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 March 31, 1999
Commission File Number: 0-23126
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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
--------------
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 May 10, 1999, there were 8,583,454 shares of common stock, $.01 par value,
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Consolidated Statements of Condition at March 31, 1999 and
June 30, 1998 (Unaudited)
Consolidated Statements of Income for the Three Months and
Nine Months Ended March 31, 1999 and 1998 (Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1999 and 1998 (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)
March 31, June 30,
Assets 1999 1998
- ------ ---------- -------
<S> <C> <C>
Cash and due from banks...................................................................... $ 29,617 $ 37,596
Money market investments..................................................................... -- 9,500
Debt and equity securities available-for-sale................................................ 116,062 134,907
Debt and equity securities held-to-maturity (with estimated
market values of $40,020 and $40,509, respectively)....................................... 39,950 40,189
Mortgage-backed securities available-for-sale................................................ 965,061 940,347
Mortgage-backed securities held-to-maturity (with estimated
market values of $280,770 and $252,332, respectively)..................................... 278,468 249,259
Loans receivable:
Mortgage loans.......................................................................... 791,434 790,951
Commercial loans........................................................................ 43,408 49,887
Consumer and other loans................................................................ 126,567 137,900
Less allowance for loan losses........................................................ (9,324) (8,941)
-------- ---------
Loans receivable, net........................................................... 952,085 969,797
Accrued interest receivable, net............................................................. 14,354 14,958
Office properties and equipment, net......................................................... 15,867 15,436
Prepaid expenses and other assets............................................................ 6,347 11,732
Mortgage servicing rights.................................................................... 1,686 2,317
Excess of cost over fair value of net assets acquired........................................ 55,514 58,936
Real estate owned, net....................................................................... 414 755
--------- ---------
Total assets.................................................................... $ 2,475,425 $ 2,485,729
========= =========
Liabilities and Stockholders' Equity
Deposits..................................................................................... $ 1,607,439 $ 1,628,298
Borrowed Funds............................................................................... 655,386 630,206
Advance payments by borrowers for taxes and insurance........................................ 13,302 9,806
Accrued expenses and other liabilities....................................................... 19,425 22,555
--------- ---------
Total liabilities............................................................... 2,295,552 2,290,865
--------- ---------
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; 8,680,142 and 9,564,988
outstanding, respectively................................................................ 108 108
Additional paid-in capital................................................................... 120,444 117,909
Retained earnings, substantially restricted.................................................. 112,609 102,305
Accumulated other comprehensive income:
Net unrealized (depreciation) appreciation on securities
available-for-sale, net of taxes......................................................... (1,011) 4,212
Less:
Unallocated common stock held by ESOP........................................................ (3,933) (4,554)
Unearned common stock held by RRP............................................................ (108) (713)
Common stock held by SERP (at cost).......................................................... (373) (373)
Treasury stock, at cost (2,070,678 and 1,185,832 shares, respectively)....................... (47,863) (24,030)
-------- --------
Total stockholders' equity.............................................................. 179,873 194,864
------- -------
Total liabilities and stockholders' equity....................................... $ 2,475,425 $ 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 Nine Months Ended
March 31, March 31,
------------------------ ---------------------
1999 1998 1999 1998
------- -------- ------ -----
Interest income:
<S> <C> <C> <C> <C>
First mortgage loans....................................... $ 15,310 $ 15,966 $ 46,908 $ 47,693
Commercial loans........................................... 1,100 1,334 3,790 2,524
Consumer and other loans................................... 2,546 3,017 8,217 9,172
Mortgage-backed securities................................. 20,015 16,714 59,579 50,189
Money market investments................................... 33 58 254 338
Debt and equity securities................................. 2,435 1,357 7,933 3,979
-------- ------ ------- --------
Total interest income................................... 41,439 38,446 126,681 113,895
------- ------ ------- -------
Interest expense:
Deposits................................................... 15,174 15,990 47,796 47,153
Borrowed funds............................................. 8,784 5,434 26,601 16,518
------- ------- ------- -------
Total interest expense.................................. 23,958 21,424 74,397 63,671
------- ------- ------- -------
Net interest income before provision for loan losses.... 17,481 17,022 52,284 50,224
Provision for loan losses.................................. 150 300 650 1,500
-------- ------- -------- -------
Net interest income after provision for loan losses..... 17,331 16,722 51,634 48,724
------- ------- ------- -------
Non-interest income:
Loan fees and service charges.............................. 422 345 847 718
Other operating income..................................... 1,055 948 3,129 2,474
Income from Money Centers.................................. 628 637 1,930 1,207
Condemnation award on joint venture........................ -- -- -- 1,483
Net gain (loss) on securities.............................. 12 (8) 19 (5)
------- -------- ------- -------
Total non-interest income............................... 2,117 1,922 5,925 5,877
------ ------ ------ ------
Non-interest expense:
Compensation and benefits.................................. 5,143 5,191 15,440 14,764
Occupancy and equipment.................................... 1,864 1,776 5,282 4,785
Federal deposit insurance premiums......................... 245 237 698 690
Advertising................................................ 283 208 776 912
Other operating expenses................................... 1,657 1,675 4,913 4,799
------ ------- ------- -------
Total general and administrative expenses............... 9,192 9,087 27,109 25,950
Real estate operations, net................................ 17 12 90 170
Amortization of excess of cost over fair value
of net assets acquired................................... 1,141 1,141 3,422 3,077
------- ------- -------- -------
Total non-interest expense................................. 10,350 10,240 30,621 29,197
------- ------- ------- -------
Income before income taxes.................................... 9,098 8,404 26,938 25,404
Income tax expense ........................................... 4,022 3,746 11,872 11,118
------- ------- ------- -------
Net income.................................................... $ 5,076 $ 4,658 $ 15,066 $ 14,286
===== ===== ====== ======
Net income per common share:
Basic........................................ $ 0.61 $ 0.51 $ 1.76 $ 1.62
===== ==== ==== ====
Diluted...................................... $ 0.58 $ 0.48 $ 1.68 $ 1.53
==== ==== ==== ====
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)
Nine Months Ended
March 31,
--------------------------
Cash flows from operating activities: 1999 1998
------- ------
<S> <C> <C>
Net income............................................................................. $ 15,066 $ 14,286
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses.............................................................. 650 1,500
Provision for losses on real estate owned.............................................. 28 110
Amortization of premiums, net.......................................................... 1,761 1,645
Amortization relating to allocation and earned portion of stock plans.................. 2,490 2,695
Amortization of excess of cost over fair value of net assets acquired.................. 3,422 3,077
Amortization of mortgage servicing rights.............................................. 631 495
Depreciation and amortization.......................................................... 1,374 1,191
Net (gain) loss on securities.......................................................... (19) 5
Net gain on loans sold................................................................. (113) (7)
Proceeds from loans sold............................................................... 24,019 2,455
Net gain on sale of real estate owned.................................................. (61) (132)
Decrease (increase) in accrued interest receivable, net................................ 604 (452)
Decrease in prepaid expenses and other assets.......................................... 7,074 1,074
Increase (decrease) in accrued expenses and other liabilities.......................... 606 (2,963)
------- --------
Net cash provided by operating activities.......................................... 57,532 24,979
------ -------
Cash flows from investing activities:
(Originated and purchased loans) net of principal repayments........................... (7,261) 8,021
Purchases of mortgage-backed securities available-for-sale............................. (584,045) (335,478)
Proceeds from sales of mortgage-backed securities available-for-sale................... 248,260 165,208
Purchases of mortgage-backed securities held-to-maturity............................... (106,292) (67,242)
Principal repayments from mortgage-backed securities................................... 379,675 216,056
Purchases of debt securities available-for-sale........................................ (16,873) (9,994)
Purchases of debt securities held-to-maturity.......................................... (2,253) --
Proceeds from calls and maturities of debt securities.................................. 21,545 12,505
Proceeds from sales of debt securities available-for-sale.............................. 14,157 4,870
Purchases of office properties and equipment........................................... (1,850) (1,191)
Proceeds from sales of real estate owned............................................... 715 2,448
Cash and cash equivalents acquired in Continental Bank acquisition..................... -- 9,106
------- ------
Net cash (used in) provided by investing activities................................ (54,222) 4,309
-------- -----
Cash flows from financing activities:
(Decrease) increase in deposits........................................................ (20,516) 20,261
Decrease in advance payments by borrowers for taxes and insurance...................... 3,496 4,929
Proceeds from FHLB advances............................................................ 801,892 55,200
Repayment of FHLB advances........................................................... (600,202) (6,825)
Proceeds from reverse repurchase agreements............................................ 408,419 758,981
Repayment of reverse repurchase agreements............................................. (584,929) (830,584)
Purchases of treasury stock............................................................ (24,859) (11,883)
Net proceeds from issuance of common stock upon exercise of stock options.............. 564 2,398
Dividends paid......................................................................... (4,654) (4,079)
-------- ---------
Net cash used in financing activities............................................... (20,789) (11,602)
-------- ---------
Net (decrease) increase in cash and cash equivalents................................... (17,479) 17,686
Cash and cash equivalents at beginning of period....................................... 47,096 30,665
------- -------
Cash and cash equivalents at end of period............................................. $ 29,617 $ 48,351
====== ======
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)
Nine Months Ended
March 31,
------------------------
1999 1998
------ ------
Supplemental disclosures of cash flow information
Cash paid during the nine months ended for:
<S> <C> <C>
Interest............................................................................... $ 73,598 $ 63,751
====== ======
Income taxes........................................................................... $ 12,462 $ 11,077
====== ======
Non-cash investing activities:
Transfers from loans to real estate owned.............................................. $ 340 $ 3,399
=== =====
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
nine months ended March 31, 1999 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.
Comprehensive income for the three and nine months ended March 31, 1999 and 1998
is as follows:
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income ............................................... $ 5,076 $4,658 $15,066 $14,286
Other comprehensive income, net of taxes:
Change in net unrealized appreciation
on securities available-for-sale
net of reclassification adjustment............... (1,267) (465) (5,223) 2,335
------- ----- ------- -----
Comprehensive income...................................... $ 3,809 $4,193 $ 9,843 $16,621
======= ===== ====== ======
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized on
November 16, 1993 and is the holding company for Reliance Federal Savings Bank
(the "Bank") and the subsidiaries of the Bank. 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.
Financial Condition
As of March 31, 1999, total assets were $2.5 billion, a decrease of $10.3
million from June 30, 1998. Mortgage-backed securities increased $53.9 million,
or 4.5%, during the nine months ended March 31, 1999, primarily due to increased
purchases of private label collateralized mortgage obligations and adjustable
rate securities offset by amortization and prepayments. Investment securities
decreased $19.1 million, or 10.9%, from $175.1 million at June 30, 1998 to
$156.0 million at March 31, 1999 as a result of sales and calls of debt
securities.
8
<PAGE>
Deposits decreased $20.9 million, or 1.3%, during the nine months ended March
31, 1999 as a result of a reduction in certificate of deposit products while
borrowings increased $25.2 million, or 4.0%, from $630.2 million at June 30,
1998 to $655.4 million at March 31, 1999 as a result of additional FHLB
advances.
Treasury stock increased from $24.0 million at June 30, 1998 to $47.9 million at
March 31, 1999 as a result of 884,846 shares repurchased net of stock options
exercised during the nine months ended. During the quarter ended March 31, 1999,
the Company repurchased 36,207 at an aggregate cost of $1.0 million.
Non-performing assets
Non-performing loans totaled $7.2 million, or 0.75% of total loans at March 31,
1999 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 satisfaction during
the nine months ended March 31, 1999. Non-performing loans at March 31, 1999
were comprised of $4.6 million of loans secured by one- to four-family
residences, $1.6 million of commercial real estate loans, $678,000 of commercial
loans and $311,000 of guaranteed student and other loans.
For the quarter and nine months ended March 31, 1999, the Company's loan loss
provision was $150,000 and $650,000, respectively and net charge-offs were
$52,000 and $268,000, respectively. The Company's allowance for loan losses
totalled $9.3 million at March 31, 1999 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 128.71% and 0.97% at March 31, 1999 compared to
96.12% and 0.91% at June 30, 1998, respectively. Management believes the
allowance for loan losses at March 31, 1999 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.
<TABLE>
March 31, June 30,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Non-accrual mortgage loans delinquent more than 90 days.................... $ 5,876 $ 8,218
Non-accrual commercial loans delinquent more than 90 days.................. 678 567
Non-accrual other loans delinquent more than 90 days....................... 380 316
----- -----
Total non-accrual loans delinquent more than 90 days................... 6,934 9,101
Loans 90 days or more delinquent and still accruing........................ 310 201
----- -----
Total non-performing loans................................................. 7,244 9,302
Total foreclosed real estate, net of related allowance for losses.......... 414 755
----- -----
Total non-performing assets................................................ $ 7,658 $ 10,057
===== ======
9
<PAGE>
Non-performing loans to total loans........................................ 0.75% 0.95%
Non-performing assets to total assets...................................... 0.31% 0.40%
Allowance for loan losses to non-performing loans.......................... 128.71% 96.12%
Allowance for loan losses to total loans................................... 0.97% 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 March 31, 1999, $874.5 million, or 37.3%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $791.4 million, of which $408.8 million, or
51.7%, were adjustable-rate loans and $382.6 million, or 48.3%, were fixed-rate
loans. The Bank's commercial loan portfolio totalled $43.4 million, of which
$32.6 million, or 75.1%, were adjustable-rate loans and $10.8 million, or 24.9%,
were fixed-rate loans. In addition, at March 31, 1999, the Bank's consumer loan
portfolio totalled $126.6 million, of which $99.4 million, or 78.5%, were
adjustable-rate home-equity lines of credit and guaranteed student loans and
$27.2 million, or 21.5%, were fixed-rate home-equity and other consumer loans.
At March 31, 1999, the mortgage-backed securities portfolio totalled $1.2
billion, of which $333.7 million, or 26.8%, of the mortgage-backed portfolio
were adjustable-rate securities and $909.8 million, or 73.2%, were fixed-rate
securities. The mortgage-backed securities portfolio classified as
available-for-sale totalled $965.1 million of which $275.5 million, or 28.6%,
were adjustable rate securities and $689.5 million, or 71.4%, were fixed-rate
securities. The mortgage-backed securities portfolio classified as
held-to-maturity totalled $278.5 million of which $58.2 million, or 20.9%, were
adjustable rate securities and $220.3 million, or 79.1%, were fixed-rate
securities.
10
<PAGE>
During the nine months ended March 31, 1999, the Bank purchased approximately
$531.5 million of agency and private label collateralized mortgage obligations
and $158.8 million of 1 year adjustable rate mortgage-backed securities. In
addition, during the nine months ended March 31, 1999 the Bank sold
approximately $62.5 million of 30 year fixed rate mortgage-backed securities,
$165.8 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.
The Bank has recently begun to purchase adjustable rate mortgage-backed
securities in order to adjust to interest rate changes. 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 March 31, 1999 and
1998.
General. Net income for the three months ended December 31, 1998 was $5.1
million, an increase of $418,000, or 9.0%, from $4.7 million in the prior year
period. Net income for the quarter ended March 31, 1999 represents an annualized
return on average assets and average tangible equity of 0.82% and 16.84%,
respectively as compared to 0.85% and 14.72%, respectively, in the prior year
period.
Interest Income. Interest income increased $3.0 million, or 7.8%, from $38.5
million for the three months ended March 31, 1998, to $41.4 million for the
three months ended March 31, 1999. The increase resulted from an increase of
$285.4 million, or 13.9%, in the average balance of interest-earning assets from
$2.1 billion for the 1998 period to $2.3 billion for the 1999 period offset by a
decrease in the average yield of interest-earning assets from 7.47% in the prior
year period to 7.08%. The growth in average interest-earning assets resulted
from increased investments in mortgage-backed securities and debt securities.
For the three months ended March 31, 1999, interest income from mortgage-backed
securities increased $3.3 million, or 19.7%, from $16.7 million for the 1998
period to $20.0 million for the 1999 period, primarily due to an increase of
$232.7 million, or 23.1%, in the average balance of mortgage-backed securities
offset by a decrease in the average yield on these securities of 23 basis points
from 6.70% for the 1998 period to 6.47% for the 1999 period. The increase in the
average balance of mortgage-backed securities is primarily due to increased
purchases of private label collateralized mortgage obligations and
adjustable-rate securities. 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 income from consumer
and other loans decreased $471,000, or 15.6% from $3.0 million in the prior year
period to $2.5 million for the 1999 period due to a $13.1 million decrease in
the average balance of consumer and other loans and a 59 basis point decrease in
the average yield of consumer and other loans. The decease in the average yield
is due to the reduction in the prime rate during the year.
Interest Expense. Interest expense for the three months ended March 31, 1999,
was $24.0 million, an increase of $2.5 million, or 11.8%, from $21.4 million for
the three months ended March 31, 1998. The increase in interest expense is
related to a $276.9 million, or 14.4%, increase in the average balance of
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interest-bearing liabilities from $1.9 billion for the 1998 period to $2.2
billion for the 1999 period offset by a 10 basis point decrease in the cost of
interest-bearing liabilities from 4.47% for the 1998 period to 4.37% for the
1999 period. The slight decrease in the average cost of interest-bearing
liabilities resulted primarily from a lower interest rate environment during the
quarter ended March 31, 1999. Interest expense on deposits decreased $816,000,
or 5.1%, from $16.0 million for the 1998 period to $15.2 million for the 1999
period, primarily as a result of a 29 basis point decrease in the average cost
of such deposits from 4.18% in the 1998 period to 3.89% in the 1999 period
offset by a $36.3 million, or 2.3% increase in the average balance of such
deposits. Interest expense on borrowed funds increased $3.4 million, or 61.6%,
from $5.4 million for the 1998 period to $8.8 million for the 1999 period
primarily due to a $248.6 million, or 64.4%, increase in the average balance of
borrowings from $386.2 million in the 1998 period to $634.8 million for the 1999
period offset by a 10 basis point decrease in the average cost of such
borrowings from 5.63% in the 1998 period to 5.53% in the 1999 period. The Bank
continues to use borrowings to leverage its capital and fund asset growth.
Borrowed funds, principally reverse repurchase agreements, FHLB-NY advances and
trust preferred securities, 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 $17.5 million for the
quarter ended March 31, 1999, an increase of $459,000, or 2.7%, from $17.0
million for the quarter ended March 31, 1998. The increase in net interest
income was attributable to the growth in average interest-earning assets to $2.3
billion for the quarter ended March 31, 1999 from $2.1 billion for the quarter
ended March 31, 1998. The growth in average interest-earning assets resulted
from increased investments in mortgage-backed securities and debt securities. As
a result of a lower interest rate environment, coupled with accelerated loan and
securities prepayments, and the leveraging of the proceeds from the trust
preferred securities, the Bank's net interest spread declined to 2.71% from
3.00% and its net interest margin declined to 2.98% from 3.31%, respectively,
for the quarters ended March 31, 1999 and 1997. For the quarter ended March 31,
1999, the yield on interest-earning assets was 7.08% and the cost of
interest-bearing liabilities was 4.37% as compared to 7.47% and 4.47%,
respectively, for the quarter ended March 31, 1998.
Provision for Loan Losses. The provision for loan losses totalled $150,000 for
the three months ended March 31, 1999 compared to $300,000 for the three months
ended March 31, 1998. The decrease in the provision primarily reflects the
improvement in non-performing loans. Non-performing loans decreased $5.1
million, or 41.1%, from $12.3 million at March 31, 1998 to $7.2 million at March
31, 1999. 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 increased $195,000, or 10.1%, from $1.9
million in the prior year quarter to $2.1 million in the quarter ended March 31,
1999. The increase is mainly the result of additional fee income from loan
prepayment penalties, annuity sales and ATM transactions.
Non-Interest Expense. Non-interest expense totaled $10.3 million for the quarter
ended March 31, 1999, an increase of $110,000, or 1.1% from $10.2 million
recorded in the prior year quarter. As a result of an
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increased asset base and limited expense growth, the general and administrative
expenses to average assets ratio improved to 1.49% from 1.65% in the prior year
period. The slight increase in non-interest expense is mainly due to increased
advertising expense which increased $75,000, or 36.1% from $208,000 in the prior
year quarter to $283,000 in the quarter ended March 31, 1999. The Company
increased its spending on advertising with the introduction of a 24 hour 7 day a
week call center for consumer and home equity lending.
Income Tax Expense. Income tax expense was $4.0 million for the quarter ended
March 31, 1999 representing an effective income tax rate of 44.2% as compared to
$3.7 million and an effective tax rate of 44.6% 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 Nine Months Ended March 31, 1999 and
1998.
General. The Company reported net income of $15.1 million for the nine months
ended March 31, 1999 as compared to $14.3 million for the nine months ended
March 31, 1998. Net income for the nine months ended March 31, 1999 represents
an annualized return on average assets and average tangible equity of 0.81% and
16.42%, respectively as compared to 0.89% and 15.65%, respectively, in the prior
year period
Interest Income. Interest income increased $12.8 million, or 11.2%, from $113.9
million for the nine months ended March 31, 1998 to $126.7 million for the nine
months ended March 31, 1999. The increase in net interest income was
attributable to the growth in average interest-earning assets to $2.3 billion
for the nine months ended March 31, 1999 from $2.0 billion for the nine months
ended March 31, 1998. The growth in interest-earning assets resulted from assets
acquired in the Continental Bank acquisition and increased purchases of
mortgage-backed and debt securities. For the nine months ended March 31, 1998,
interest income from mortgage-backed securities increased $9.4 million, or
18.7%, from $50.2 million for the 1998 period to $59.6 million for the 1999
period, primarily due to an increase of $246.0 million, or 25.2%, in the average
balance of mortgage-backed securities offset by a 38 basis points decrease in
the average yield on these securities from 6.92% for the 1998 period to 6.54%
for the 1999 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 nine months ended March 31, 1999, was
$74.4 million, an increase of $10.7 million, or 16.8%, from $63.7 million for
the nine months ended March 31, 1998. The increase in interest expense is
related to a $326.5 million, or 17.4%, increase in the average balance of
interest-bearing liabilities and a 2 basis point decrease in the cost of
interest-bearing liabilities from 4.53% for the 1998 period to 4.51% for the
1999 period. Interest expense on total deposits increased $643,000, or 1.4%,
from $47.2 million for the 1998 period to $47.8 million for the 1999 period,
primarily as a result of a $102.9 million, or 6.7%, increase in the average
balance of deposits offset by a 17 basis point decrease in the average cost of
such deposits from 4.21% for the 1998 period to 4.04% for the 1999 period.
Interest
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expense on borrowed funds increased $10.1 million, or 61.0%, from $16.5 million
for the 1998 period to $26.6 million for the 1999 period. Borrowings averaged
$620.0 million for the nine months ended March 31, 1999, an increase of $239.6
million, or 63.0%, from $380.3 million for the nine months ended March 31, 1998.
Borrowed funds, principally reverse repurchase agreements, FHLB-NY advances and
trust preferred securities 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 $52.3 million for the nine
months ended March 31, 1999, an increase of $2.1 million, or 4.1%, from $50.2
million for the nine months ended March 31, 1998. The increase in net interest
income was attributable to the growth in average interest-earning assets to $2.3
billion for the nine months ended March 31, 1999 from $2.0 billion for the nine
months ended March 31, 1998. 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 lower interest
rate environment, coupled with accelerated loan and securities prepayments, and
the leveraging of the proceeds from the trust preferred securities, the Bank's
net interest spread declined from 3.05% for the nine months ended March 31, 1998
to 2.70% for the nine months ended March 31, 1999. The yield on interest-earning
assets was 7.21% for the nine months ended March 31, 1999 and the cost of
interest-bearing liabilities was 4.51% as compared to 7.58% and 4.53%,
respectively for the nine months ended March 31, 1998.
Provision for Loan Losses. The provision for loan losses totalled $650,000 for
the nine months ended March 31, 1999 as compared to $1.5 million for the nine
months ended March 31, 1998. The decrease in the provision primarily reflects
the improvement in non-performing loans. Non-performing loans decreased $5.1
million, or 41.1%, from $12.3 million at March 31, 1998 to $7.2 million at March
31, 1999. 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 increased $48,000, or 0.8%, from $5.9
million for the nine months ended March 31, 1998 to $5.9 million for the nine
months ended March 31, 1999. The slight increase was due to a gain recognized in
the prior year period from a condemnation award received from an inactive joint
venture, additional fee income generated from the check cashing operations
acquired from Continental Bank and increased deposit fee income in the current
year period.
Non-Interest Expense. Non-interest expense totalled $30.6 million for the nine
months ended March 31, 1999 as compared to $29.2 million for the nine months
ended March 31, 1998, an increase of $1.4 million, or 4.9%. 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 nine months ended March 31, 1999,
compensation and benefits expense increased $676,000, or 4.6%, to $15.4 million
from $14.8 million for the nine months ended March 31, 1998. 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 $497,000, or 10.4%, from $4.8 million for the nine months ended March
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31, 1998 to $5.3 million for the nine months ended March 31, 1999 due to costs
associated with the operation of two new banking offices and five check cashing
facilities which were acquired from Continental Bank.
For the nine months ended March 31, 1999, real estate operations, net was
$90,000 as compared to $170,000 in the prior year nine month period. The
decrease is mainly the result of a lower provision for REO losses during the
nine months ended March 31, 1999. During the nine months ended March 31, 1999,
the Bank established a provision for REO losses of $28,000 as compared to
$110,000 in the prior year nine month period.
Income Tax Expense. Income tax expense was $11.9 million for the nine months
ended March 31, 1999 and $11.1 million for the nine months ended March 31, 1998.
The effective income tax rates were 44.1% for the 1999 period as compared to
43.8% for 1998 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 nine months ended
March 31, 1999, the Bank made dividend payments of $8.0 million to the Company.
During the quarter ended March 31, 1999, the Bank did not make any dividend
payments 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 March 31, 1999, the Company repurchased 36,207 shares under its
eighth repurchase program at an aggregate cost of $1.1 million. For the nine
months ended March 31, 1999, the Company repurchased 930,207 shares at an
aggregate cost of $24.9 million.
On March 17, 1999, the Board of Directors declared a regular cash dividend of
$0.21 per common share for the quarter ending March 31, 1999, an increase of
$0.03 or 16.7% from the regular cash dividend paid for the second quarter of
fiscal year 1999. The dividend was paid on April 16, 1999 to stockholders of
record on April 2, 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 8.85% for the nine months ended March 31,
1999.
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 March 31, 1999,
assets qualifying for liquidity, including cash, US government obligations and
other eligible securities, totalled $305.9 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
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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 nine months ended March 31, 1999, principal payments
on loans and mortgage-backed securities totalled $258.5 million and $379.7
million, respectively, as compared to $146.7 million and $216.1 million,
respectively, in the prior year period. In addition, during the nine months
ended March 31, 1999, the Bank sold $248.3 million of mortgage-backed
securities. At March 31, 1999, advances from the FHLB-NY and borrowings under
reverse repurchase agreements and capital trust securities totalled $655.4
million, an increase of $25.2 million, from $630.2 million at June 30, 1998.
Deposits decreased $20.9 million, or 1.3%, during the nine months ended March
31, 1999 as a result of reduction in 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 nine months ended March 31, 1999, the
Bank originated and purchased mortgage, commercial and consumer loans in the
amount of $122.1 million, $113.5 million and $28.2 million, respectively. During
the nine months ended March 31, 1999, the Bank purchased $690.3 million of
mortgage-backed securities of which $584.0 million were classified as
available-for-sale and $106.3 million were classified as held-to-maturity.
At March 31, 1999, the Bank had outstanding loan commitments of $32.2 million,
open home equity lines of credit of $50.9 million and $19.0 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 March 31, 1999
totalled $790.7 million. Management believes that a significant portion of such
deposits will remain with the Bank.
At March 31, 1999, the Bank exceeded each of the OTS capital requirements. The
Bank's tangible, core, and risked-based ratios were 6.66%, 6.66% and 12.26%,
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
16
<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 and Litigation Reform Act Safe Harbor Statement
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
17
<PAGE>
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The Company does not undertake -- and specifically disclaims any obligation --
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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 March 31, 1999 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 March 31, 1999, 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 March 31, 1999.
GAP Analysis. 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 March 31, 1999, 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 $104.7 million , or (4.23%) of total assets at
March 31, 1999 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.
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
18
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at March 31, 1999, 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.
19
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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.
Not applicable.
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) Form 8-K
1) The Company filed Form 8-K on March 23,
1999, which included a copy of the Company's
press release dated March 17, 1999,
announcing a 16.7% increase in the regular
third quarter cash dividend for fiscal year
1999.
- ------------------
(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.
20
<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 05/14/99 /s/ Paul D. Hagan 05/14/99
- ---------------------- -------- ----------------- --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
21
<TABLE>
<CAPTION>
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -----
(In thousands, except per share amount)
<S> <C> <C> <C> <C>
Net Income..................................................... $ 5,076 $ 4,658 $ 15,066 $ 14,286
===== ===== ====== ======
Weighted average common shares outstanding..................... 8,316 9,161 8,545 8,799
Basic earnings per common share................................ $ 0.61 $ 0.51 $ 1.76 $ 1.62
==== ==== ==== ====
Weighted average common shares outstanding..................... 8,316 9,161 8,545 8,799
Potential common stock due to dilutive
effect of stock options.................................... 466 559 460 538
------- ----- ------ -----
Total shares for diluted earnings per share.................... 8,782 9,720 9,005 9,337
===== ===== ====== ======
Diluted earnings per common share ............................. $ 0.58 $ 0.48 $ 1.68 $ 1.53
==== ==== ==== ====
22
</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> 9-mos
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 29,617
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,081,123
<INVESTMENTS-CARRYING> 318,418
<INVESTMENTS-MARKET> 320,790
<LOANS> 961,409
<ALLOWANCE> 9,324
<TOTAL-ASSETS> 2,475,425
<DEPOSITS> 1,607,439
<SHORT-TERM> 605,386
<LIABILITIES-OTHER> 32,727
<LONG-TERM> 50,000
0
0
<COMMON> 120,552
<OTHER-SE> 59,321
<TOTAL-LIABILITIES-AND-EQUITY> 2,475,425
<INTEREST-LOAN> 58,915
<INTEREST-INVEST> 67,512
<INTEREST-OTHER> 254
<INTEREST-TOTAL> 126,681
<INTEREST-DEPOSIT> 47,796
<INTEREST-EXPENSE> 74,397
<INTEREST-INCOME-NET> 52,284
<LOAN-LOSSES> 650
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 30,621
<INCOME-PRETAX> 26,938
<INCOME-PRE-EXTRAORDINARY> 26,938
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,066
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 7.08
<LOANS-NON> 6,934
<LOANS-PAST> 310
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,941
<ALLOWANCE-OPEN> 304
<CHARGE-OFFS> 37
<RECOVERIES> 9,324
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 9,324
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,116
</TABLE>
