UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Exchange Act")
For the quarterly period ended December 31, 1998
Commission File Number: 0-23126
RELIANCE BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3187176
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
585 Stewart Avenue, Garden City, New York 11530
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 222-9300
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of February 10, 1998, there were 8,707,588 shares of common stock, $.01 par
value, outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Consolidated Statements of Condition at December 31, 1998 and
June 30, 1998 (Unaudited)
Consolidated Statements of Income for the Three Months and
Six Months Ended December 31, 1998 and 1997 (Unaudited)
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1998 and 1997 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
1
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<TABLE>
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
(Dollars in thousands, except share and per share data)
December 31, June 30,
Assets 1998 1998
- ------ ----------- -------
<S> <C> <C>
Cash and due from banks...................................................................... $ 34,312 $ 37,596
Money market investments..................................................................... 2,000 9,500
Debt and equity securities available-for-sale................................................ 102,996 134,907
Debt and equity securities held-to-maturity (with estimated
market values of $38,876 and $40,509, respectively)...................................... 38,697 40,189
Mortgage-backed securities available-for-sale................................................ 960,219 940,347
Mortgage-backed securities held-to-maturity (with estimated
market values of $279,630 and $252,332, respectively)..................................... 276,324 249,259
Loans receivable:
Mortgage loans.......................................................................... 791,653 790,951
Commercial loans........................................................................ 48,300 49,887
Consumer and other loans................................................................ 131,142 137,900
Less allowance for loan losses........................................................ (9,226) (8,941)
-------- ---------
Loans receivable, net........................................................... 961,869 969,797
Accrued interest receivable, net............................................................. 14,023 14,958
Office properties and equipment, net......................................................... 15,400 15,436
Prepaid expenses and other assets............................................................ 7,227 11,732
Mortgage servicing rights.................................................................... 1,903 2,317
Excess of cost over fair value of net assets acquired........................................ 56,655 58,936
Real estate owned, net....................................................................... 679 755
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Total assets.................................................................... $ 2,472,304 $ 2,485,729
========= =========
Liabilities and Stockholders' Equity
Deposits..................................................................................... $ 1,647,016 $ 1,628,298
Borrowed Funds............................................................................... 598,316 630,206
Advance payments by borrowers for taxes and insurance........................................ 7,253 9,806
Accrued expenses and other liabilities....................................................... 42,467 22,555
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Total liabilities............................................................... 2,295,052 2,290,865
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Commitments
Stockholders' Equity
Preferred Stock, $.01 par value, 4,000,000 shares
authorized; none issued.................................................................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 10,750,820 shares issued; 8,705,888 and 9,564,988
outstanding, respectively................................................................ 108 108
Additional paid-in capital................................................................... 119,477 117,909
Retained earnings, substantially restricted.................................................. 109,282 102,305
Accumulated other comprehensive income:
Net unrealized appreciation on securities available-for-sale, net of taxes................ 256 4,212
Less:
Unallocated common stock held by ESOP........................................................ (4,140) (4,554)
Unearned common stock held by RRP............................................................ (304) (713)
Common stock held by SERP (at cost).......................................................... (373) (373)
Treasury stock, at cost (2,044,932 and 1,185,832 shares, respectively)....................... (47,054) (24,030)
--------- --------
Total stockholders' equity.............................................................. 177,252 194,864
------- -------
Total liabilities and stockholders' equity....................................... $ 2,472,304 $ 2,485,729
========= =========
See accompanying notes to unaudited consolidated financial statements.
2
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ------------------------
1998 1997 1998 1997
-------- -------- ------ ------
Interest income:
<S> <C> <C> <C> <C>
First mortgage loans....................................... $ 15,880 $ 15,980 $ 31,598 $ 31,727
Commercial loans........................................... 1,298 1,190 2,690 1,190
Consumer and other loans................................... 2,746 3,129 5,671 6,155
Mortgage-backed securities................................. 19,840 17,492 39,564 33,475
Money market investments................................... 58 164 221 280
Debt and equity securities................................. 2,552 1,311 5,498 2,622
------ ------ ------ ------
Total interest income................................... 42,374 39,266 85,242 75,449
------ ------ ------ ------
Interest expense:
Deposits................................................... 15,987 16,199 32,622 31,163
Borrowed funds............................................. 8,787 5,879 17,817 11,084
------ ------ ------ ------
Total interest expense.................................. 24,774 22,078 50,439 42,247
------ ------ ------ ------
Net interest income before provision for loan losses.... 17,600 17,188 34,803 33,202
Provision for loan losses.................................. 350 300 500 1,200
------- ------- ------ ------
Net interest income after provision for loan losses..... 17,250 16,888 34,303 32,002
------ ------ ------ ------
Non-interest income:
Loan fees and service charges.............................. 265 150 425 373
Other operating income..................................... 1,061 847 2,074 1,526
Income from Money Centers.................................. 670 570 1,302 570
Condemnation award on joint venture........................ -- -- -- 1,483
Net gain (loss) on securities.............................. (59) 125 7 3
------- ------ ------ -------
Total non-interest income............................... 1,937 1,692 3,808 3,955
----- ----- ----- -----
Non-interest expense:
Compensation and benefits.................................. 5,011 5,052 10,297 9,573
Occupancy and equipment.................................... 1,643 1,550 3,418 3,009
Federal deposit insurance premiums......................... 225 232 453 453
Advertising................................................ 225 308 493 704
Other operating expenses................................... 1,686 1,674 3,256 3,124
----- ----- ------ ------
Total general and administrative expenses............... 8,790 8,816 17,917 16,863
Real estate operations, net................................ (14) (67) 73 158
Amortization of excess of cost over fair value
of net assets acquired................................... 1,141 1,090 2,281 1,936
----- ----- ------ ------
Total non-interest expense................................. 9,917 9,839 20,271 18,957
----- ----- ------ ------
Income before income taxes.................................... 9,270 8,741 17,840 17,000
Income tax expense ........................................... 4,051 3,854 7,850 7,372
----- ----- ------ ------
Net income.................................................... $ 5,219 $ 4,887 $ 9,990 $ 9,628
===== ===== ===== =====
Net income per common share:
Basic........................................ $ 0.63 $ 0.54 $ 1.16 $ 1.12
==== ==== ==== ====
Diluted...................................... $ 0.60 $ 0.51 $ 1.10 $ 1.05
==== ==== ==== ====
See accompanying notes to unaudited consolidated financial statements.
3
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended
December 31,
-------------------------
Cash flows from operating activities: 1998 1997
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<S> <C> <C>
Net income............................................................................. $ 9,990 $ 9,628
Adjustments to reconcile net income to net cash provided by operating activities:......
Provision for loan losses.............................................................. 500 1,200
Provision for losses on real estate owned.............................................. 35 80
Amortization of premiums, net.......................................................... 1,430 651
Amortization relating to allocation and earned portion of stock plans.................. 1,669 1,777
Amortization of excess of cost over fair value of net assets acquired.................. 2,281 1,936
Amortization of mortgage servicing rights.............................................. 414 433
Depreciation and amortization.......................................................... 911 770
Net gain on securities................................................................. (7) (3)
Net gain on loans sold................................................................. (62) (3)
Proceeds from loans sold............................................................... 14,216 1,724
Net gain on sale of real estate owned.................................................. (64) (53)
Decrease (increase) in accrued interest receivable, net................................ 935 (625)
Decrease (increase) in prepaid expenses and other assets............................... 4,962 (3,549)
Increase in accrued expenses and other liabilities..................................... 23,482 24,503
------ -------
Net cash provided by operating activities.......................................... 60,692 38,469
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Cash flows from investing activities:
(Originated and purchased loans) net of principal repayments........................... (7,175) 1,205
Purchases of mortgage-backed securities available-for-sale............................. (331,826) (271,365)
Proceeds from sales of mortgage-backed securities available-for-sale................... 115,705 152,445
Purchases of mortgage-backed securities held-to-maturity............................... (85,189) (67,242)
Principal repayments from mortgage-backed securities................................... 249,783 109,127
Purchases of debt securities available-for-sale........................................ (2,000) (9,994)
Purchases of debt securities held-to-maturity.......................................... (1,000) --
Proceeds from calls and maturities of debt securities.................................. 18,545 10,000
Proceeds from sales of debt securities available-for-sale.............................. 14,157 2,699
Purchases of office properties and equipment........................................... (905) (998)
Proceeds from sales of real estate owned............................................... 442 2,257
Cash and cash equivalents acquired in Continental Bank acquisition..................... -- 9,106
--------- -----
Net cash used in investing activities.............................................. (29,463) (62,760)
-------- --------
Cash flows from financing activities:
Increase in deposits................................................................... 18,947 30,150
Decrease in advance payments by borrowers for taxes and insurance...................... (2,553) (2,346)
Proceeds from FHLB advances............................................................ 424,381 15,200
Repayment of FHLB advances........................................................... (245,388) (6,825)
Proceeds from reverse repurchase agreements............................................ 285,218 537,205
Repayment of reverse repurchase agreements............................................. (496,101) (533,917)
Purchases of treasury stock............................................................ (23,809) (8,265)
Net proceeds from issuance of common stock upon exercise of stock options.............. 460 1,258
Dividends paid......................................................................... (3,168) (2,628)
------- -------
Net cash (used in) provided by financing activities................................. (42,013) 29,832
-------- ------
Net (decrease) increase in cash and cash equivalents................................... (10,784) 5,541
Cash and cash equivalents at beginning of period....................................... 47,096 30,665
------- ------
Cash and cash equivalents at end of period............................................. $ 36,312 $ 36,206
======= ======
See accompanying notes to unaudited consolidated financial statements.
4
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RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Unaudited)
(Dollars in thousands)
Six Months Ended
December 31,
----------------------
1998 1997
---- ----
Supplemental disclosures of cash flow information
Cash paid during the six months ended for:
<S> <C> <C>
Interest............................................................................... $ 50,166 $ 40,552
====== ======
Income taxes........................................................................... $ -- $ 175
====== ======
Non-cash investing activities:
Transfers from loans to real estate owned.............................................. $ 337 $ 2,620
====== =====
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
5
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RELIANCE BANCORP, INC. and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Reliance Bancorp, Inc. (the "Company"), its direct
wholly-owned subsidiary, Reliance Federal Savings Bank (the "Bank") and
the subsidiaries of the Bank.
The unaudited consolidated financial statements included herein reflect
all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the three and
six months ended December 31, 1998 are not necessarily indicative of
the results of operations that may be expected for the entire fiscal
year. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These
unaudited consolidated financial statements should be read in
conjunction with audited consolidated financial statements and notes
thereto, included in the Company's 1998 Annual Report on Form 10-K.
2. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 requires that
enterprises report certain financial and descriptive information about
operating segments in complete sets of financial statements of the
Company and in condensed financial statements of interim periods issued
to stockholders. SFAS No. 131 also requires that enterprises report
certain information about their products and services, geographic areas
in which they operate, and their major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 but does
not have to be applied to interim financial statements in the initial
year of application. 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.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No.132 revises
employers' disclosures about pension and other postretirement benefit
plans, but does not change the measurement or recognition of those
plans. SFAS No. 132 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 not considered useful. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997
and requires restatement of prior periods presented. 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.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes
6
<PAGE>
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is,
unrealized gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for
fiscal quarters of fiscal years beginning after June 15, 1999 and does
not require restatement of prior periods. Management of the Company
believes the implementation of SFAS No. 133 will not have a material
impact on the Company's financial condition or results of operations.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" ("SFAS No. 134"). SFAS No. 134 conforms the
accounting for securities retained after the securitization of mortgage
loans by a mortgage banking enterprise with the accounting for
securities retained after the securitization of other types of assets
by a nonmortgage banking enterprise. SFAS No. 134 is effective for the
first fiscal quarter beginning after December 15, 1998. Management of
the Company believes the implementation of SFAS No. 134 will not have a
material impact on the Company's financial condition or results of
operations.
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 requires that all
items that are components of "comprehensive income" be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as "the change in
equity [net assets] of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources."
It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The
Company adopted the provisions of SFAS No. 130 during the first quarter
of fiscal 1999 and as such was required to (a) classify items of other
comprehensive income by their nature in a financial statement; (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section in the statement of financial condition and (c)
reclassify prior periods presented. As the requirements of SFAS No. 130
are disclosure-related, its implementation had no impact on the
Company's financial condition or results of operations.
7
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Comprehensive income for the three and six months ended December 31,
1998 and 1997 is as follows:
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income ....................................... $ 5,219 $ 4,887 $ 9,990 $ 9,628
Other comprehensive income, net of taxes:
Change in net unrealized appreciation
on securities available-for-sale
net of reclassification adjustment....... (5,160) (208) (3,956) 2,800
------- ----- -------- ------
Comprehensive income.............................. $ 59 $ 4,679 $ 6,034 $ 12,428
======= ===== ===== ======
</TABLE>
8
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized on
November 16, 1993 and is the holding company for Reliance Federal Savings Bank
(the "Bank") and the subsidiaries of 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. As of December 31, 1998, the Company had
8,705,888 shares outstanding, all of which were common shares.
The Company is headquartered in Garden City, New York and its primary business
currently consists of the operations of its wholly owned subsidiary, the Bank.
In addition to directing, planning and coordinating the business activities of
the Bank, the Company invests primarily in U.S. Government securities, corporate
debt and equity securities and repurchase agreements. In addition, the Company
completed the acquisition of 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 five money center check cashing operations which result in additional
fee income to the Bank.
The Company's results of operations are dependent primarily on 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 expenses, other non-interest expenses, and income tax expense.
General and administrative expenses 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, and amortization of excess of
cost over fair value of net assets acquired. The earnings of the Company and the
Bank may also significantly be affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
9
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Financial Condition
As of December 31, 1998, total assets were $2.5 billion, a decrease of $13.4
million from June 30, 1998. Mortgage-backed securities increased $46.9 million,
or 3.9%, during the quarter ended December 31, 1998, primarily due to increased
purchases of fixed rate agency and private label collateralized mortgage
obligations offset by amortization and prepayments. Debt and equity securities
decreased $33.4 million, or 19.1%, from $175.1 million at June 30, 1998 to
$141.7 million at December 31, 1998 as a result of sales and calls of debt
securities.
Deposits increased $18.7 million, or 1.2%, during the six months ended December
31, 1998 as a result of growth in new certificate of deposit products while
borrowings decreased $31.9 million, or 5.1%, from $630.2 million at June 30,
1998 to $598.3 million at December 31, 1998.
Treasury stock increased from $24.0 million at June 30, 1998 to $47.1 million at
December 31, 1998 principally as a result of 894,000 shares repurchased during
the six months ended December 31, 1998.
Non-performing assets
Non-performing loans totalled $7.5 million, or 0.77% of total loans, at December
31, 1998, as compared to $9.3 million, or 0.95% of total loans, at June 30,
1998. The lower level of non-performing loans is due to a large loan that paid
off during the quarter ended December 31, 1998. Non-performing loans at December
31, 1998 were comprised of $5.0 million of loans secured by one- to four-family
residences, $1.7 million of commercial real estate loans, $586,000 of commercial
loans and $243,000 of guaranteed student and other loans.
For the quarter ended December 31, 1998, the Company's loan loss provision was
$350,000 as compared to $150,000 in the prior linked quarter ended September 30,
1998 and $300,000 in the prior year quarter. The higher provision during the
quarter ended December 31, 1998 primarily relates to the higher level of
charge-offs recorded during the quarter. For the three and six months ended
December 31, 1998, the Company experienced net charge-offs of $209,000 and
$216,000, respectively. The higher level of charge-offs during the quarter ended
December 31, 1998 was due to the Bank partially charging-off the loan balance on
a non-performing commercial real estate loan. The Company's allowance for loan
losses totalled $9.2 million at December 31, 1998 as compared to $8.9 million at
June 30, 1998 which represents a ratio of allowance for loan losses to
non-performing loans and to total loans of 123.34% and 0.95%, respectively, and
96.12% and 0.91%, respectively. Management believes the allowance for loan
losses at December 31, 1998 is adequate and sufficient reserves are presently
maintained to cover losses on non-performing loans.
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more on which the Bank is accruing interest at the dates
indicated and real estate owned. It is the Bank's policy to classify any loans,
or any portion thereof, determined to be uncollectible 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.
10
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<TABLE>
December 31, June 30,
1998 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Non-accrual mortgage loans delinquent more than 90 days.................... $ 6,337 $ 8,218
Non-accrual commercial loans delinquent more than 90 days.................. 586 567
Non-accrual other loans delinquent more than 90 days....................... 325 316
------ -----
Total non-accrual loans delinquent more than 90 days................... 7,248 9,101
Loans 90 days or more delinquent and still accruing........................ 231 201
------ -----
Total non-performing loans................................................. 7,479 9,302
Total foreclosed real estate, net of related allowance for losses.......... 679 755
------ -----
Total non-performing assets................................................ $ 8,158 $10,057
====== ======
Non-performing loans to total loans........................................ 0.77% 0.95%
Non-performing assets to total assets...................................... 0.33% 0.40%
Allowance for loan losses to non-performing loans.......................... 123.34% 96.12%
Allowance for loan losses to total loans................................... 0.95% 0.91%
</TABLE>
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 loans
("ARM"), consumer and commercial loans, shorter-term fixed rate multi-family,
mortgage, consumer and commercial loans and the purchase of shorter-term fixed
rate and adjustable-rate mortgage-backed securities. However, there can be no
assurances that the Bank will be able to originate adjustable rate loans or
acquire mortgage-backed securities with terms and characteristics which conform
with the Bank's underwriting standards, investment criteria or interest rate
risk policies.
The Company has attempted to limit its exposure to interest rate risk through
the origination and purchase of ARMs and through purchases of adjustable-rate
mortgage-backed and mortgage-related securities and fixed rate mortgage-backed
and mortgage-related securities with short and medium-term average lives.
The actual duration of mortgage loans and mortgage-backed securities can be
significantly impacted by changes in mortgage prepayment and market interest
rates. Mortgage prepayment rates will vary due to a number of factors, including
the regional economy in the area where the underlying mortgages were originated,
seasonal factors, demographic variables and the assumability of the underlying
mortgages. However, the largest determinants of prepayment rates are prevailing
interest rates and related mortgage refinancing opportunities. Management
monitors interest rate sensitivity so that adjustments in the asset and
liability mix, when deemed appropriate, can be made on a timely basis.
At December 31, 1998, $751.8 million, or 32.2%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $791.7 million, of which $416.5 million, or
52.6%, were adjustable-rate loans and $375.2 million, or 47.4%, were fixed
11
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- -rate loans. The Bank's commercial loan portfolio totalled $48.3 million,
of which $39.7 million, or 82.1%, were adjustable-rate loans and $8.6 million,
or 17.9%, were fixed-rate loans. In addition, at December 31, 1998, the Bank's
consumer loan portfolio totalled $131.1 million, of which $103.7 million, or
79.1%, were adjustable-rate home-equity lines of credit and guaranteed student
loans and $27.5 million, or 20.9%, were fixed-rate home-equity and other
consumer loans.
At December 31, 1998, the mortgage-backed securities portfolio totalled $1.2
billion, of which $191.9 million, or 15.5%, of the mortgage-backed portfolio
were adjustable-rate securities and $1.0 billion, or 84.5%, were fixed-rate
securities. The mortgage-backed securities portfolio classified as
available-for-sale totalled $960.2 million of which $128.9 million, or 13.4%,
were adjustable rate securities and $831.3 million, or 86.6%, were fixed-rate
securities. The mortgage-backed securities portfolio classified as held-
to-maturity totalled $276.3 million of which $63.0 million, or 22.8%, were
adjustable rate securities and $213.3 million, or 77.2%, were fixed-rate
securities.
During the six months ended December 31, 1998, the Bank purchased approximately
$417.0 million of agency and private label collateralized mortgage obligations.
In addition, during the six months ended December 31, 1998 the Bank sold
approximately $51.9 million of 30 year mortgage-backed securities, $43.8 million
of agency and private label collateralized mortgage obligations and $20.0
million of adjustable-rate securities. The Bank has continued to reposition its
securities portfolio by purchasing agency and private label collateralized
mortgage obligations in order to increase the incremental yield of the portfolio
as well as shorten the duration of the securities portfolio. Management believes
that these securities may represent attractive alternatives relative to other
investments due to the wide variety of maturity, repayment, and interest rate
options available. The Bank has funded the purchase of these securities through
a combination of internal deposit growth and borrowings, primarily reverse
repurchase agreements and FHLB-NY advances, and from sales and principal
repayments of mortgaged-backed securities..
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
1997.
General. Net income for the three months ended December 31, 1998 was $5.2
million, an increase of $332,000, or 6.8%, from $4.9 million in the prior year
period. Net income for the quarter ended December 31, 1998 represents an
annualized return on average assets and average tangible equity of 0.84% and
17.89%, respectively as compared to 0.89% and 15.87%, respectively, in the prior
year period.
Interest Income. Interest income increased $3.1 million, or 7.9%, from $39.3
million for the three months ended December 31, 1997, to $42.4 million for the
three months ended December 31, 1998. The increase resulted from an increase of
$273.2 million, or 13.3%, in the average balance of interest-earning assets from
$2.1 billion for the 1997 period to $2.3 billion for the 1998 period and a
decrease in the average yield of interest-earning assets from 7.62% in the prior
year period to 7.26%. The growth in interest-earning assets was directly
attributable to assets acquired from Continental Bank and the Bank's increased
purchases of mortgage-backed securities and increased originations of
multi-family loans. Interest income from consumer and other loans decreased
$383,000, or 12.2% from $3.1 million in the prior year period to $2.7 million
for the 1998 period due to a $10.2 million decrease in the average balance of
consumer and other loans and a 48 basis point decrease in the average yield of
consumer and other loans. For the three months ended December 31, 1998, interest
income from mortgage-backed securities increased $2.3 million, or 13.4%, from
$17.5 million for the 1997 period to $19.8 million for the 1998 period,
primarily due to an increase of $203.5 million, or 20.1%, in the average balance
of mortgage-backed securities
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<PAGE>
offset by a decrease in the average yield on these securities of 40 basis points
from 6.97% for the 1997 period to 6.57% for the 1998 period. The increase in the
average balance of mortgage-backed securities is primarily due to increased
purchases of private label collateralized mortgage obligations and securities
acquired from Continental Bank. Mortgage-backed securities generally bear
interest rates lower than loans. Accordingly, to the extent the demand for loans
which meet the Bank's underwriting standards remains low in the Bank's primary
market area and the Bank continues to increase its investment of mortgage-backed
securities, yields on interest-earning assets may tend to be lower than if the
Bank increased its investment of funds in loans.
Interest Expense. Interest expense for the three months ended December 31, 1998,
was $24.8 million, an increase of $2.7 million, or 12.2%, from $22.1 million for
the three months ended December 31, 1997. The increase in interest expense is
related to a $278.5 million, or 14.5%, increase in the average balance of
interest-bearing liabilities from $1.9 billion for the 1997 period to $2.2
billion for the 1998 period offset by a 9 basis point decrease in the cost of
interest-bearing liabilities from 4.60% for the 1997 period to 4.51% for the
1998 period. The decrease in the average cost of interest-bearing liabilities
resulted primarily from a lower interest rate environment during the quarter
ended December 31, 1998. Interest expense on deposits decreased $212,000, or
1.3%, from $16.2 million for the 1997 period to $16.0 million for the 1998
period, primarily as a result of a 24 basis point decrease in the average cost
of such deposits from 4.27% in the 1997 period to 4.03% in the 1998 period
offset by a $77.7 million, or 5.0% increase in the average balance of such
deposits. Interest expense on borrowed funds increased $2.9 million, or 49.5%,
from $5.9 million for the 1997 period to $8.8 million for the 1998 period
primarily due to a $211.1 million, or 52.7%, increase in the average balance of
borrowings from $400.9 million in the 1997 period to $612.0 million for the 1998
period offset by a 13 basis point decrease in the average cost of such
borrowings from 5.87% in the 1997 period to 5.74% in the 1998 period. The Bank
continues to use borrowings to leverage its capital and fund asset growth.
Borrowed funds, principally reverse repurchase agreements and FHLB-NY advances,
have been reinvested by the Bank in mortgage-backed securities and loans,
leveraging the Bank's capital and improving the return on tangible equity.
Net Interest Income. Net interest income increased to $17.6 million for the
quarter ended December 31, 1998, an increase of $412,000, or 2.4%, from $17.2
million for the quarter ended December 31, 1997. The increase in net interest
income was attributable to the growth in average interest-earning assets to $2.3
billion for the quarter ended December 31, 1998 from $2.1 billion for the
quarter ended December 31, 1997. The growth in average interest-earning assets
resulted from increased investments in mortgage-backed securities and debt
securities. As a result of a continued flat interest rate yield curve and the
leveraging of the proceeds from the trust preferred securities, the Bank's net
interest spread declined to 2.75% from 3.02% and its net interest margin
declined to 3.02% from 3.34%, respectively, for the quarters ended December 31,
1998 and 1997. For the quarter ended December 31, 1998, the yield on
interest-earning assets was 7.26% and the cost of interest-bearing liabilities
was 4.51% as compared to 7.62% and 4.60%, respectively, for the quarter ended
December 31, 1997.
Provision for Loan Losses. The provision for loan losses totalled $350,000 for
the three months ended December 31, 1998 compared to $300,000 for the three
months ended December 31, 1997. The Company increased its provision for loan
losses during the quarter due to higher charge-offs during the quarter and to
increase its loan loss coverage ratios. Management believes that, based on
information currently known to management, the provision for possible loan
losses and the allowance for possible loan losses are currently reasonable and
adequate to cover potential losses reasonably expected in the existing loan
portfolio. While management estimates loan losses using the best available
information, no assurance
13
<PAGE>
can be given that future additions to the allowance will not be necessary based
on changes in economic and real estate market conditions, further information
obtained regarding problem loans, identification of additional problem loans and
other factors, both within and outside of management's control.
Non-Interest Income. Non-interest income increased $245,000, or 14.5%, from $1.7
million in the prior year quarter to $1.9 million in the quarter ended December
31, 1998. The increase is mainly the result of additional fee income from the
acquisition of Continental Bank's check cashing operations and ATM transactions.
Non-Interest Expense. Non-interest expense totalled $9.9 million for the quarter
ended December 31, 1998, a $78,000, or 0.8%, increase from $9.8 million recorded
in the prior year quarter. For the quarter ended December 31, 1998, compensation
and benefits expense decreased to $5.0 million, a decrease of $41,000, or 0.8%,
from $5.1 million for the quarter ended December 31, 1997. The decrease is due
to lower ESOP and RRP expenses. For the quarter ended December 31, 1998, ESOP
and RRP expenses were collectively $756,000, a decrease of $133,000, or 14.9%
from $889,000 recorded in the prior year quarter.
Income Tax Expense. Income tax expense was $4.1 million for the quarter ended
December 31, 1998 representing an effective income tax rate of 43.7% as compared
to $3.9 million and an effective tax rate of 44.1% in the prior year. The Bank's
effective income tax rate is primarily affected by the amortization of excess of
cost over fair value of net assets acquired for which no tax benefit is provided
as well as associated tax benefits related to a subsidiary of the Bank.
Comparison of Operating Results for the Six Months Ended December 31, 1998 and
1997.
General. The Company reported net income of $10.0 million for the six months
ended December 31, 1997 as compared to $9.6 million for the six months ended
December 31, 1997.
Interest Income. Interest income increased $9.8 million, or 13.0%, from $75.4
million for the six months ended December 31, 1997 to $85.2 million for the six
months ended December 31, 1998. The increase in net interest income was
attributable to the growth in average interest-earning assets to $2.3 billion
for the six months ended December 31, 1998 from $2.0 billion for the six months
ended December 31, 1997. The growth in interest-earning assets was directly
attributable to assets acquired from Continental Bank, the Bank's increased
purchases of mortgage-backed securities and increased originations of
multi-family loans. For the six months ended December 31, 1997, interest income
from mortgage-backed securities increased $6.1 million, or 18.2%, from $33.5
million for the 1997 period to $39.6 million for the 1998 period, primarily due
to an increase of $252.7 million, or 26.4%, in the average balance of
mortgage-backed securities offset by a 46 basis points decrease in the average
yield on these securities from 7.04% for the 1997 period to 6.58% for the 1998
period. The increase in the average balance of mortgage-backed securities is
primarily due to increased purchases of shorter duration private label
collateralized mortgage obligations securities and securities acquired from
Continental Bank. Mortgage-backed securities generally bear interest rates lower
than loans. Accordingly, to the extent the demand for loans which meet the
Bank's underwriting standards remains low in the Bank's primary market area and
the Bank continues to increase its investment of mortgage-backed securities,
yields on interest-earning assets may tend to be lower than if the Bank
increased its investment of funds in loans.
Interest Expense. Interest expense for the six months ended December 31, 1998,
was $50.4 million, an increase of $8.2 million, or 19.4%, from $42.2 million for
the six months ended December 31, 1997. The
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<PAGE>
increase in interest expense is related to a $351.2 million, or 19.0%, increase
in the average balance of interest-bearing liabilities and a 1 basis point
increase in the cost of interest-bearing liabilities from 4.57% for the 1997
period to 4.58% for the 1998 period. Interest expense on total deposits
increased $1.5 million, or 4.7%, from $31.2 million for the 1997 period to $32.6
million for the 1998 period, primarily as a result of a $136.3 million, or 9.0%,
increase in the average balance of deposits offset by a 12 basis point decrease
in the average cost of such deposits from 4.23% for the 1997 period to 4.11% for
the 1998 period. Interest expense on borrowed funds increased $6.7 million, or
60.7%, from $11.1 million for the 1997 period to $17.8 million for the 1998
period. Borrowings averaged $612.6 million for the six months ended December 31,
1998, an increase of $235.1 million, or 62.3%, from $377.4 million for the six
months ended December 31, 1997. Borrowed funds, principally reverse repurchase
agreements and FHLB-NY advances have been reinvested by the Bank in
mortgage-backed securities and multi-family loans leveraging the Bank's capital
and improving the return on tangible equity.
Net Interest Income. Net interest income increased to $34.8 million for the six
months ended December 31, 1998, an increase of $1.6 million, or 4.8%, from $33.2
million for the six months ended December 31, 1997. The increase in net interest
income was attributable to the growth in average interest-earning assets to $2.3
billion for the six months ended December 31, 1998 from $2.0 billion for the six
months ended December 31, 1997. The growth in interest-earning assets was from
assets acquired from the Continental Bank acquisition and increased purchases of
mortgage-backed securities and debt securities. As a result of a continued flat
yield curve and the leveraging of the proceeds from the trust preferred
securities, the Bank's net interest spread declined from 3.07% for the six
months ended December 31, 1997 to 2.69% for the six months ended December 31,
1998. The yield on interest-earning assets was 7.27% for the six months ended
December 31, 1998 and the cost of interest-bearing liabilities was 4.58% as
compared to 7.64% and 4.57%, respectively for the six months ended December 31,
1997.
Provision for Loan Losses. The provision for loan losses totalled $500,00 for
the six months ended December 31, 1998 as compared to $1.2 million for the six
months ended December 31, 1997.
Non-performing loans at December 31, 1998 were comprised of $5.0 million of
loans secured by one- to four-family residences, $1.7 million of commercial real
estate loans, $586,000 of commercial loans and $243,000 of guaranteed student
loans. The Company's allowance for loan losses totalled $9.2 million at December
31, 1998 which represents a ratio of allowance for loan losses to non-performing
loans and to total loans of 123.34% and 0.95%, respectively. The Company's
non-performing assets to total assets ratio was 0.33% at December 31, 1998. Net
charge-offs were $216,000 for the six months ended December 31, 1998. Management
believes that, based on information currently known to management, the provision
for possible loan losses and the allowance for possible loan losses are
currently reasonable and adequate to cover potential losses reasonably expected
in the existing loan portfolio. While management estimates loan losses using the
best available information, no assurance can be given that future additions to
the allowance will not be necessary based on changes in economic and real estate
market conditions, further information obtained regarding problem loans,
identification of additional problem loans and other factors, both within and
outside of management's control.
Non-Interest Income. Non-interest income decreased $147,000, or 3.7%, from $4.0
million for the six months ended December 31, 1997 to $3.8 million for the six
months ended December 31, 1998. The slight decrease was due to a gain recognized
in the prior year period from a condemnation award received from an inactive
joint venture offset by additional fee income generated from the check cashing
operations acquired from Continental Bank and increased deposit fee income in
the current year period.
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<PAGE>
Non-Interest Expense. Non-interest expense totalled $20.3 million for the six
months ended December 31, 1998 as compared to $19.0 million for the six months
ended December 31, 1997, an increase of $1.3 million, or 6.9%. This increase is
mainly the result of higher compensation expense, goodwill amortization and
other occupancy costs associated with the Continental Bank acquisition offset by
lower advertising expense. For the six months ended December 31, 1998,
compensation and benefits expense increased $724,000, or 7.6%, to $10.3 million
from $9.6 million for the six months ended December 31, 1997. The increase in
compensation and benefits expense is due to the addition of banking offices,
check cashing and commercial lending personnel from the Continental Bank
acquisition and normal salary adjustments. Occupancy and equipment expense
increased $409,000, or 13.6%, from $3.0 million for the six months ended
December 31, 1997 to $3.4 million for the six months ended December 31, 1998 due
to costs associated with the operation of two new banking offices and five check
cashing facilities.
Income Tax Expense. Income tax expense was $7.9 million for the six months ended
December 31, 1998 and $7.4 million for the six months ended December 31, 1997.
The effective income tax rates were 44.0% for the 1998 period as compared to
43.4% for 1997 period.
Liquidity and Capital Resources
The Company's current primary sources of funds are principal and interest
payments and sales of investments securities and dividends from the Bank.
Dividend payments to the Company from the Bank are subject to the profitability
of the Bank and by applicable laws and regulations. During the quarter ended
December 31, 1998, the Bank made a dividend payment of $8.0 million to the
Company. The Company's liquidity is available to, among other things, support
future expansion of operations or diversification into other banking-related
business, payments of dividends or repurchase its common stock.
On November 6, 1998, the Company announced the completion of its seventh stock
repurchase program and the approval by its Board of Directors for an eighth
stock repurchase plan to repurchase up to 500,000 of the Company's outstanding
shares. As of January 20, 1998, the Company has not repurchased any shares under
this repurchase program. During the quarter ended December 31, 1998, the Company
repurchased 298,500 shares at an aggregate cost of $8.2 million.
On December 16, 1998, the Board of Directors declared a regular cash dividend of
$0.18 per common share for the quarter ending December 31, 1998. The dividend
was paid on January 15, 1999 to stockholders of record on January 4, 1999.
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 4.8% for the six months ended December 31,
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 December 31, 1998,
assets qualifying for liquidity, including cash, US government obligations and
other eligible securities, totalled $194.6 million.
The Bank's primary sources of funds are principal and interest payments on
loans, mortgage-backed securities and debt and equity securities, deposits,
advances from the FHLB-NY, borrowings under reverse
16
<PAGE>
repurchase agreements and sales of loans. While maturities and scheduled
amortization of loans, mortgage-backed securities and debt and equity securities
are predictable sources of funds, deposit flows and mortgage prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition. During the six months ended December 31, 1998, principal
payments on loans and mortgage-backed securities totalled $168.5 million and
$249.8 million, respectively, as compared to $104.1 million and $109.1 million,
respectively, in the prior year period. In addition, during the six months ended
December 31, 1998, the Bank sold $115.7 million of mortgage-backed securities.
At December 31, 1998, advances from the FHLB-NY and borrowings under reverse
repurchase agreements and capital trust securities totalled $598.3 million, a
decrease of $31.9 million, from $630.2 million at June 30, 1998. Deposits
increased $18.7 million, or 1.1%, during the quarter ended December 31, 1998 as
a result of growth in new certificate of deposit products.
The primary investment activity of the Bank is the origination of mortgage,
commercial and consumer loans, and the purchase of mortgage loans and
mortgage-backed securities. During the six months ended December 31, 1998, the
Bank originated and purchased mortgage, commercial and consumer loans in the
amount of $70.6 million, $85.7 million and $19.2 million, respectively. During
the six months ended December 31, 1998, the Bank purchased $417.0 million of
mortgage-backed securities of which $331.8 million were classified as
available-for-sale and $85.2 million were classified as held-to-maturity.
At December 31, 1998, the Bank had outstanding loan commitments of $35.5
million, open home equity lines of credit of $50.3 million and $16.4 million of
open commercial lines of credit. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less from
December 31, 1998 totalled $815.7 million. Management believes that a
significant portion of such deposits will remain with the Bank.
At December 31, 1998, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 6.36%, 6.36% and 16.13%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
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
17
<PAGE>
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 adopted a "Year 2000 Policy" and is in the process of reviewing
its internal systems. The Company has begun testing all computer software
programs and hardware to determine Year 2000 compliance. Further, the Company
has purchased Year 2000 compliant software from EDS for use with the mainframe
computer. The Company believes that with existing modifications to existing
software and conversions to new software and hardware where necessary, the Year
2000 problem will be mitigated without causing a material adverse impact on the
operations of the Company. The Company expects to complete testing and
implementation of changes in the second quarter of calendar 1999.
The Company has initiated formal written communications with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failures to remediate their own Year 2000 Issue.
Significant suppliers have been requested to certify that they are Year 2000
compliant or, if not, to provide their plans to become compliant. Management of
the Company receives monthly updates as to which significant suppliers are Year
2000 compliant and follow-up with all significant suppliers is being conducted
according to plan. 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 discussions with the Company's computer software and hardware vendors,
including its data processing vendors, such vendors 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 Quarterly 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
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<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at June
30, 1998 in Exhibit 13.1 to the Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on September 28, 1998. There have been no
material changes in the Company's market risk at December 31, 1998 as compared
to June 30, 1998. The following is an update of the discussion provided therein:
General. The Company's largest component of market risk continues to be interest
rate risk. Virtually all of this risk continues to reside at the Bank level. The
Bank still is not subject to foreign currency exchange or commodity price risk.
At December 31, 1998, neither the Company nor the Bank owned any trading assets,
nor did they utilize hedging transactions such as interest rate swaps and caps.
Assets, Deposit Liabilities and Wholesale Funds. There has been no material
change in the composition of assets, deposit liabilities and wholesale funds
from June 30, 1998 to December 31, 1998.
GAP Analysis. The one-year cumulative interest sensitivity gap as a percentage
of total assets falls within 4.5% of the level at June 30, 1998 utilizing
similar assumptions as at June 30, 1998.
The Bank's exposure to the risks of changing interest rates may be analyzed, in
part, by examining the extent to which its assets and liabilities are "interest
rate sensitive" and by monitoring the Bank's interest rate sensitivity "gap". An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest-earning
assets maturing or repricing exceeds the amount of interest-bearing liabilities
maturing or repricing within the same period. A gap is considered negative when
the amount of interest-bearing liabilities maturing or repricing exceed the
amount of interest-bearing assets maturing or repricing within the same period.
Accordingly, a positive gap may enhance net interest income in a rising rate
environment and reduce net interest income in a falling rate environment.
Conversely, a negative gap may enhance net interest income in a falling rate
environment and reduce net interest income in a rising rate environment.
At December 31, 1998, the Company's estimated one year interest sensitivity
"gap" (the difference between interest-earning assets and interest-bearing
liabilities that reprice or mature within such period expressed as a percentage
of total assets) was a negative gap of $204.0 million , or (8.21%) of total
assets at December 31, 1998 as compared to a negative gap of $213.7 million, or
(8.60)% of total assets at June 30, 1998. The prepayment rates for mortgage
loans, mortgage-backed securities and consumer loans are based upon the Bank's
historical performance.
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<PAGE>
Interest Rate Risk Compliance. The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at June 30, 1998. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value at December 31, 1998, compared to June 30, 1998, and the projected changes
continue to fall within the board approved limits at all levels of potential
interest rate volatility.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Holding Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on
November 10, 1998 (The Annual Meeting).
At the Annual Meeting, the shareholders of the Company
elected Raymond L. Nielsen, Conrad J. Gunther Jr. and J.
William Newby as directors of the Company each to serve for
a three year term and in any case, until the election and
qualification of their respective successors. In addition,
the shareholders of the Company ratified the appointment of
KPMG LLP as independent auditors of the Company for its 1999
fiscal year.
The number of votes cast at the meeting as to each matter
acted upon were as follows:
(a) Election of Directors:
For Withheld
--- --------
Raymond L. Nielsen 7,985,646 40,510
Conrad J. Gunther Jr. 7,986,288 39,868
J. William Newby 7,984,496 41,660
(b) The ratification of the appointment of KPMG LLP, as
independent auditors of Reliance Bancorp, Inc. for the fiscal
year ending June 30, 1999.
For: 7,993,933
Against: 28,755
Abstained: 3,468
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<PAGE>
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of Reliance Bancorp, Inc. (1)
3.2 Reliance Bancorp, Inc. By-Laws. (1)
11.0 Statement Re: Computation of Per Share Earnings.
27.0 Financial Data Schedule. (2)
b) Reports on Form 8-K
1) The Company filed Form 8-K on November 13, 1998, which
included a copy of the Company's press release dated
November 6, 1998 announcing the eighth stock repurchase
program and the completion of the seventh stock repurchase
program.
- -------------------
(1) Incorporated by reference into this document from the Exhibits filed
with the Registration Statement of Form S-1, Registration No. 33-72476.
(2) Submitted only with filing in electronic format.
22
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reliance Bancorp, Inc.
----------------------
(Registrant)
/s/ Raymond A. Nielsen 02/10/99 /s/ Paul D. Hagan 02/10/99
- ---------------------- -------- ----------------- --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
23
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except per share amount)
<S> <C> <C> <C> <C>
Net Income..................................................... $ 5,219 $ 4,887 $ 9,990 $ 9,628
===== ===== ===== =====
Weighted average common shares outstanding..................... 8,318 9,010 8,659 8,617
Basic earnings per common share................................ $ 0.63 $ 0.54 $ 1.16 $ 1.12
==== ==== ===== ====
Weighted average common shares outstanding..................... 8,318 9,010 8,659 8,617
Potential common stock due to dilutive
effect of stock options.................................... 437 596 466 577
---- ---- ---- ----
Total shares for diluted earnings per share.................... 8,755 9,606 9,125 9,194
Diluted earnings per common share ............................. $ 0.60 $ 0.51 $ 1.10 $ 1.05
====== ==== ===== ====
24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contained summary information extracted from the Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 34,312
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,063,215
<INVESTMENTS-CARRYING> 315,021
<INVESTMENTS-MARKET> 318,506
<LOANS> 971,095
<ALLOWANCE> 9,226
<TOTAL-ASSETS> 2,472,304
<DEPOSITS> 1,647,016
<SHORT-TERM> 548,316
<LIABILITIES-OTHER> 49,720
<LONG-TERM> 50,000
0
0
<COMMON> 119,585
<OTHER-SE> 57,667
<TOTAL-LIABILITIES-AND-EQUITY> 2,472,304
<INTEREST-LOAN> 39,959
<INTEREST-INVEST> 45,062
<INTEREST-OTHER> 221
<INTEREST-TOTAL> 85,242
<INTEREST-DEPOSIT> 32,622
<INTEREST-EXPENSE> 50,439
<INTEREST-INCOME-NET> 34,803
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 20,271
<INCOME-PRETAX> 17,840
<INCOME-PRE-EXTRAORDINARY> 17,840
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,990
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 7.27
<LOANS-NON> 7,248
<LOANS-PAST> 231
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,941
<CHARGE-OFFS> 249
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 9,226
<ALLOWANCE-DOMESTIC> 9,226
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,134
</TABLE>
