 240
Acquisition Related Tax Benefits not Previously Recognized................ -- 562 --
Depreciation and Amortization............................................. 1,635 1,417 1,027
Net Gain on Loans Sold.................................................... (44) (28) (30)
Proceeds from Loans Sold.................................................. 8,473 7,303 5,860
Net Gain on Sale of Real Estate Owned..................................... (146) (56) (19)
(Increase) Decrease in Accrued Interest Receivable, Net.................. (1,837) (728) 738
(Increase) Decrease in Prepaid Expenses and Other Assets.................. (1,345) 3,174 3,037
Increase (Decrease) in Accrued Expenses and
Other Liabilities....................................................... 2,670 7,164 (6,413)
------ ------ -------
Net Cash Provided by Operating Activities............................ 41,290 38,954 19,982
------ ------ ------
Cash Flows From Investing Activities:
Principal Payments Net of (Originations and Purchased Loans)................ 5,417 (101,583) (44,258)
Purchases of Mortgage-Backed Securities Held-to-Maturity.................... (147,163) -- (16,472)
Purchases of Mortgage-Backed Securities Available-for-Sale.................. (623,759) (277,483) (382,645)
Proceeds from Sales of Mortgage-Backed Securities Available-for-Sale........ 190,245 59,810 180,590
Principal Repayments from Mortgage-Backed Securities........................ 351,591 123,823 148,059
Proceeds from Call of Debt Securities....................................... 12,500 7,313 21,800
Proceeds from Sales of Debt and Equity Securities Available-for-Sale........ 4,870 5,028 29,245
Purchases of Debt Securities Available-for-Sale............................. (115,500) (19,715) --
Purchases of Debt and Equity Securities Held-to-Maturity.................... -- (5,007) (20,000)
Proceeds from Maturities of Debt Securities................................. 1,205 1,350 28,100
Purchases of Premises and Equipment......................................... (1,623) (1,734) (2,595)
Proceeds from Sale of Real Estate Owned .................................... 3,402 1,899 1,715
Cash and Cash Equivalents Acquired from Continental Bank Acquisition........ 9,106 -- --
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................................. (309,709) (206,299) (150,885)
-------- -------- --------
25
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows, Continued
- ------------------------------------------------
(Dollars in thousands)
Year Ended June 30,
------------------------------------
1998 1997 1996
---- ---- ----
Cash Flows from Financing Activities:
<S> <C> <C> <C>
Increase in Deposits........................................................ $55,717 $91,009 $44,558
Increase (Decrease) in Advance Payments by Borrowers
for Taxes and Insurance.................................................. 789 171 (9,210)
Proceeds from FHLB Advances................................................. 143,336 60,000 --
Repayment of FHLB Advances.................................................. (22,025) (23,000) (87,000)
Proceeds from Reverse Repurchase Agreements................................. 1,077,963 1,177,298 824,727
Repayment of Reverse Repurchase Agreements.................................. (1,002,606) (1,128,545) (618,602)
Proceeds from Capital Securities............................................ 50,000 -- --
Purchases of Treasury Stock................................................. (15,269) (8,113) (3,829)
Net Proceeds from Issuance of Common Stock Upon
Exercise of Stock Options................................................ 2,670 898 --
Dividends Paid.............................................................. (5,725) (4,578) (3,808)
------- ------- -------
Net Cash Provided by Financing Activities............................. 284,850 165,140 146,836
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents........................ 16,431 (2,205) 15,933
Cash and Cash Equivalents at Beginning of Year............................... 30,665 32,870 16,937
------ ------ ------
Cash and Cash Equivalents at End of Year..................................... $ 47,096 $ 30,665 $ 32,870
======= ====== ======
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest................................................................... $ 85,449 $ 71,005 $ 50,847
====== ====== ======
Income Taxes .............................................................. $ 11,077 $ 4,745 $ 8,384
====== ===== =====
Non-cash Investing Activities:
Transfers from Loans to Real Estate Owned................................... $ 3,654 $ 929 $ 1,311
===== === =====
Transfers of Mortgage-Backed Securities From Held-to-Maturity
to Available-for-Sale..................................................... $ -- $ -- $ 283,245
==== ==== =======
Supplemental Information to the Consolidated Statements of Cash Flows Relating
to Continental Bank, Bank of Westbury and Sunrise Bancorp, Inc. Acquisitions
- -------------------------------------------------------------------------
Non-cash investing and financing transactions relating to the Continental Bank
acquisition for the year ended June 30, 1998 and the Bank of Westbury and
Sunrise Bancorp, Inc. acquisitions for the year ended June 30, 1996 not
reflected in the Consolidated Statement of Cash Flows are listed below:
1998 1996
---- ----
<S> <C> <C>
Fair Value of Assets Acquired, Excluding Cash and Cash
Equivalents Acquired...................................................... $ 168,240 $ 745,341
Liabilities Assumed.......................................................... (171,083) (702,273)
Excess of Cost Over Fair Value of Net Assets Acquired........................ 17,691 51,356
Stock Consideration.......................................................... (23,954) --
-------- -------
Cash Paid for Acquisitions, Net of (Cash and Cash
Equivalents Acquired).................................................... $ (9,106) $ 94,424
======= ======
See accompanying notes to consolidated financial statements.
</TABLE>
26
<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 primarily 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
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
27
<PAGE>
using the level-yield method. The Company currently has the ability and intent
to hold the debt securities until maturity. Equity securities classified
held-to-maturity are not readily marketable.
(e) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities. Mortgage-backed securities held-to-maturity are carried at current
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 is
credited to income based on the principal amount outstanding during the period.
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" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures". 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
Land is carried at cost. Buildings, leasehold improvements, furniture and
fixtures and equipment are carried at cost, less accumulated depreciation and
amortization. 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.
28
<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
acquisitions of the Bank of Westbury, Sunrise Bancorp, Inc. and Continental Bank
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 is 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. In the interest of maintaining a comprehensive benefit package for
employees, the Bank periodically evaluates the overall effectiveness and
economic value of the pension plan. Based on an evaluation of the pension plan
in fiscal 1998, the Bank concluded that future benefit accruals under the plan
would cease, or "freeze" on May 31, 1998. In its stead, Reliance Federal Savings
Bank 401(k) Retirement Savings Plan (the "401(k) Plan") was formed. Effective
June 1, 1998, all Reliance Federal Savings Bank employees who are at least 21
years of age and have completed one year of service are eligible to participate
in the 401(k) Plan.
Actuarial gains and losses that arise from changes in assumptions concerning
future events, used in estimating pension costs, have been amortized over a
period that reflects the long range nature of pension expense. However, as a
result of the freezing of the plan, the Bank recognized a curtailment gain in
fiscal 1998. (See Note 16).
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 results in
fluctuations in compensation expense as a result of changes in the fair value of
the Company's common stock; however, such compensation expense fluctuations
result in an offsetting adjustment to paid in capital. Therefore, total
stockholders' equity is not affected.
The Bank follows SFAS No. 123, "Accounting for Stock-Based Compensation". 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.
29
<PAGE>
25, "Accounting for 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; 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.
(m) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost.
(n) Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". 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, adjusted for the unallocated portion of
shares held by the ESOP in accordance with SOP 93-6. 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 was 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 effective December 31, 1997.
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 $103.6 million. 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. The financial position and
results of operations of the Company as of and for the year ended June 30, 1998,
1997 and 1996 are presented in Note 20.
On February 9, 1998, the Company completed its fifth five percent stock
repurchase plan repurchasing 440,973 shares at an aggregate cost of $13.4
million. On January 12, 1998, the Company announced its sixth stock repurchase
plan to repurchase up to 500,000 of the Company's outstanding shares. As of June
30, 1998, 100,000 shares under this program were repurchased at an aggregate
cost of $3.7 million. During fiscal years 1998, 1997 and 1996, the Company
repurchased total shares of 460,973, 442,182 and 260,776, respectively, at an
aggregate cost of $15.3 million, $8.1 million and $3.8 million, respectively.
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, 1998 and 1997 was
approximately $21.4 million and $25.3 million, 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,
30
<PAGE>
the amount required for the liquidation account, or if such declaration and
payment would otherwise violate regulatory requirements. During fiscal 1998, the
Company declared cash dividends totalling $6.0 million.
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 six 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.
Acquisition of Continental Bank
On October 17, 1997, the Company completed the acquisition of Continental Bank
("Continental"), a commercial bank with two full service banking offices located
in Nassau and Suffolk counties in Long Island, New York, a commercial lending
facility and five check cashing facilities ("Money Centers") in Manhattan. The
transaction was accounted for as a purchase. Under the terms of the merger,
Reliance issued 1.10 shares (1,013,909 shares) of its common stock for each
outstanding common share of Continental. The cost of the acquisition was
approximately $24.4 million. Assets acquired in the transaction, principally
loans and mortgage-backed securities aggregated $177.8 million and liabilities
assumed, substantially all deposits and borrowings, aggregated $171.1 million.
The excess of cost over fair value of net assets acquired in the transaction was
$17.7 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 Actual.................. (4,218) (199) (146) (274) 467 (4,370)
1999 Projected............... (4,563) (282) (112) (297) 457 (4,797)
2000 Projected............... (4,563) (148) (92) (240) 300 (4,743)
2001 Projected............... (4,563) (49) (71) (190) 9 (4,864)
Thereafter Projected......... (45,247) 53 (77) (1,356) -- (46,627)
-------- ----- ----- ------- ------ --------
$ (68,486) $ (626) $ (730) $ (2,787) $ 2,285 $ (70,344)
======= ===== ===== ======= ===== ========
31
<PAGE>
4. Money Market Investments
Money market investments generally have original maturities of three months or
less, and at June 30, 1998 and 1997 consist solely of securities purchased 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 $4.5 million for the
year ended June 30, 1998 and $3.0 million for the year ended June 30, 1997. The
maximum amount of such agreements outstanding at any month-end during the fiscal
year ended June 30, 1998 and 1997 was $23.0 million and $8.5 million,
respectively.
5. Debt and Equity Securities
A summary of the amortized cost and estimated market values of debt and equity
securities are as follows:
June 30, 1998
-------------------------------------------------
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.............................. $ 22,493 $ 293 $ -- $ 22,786
Obligation of New York State.................................... 390 27 -- 417
FHLB Stock...................................................... 17,306 -- -- 17,306
------ --- --- ------
$ 40,189 $ 320 $ -- $ 40,509
====== === === ======
Available-for-Sale:
U.S. Government Agency Obligations.............................. $ 29,031 $ 260 $ (1) $ 29,290
Corporate Obligations........................................... 103,070 343 (246) 103,167
Marketable Equity Securities.................................... 2,419 31 -- 2,450
----- ---- ---- ------
$ 134,520 $ 634 $ (247) $ 134,907
======= === ==== =======
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
Obligation of New York State.................................... 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
======= === ==== =======
32
<PAGE>
The amortized cost and estimated market value of debt and equity securities at
June 30, 1998 and 1997, by contractual maturity, are shown below:
June 30, 1998 June 30, 1997
---------------------------------------- ----------------------------------------
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.... $ 2,493 $ 2,499 $ 5,892 $ 5,902 $ -- $ -- $ 10,955 $ 10,981
Due After One Year
Through Five Years....... 390 417 18,466 18,493 10,343 10,369 5,866 5,845
Due After Five Years
Through Ten Years........ 20,000 20,287 13,144 13,378 20,000 20,100 10,000 10,066
Due After Ten Years........ -- -- 94,599 94,684 -- -- -- --
Equity Securities.......... 17,306 17,306 2,419 2,450 15,683 15,683 8 17
------ ------ ------ ----- ------ ------ ----- -----
$ 40,189 $ 40,509 $ 134,520 $ 134,907 $ 46,026 $ 46,152 $ 26,829 $ 26,909
====== ====== ======= ======= ====== ====== ====== ======
In fiscal 1998,1997 and 1996 gross proceeds from the sale of debt and equity
securities available-for-sale totalled $4.9 million, $5.0 million and $29.2
million, respectively. For fiscal 1998, 1997 and 1996 gross realized gains
totalled $11,000, $17,000 and $20,000, respectively, and gross realized losses
totalled $0, $16,000 and $15,000, respectively.
33
<PAGE>
6. Mortgage-Backed Securities
The amortized cost and estimated market values of mortgage-backed securities are
summarized as follows:
June 30, 1998
--------------------------------------------------
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.................................................... $ 78,106 $ 2,126 $ -- $ 80,232
FHLMC................................................... 10,304 267 -- 10,571
FNMA.................................................... 33,949 959 -- 34,908
REMICs:
Agency Issuance.................................. 53,021 85 (307) 52,799
Private Issuance................................. 73,879 353 (410) 73,822
------ --- ---- ------
$ 249,259 $ 3,790 $ (717) $ 252,332
======= ===== ===== =======
Available-for-Sale:
Pass-through Certificates Guaranteed by:
GNMA.................................................... $ 187,562 $ 2,732 $ (47) 190,247
FHLMC................................................... 118,982 1,702 (7) 120,677
FNMA.................................................... 140,597 1,618 (32) 142,183
REMICs:
Agency Issuance................................... 128,113 198 (39) 128,272
Private Issuance.................................. 358,033 1,404 (469) 358,968
------- ----- ---- -------
$ 933,287 $ 7,654 $ (594) $ 940,347
======= ===== ==== =======
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>
In fiscal 1998, 1997 and 1996 gross proceeds from the sale of mortgage-backed
securities available-for-sale totalled $190.2 million, $59.8 million and $180.6
million, respectively. For fiscal 1998, 1997 and 1996 gross realized gains
totalled $540,000, $466,000 and $1,881,000, respectively, and gross realized
losses totalled $556,000, $295,000 and $1,208,000, respectively.
34
<PAGE>
7. Loans Receivable
Loans receivable, net are summarized as follows:
June 30,
--------------------------
1998 1997
---- ----
Mortgage Loans: (In thousands)
One- to four-family........................ $ 492,804 $ 552,577
Multi-family............................... 243,070 190,293
Commercial Real Estate..................... 43,624 23,445
Co-op...................................... 7,516 8,647
Construction............................... 4,879 1,440
------ ------
791,893 776,402
Less:
Unearned Discount, Premiums and
Deferred Loan Origination Fees, Net........ (942) (790)
------- -------
Total Mortgage Loans.................. 790,951 775,612
------- -------
Commercial Loans:
Asset Based Loans.......................... 21,339 --
Other Commercial Loans..................... 28,548 --
------ -----
Total Commercial Loans................ 49,887 --
------ -----
Consumer and Other Loans:
Home Equity Lines of Credit................ 93,862 91,782
Guaranteed Student Loans................... 15,262 17,006
Home Equity Loans.......................... 19,050 19,505
Loans on Deposit Accounts.................. 5,416 5,514
Other Loans................................ 3,622 4,308
----- -----
137,212 138,115
Deferred Loan Origination Costs, Net........ 688 776
----- ------
Total Consumer and Other Loans........ 137,900 138,891
------- -------
Less:
Allowance for Loan Losses.................. (8,941) (5,182)
------- -------
$ 969,797 $ 909,321
======= =======
June 30,
--------------------------
1998 1997
---- ----
Commitments Outstanding: (In thousands)
Mortgage Loans............................. $ 33,386 $ 26,214
====== ======
Consumer and Other Commercial Loans........ $ 7,056 $ 509
====== =====
Unused Consumer Lines of Credit............ $ 53,361 $ 53,399
====== ======
Unused Commercial Lines of Credit.......... $ 22,622 $ --
====== =====
At June 30, 1998 and 1997, the Company had commitments to sell loans of $3.7
million and $525,000, respectively. At June 30, 1998, the Company had no
commitments to purchase loans. At June 30, 1997, the Company had commitments to
purchase loans of $1.5 million.
35
<PAGE>
The principal balance of loans in arrears three months or more:
June 30,
-------------------------------------
1998 1997
--------------- -----------------
No. of No. of
loans Amount loans Amount
----- ------ ----- ------
(Dollars in thousands)
One- to four-family Mortgages...... 70 $ 6,256 120 $ 10,959
Consumer and Other Loans........... 62 517 71 465
Commercial Real Estate............. 7 1,962 9 3,303
Commercial......................... 9 567 -- --
---- ----- ---- ------
148 $ 9,302 200 $ 14,727
=== ===== === ======
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,
-------------------
1998 1997 1996
---- ---- ----
(In thousands)
Interest Income that would have been Recorded..... $ 1,159 $ 838 $ 622
Interest Income Recognized........................ (360) (265) (68)
---- ---- ---
Interest Income Foregone.......................... $ 799 $ 573 $ 554
=== === ===
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, 1998 and 1997, the Company had four impaired commercial real estate
loans totalling $1.9 million and $2.9 million, respectively, with no related
allowance. The Company had ten impaired commercial loans totalling $567,000 at
June 30, 1998 and no impaired commercial loans at June 30, 1997 and 1996, with
no related allowances. The Company's average recorded investment in impaired
loans for the years ended June 30, 1998, 1997 and 1996 was $2.5 million, $1.9
million and $493,000, respectively. The Company did not recognize any interest
income on impaired loans for the years ended June 30, 1998, 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, 1998
and 1997, there were no fixed rate loans classified as held for sale.
Included in mortgage loans at June 30, 1998 and 1997 are $425.2 million and
$416.2 million, respectively, of adjustable rate mortgage loans.
Proceeds from the sale of first mortgage loans were $8.5 million, $7.3 million
and $5.9 million during the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. Gross realized gains and losses resulting from sale of first
mortgage loans were as follows:
Year Ended June 30,
----------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Gross Realized Gains............. $ 44 $ 31 $ 34
Gross Realized Losses............ -- (3) (4)
--- --- ---
$ 44 $ 28 $ 30
== == ==
36
<PAGE>
The Bank services mortgage loans for investors which are not included in the
accompanying consolidated statements of condition. A summary of the principal
balances, custodial escrow, servicing income and number of loans serviced for
others by the Bank are as follows:
Year Ended June 30,
---------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Principal Balances............................ $ 355,149 $ 410,229 $ 455,626
======= ======= =======
Custodial Escrow.............................. $ 4,290 $ 4,493 $ 6,980
===== ===== =====
Servicing Income (Excludes MSR Amortization).. $ 1,183 $ 1,399 $ 861
===== ===== ===
Number of Loans............................... 6,085 6,842 7,497
===== ===== =====
Fees earned for servicing loans are reported as income when the related mortgage
payments are collected. Mortgage Servicing Rights ("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, 1998 and 1997, 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,
------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Balance at Beginning of the Year............... $ 3,046 $ 3,905 $ --
MSRs Acquired in Acquisitions of
Bank of Westbury and Sunrise Bancorp, Inc..... -- -- 4,145
Amortization................................... (729) (859) (240)
---- ---- ----
Balance at End of the Year..................... $ 2,317 $ 3,046 $ 3,905
===== ===== =====
8. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Year Ended June 30,
------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Balance at Beginning of the Year............ $ 5,182 $ 4,495 $ 1,729
Provision for Loan Losses................... 1,650 950 725
Allowances of Acquired Institutions......... 2,745 -- 2,217
Charge-offs................................. (773) (306) (265)
Recoveries.................................. 137 43 89
----- ------ ------
Balance at End of the Year.................. $ 8,941 $5,182 $ 4,495
===== ===== =====
9. Real Estate Owned
Real estate owned, net is summarized as follows:
June 30,
-------------------
1998 1997
---- ----
(In thousands)
One- to four-family Residences................... $ 505 $ 365
Co-ops........................................... 73 419
Commercial....................................... 300 --
Allowance for Losses on Real Estate Owned........ (123) (334)
---- ----
$ 755 $ 450
===== =====
37
<PAGE>
Results of operating real estate owned for the years ended June 30, 1998, 1997
and 1996 are summarized as follows:
Year Ended June 30,
---------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Net Gain on Sale on Real Estate Owned.......... $ 146 $ 56 $ 19
Net Expenses of Holding Property............... (271) (239) (223)
Provision for Losses........................... (93) (200) (375)
---- ---- ----
$(218) $ (383) $(579)
===== ===== =====
Activity in the allowance for losses in real estate owned is summarized as
follows:
Year Ended June 30,
-------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Balance at Beginning of the Year............ $ 334 $ 768 $ 589
Provision for Losses........................ 93 200 375
Allowance of Acquired Institutions.......... -- -- 188
Charge-offs................................. (304) (634) (384)
--- ---- ----
Balance at End of the Year.................. $ 123 $ 334 $ 768
=== === ===
10. Accrued Interest Receivable
Accrued interest receivable, net is summarized as follows:
June 30,
------------------
1997 1998
------ ------
(In thousands)
Debt Securities......................................... $ 1,708 $ 842
Mortgage-Backed Securities.............................. 7,137 5,548
Loans Receivable, Net of Reserves for Uncollectible
Interest of $1,293 and $1,741, respectively........... 6,113 5,650
------ ------
$ 14,958 $ 12,040
====== ======
11. Office Properties and Equipment
A summary of office properties and equipment, net is as follows:
June 30,
------------------
1998 1997
---- ----
(In thousands)
Land.............................................. $ 4,489 $ 4,094
Buildings......................................... 10,477 8,970
Furniture, Fixtures and Equipment................. 13,853 12,161
Leasehold Improvements............................ 4,407 2,908
Capital Lease..................................... 1,470 1,470
------ ------
Office Properties and Equipment, at Cost.......... 34,696 29,603
Accumulated Depreciation and Amortization......... (19,260) (15,514)
------- -------
$ 15,436 $ 14,089
====== ======
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 $2.0 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 $311,000 and $404,000 at June 30, 1998
and 1997, respectively, and is included in accrued expenses and other
liabilities. The leaseback is recorded as a capital
38
<PAGE>
lease in the amount of $1.5 million at June 30, 1998 and 1997 (refer to the
above table) and the related obligation under capital leases of $535,000 and
$673,000 at June 30, 1998 and 1997 is reflected in accrued expenses and other
liabilities. The projected annual lease payments amount to $215,000 per year
(including interest) and total $717,000 through the duration of the lease.
Depreciation and amortization of office properties and equipment, included in
occupancy and equipment expense, was approximately, $1.6 million, $1.4 million
and $1.0 million for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
12. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
1998 1997
------------------------------- --------------------------
Weighted Weighted
average average
rate Amount Percent rate Amount Percent
---- ------ ------- ---- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW..................................... 1.52% $ 104,955 7% 1.00% $ 78,017 6%
Passbook................................ 2.22 443,745 27 2.40 438,612 31
Money Market............................ 2.22 92,815 6 2.40 92,184 6
Certificates of Deposit................. 5.56 934,558 57 5.61 806,750 56
Non-Interest Bearing Demand Deposit..... -- 52,225 3 -- 20,474 1
------- --- -------- ---
$ 1,628,298 100% $ 1,436,037 100%
========= === ========= ===
June 30,
----------------------------------------
1998 1997
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Contractual Maturity of Certificates of Deposit Accounts:
Under 12 months............................................ $ 797,860 85% $ 524,707 65%
Over 12 months to 36 months................................ 112,097 12 245,382 30
Over 36 months............................................. 24,601 3 36,661 5
------- --- ------- ---
$ 934,558 100% $ 806,750 100%
======= === ======= ===
The aggregate amount of certificates of deposit accounts with a minimum
denomination of $100,000 was approximately $78,052,000 and $51,259,000 at June
30, 1998 and 1997, respectively.
Interest expense on deposits is summarized as follows:
Year Ended June 30,
---------------------------
1998 1997 1996
---- ---- ----
(In thousands)
NOW................................. $ 1,257 $ 1,041 $ 1,161
Passbook............................ 10,439 10,937 8,942
Money Market........................ 2,249 2,493 2,515
Certificates of Deposit............. 49,487 39,668 29,807
------ ------- ------
$ 63,432 $ 54,139 $ 42,425
====== ====== ======
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,
were assessed a one-time assessment of 65.7 basis points per $100 of insured
SAIF deposits. The Company recorded a one-time pre-tax charge of $8.25 million
during the first quarter of fiscal year 1997.
39
<PAGE>
13. Borrowed Funds
The Bank was obligated for borrowings as follows:
June 30, 1998 June 30, 1997
------------------- -----------------
Weighted Weighted
average average
rate Amount rate Amount
---- ------ ---- ------
(Dollars in thousands)
Advances from FHLB - NY................................... 5.49% $ 182,136 5.58% $ 40,000
Reverse Repurchase Agreements............................. 5.64 398,070 5.78 311,913
Company Obligated Mandatorily Redeemable Capital
Securities of Reliance Capital Trust I................ 8.17 50,000 -- --
------ -------
$ 630,206 $ 351,913
======= =======
Information concerning borrowings under reverse repurchase agreements is
summarized as follows:
At or for the Year Ended
-------------------------------------
June 30, 1998 June 30, 1997
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Average Balance during the Year........................................... $ 309,618 $ 288,845
Average Interest Rate during the Year..................................... 5.79% 5.63%
Maximum Month-end Balance during the Year................................. $ 398,070 $ 326,391
Mortgage-Backed Securities Pledged as Collateral under Reverse
Repurchase Agreements at Year End:
Carrying Value....................................................... $ 418,883 $ 326,843
Estimated Market Value............................................... $ 421,931 $ 326,801
</TABLE>
FHLB advances and reverse repurchase agreements at June 30, 1998 have
contractual maturities as follows:
Reverse
Year Ended FHLB Repurchase
June 30, Advances Agreements
-------- -------- ----------
(In thousands)
1999 $ 28,136 $ 278,070
2000 -- 25,000
2001 20,000 --
2002 34,000 20,000
2003 -- 75,000
Thereafter 100,000 --
------- -------
Total $ 182,136 $ 398,070
======= =======
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, 1998 and 1997 were secured
by a blanket lien over all assets equal to 110% of borrowings.
On April 29, 1998, Reliance Capital Trust I, a trust formed under the laws of
the State of Delaware (the "Capital Trust") issued $50 million of 8.17% capital
securities. The Holding Company is the owner of all the beneficial interests
represented by common securities of the Trust. The Trust exists for the sole
purpose of issuing the Trust securities (comprised of the capital securities and
the common securities) and investing the proceeds thereof in the 8.17% junior
subordinated deferrable interest debentures issued by the Holding Company on
April 23, 1998 which are scheduled to mature on May 1, 2028. Interest on the
capital securities is payable in semiannual installments, commencing on November
1, 1998. The Trust securities are subject to mandatory redemption (i) in whole,
but not in part upon repayment in full, at the stated maturity of the junior
subordinated debentures at a redemption price equal
40
<PAGE>
to the principal amount of, plus accrued interest on, the junior subordinated
debentures,(ii) in whole, but not in part, at any time prior to May 1, 2008,
contemporaneously with the occurrence and continuation of a special event,
defined as a tax event or regulatory capital event, at a special event
redemption price equal to the greater of 100% of the principal amount of the
junior subordinated debentures or the sum of the present values of the principal
amount and premium payable with respect to an optional redemption of the junior
subordinated debentures on the initial optional repayment date to and including
the initial optional prepayment date, discounted to the prepayment date plus
accrued and unpaid interest thereon, and (iii) in whole or in part, on or after
May 1, 2008, contemporaneously with the optional prepayment by the Corporation
of the junior subordinated debentures at a redemption price equal to the
optional prepayment price. Subject to prior required regulatory approval, the
junior subordinated debentures are redeemable during the 12-month periods
beginning on or after May 1, 2008 at 104.085% of the principal amounts
outstanding, declining ratably each year thereafter to 100%, plus accrued and
unpaid interest thereon to the date of redemption. Deferred issuance costs in
the amount of $1.0 million, are being amortized over ten years and are included
in Prepaid Expenses and Other Assets in the Company's Consolidated Statement of
Condition as of June 30, 1998.
14. Income Taxes
The Company files a consolidated Federal income tax return on a calendar-year
basis.
Under legislation enacted subsequent to June 30, 1996, the Bank is no longer
able to use the percentage of taxable income method previously allowed 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.
The Company provided for New York State and New York City taxes based on
alternative taxable income for the year ended June 30, 1998 and based on taxable
income for the years ended June 30, 1997 and 1996.
In connection with the acquisitions of the Bank of Westbury, Sunrise Bancorp,
Inc and Continental Bank, a net deferred tax asset of $911,000, a net deferred
tax liability of $2,285,000 and a net deferred tax asset of $1,050,000,
respectively, were recognized for temporary differences between the book basis
and tax basis of assets and liabilities acquired.
41
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1998 and
June 30, 1997 are presented below:
<TABLE>
<CAPTION>
June 30,
--------------------
1998 1997
---- ----
Deferred Tax Assets: (In thousands)
<S> <C> <C>
Provisions for Losses on Loans and Real Estate Owned........................ $ 1,833 $ 325
Book Deferred Gain on Sale of Building...................................... 368 468
Deposits.................................................................... 333 535
Deferred Fees............................................................... 71 128
Other ...................................................................... 6 --
---- ----
Total Deferred Tax Assets................................................... 2,611 1,456
----- -----
Deferred Tax Liabilities:
Unrealized Gain on Available-for-Sale Securities............................ 3,235 1,299
Mortgage Loans.............................................................. 483 680
Office Properties and Equipment............................................. 335 830
Mortgage Servicing Rights................................................... 298 492
Debt and Equity and Mortgage-Backed Securities.............................. 185 181
Other....................................................................... 747 772
----- -----
Total Deferred Tax Liabilities............................................... 5,283 4,254
----- -----
Net Deferred Tax Liability...................................................... $ (2,672) $ (2,798)
======= =======
The total income tax provision for the years ended June 30, 1998, 1997 and 1996
differs from the amount of tax provision that would result by applying the
statutory United States Federal income tax rate of 35.0% for fiscal 1998, 1997
and 1996 to income before income taxes:
Year Ended June 30,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------ -----------------
Amount % Amount % Amount %
------ -- ------ -- ------ --
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax Provision Statutory Rate............... $ 11,739 35.0% $ 7,376 35.0% $ 7,584 35.0%
Amortization of Excess of Cost Over
Fair Value of Net Assets Acquired........ 1,444 4.3 1,191 5.7 675 3.1
State and Local Income Tax, Net of
Federal Income Tax Benefit............... 924 2.8 1,228 5.8 1,684 7.8
Non-Deductible Expense of ESOP............. 643 1.9 302 1.4 133 0.6
Tax Exempt Interest on Municipal
Investments.............................. (11) 0.0 (11) (0.1) (23) (0.1)
Other, Net................................. 71 0.2 52 0.3 (107) (0.5)
--- --- ---- --- ---- ---
Income Tax Expense ..................... $ 14,810 44.2% $ 10,138 48.1% $ 9,946 45.9%
====== ==== ====== ==== ===== ====
</TABLE>
The components of the provision for income taxes for the years ended June 30,
1998, 1997 and 1996 are as follows:
Year Ended June 30,
--------------------------------
1998 1997 1996
---- ---- ----
Current: (In thousands)
Federal...................... $ 13,876 $ 8,193 $ 6,858
State and Local.............. 1,459 1,861 2,348
----- ----- -----
15,335 10,054 9,206
Deferred:
Federal...................... (488) 56 497
State and Local.............. (37) 28 243
----- ---- ----
(525) 84 740
---- ------ ---
$ 14,810 $ 10,138 $ 9,946
====== ====== =====
42
<PAGE>
15. Commitments
At June 30, 1998, 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, 1998, 1997 and 1996 was
approximately $1.3 million, $1.0 million and $819,000, 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)
1999...................... 1,116
2000...................... 947
2001...................... 848
2002...................... 821
2003...................... 444
Thereafter................ 1,130
-----
$ 5,306
=======
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, 1998 and 1997, has outstanding balances on letters of
credits of $500,000 and $500,000, respectively. In addition, at June 30, 1998,
the Bank had $828,000 in commercial standby letters of credit. 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 Plans
Pension Plan
The following table sets forth the Pension Plan's funded status and amounts
recognized in the Company's consolidated statements of condition:
<TABLE>
<CAPTION>
June 30,
-------------------
1998 1997
---- ----
(In thousands)
Actuarial Present Value of Benefits Obligations:
<S> <C> <C>
Vested Benefit Obligation.................................................... $ 4,991 $ 7,494
Accumulated Benefit Obligation............................................... 4,991 7,596
===== =====
Plan Assets at Fair Value......................................................... 5,658 8,825
Projected Benefit Obligation for Service Rendered to Date......................... 4,991 9,365
----- -----
Plan Assets Greater (Less) Than Projected Benefit Obligation...................... 667 (540)
Unrecognized Net Asset Value Being Amortized over 15 Years........................ -- (21)
Unrecognized Prior Service Cost................................................... (40) (58)
Unrecognized Net Loss Due to Past Experience
Different from Assumptions Made and Changes in Assumptions..................... 169 1,116
---- -----
Prepaid Pension Cost.............................................................. $ 796 $ 497
=== ===
43
<PAGE>
The components of net pension expense are as follows:
Year Ended June 30,
----------------------
1998 1997 1996
---- ---- ----
(In thousands)
Service Cost-benefits Earned during the Year....... $ 627 $ 327 $ 330
Interest Cost on Projected Benefit Obligation...... 710 627 553
Net Amortization and Deferral...................... 20 (290) 64
Actual Return on Plan Assets....................... (710) (482) (778)
Curtailment Gain Recognized........................ (739) -- --
Settlement Loss Recognized......................... 117 -- --
---- ---- ---
Net Pension Expense................................ $ 25 $ 182 $ 169
=== === ===
Year Ended June 30,
-----------------------
1998 1997 1996
---- ---- ----
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..... 8.0% 9.0% 9.0%
Based on an evaluation of the pension plan in fiscal 1998, the Bank concluded
that future benefit accruals under the plan would cease, or "freeze" on May 31,
1998. In connection with the freezing of the Plan, the Bank recognized a
curtailment gain of approximately $739,000 and a settlement loss of
approximately $117,000 as of May 31, 1998.
In connection with the acquisitions of Bank of Westbury, Sunrise Bancorp, Inc.
and Continental Bank, 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's pension plan effective June 1, 1997. However, as
a result of the pension plan's eligibility requirements and the freezing of the
pension plan on May 31, 1998, no Continental employees were eligible to
participate in the plan.
Reliance Federal Savings Bank 401(k) Retirement Plan
Effective June 1, 1998, employees of the Bank who are at least 21 years of age
and have completed one year of service are eligible to participate in the
Reliance Federal Savings Bank 401(k) Retirement Plan (the "401(k) Plan").
Eligible employees may make pre-tax contributions equal to the lesser of ten
percent of their annual compensation or the amount permitted by law. As a base
amount, the Bank will make contributions (on account for eligible employees)
equal to two percent of all eligible employees earnings regardless of whether
employees make contributions on their own behalf. Additionally, the Bank will
make matching contributions equal to 75% of employee contributions that do not
exceed four percent of their annual earnings. Employees are immediately vested
in their own contributions and after five years of service they will be vested
in the Bank's base and matching contributions. During fiscal 1998, the Bank
incurred $40,000 in 401(k) Plan costs.
17. Stock Benefit Plans
The following are the stock based benefit plans maintained by the Company:
Stock Option Plan
The Company maintains the Reliance Bancorp, Inc. 1994 Incentive Stock Option
Plan and the Reliance Bancorp, Inc. 1996 Incentive Stock Option Plan Amended and
Restated as of February 17, 1997 (the "Stock Option Plans"). Under the Stock
Option Plans, stock options (which expire ten years from the date of grant) 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
44
<PAGE>
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 Amended and Restated Reliance Bancorp, Inc. 1994 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 options 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.
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>
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
Granted....................................................... 13,647 3,353 40,500 29.87
Forfeited..................................................... -- -- -- --
Exercised..................................................... (131,399) (102,816) (1,500) 11.33
--------- --------- ------- -----
Balance Outstanding at June 30, 1998.......................... 512,371 295,329 276,877 $ 13.17
======= ======= ======= =====
Shares Exercisable at June 30, 1998........................... 390,294 250,847 274,634 $ 13.45
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:
1998 1997 1996
-------- -------- -------
(Dollars in thousands, except per share data)
Net Income As Reported $ 18,729 $ 10,936 $ 11,723
Pro forma 18,492 8,672 11,669
Net Income per Common Share:
Basic As Reported $ 2.11 $ 1.32 $ 1.36
Pro forma $ 2.08 1.04 1.36
Diluted As Reported $ 1.99 $ 1.25 $ 1.32
Pro forma $ 1.96 0.99 1.32
45
<PAGE>
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 1998, 1997 and 1996: dividend yield of 3.00% for all years; expected
volatility of 22.05% for fiscal 1998 and 16.64% for fiscal 1997 and 1996;
risk-free interest rates of 6.25% for all years; and expected option lives of 6
years for all 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 $8.3 million 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 to the ESOP
over a 10 year period. At June 30, 1998 and 1997, the loan had an outstanding
balance of $4.8 million and $5.6 million, respectively, and an interest rate of
8.50% and 8.50%, respectively. Interest expense for the obligation was $441,000,
$502,000 and $588,000, respectively, for the year ended June 30, 1998, 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, 1998, 288,394 shares remaining in the ESOP 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, 1998 and 1997, the fair market value of the 455,400
and 538,200 unallocated shares, respectively, was $17.4 million and $15.8
million, respectively.
Recognition and Retention Plans and Trusts ("RRPs")
The Bank maintains the Reliance Federal Savings Bank Recognition and
Retention Plan for Officers and Employees and the Amended and Restated Reliance
Federal Savings Bank 1994 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 412,447 shares have been awarded to Officers and Directors
(327,715 at the time of the Conversion and 84,732 thereafter). 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 $3.7 million,
$2.5 million and $2.0 million, respectively, for the years ended June 30, 1998,
1997 and 1996.
18. Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share", which establishes new standards for computing and presenting earnings
per share ("EPS"). All earnings per share amounts have been restated to conform
to the new requirements.
Basis EPS is computed by dividing net income by the weighted average number of
common shares outstanding. The weighted average number of common shares
outstanding includes the average number of shares of common stock outstanding
adjusted for the weighted average number of unallocated shares held by the ESOP.
46
<PAGE>
Diluted EPS is computed by dividing net income by the weighted average number of
common shares and common equivalent shares outstanding during the year. For the
diluted EPS calculation, the weighted average number of common shares and common
equivalent shares outstanding include the average number of shares of common
stock outstanding adjusted for the weighted average number of unallocated shares
held by the ESOP and the dilutive effect of unexercised stock options using the
treasury stock method. When applying the treasury stock method, the Company's
average stock price is utilized, and the Company adds to the proceeds the tax
benefit that would have been credited to additional paid-in capital assuming
exercise of non-qualified stock options.
The computation of basis and diluted EPS for the fiscal years ended June 30,
1998, 1997 and 1996 are presented in the following table:
Year Ended June 30,
-------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net income......................................... $ 18,729 $ 10,936 $ 11,723
Weighted average common shares..................... 8,890 8,299 8,594
----- ------- -------
Basic earnings per share........................... $ 2.11 $ 1.32 $ 1.36
======== ======== ========
Net income......................................... $ 18,729 $ 10,936 $ 11,723
Weighted average common shares - basic............. 8,890 8,299 8,594
Effect of dilutive stock options................... 535 425 269
-------- ------- -------
Weighted average common shares and common
equivalent shares............................... 9,425 8,724 8,863
-------- ----- -------
Diluted earnings per share......................... $ 1.99 $ 1.25 $ 1.32
======= ====== ======
19. 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, 1998 and 1997, 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, 1998, 1997 and 1996,
the Bank was 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 1998 and 1997,
the Bank made dividend payments to the Company of $14.0 million and $6.7
million, respectively.
During fiscal 1998, the Company invested $18.8 million of the proceeds from the
issuance of its Junior Subordinated debt in the Bank which increased the Bank's
capital and capital ratios.
47
<PAGE>
The following table sets forth the required ratios and amounts and the Bank's
actual capital amounts and ratios at June 30, 1998 and 1997:
June 30, 1998
------------------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- -- ------- -- ------- --
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible.................. $ 35,825 1.5% $ 145,337 6.1% $ 109,512 4.6%
Leverage.................. 71,650 3.0 145,337 6.1 73,687 3.1
Risk-based................ 80,724 8.0 154,245 15.3 73,521 7.3
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
20. 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.
48
<PAGE>
June 30,
------------------------------------------------------
1998 1997
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In thousands)
On Balance Sheet:
Financial Assets:
<S> <C> <C> <C> <C>
Cash and Due from Banks.............................. $ 37,596 $ 37,596 $ 29,565 $ 29,565
Money Market Investments............................. 9,500 9,500 1,100 1,100
Debt and Equity Securities Available-for-Sale........ 134,907 134,907 26,909 26,909
Debt and Equity Securities Held-to-Maturity.......... 40,189 40,509 46,026 46,152
Mortgage-Backed Securities Available-for-Sale........ 940,347 940,347 721,819 721,819
Mortgage-Backed Securities Held-to-Maturity.......... 249,259 252,332 159,356 163,108
Loans Receivable, Net................................ 969,797 984,224 909,321 910,671
Mortgage Servicing Rights............................ 2,317 2,632 3,046 3,797
Financial Liabilities:
Deposits............................................. 1,628,298 1,630,087 1,436,037 1,432,234
Borrowed Funds....................................... 630,206 631,407 351,913 349,499
Off Balance Sheet:
Outstanding Commitments.............................. 116,425 116,425 80,122 80,122
Letters of Credit.................................... 1,382 1,382 500 500
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.
49
<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.
21. Parent-Only Financial Information
The following condensed statements of condition at June 30, 1998 and 1997 and
condensed statements of income and cash flows for the years ended June 30, 1998,
1997 and 1996 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.
CONDENSED STATEMENTS OF CONDITION
June 30,
--------------------------
1998 1997
---- ----
ASSETS (In thousands)
<S> <C> <C>
Cash..................................................................... $ 1,294 $ 470
Money Market Investments................................................. 9,500 1,100
Debt Securities Available-for-Sale....................................... 24,374 4,811
ESOP Loan Receivable..................................................... 4,799 5,622
Other Assets............................................................. 2,210 633
Investment in Reliance Federal Savings Bank.............................. 205,355 151,772
Investment in Reliance Capital Trust I................................... 1,547 --
------ -----
Total Assets..................................................... $ 249,079 $ 164,408
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued Expenses......................................................... $ 2,668 $ 1,738
Junior Subordinated Debt Issued to Reliance Capital Trust I.............. 51,547 --
Stockholders' Equity..................................................... 194,864 162,670
------- -------
Total Liabilities and Stockholders' Equity....................... $ 249,079 $ 164,408
======= =======
50
<PAGE>
CONDENSED STATEMENTS OF INCOME
Year Ended June 30,
-------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest Income - Securities and Repurchase Agreements.......... $ 615 $ 230 $ 958
Interest Income - ESOP Loan Receivable.......................... 441 502 588
----- ---- -----
Total Interest Income................................... 1,056 732 1,546
Interest Expense................................................ (724) -- --
Cash Dividends from the Bank.................................... 14,000 6,700 --
Other Operating Income.......................................... 11 -- 3
Other Operating Expense......................................... (418) (521) (551)
----- ---- ----
Income Before Income Taxes and Equity in Undistributed
Earnings of the Bank......................................... 13,925 6,911 998
(Recovery) Provision for Income Taxes........................... (30) 90 445
----- ---- ----
Income before Equity in Undistributed
Earnings of the Bank........................................ 13,955 6,821 553
Equity in Undistributed Earnings of Reliance
Federal Savings Bank........................................ 4,774 4,115 11,170
----- ----- ------
Net Income...................................... $ 18,729 $ 10,936 $ 11,723
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended June 30,
-------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Cash from Operating Activities:
<S> <C> <C> <C>
Net Income...................................................... $ 18,729 $ 10,936 $ 11,723
Equity in Undistributed Earnings of the Bank ................... (4,774) (4,115) (11,170)
Accretion of Discounts.......................................... (47) (70) --
Net Gain on Sale of Securities.................................. (11) -- (3)
(Increase) Decrease in Other Assets............................. (1,655) 544 (73)
Increase in Accrued Expenses.................................... 2,550 122 52
----- ---- ---
Net Cash Provided by Operating Activities.................. 14,792 7,417 529
------ ----- ---
Cash Flows from Investing Activities:
Purchase of Debt Securities Available-for-Sale.................. (24,187) (4,715) --
Proceeds from Sales of Debt Securities Available-for-Sale....... 4,870 -- 23,883
Principal Payments on ESOP Loan Receivable...................... 823 850 831
Payments for Investments in Reliance Capital Trust I............ (1,547) -- --
Payments for Investments in Bank................................ (18,750) -- (9,673)
------- ---- ------
Net Cash (Used in) Provided by Investing Activities......... (38,791) (3,865) 15,041
------- ------ ------
Cash Flows from Financing Activities:
Proceeds from Issuance of Junior Subordinated Debt.............. 51,547 -- --
Purchase of Treasury Stock...................................... (15,269) (8,113) (3,829)
Net Proceeds from Issuance of Common Stock
Upon Exercise of Stock Options............................... 2,670 898 --
Dividends Paid.................................................. (5,725) (4,578) (3,808)
------ ------- -------
Net Cash Provided by (Used in) Financing Activities........ 33,223 (11,793) (7,637)
------ -------- -------
Net Increase (Decrease) in Cash and Cash Equivalents............ 9,224 (8,241) 7,933
Cash and Cash Equivalents at Beginning of Year.................. 1,570 9,811 1,878
------ ----- -----
Cash and Cash Equivalents at the End of Year.................... $ 10,794 $ 1,570 $ 9,811
====== ===== =====
</TABLE>
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
[LOGO] KPMG Peat Marwick LLP
Certified Public Accountants
1305 Walt Whitman Road
Melville, NY 11747-4302
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, 1998 and 1997 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, 1998.
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick
Melville, NY 11747-4302
July 23, 1998
52
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Quarterly Financial Data
- ----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Fiscal 1998 Quarter Ended
-------------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
Interest Income............................................. $ 36,183 $ 39,266 $ 38,446 39,924
Interest Expense............................................ 20,169 22,078 21,424 23,157
------ ------ ------ ------
Net Interest Income......................................... 16,014 17,188 17,022 16,767
Provision for Loan Losses................................... 900 300 300 150
------ ------ ------ ------
Net Interest Income after Provision for Loan Losses......... 15,114 16,888 16,722 16,617
Non-Interest Income......................................... 2,263 1,692 1,922 1,982
General and Administrative Expense.......................... 8,047 8,816 9,087 9,275
Real Estate Operations, net................................. 225 (67) 12 48
Amortization of Excess of Cost Over Fair Value
of Net Assets Acquired.................................... 846 1,090 1,141 1,141
----- ----- ----- -----
Income Before Provision for Income Taxes.................... 8,259 8,741 8,404 8,135
Income Tax Expense.......................................... 3,518 3,854 3,746 3,692
----- ----- ----- -----
Net Income.................................................. $ 4,741 $ 4,887 $ 4,658 $ 4,443
===== ===== ===== =====
Basic Earnings Per Share.................................... $ 0.58 $ 0.54 $ 0.51 $ 0.48
==== ==== ==== ====
Diluted Earnings Per Share ................................. $ 0.54 $ 0.51 $ 0.48 $ 0.46
==== ==== ==== ====
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
======= ===== ===== =====
Basic Earnings (Loss) Per Share........................... $ (0.17) $ 0.47 $ 0.50 $ 0.53
====== ==== ==== ====
Diluted Earnings (Loss) Per Share ........................ $ (0.17) $ 0.45 $ 0.47 $ 0.50
====== ===== ==== ====
53
</TABLE>
<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
Charles V. DeRosa
Taxation
Frank A. Dreiss, Jr.
Data Processing
John J. Hogan
Marketing
James F. Kramer
Controller
William J. McKenna
Loan Servicing
Peter McCarthy
Retail Banking
William Riley
Commercial Lending
Jeannette Sabatelli
Consumer Credit
Frances Secondo
Internal Audit
Kevin J. Talty
Mortgage Originations
ASSISTANT VICE PRESIDENTS
John F. Brackx
Joseph C. Byrne
Roseanne Cullmer
Christine V. Gerber
Russell M. Kerstein
Steven F. Leibow
Maureen Marsh
John J. Martingale
Charles McCartin
Peter O'Neill
Francis J. McHale, Jr.
Panagiota Paloscio
Stephen Plezia
Thomas Rose
Ronald K. Session
54
<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
Patricia 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
Wendy Kubovec
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
Garden City
118 Seventh Street
Garden City, New York 11530
Thomas Quigley
AVP - Branch Manager
Hicksville
405 Jerusalem Avenue
Hicksville, New York 11801
Jacqueline Harrison
Branch Manager
North Bellmore
2843 Jerusalem Avenue
North Bellmore, New York 11710
Ann Marie Richartz
Branch Manager
Plainview
1074 Old Country Road
Plainview, New York 11803
Jacqueline Campo
Branch Manager
Roosevelt Field
300 Garden City Plaza
Garden City, New York 11530
Jean Hahn
Branch Manager
55
<PAGE>
RELIANCE BANCORP, INC.
BANKING OFFICES, Continued
NASSAU Continued
- ----------------
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
SUFFOLK
- -------
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 Babylon North
1383 Deer Park Avenue
North Babylon, NY 11703
Theresa Mackey
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
56
<PAGE>
STOCKHOLDER INFORMATION
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 10, 1998 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 9, 1998. 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 1998 and 1997.
1998
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
High.......... $33.00 $36.88 $38.75 $42.25
Low........... $27.69 $30.00 $29.69 $36.75
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
As of July 31, 1998, the Company had approximately 1,100 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
1305 Walt Whitman Road
Melville, New York 11747-4302
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
57
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
[LOGO] KPMG Peat Marwick LLP
Certified Public Accountants
1305 Walt Whitman Road
Melville, NY 11747-4302
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 23, 1998, relating to the consolidated statements of condition of Reliance
Bancorp, Inc. and subsidiary as of June 30, 1998 and 1997 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, 1998, which
report is incorporated by reference to the June 30, 1998 Annual Report on Form
10-K of Reliance Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Melville, New York
September 28, 1998
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
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