UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
0-23126
Commission File Number
RELIANCE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3187176
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
585 Stewart Avenue, Garden City, New York 11530
(Address of Principal Executive Offices) (Zip Code)
(516) 222-9300
(Registrant's telephone number, including area code)
None
Securities registered pursuant to Section 12(b) of the Act
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
As of September 15, 1999 the aggregate market value of the shares of common
stock of the registrant outstanding was $306,612,295 excluding the 467,310
shares held by all directors and officers of the registrant. This figure is
based on the closing price by the Nasdaq National Market for a share of the
registrant's common stock on September 15, 1999, which was $37.75 as reported in
the Wall Street Journal on September 16, 1999. The number of shares of the
registrant's common stock outstanding as of September 15, 1999 was 8,589,490
shares.
DOCUMENTS INCORPORATED BY REFERENCE
No part of the following document is incorporated by reference.
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PART I
Item 1. Business
Reliance Bancorp, Inc. ("Reliance" or the "Company") is a Delaware
corporation organized on November 16, 1993 at the direction of the Board of
Directors of Reliance Federal Savings Bank (the "Bank") for the purpose of
becoming a holding company to own all of the outstanding capital stock of the
Bank upon its conversion from a mutual to a stock form of organization. The
stock conversion was completed on March 31, 1994.
In addition to directing, planning and coordinating the business
activities of the Bank, the Company invests primarily in U.S. Government
securities, corporate debt and equity securities and repurchase agreements. In
addition, the Company completed its acquisitions of Bank of Westbury, a Federal
Savings Bank, in August 1995, Sunrise Bancorp Inc., in January 1996 and
Continental Bank ("Continental"), a commercial bank, in October 1997.
General
The primary business of the Company is the operations of its
wholly-owned subsidiary, the Bank. The Bank's principal business is attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations, principal repayments and borrowings,
primarily in mortgage, multi-family, commercial, consumer (primarily home equity
lines of credit, home equity loans, auto and guaranteed student loans),
commercial real estate and construction loans. In the past, the Bank has also
invested in loans secured by cooperative units ("co-op loans") but in recent
years has discontinued its origination activities in this area. In addition,
during periods in which the demand for loans which meet the Bank's underwriting,
investment and interest rate risk standards is lower than the amount of funds
available for investment, the Bank invests excess funding in mortgage-backed
securities, securities issued by the U.S. Government and agencies thereof and
other investments permitted by federal laws and regulations. The Bank's revenues
are derived principally from interest on its loan and mortgage-backed securities
portfolios. The Bank's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed and investment securities,
FHLB-NY advances and reverse repurchase agreements. The Bank also operates five
Money Center check cashing operations which generate additional fee income for
the Bank.
The information presented in the consolidated financial statements and in
the Form 10-K reflect the financial condition and results of operations of the
Company, as consolidated with the Bank, its wholly-owned subsidiary. At June 30,
1999, the Company had total assets of $2.5 billion.
Acquisition of Reliance Bancorp, Inc. by North Fork Bancorporation, Inc.
On August 30, 1999, the Company announced that it had signed a definitive
Agreement and Plan of Merger, dated as of August 30, 1999 (the "Merger
Agreement"), with North Fork Bancorporation, Inc., a Delaware corporation
("NFB"). NFB is the bank holding company parent of North Fork Bank and Trust
Company, a New York State chartered stock commercial bank. The Merger Agreement
provides, among other things, that Reliance will merge with and into NFB, with
NFB being the surviving corporation ("Merger").
Pursuant to the Merger Agreement, each share of Reliance common stock, par value
$0.01 per share ("Reliance Common Stock" or the "Company's Common Stock"),
issued and outstanding immediately prior to the Effective Time will be converted
into and become the right to receive 2.0 shares of NFB common stock, par value
$2.50 per share ("NFB Common Stock"). The exchange ratio was based upon the
price of NFB's stock utilizing its closing price on August 27, 1999 of $19.06
for a total value to Reliance shareholders of $38.12 per share.
The Merger will be structured as a tax-free reorganization and will be accounted
under the purchase method of accounting. Consummation of the Merger is subject
to the satisfaction of certain customary conditions, including approval of the
Merger Agreement by the stockholders of Reliance and approval of the appropriate
regulatory agencies. Following consummation of the Merger, the Bank will be
merged with and into North Fork Bank and Trust Company. It is anticipated that
the Merger will be completed in 2000.
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Reliance has the right to terminate the Merger Agreement if should the closing
price of NFB's shares decline beyond a specified price and index, unless NFB
elects to increase the Merger Consideration to be received by Reliance's
stockholders as set forth in the Merger Agreement.
The Merger Agreement also provides that options to purchase shares of Reliance
Common Stock under Reliance's stock option plans that are outstanding at the
Effective Time shall be converted into options to purchase shares of NFB Common
Stock in accordance with the procedure set forth in the Merger Agreement. In
connection with the Merger Agreement, Reliance granted to NFB a stock option
pursuant to a Stock Option Agreement, dated as of August 30, 1999, which, under
certain defined circumstances, would enable NFB to purchase up to 19.9% of
Reliance's issued and outstanding shares of common stock. The Stock Option
Agreement provides that the total profit receivable thereunder may not exceed
$17.4 million plus reasonable out-of-pocket expenses.
Market Area and Competition
The Bank has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank's deposit gathering area is primarily
concentrated in the communities surrounding its full service banking offices in
the New York City Borough of Queens and the New York State Counties of Nassau
and Suffolk. The Bank's primary lending area extends beyond its deposit
gathering area to the New York City Boroughs of Brooklyn, Staten Island,
Manhattan and the Bronx and the New York State County of Westchester.
The greater New York metropolitan area has historically benefitted from having a
large number of corporate headquarters and a diversity of financial service
industries. The New York State counties of Nassau and Suffolk have also
continued to benefit from a large and well-developed suburban market, well
educated employment base and a diversity of industrial, service and high
technology businesses. After a prolonged period of decline, which was marked by
layoffs in the financial services and defense industries and corporate
relocations and downsizings, the economy in the greater New York metropolitan
area performed well during fiscal 1999. Durable goods, retail trade and the
service sector are driving economic growth in the suburbs, while financial
services and securities industries are responsible for growth in New York City.
In addition, the pool of skilled labor, access to international markets and the
growing media industry in the area have kept the region one of the most
attractive in the country. The healthy economy has also benefitted the greater
New York metropolitan area office market where the overall and class A office
vacancy rates have significantly declined. This decline in the vacancy rate kept
asking rents for all types of space on the upswing. The improved economic
environment is also evident in the Long Island, New York area, which is
experiencing a rebound in its residential, commercial and industrial real estate
markets not seen in a number of years. The residential real estate market in the
greater New York metropolitan area was also favorably impacted during fiscal
year 1999 by increased demand for housing during the period of low unemployment
and generally low stable interest rates.
The Bank faces significant competition both in making loans and in attracting
deposits. The Bank's market area has a high density of financial institutions,
many of which are branches of significantly larger institutions which have
greater financial resources than the Bank, and all of which are competitors of
the Bank to varying degrees. The Bank's competition for loans comes principally
from commercial banks, savings banks, credit unions, savings and loan
associations and mortgage banking companies. Its most direct competition for
deposits has historically come from savings and loan associations, savings
banks, commercial banks and credit unions. The Bank faces additional competition
for deposits from short-term money market funds and other corporate and
government securities funds, as well as from other financial institutions such
as brokerage firms and insurance companies. Competition may also increase as a
result of the lifting of federal restrictions on the interstate banking
operations for financial institutions and the entrance of non-depository
financial institutions into the industry through the formation and acquisition
of thrift institutions.
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Lending Activities
Portfolio Composition. The Bank offers a variety of loans to serve the
credit needs of its communities. The Bank's loan portfolio is comprised
primarily of first mortgage loans, most of which are underwritten to meet
Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage
Association ("FNMA") standards and guidelines and are secured by one- to
four-family residences, including co-op loans and, to a lesser extent, by
multi-family residences and commercial real estate. The Bank also emphasizes the
origination of consumer loans in the form of its home equity lines of credit and
home equity loans. The remainder of the Bank's loan portfolio, at June 30, 1999,
consisted of a variety of commercial, consumer and other loans, primarily
secured and unsecured commercial, guaranteed student loans, auto and loans on
deposit accounts.
The types of loans that the Bank may originate are subject to federal
laws and regulations. Interest rates charged by the Bank on loans are affected
principally by the demand for such loans, the cost and supply of money available
for lending purposes and rates offered by its competitors. General and economic
conditions, monetary policies of the federal government including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters also
affect interest rates charged by the Bank.
One- to Four-Family Residential Mortgage Lending. The Bank currently
offers first mortgage loans secured by one- to four-family residences and
condominiums located in the Bank's primary lending area. The Bank offers such
loans as fixed rate mortgage loans and adjustable rate mortgage loans ("ARMs")
with maturities ranging from five to 30 years. Loan originations are generally
obtained from existing or past customers, members of the local communities
served, or referrals from local real estate agents, attorneys and builders. The
Bank's one- to four-family residential mortgage loans are generally underwritten
according to guidelines of the FHLMC, FNMA and other governmental agencies.
However, the Bank originates loans for its own portfolio with amounts in excess
of the loan amounts specified by such guidelines.
At June 30, 1999, $440.1 million, or 44.8% of the Bank's total loan
portfolio consisted of one- to four-family residential and co-op loans loans, of
which $159.1 million, or 36.1%, were ARM loans. The Bank currently offers
one-year ARM loans with terms of up to 30 years and loans with terms of up to 30
years which are fixed for three, five, seven and ten years and convert into
one-year ARM loans at the end of the initial fixed period. These ARM loans may
carry an initial interest rate which is less than the fully indexed rate for the
loan. These ARM loans may be originated on a point or no-point basis (i.e., with
or without a loan origination fee based on a percentage of the loan amount). The
maximum loan amount for ARM loans offered by the Bank is currently $750,000 and
the maximum loan-to-value ratio is 80.0% of the property's appraised value or
sales price, whichever is lower, or over 80% if private mortgage insurance is
obtained. Presently, the Bank's interest rates on ARM loans fluctuate based upon
a spread above the weekly average yield of United States Treasury securities,
adjusted to a constant maturity which corresponds to the adjustment period of
the loan (the "U.S. Treasury constant maturity index") as published weekly by
the Federal Reserve Board and are generally subject to limitations on interest
rate increases and decreases and specified lifetime caps. The Bank's ARM loans
typically carry an initial interest rate below the fully-indexed rate for the
loan. However, to recognize the credit risks associated with ARM loans offered
at initial discounts below market interest rates, the Bank generally underwrites
its one-year ARM loans assuming a rate equal to 200 basis points over the
initial discount rate. For ARM loans with longer adjustment periods, and
therefore, less risk due to the longer period for the borrower's's income to
adjust to anticipated higher future payments, the Bank underwrites the loans
using the initial rate, which may be discounted. The volume and types of ARM
loans originated by the Bank have been affected by such market factors as the
level of interest rates, competition, consumer preferences and the availability
of funds. During the past several years, demand for ARM loans has been weak due
to a low interest rate environment and consumer preference for fixed rate loans.
Accordingly, although the Bank will continue to offer ARM loans, there can be no
assurance that the Bank will be able to originate a sufficient volume of ARM
loans in the future to increase or maintain the proportion that these loans
currently bear to total loans.
The Bank currently offers fixed rate mortgage loans with terms of 10 to
30 years, secured by one- to four-family residences and condominiums. The Bank
also offers these loans on a point or no-point basis with the respective
interest rates determined in accordance with prevailing market and competitive
factors. Fixed rate mortgage loans
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with terms exceeding 15 years are currently originated by the Bank for sale in
the secondary market to the FHLMC, FNMA and other investors. The maximum loan
amount for fixed rate loans offered by the Bank is currently $750,000. For fixed
rate loans to be retained for the Bank's portfolio, the Bank's underwriting
standards establish an 80.0% maximum loan-to-value ratio or over 80% if private
mortgage insurance is obtained. Fixed rate loans which meet the eligibility
requirements for sale to FHLMC or FNMA will be considered for amounts up to
95.0% of the appraised value or sales price, whichever is lower. Loan
applications which meet the eligibility requirements of the State of New York
Mortgage Agency ("SONYMA") Low Interest Rate Program will be considered for
amounts up to 100.0% of the appraised value or sales price, whichever is lower.
At June 30, 1999, $281.0 million, or 63.9%, of the Bank's one- to four-family
residential mortgage loan portfolio consisted of fixed rate loans.
Multi-Family and Commercial Real Estate Lending. The Bank currently
offers fixed rate loans and ARM loans (one, three, five, seven, ten and 15 year)
secured by multi-family dwellings (five or more units) and commercial real
estate (e.g., office buildings, retail stores, mixed use properties, shopping
centers, etc.). The maximum loan amounts for multi-family and commercial real
estate loans offered by the Bank are $5.0 million and $1.5 million,
respectively. The Bank offers multi-family or commercial real estate loans with
terms up to 15 years, and amortizations of up to 30 years for multi-family loans
and 15 years for commercial real estate loans. The maximum loan-to-value ratios
for multi-family and commercial real estate loans is 70.0% and 60.0%,
respectively, of the property's appraised value or sales price, whichever is
lower.
For fiscal 1999, originations of multi-family loans totalled $90.0
million as compared to $60.7 million in fiscal 1998 and $115.9 million in fiscal
1997. The Bank increased its emphasis on originations of 5 year ARM loans with
terms of up to 15 years and amortizations up to 30 years. These ARM loans may
carry an initial interest rate which is less than the fully indexed rate for the
loan. These ARM loans are originated on a point basis and no-point basis.
Presently, the Bank's interest rates on 5 year ARM loans fluctuate based upon a
spread above the weekly average yield of United States Treasury securities,
adjusted to a constant maturity of 5 years which corresponds to the adjustment
period of the loan (the "U.S. Treasury constant maturity index for 5 years") as
published weekly by the Federal Reserve Board.
During fiscal 1999, the Bank originated commercial real estate loans
totalling $12.4 million as compared to $1.1 million for fiscal 1998 and $650,000
for fiscal 1997. Due to market conditions and the Bank's determination to
originate such loans on a selective basis, the Bank's commercial real estate
originations in recent periods have been relatively low in comparison to its
other lending activities.
The Bank determines the interest rate and term of each multi-family or
commercial real estate loan on a case-by-case basis and in accordance with
prevailing market and competitive factors. In making its determination, the Bank
will consider the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property, the marketability
of the property and the Bank's lending experience with the borrower, and the
property's net operating income available for debt service.
At June 30, 1999, the Bank's multi-family loans, consisting of 295
loans, totalled $316.1 million, or 32.2% of the Bank's total loan portfolio.
Commercial property loans, consisting of 89 loans, totalled $48.1 million, or
4.9% of the Bank's total loan portfolio. At June 30, 1999, all multi-family
loans were current and performing in accordance with their terms. At June 30,
1999, the Bank had eight commercial real estate loans totalling $1.9 million
which were not performing in accordance with their loan terms and are on
non-accrual status.
Loans secured by commercial properties generally involve a greater
degree of risk than residential mortgage loans. Because payments on loans
secured by commercial properties are often dependent on the successful operation
or management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
Additionally, the past declines in real estate values have been more pronounced
with respect to commercial properties. The Bank seeks to minimize these risks by
originating such loans on a selective basis.
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Construction Lending. The Bank currently offers construction loans
secured by one- to four-family, multi-family and commercial real estate
properties on a selective basis. The Bank's construction loan originations in
recent periods have primarily been made to finance the construction of one- to
four-family residential properties. As of June 30, 1999, the Bank has
outstanding commitments to fund construction loans in the amount of $8.8
million, of which $7.5 million, or 0.79% of total loans, has been disbursed.
Commercial Lending. A key management objective is to maintain the
quality of the commercial loan portfolio, substantially all of which was
acquired in the Continental Bank acquisition. This objective is achieved by
maintaining high underwriting standards coupled with regular evaluation of the
creditworthiness of and the designation of lending limits for each borrower. The
portfolio strategies seek to avoid concentrations by industry or loan size in
order to minimize credit exposure and to originate loans in markets with which
it is familiar. At June 30, 1999, the Bank's commercial loans, consisting of 419
loans, totalled $44.9 million, or 4.6% of the Bank's total loan portfolio. Loans
in this category are typically made to small and medium sized businesses and
range between $25,000 and $5 million. The primary source of repayment is from
the borrower's operating profits and cash flows. Based on underwriting
standards, loans may be secured in whole or in part by collateral such as liquid
assets, accounts receivable, equipment, inventory or real property.
Consumer and Other Lending. The Bank currently offers three general
types of consumer loans consisting of: (1) home equity lines of credit; (2) home
equity loans; and (3) guaranteed student loans. The Bank offers adjustable rate
home equity lines of credit secured by one- to four-family owner-occupied
properties (including condominiums) which serve as the primary residence of the
borrower. Co-op units do not qualify as security for such loans. The Bank's home
equity line of credit loans include a standard home equity line of credit, which
may be secured only by a first or second mortgage on the underlying property,
and a mini-home equity line of credit, which may be secured by any recorded
mortgage on the underlying property. Both are open end lines of credit available
only to borrowers within the Bank's lending community. The maximum line of
credit is presently $250,000 for the standard home equity line of credit and
$50,000 for the mini-home equity line of credit. The maximum total debt
permitted to encumber a property varies based upon the loan-to-value ratio. When
the loan balance plus any prior liens is: (1) $400,000 or less, the maximum
loan-to-value ratio is 80%; (2) greater than $400,000 but $500,000 or less, the
maximum loan-to-value ratio is 70%; (3) greater than $500,000 but $650,000 or
less, the maximum loan-to-value ratio is 65%; and (4) greater than $650,000 but
$750,000 or less, the maximum loan-to-value ratio is 60%. For the standard home
equity line of credit, borrowers may draw on their line for a period of 10 years
and may pay interest only on a monthly basis. At the end of the 10 year period,
borrowers must repay principal and interest at a 20-year amortization rate. For
the mini-home equity line of credit, borrowers may draw on their line for a
period of 5 years and may pay interest only on a monthly basis. Borrowers must
then repay principal and interest at a 10- year amortization rate. Advances
under each line of credit are accessed by the borrower drawing a personal check
on his or her individual account set up specifically for the program. The
account is separate and distinct from any other checking account held by the
borrower.
The Bank also offers fixed rate home equity loans with terms ranging
from one to 15 years. Such loans are secured by one- to four-family
owner-occupied real property (including condominiums) which is the primary
residence of the borrower. The loan is available only to borrowers within the
Bank's lending community and co-op units do not qualify as security for such
loans. The maximum loan amount is $50,000 and the maximum loan-to-value ratio is
80%.
The Bank's guaranteed student loans are made only under the Guaranteed
Student Loan Program administered by the New York State Higher Education
Services Corporation ("NYSHESC"). The Bank does not fix the amount, maturity, or
interest rate for its Education Loans; however, such terms meet the maximums
authorized by NYSHESC and therefore are guaranteed by NYSHESC. The Bank will not
approve an Education Loan application for any course of study offered by any
school with a default ratio above 15.0% on the most recent Cohort Default Rate
Listing published by the United States Department of Education. Increased
competition for guaranteed student loans in general has resulted in reduced
origination activity by the Bank for such loans. At June 30, 1999, the Bank's
guaranteed student loans totalled $12.7 million, or 1.3% of total loans.
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Additionally, the Bank offers loans fully secured by its deposit
accounts which, at June 30, 1999, totalled $5.2 million, or 0.53% of total
loans. The Bank offered other consumer loans in the form of home improvement,
auto, overdraft checking and boat loans; however, the Bank currently offers only
auto and overdraft checking loans.
At June 30, 1999, such loans totalled $1.4 million or 0.14% of total loans.
Loan Approval Procedures and Authority. Loan approval authority has
been granted by the Board of Directors to the Bank's Mortgage Loan, Commercial
Loan and Consumer Loan Committees. For all mortgage loans originated by the
Bank, upon receipt of a completed loan application from a prospective borrower,
a credit report is ordered, certain other information is verified and, if
necessary, additional financial information is requested. An appraisal of the
real estate intended to secure the proposed loan is required and is currently
performed by Board approved independent fee appraisers. The Bank requires title
insurance on all mortgage loans, except for certain consumer loans secured by
real estate. Borrowers must also obtain hazard insurance and may be required to
obtain flood insurance prior to closing. Borrowers generally are required to
advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes and private mortgage insurance premiums, if
required.
Delinquent Loans and Foreclosed Assets
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of specific steps to induce the borrower to cure
the delinquency and restore the loan to a current status.
The Bank's collection procedures applicable to mortgage loans include a
computerized delinquency notice being sent at the time a payment is over 15 days
past due, with a second notice being sent at the time payment becomes 30 days
past due. A personal letter is generally sent after the 40th day of delinquency.
In the event that payment is not received after the 60th day, a division
supervisor will be notified. Such supervisor will then order an inspection of
the property within the next week and assume control of the account within two
weeks. If personal contact is made with the borrower during inspection or any
time prior to foreclosure, the Bank will attempt to obtain full payment or work
out a repayment schedule with the borrower to avoid foreclosure. Foreclosure
notices are sent when a loan is 85-90 days delinquent. Foreclosure commences on
the 91st day of delinquency. Most loan delinquencies are cured within 90 days
and no legal action is taken.
The Bank's collection procedures applicable to home equity lines of
credit are generally similar to those discussed above; however, if an agreeable
resolution of the delinquency is not reached, a notice of intent to foreclose is
generally sent after the 45th day of delinquency and the matter is generally
transferred to the supervisor on the same day. As with mortgage loans,
foreclosures for home equity lines of credit commence on the 91st day of
delinquency.
With respect to delinquent payments on other loans (e.g., mini-home
equity loans, automobile loans, etc.), delinquency letters are sent to borrowers
at the end of 26 and 40 days. In the event such loans become delinquent 120 days
or more, the account is charged off and legal action is pursued.
As part of the Bank's collection procedures applicable to commercial
loans, telephone contact is initiated and continued until the delinquency is
cured. If payment remains uncollected, a demand for satisfaction is sent by the
45th day. If contact is made with the borrower at any time prior to 90 days
delinquent, the Bank attempts to obtain full payment or work out a repayment
schedule with the borrower to avoid legal action. All loans more than 90 days
delinquent are sent to an attorney for collection.
Non-Accrual Loans. The following table sets forth information regarding
non-accrual loans and loans delinquent 90 days or more on which the Bank is
accruing interest at the dates indicated. It is the Bank's policy to classify
any loans, or any portion thereof, that have been determined to be
uncollectible, in whole or in part, as non-accrual loans. With the exception of
guaranteed student loans, the Bank also classifies as non-accrual loans all
loans 90 days or more past due. When a loan is placed on non-accrual status, the
Bank ceases the accrual of interest owed and previously accrued interest is
charged against interest income. During the fiscal years ended June 30, 1999,
1998, and 1997, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they
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been current, totalled $498,000, $799,000, and $573,000, respectively. These
amounts were not included in the Bank's interest income for the respective
periods.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans delinquent
more than 90 days............................. $ 5,561 $ 8,218 $ 14,262 $ 12,277 $ 3,210
Non-accrual commercial loans delinquent
more than 90 days............................. 433 567 -- -- --
Non-accrual other loans delinquent
more than 90 days.......................... 309 316 188 352 --
------ ------- -------- -------- --------
Total non-accrual loans........................ 6,303 9,101 14,450 12,629 3,210
Loans 90 days or more delinquent
and still accruing.......................... 255 201 277 350 461
------ ------ ------- ------- ------
Total non-performing loans..................... 6,558 9,302 14,727 12,979 3,671
----- ----- ------ ------ -----
Total foreclosed real estate, net of
related allowance for losses............... 177 755 450 1,564 1,558
------ ------- ------- ------ ------
Total non-performing assets.................... $ 6,735 $ 10,057 $ 15,177 $ 14,543 $ 5,229
===== ====== ====== ====== =====
Non-performing loans to total loans............ 0.67% 0.95% 1.61% 1.58% 1.10%
Non-performing assets to total assets.......... 0.27% 0.40% 0.77% 0.82% 0.56%
</TABLE>
Allowances for Losses on Loans, Investments in Real Estate and Real Estate
Owned.
The Bank's allowance for loan losses is established and maintained
through a provision for loan losses based on management's evaluation of the risk
inherent in the Bank's loan portfolio and the condition of the local economy in
the Bank's market areas. Such evaluation, which includes a review of all loans
on which full collectibility is not reasonably assured, considers among other
matters, the estimated fair market value of the underlying collateral, economic
and regulatory conditions, and other factors that warrant recognition of an
adequate loan loss allowance. The evaluation includes a system of ranges and
percentages as a supplemental measure for reviewing the adequacy of the
allowance for loan losses. Although management believes it uses the best
information available to make determinations with respect to the adequacy of the
Bank's allowance for loan losses, future adjustments may be necessary if
economic and other conditions differ from the economic and other conditions in
the assumptions used in making the initial determinations which such adjustments
could have an adverse impact on the earnings or financial condition of the
Company.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. The Bank's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the Office of
Thrift Supervision ("OTS") and the Federal Deposit Insurance Company ("FDIC"),
both of which can order the establishment of additional general or specific loss
allowances.
As a result of the declines in local and regional real estate market
values and the significant losses experienced by many financial institutions,
there has been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institutions by the OTS and the FDIC. While the Bank believes it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, where reviewing the Bank's loan portfolio, will not request the
Bank to materially increase its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings.
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Investment Activities
General
As part of the present investment policy, the Bank deploys a large
portion of its investable funds into mortgage-backed securities, and to a lesser
extent, U.S. Government and agency obligations, and state and municipal debt
securities. The Company deploys a large portion of its investable funds into
corporate debt and equity securities. The investment policy of the Bank and
Company, which is approved by the Board of Directors and implemented by the
Company's Investment Committee as authorized by the Board, is designed primarily
to generate a favorable return for the Company without compromising the
Company's business objectives or incurring undue interest rate or credit risk,
and to provide and maintain liquidity for the Company.
The Investment Committee, which is comprised of the Company's President
and Chief Executive Officer, Executive Vice President - Treasurer, Senior Vice
President-Chief Financial Officer, and Vice President - Investment Officer,
meets as needed but not less than on a monthly basis to monitor the Company's
investment transactions, to establish future investment strategies and to set
future spending parameters. The Board of Directors reviews the Company's
investment policy on a quarterly basis and the Company's investment activity on
a monthly basis. In establishing its investment strategies, the Committee
considers the Company's business and growth plans, its interest rate sensitivity
"gap" position, the local and national economic environment, the types of
securities to be held and other factors.
Although federally-chartered savings institutions have authority to
invest in various types of assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers acceptances, repurchase
agreements, loans of federal funds, and, subject to certain limits, corporate
securities, commercial paper and mutual funds, the Bank currently favors
mortgage-backed securities over other types of securities due to the Bank's
focus upon residential mortgage lending. The Bank and the Company currently do
not purchase securities with the intention of trading such securities, nor does
the Bank or the Company maintain trading portfolios.
Debt and Equity Securities
At June 30, 1999, the Bank's debt and equity securities portfolio
classified held-to-maturity totalled $28.8 million. The debt and equity
securities held-to-maturity portfolio consisted of $8.9 million in U.S.
Government agency obligations, $390,000 in municipal obligations and $19.6
million of FHLB stock. At June 30, 1999, the Bank's debt and equity securities
portfolio classified as available-for-sale totalled $112.1 million. The Bank's
debt and equity securities available-for-sale portfolio consisted of $102.1
million in corporate debt securities and $10.0 million in U.S. Government agency
obligations. The Bank's current investment policy does not permit the Bank to
invest in non-investment grade bonds or high-risk mortgage derivatives.
At June 30, 1999, the Company's debt and equity securities
available-for-sale portfolio totalled $10.1 million and consisted of $9.2
million of corporate debt securities and $877,000 of equity securities.
Mortgage-Backed Securities
The Bank invests in mortgage-backed securities, including Real Estate
Mortgage Investment Conduits ("REMICs") and Collateralized Mortgage Obligations
("CMOs"), and utilizes such investments to complement its mortgage lending
activities in periods of low loan demand for the types of mortgage loans the
Bank originates to be held for investment in conformance with its underwriting
standards and interest rate risk policies, namely, ARM loans and shorter-term
fixed rate loans secured by one- to four-family properties and multi-family
loans. Investments in mortgage-backed securities involve a risk that actual
prepayments will exceed prepayments estimated over the life of the security
which may result in a loss of any premium paid for such instruments thereby
reducing the net yield on such securities. In addition, if interest rates
increase, the market value of such securities may be adversely affected.
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REMICs and CMOs are typically issued by a special purpose entity, which
may be organized in a variety of legal forms, such as a trust, a corporation or
a partnership. The entity aggregates pools of loans or pass-through securities,
which are used to collateralize the mortgage-related securities. Once combined,
the cash flows are divided into "tranches" or classes of individual securities,
thereby creating more predictable average lives for each security than the
underlying collateral. Accordingly, under this security structure, loan
principal and interest payments are allocated to a mortgage-related securities
class or classes structured to have priority until it has been paid off. It is
the policy of the Bank to limit its privately issued REMICs and CMOs to non-high
risk securities rated "AAA". As of June 30, 1999, the Bank's portfolio of REMICs
totalled $684.3 million of which $246.4 million were agency issued and $437.9
million were private issued.
The Bank purchases mortgage-backed securities in order to: (i) generate
positive interest rate spreads with minimal administrative expense; (ii) lower
its credit risk as a result of the guarantees provided by FHLMC, FNMA, and GNMA;
(iii) utilize these securities as collateral for borrowings; and (iv) increase
the liquidity of the Bank. The Bank has primarily invested in mortgage-backed
securities issued or sponsored by FNMA, FHLMC and GNMA and private issuers.
At June 30, 1999, mortgage-backed securities totalled $1.2 billion, or
48.6% of total assets, of which $255.9 million were classified as
held-to-maturity and $935.0 million were classified as available-for-sale. The
Bank increased its purchases of mortgage-backed securities available-for-sale as
part of its leveraging strategy in order to improve its return on equity. At
June 30, 1999, the mortgage-backed securities portfolio classified as
available-for- sale had an unrealized loss of $15.8 million. The market value of
all mortgage-backed securities totalled approximately $1.2 billion at June 30,
1999.
As of June 30, 1999, $381.3 million, or 32.0%, of the Bank's
mortgage-backed securities portfolio carried adjustable rates repricing
annually. The adjustable rate portfolio had a weighted average interest rate
yield of 5.85% at June 30, 1999.
Sources of Funds
General. Deposits, loans and mortgage-backed securities principal and
interest payments, FHLB-NY advances and reverse repurchase agreements are the
primary sources of the Bank's funds for use in lending, investing and for other
general purposes. The Bank utilizes borrowings as part of its asset/liability
management strategy.
Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank presently offers passbook savings, demand
deposit, NOW, money market, and certificate accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates, pricing of deposits and competition. The Bank's deposits are
primarily obtained from areas surrounding its offices, and the Bank relies
primarily on marketing new products, service and long-standing relationships
with customers to attract and retain these deposits. The Bank does not use
brokers to obtain deposits, nor does it offer a negotiated rate on large dollar
deposits.
When management determines the levels of the Bank's deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings
and the rates charged on other sources of funds. The Bank has maintained a high
level of passbook, demand deposit and NOW accounts ("core deposits"), which has
contributed to its low cost-of-funds. Passbook, demand deposits and NOW accounts
represented 39.9% of total deposits at June 30, 1999 as compared to 36.9% of
total deposits at June 30, 1998.
Borrowings. The Bank has utilized borrowed funds to grow, leveraging the
Bank's capital and improving the return on equity. Borrowed funds, principally
from the FHLB-NY and reverse repurchase agreements are utilized as a source of
funding in order to take advantage of favorable rates of interest in comparison
to its other sources of funds. The Bank's FHLB-NY advances are generally secured
by a blanket lien against the Bank's mortgage portfolio, mortgage-backed and
investment securities portfolios and the Bank's investment in the stock of the
FHLB-NY. The
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maximum amount that the FHLB-NY will advance for purposes other than for meeting
withdrawals, fluctuates from time to time in accordance with the policies of the
FHLB-NY. At June 30, 1999, total advances from the FHLB-NY were $338.7 million.
The Bank has also entered into reverse repurchase agreements with nationally
recognized primary securities dealers. Reverse repurchase agreements are
accounted for as borrowings and are secured by the securities sold with
agreements to repurchase. At June 30, 1999, borrowings under reverse repurchase
agreements totalled $313.7 million.
The Company has utilized borrowed funds to obtain capital to improve Bank
capital ratios and fund asset growth. On April 29, 1998, Reliance Capital Trust
I, a trust formed under the laws of the State of Delaware (the " Capital
Trust"), issued $50 million of 8.17% capital securities. The Holding Company is
the owner of all the beneficial interests represented by common securities of
the Trust. The Trust exists for the sole purpose of issuing the Trust securities
(comprised of the capital securities and the common securities) and investing
the proceeds thereof in the 8.17% junior subordinated deferrable interest
debentures issued by the Holding Company on April 23, 1998 which are scheduled
to mature on May 1, 2028. Interest on the capital securities is payable in
semiannual installments, commencing on November 1, 1998. The Trust securities
are subject to mandatory redemption (i) in whole, but not in part upon repayment
in full, at the stated maturity of the junior subordinated debentures at a
redemption price equal to the principal amount of, plus accrued interest on, the
junior subordinated debentures,(ii) in whole, but not in part, at any time prior
to May 1, 2008, contemporaneously with the occurrence and continuation of a
special event, defined as a tax event or regulatory capital event, at a special
event redemption price equal to the greater of 100% of the principal amount of
the junior subordinated debentures or the sum of the present values of the
principal amount and premium payable with respect to an optional redemption of
the junior subordinated debentures on the initial optional repayment date to and
including the initial optional prepayment date, discounted to the prepayment
date plus accrued and unpaid interest thereon, and (iii) in whole or in part, on
or after May 1, 2008, contemporaneously with the optional prepayment by the
Corporation of the junior subordinated debentures at a redemption price equal to
the optional prepayment price. Subject to prior required regulatory approval,
the junior subordinated debentures are redeemable during the 12-month periods
beginning on or after May 1, 2008 at 104.085% of the principal amounts
outstanding, declining ratably each year thereafter to 100%, plus accrued and
unpaid interest thereon to the date of redemption. Deferred issuance costs in
the amount of $1.0 million, are being amortized over ten years and are included
in Prepaid Expenses and Other Assets in the Company's Consolidated Statement of
Condition as of June 30, 1999.
Subsidiary Activities
The Bank formed a number of subsidiaries in the mid-1980s to enter into
real estate-development joint ventures for the development of properties located
in the Bank's primary lending area, all of which are currently inactive. The
Bank does not currently intend to form any new subsidiaries or use any currently
inactive subsidiaries to enter into new real estate development projects. The
Bank maintains the following active subsidiaries.
RFS Insurance Agency Inc. RFS Insurance was organized by the Bank on
April 15, 1983 and currently offers the sale of non-deposit investment products
(annuities and mutual funds) to Bank customers and recognizes fee income from
such sales.
Reliance Preferred Funding Corp. Reliance Preferred Funding Corp. (the
"Subsidiary") was organized by the Bank on April 4, 1997 for the purpose of
engaging in a real estate investment trust ("REIT"). The purpose of the
subsidiary is to enhance and strengthen the Bank's capital position. The
Subsidiary is poised to raise capital expeditiously in the event that the Bank
should need such capital (e.g., for a significant strategic transaction or
combination). In addition to such possible increased capital resulting from any
future public offering that the Subsidiary or the Bank may conduct, the
Subsidiary affords the Bank certain tax benefits.
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Personnel
As of June 30, 1999, the Bank had 344 full-time employees and 162
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation
General. The Company and the Bank report their income on a calendar
year basis using the accrual method of accounting and are subject to Federal
income taxation in the same manner as other corporations. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Bank or the
Company. The Company and the Bank have not been audited by the Internal Revenue
Service during the last five years.
Tax Bad Debt Reserves. Prior to the enactment of the Small Business Job
Protection Act of 1996 (the "1996 Act"), on August 20, 1996, for federal income
tax purposes, thrift institutions such as the Bank, were permitted under Section
593 of the Code ("IRC 593"), to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, within specified limitations,
be deducted in arriving at taxable income. Similar deductions for additions to
the Bank's bad debt reserves were permitted under the New York State Franchise
Tax and the New York City Financial Corporation Tax. Under the 1996 Act, the
Bank, as a "large bank" (one with assets having an adjusted base of more than
$500 million), is unable to make additions to its tax bad debt reserves, is
permitted to deduct bad debts only as they occur and is required to recapture
the excess of the balance of its bad debt reserves (other than the supplemental
reserve) as of December 31, 1995 over the balance of such reserves as of
December 31, 1987 (or over a lesser amount if the Bank's loan portfolio
decreased since December 31, 1987). However, under the 1996 Act, such recapture
requirements were suspended for each of the two successive taxable years
beginning January 1, 1996, in which the Bank originates a minimum amount of
certain residential loans during such years that is not less than the average of
the principal amounts of such loans made by the Bank during its six taxable
years preceding January 1, 1996.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in the Bank's taxable income.
Nondividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits will not constitute nondividend distributions
and, therefore, will not be included in the Bank's income. The amount of
additional taxable income created from a nondividend distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Thus, approximately one and one-half times the nondividend
distribution would be includable in gross income for federal income tax
purposes, assuming a 35% federal corporate income tax rate.
Corporate Alternative Minimum Tax. In addition to the regular income
tax, corporations generally are subject to an alternative minimum tax ("AMT") in
an amount equal to 20% of alternative minimum taxable income ("AMTI") to the
extent the AMT exceeds the corporation's regular tax. AMTI is regular taxable
income as modified by certain adjustments and increased by certain tax
preference items. AMTI includes an amount equal to three-quarters of the excess
of adjusted current earnings over such specially computed AMTI. 90% of AMTI can
be offset by net operating loss carryovers. The AMT is available as a credit
against future regular income tax. The Company does not expect to be subject to
the AMT.
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Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, 80% of any dividends received may be
deducted.
State And Local Taxation
New York State Taxation. The Bank is subject to New York State
Franchise Tax on net income or one of several alternative bases, whichever
results in the highest tax. The Company and Bank will file a combined tax return
in the same manner as other corporations with some exceptions, including the
Bank's reserve for bad debts as discussed below. New York State passed
legislation that incorporated the former provisions of IRC 593 into New York
State tax law. The impact of this legislation enabled the Bank to defer the
recapture of the New York State tax bad debt reserves that would have otherwise
occurred as a result of the federal amendment to IRC 593. The legislation also
enabled the Bank to continue to utilize the reserve method for computing its bad
debt deduction. The following discussion of the reserve for bad debts is
intended only as a summary and does not purport to be a comprehensive
description of the New York State tax rules applicable to the Bank or the
Company.
Bad Debt Deduction. Federally chartered savings banks, such as the
Bank, which meet certain definition tests primarily relating to their assets and
the nature of their business ("qualifying thrifts") are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. The Bank will be a qualifying thrift only if, among other requirements,
at least 60% of its assets are assets described in Section 1453(h)(1) of the New
York State Tax Law (the "60% Test"). The Bank presently satisfies the 60% Test.
Although there can be no assurance that the Bank will satisfy the 60% Test in
the future, management believes that this level of qualifying assets can be
maintained by the Bank. The Bank's deduction for additions to its bad debt
reserve with respect to qualifying loans may be computed using the experience
method or a percentage equal to 32% of the Bank's taxable income, computed with
certain modifications, without regard to the Bank's actual loss experience, and
reduced by the amount of any addition permitted to the reserve for
non-qualifying loans ("NYS Percentage of Taxable Income Method"). The Bank's
deduction with respect to non-qualifying loans must be computed under the
experience method which is based on the qualifying thrift's actual loss
experience. Under the experience method, the amount of a reasonable addition, in
general, equals the amount necessary to increase the balance of the bad debt
reserve at the close of the taxable year to the greater of (i) the amount that
bears the same ratio to loans outstanding at the close of the taxable year as
the total net bad debts sustained during the current and five preceding taxable
years bears to the sum of the loans outstanding at the close of those six years,
or (ii) the balance of the bad debt reserve at the close of the base year
(assuming that the loans outstanding have not declined since then). The "base
year" for these purposes is the last taxable year beginning before the NYS
percentage of income bad debt deduction was taken. Any deduction for the
addition to the reserve for non-qualifying loans reduces the taxable addition to
the reserve for qualifying real property loans calculated under the NYS
Percentage of Taxable Income Method. Each year the Bank reviews the most
favorable way to calculate the deduction attributable to an addition to the bad
debt reserve. The amount of the addition to the reserve for losses on qualifying
real property loans under the NYS Percentage of Taxable Income Method cannot
exceed the amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding at the end of the
taxable year. Also, if the qualifying thrift uses the NYS Percentage of Taxable
Income Method, then the qualifying thrift's aggregate addition to its reserve
for losses on qualifying real property loans cannot, when added to the addition
to the reserve for losses on non-qualifying loans, exceed the amount by which
(i) 12% of the amount that the total deposits or withdrawable accounts of
depositors of the qualifying thrift at the close of the taxable year exceeded
(ii) the sum of the qualifying thrift's surplus, undivided profits and reserves
at the beginning of such year.
New York City Taxation. The Bank is also subject to the New York City
Financial Corporation Tax calculated, subject to a New York City income and
expense allocation, on a similar basis as the New York State Franchise Tax. In
this connection, legislation was enacted regarding the use and treatment of tax
bad debt reserves
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that is substantially similar to the New York State legislation described above.
A significant portion of the Bank's entire net income for New York City purposes
is allocated outside the jurisdiction which has the effect of significantly
reducing the New York City taxable income of the Bank.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as the deposit
insurer. The Bank is a member of the FHLB System and its deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or through legislation, could have a material adverse impact on the
Company, the Bank and their operations. The Company, as a savings and loan
holding company, is required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS under the Home Owners' Loan Act, as
amended (the "HOLA"), and of the Securities and Exchange Commission ("SEC")
under the federal securities laws. Certain of the regulatory requirements
applicable to the Bank and to the Company are referred to below or elsewhere
herein.
The description of statutory provisions and regulations applicable to
savings institutions set forth in this document do not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDI Act") and the regulations issued to implement those statutes. These laws
and regulations delineate the nature and extent of the activities in which
federal associations may engage. In particular, many types of lending
authorities for federal associations, e.g., commercial, nonresidential real
property and consumer loans, are limited to a specified percentage of the
institution's capital assets.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower. Unless
an exception applies, savings institutions may not make a loan or extend credit
to a single or related group of borrowers in excess of 15.0% of the Bank's
unimpaired capital and surplus. An additional amount may be lent, equal to 10.0%
of unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain financial instruments and
bullion, but does not include real estate. At June 30, 1999, there were two
borrowers each with aggregate loans totalling $13.1 million and $12.5 million,
respectively. These loans represented the largest aggregate amount of loans to
one borrower and were below the Bank's loans to one borrower limit of $25.8
million at such date. At June 30, 1999, both of these borrowers were current.
QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender ("QTL") test. Under the QTL test, a savings bank is required to
either maintain at least 65.0% of its "portfolio assets" (total assets less (i)
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specified liquid assets up to 20.0% of total assets, (ii) intangibles, including
goodwill, and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) on a
monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
June 30, 1999, the Bank maintained 90.3% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule effective in 1998 established three tiers of
institutions, based primarily on an institution's capital level. An institution
that exceeded all capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
approval of the OTS, make capital distributions during a calendar year equal to
the greater of: (i) 100% of its net earnings to date during the calendar year
plus the amount that would reduce by one-half the excess capital over its
capital requirements at the beginning of the calendar year; or (ii) 75% of its
net income for the previous four quarters. Any additional capital distributions
required prior regulatory approval. At June 30, 1999, the Bank was a Tier 1
Bank. Effective April 1, 1999, the OTS's capital distribution regulation
changed. Under the new regulation, an application to and the prior approval of
the OTS will be required prior to any capital distribution if the institution
does not meet the criteria for "expedited treatment: of applications under OTS
regulations (i.e., generally, safety and soundness, compliance and Community
Reinvestment Act examination ratings in the two tope categories), the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS. If an
application is not required, the institution must still provide prior notice to
OTS of the capital distribution. In the event the Bank's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. At June 30, 1999, the Bank was a Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10.0% depending upon economic conditions and the savings flows
of member institutions, and is currently 4.0%. Monetary penalties may be imposed
for failure to meet these liquidity requirements. The Bank's average liquidity
for the year ended June 30, 1999 was 9.34% which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed as a percentage upon the savings institution's
total assets, including consolidated subsidiaries, as reported in the bank's
latest quarterly thrift financial report. The assessments paid by the Bank for
the fiscal year ended June 30, 1999 totalled $366,000.
Branching. The OTS regulations authorize federally chartered savings
associations to branch nationwide to the extent allowed by federal statute. This
permits federal savings and loan associations with interstate networks to
diversify more easily their loan portfolios and lines of business
geographically. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
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Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "satisfactory" CRA rating
in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in
certain transactions with related parties or "affiliates" (i.e., any company
that controls or is under common control with an institution, including the
Company and any non-savings institution subsidiaries) is limited by Sections 23A
and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of "covered transactions" (including extension of credit to, purchases of
assets from or the issuance of a guarantee, acceptance or letter of credit on
behalf of affiliate) with any individual affiliate to 10.0% of the capital and
surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20.0% of the savings institution's capital
and surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, (including loan,
asset sales or purchases, and any servicing, leases or other agreements) must be
on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with nonaffiliated companies.
Notwithstanding Sections 23A and 23B, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies under Section 4 (c) of the Bank Holding Company Act
("BHC Act"). Further, no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and principal shareholders (generally considered to be those owners controlling
or having the power to vote ten percent or more of any class of the Company's
stock) as well as entities controlled by such persons, are currently governed by
Sections 22(g) and 22(h) of the FRA, and the Federal Reserve Board's ("FRB")
Regulation O thereunder. Among other things, these regulations require such
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and may not involve more than the normal risk of
repayment. Recent legislation created an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to insiders based, in part, on the Bank's capital position and
requires certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has the
authority to take such action under certain circumstances.
Federal law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
16
<PAGE>
impaired. The standards set forth in the Guidelines address internal
controls and information systems; internal audit system; credit underwriting;
loan documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final rule establishes deadlines for the submission
and review of such safety and soundness compliance plans when such plans are
required. Most recently, the agencies adopted guidelines related to Year 2000
computer compliance.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
standard, a 4.0% (3% for the most highly rated institutions) leverage ratio (or
core capital ratio) and an 8.0% risk-based capital standard. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage (core) capital ratio (3% for
institutions receiving the highest rating on the CAMEL financial institution
rating system), and, together with the risk-based capital standard itself, a 4%
Tier I risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The OTS regulations
also require that, in meeting the tangible, leverage (core) and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS (and other federal banking agencies) has revised the risk-based
capital standards to ensure that such standards take account of interest rate
risk. The OTS regulations set forth the methodology for calculating an interest
rate risk component that would be incorporated into the OTS risk-based capital
regulations. A savings institutions with "above normal" interest rate risk
exposure must deduct from total capital a portion of its capital to cover such
interest rate risk for purposes of calculating their risk-based capital
requirements. A savings institution's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference between
incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts) that would result from a hypothetical 200-basis
point increase or decrease in market interest rates (except when the 3-month
Treasury bond equivalent yield falls below 4.0%, then the decrease will be equal
to one-half of that Treasury rate) divided by the estimated economic value of
the institution's assets, as calculated in accordance with guidelines set forth
by the OTS. A savings institution whose measured interest rate risk exposure
exceeds 2.0% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0%, multiplied by the estimated economic value of the
bank's assets. That dollar amount is deducted from an institution's total
capital in calculating compliance with its risk-based capital requirement. For
the present time, the OTS has deferred implementation of a capital deduction
based on the interest-rate risk component. If the Bank had been subject to an
interest-rate risk component as of June 30, 1999, the Bank would not have been
subject to any deduction from capital as a result of its interest rate risk
position.
17
<PAGE>
At June 30, 1999, the Bank met each of its capital requirements. The
following table sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, and the Bank's historical amounts
and percentages at June 30, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Tangible............................ $ 36,113 1.5% $ 163,267 6.8% $ 127,154 5.3%
Leverage............................ 72,226 3.0 163,267 6.8 91,041 3.8
Risk-based.......................... 80,415 8.0 172,333 17.1 91,918 9.1
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance on Deposit Accounts. The FDIC has established a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. Under the risk-based assessment system, the average assessment rate
paid by institutions insured under the SAIF was increased. Under the risk- based
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information as of the reporting
period ending seven months before the assessment period, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC also
assigns an institution to one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial conditions and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. Under
the risk-based assessment system, there are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied. As a result of the recapitalization of
the SAIF in 1996 after the enactment of the Deposit Funds Insurance Act of 1996,
the FDIC reduced the assessment rates for deposit insurance for SAIF-assessable
deposits for fiscal 1999
18
<PAGE>
to a range of 0 to 27 basis points. The assessment rate for the Company's
SAIF-assessable deposits for fiscal 1999 was 0 basis points. In addition,
SAIF-assessable deposits are also subject to assessments for payments on the
bonds issued in the late 1980s by the Financing Corporation (the "FICO" bonds)
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
The Company's total expense in fiscal 1999 for the assessment for deposit
insurance and the FICO payments was $930,000.
Thrift Rechartering Legislation. The Funds Act provides that the Bank
Insurance Fund (the "BIF") and SAIF will merge on January 1, 1999 if there are
no more savings associations as of that date. That legislation also required
that the Department of Treasury submit a report to Congress that makes
recommendations regarding a common financial institutions charter, including
whether the separate charters for thrifts and banks should be abolished. Various
proposals to eliminate the federal thrift charter, create a uniform financial
institutions charter and abolish the OTS have been introduced in Congress. The
bills would require federal savings institutions to convert to a national bank
or some type of state charter by a specified date under some bills, or they
would automatically become national banks. Under some proposals, converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. A more recent bill passed by the House of
Representatives would not affect the federal thrift charter, but would subject
unitary savings and loan holding companies to the same activities restrictions
applicable to multiple savings and loan holding companies existing on or applied
for by March 31, 1998 would be grandfathered. The Bank is unable to predict
whether such legislation would be enacted or the extent to which the legislation
would restrict or disrupt its operations.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 1999, of $19.6 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended June 30, 1999, 1998 and 1997,
dividends from the FHLB to the Bank amounted to $1.3 million, $1.2 million and
$820,000, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of FDICIA and the FIRREA on
the FHLBs will not also cause a decrease in the value of the FHLB stock held by
the Bank.
Federal Reserve System
The FRB regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves be maintained against aggregate transaction accounts as follows: For
accounts aggregating $46.5 million or less (subject to adjustment by the FRB)
the reserve requirement is 3.0%; and for accounts greater than $46.5 million,
the reserve requirement is $1.395 million plus 10.0% (subject to adjustment by
the FRB between 8.0% and 14.0%) against that portion of total transaction
accounts in excess of $46.5 million. The first $4.9 million of otherwise
reservable balances (subject to adjustments by the FRB) are exempted from the
reserve requirements. The Bank is
19
<PAGE>
in compliance with the foregoing requirements. The balances maintained to meet
the reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the HOLA, as amended. As such, the Company has
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the holding company's subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5.0%
of the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or acquiring or retaining control of
a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
As a unitary savings and loan holding company (i.e., one that controls
only one thrift subsidiary), the Company generally will not be restricted under
existing banking laws as to the types of business activities in which it may
engage, provided that the Bank continues to be a QTL. See "Federal Savings
Institution Regulation - QTL Test" for a discussion of the QTL requirements.
Upon any non-supervisory acquisition by the Company of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings institution by OTS, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior
approval of the OTS, and certain other activities authorized by OTS regulation,
and no multiple savings and loan holding company may acquire more than 5.0% of
the stock of a company engaged in impermissible activities.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.This requirement would apply to acquisitions of the
Company's stock.
20
<PAGE>
Thrift Rechartering Legislation. The Funds Act provides that the Bank
Insurance Fund (the "BIF") and SAIF were to have merged on January 1, 1999 if
there had been no more savings associations as of that date. That legislation
also required that the Department of Treasury submit a report to Congress that
makes recommendations regarding a common financial institutions charter,
including whether the separate charters for thrifts and banks should be
abolished. Various proposals to eliminate the federal thrift charter, create a
uniform financial institutions charter and abolish the OTS have been introduced
in Congress. The bills would require federal savings institutions to convert to
a national bank or some type of state charter by a specified date under some
bills, or they would automatically become national banks. Under some proposals,
converted federal thrifts would generally be required to conform their
activities to those permitted for the charter selected and divestiture of
nonconforming assets would be required over a two year period, subject to two
possible one year extensions. State chartered thrifts would become subject to
the same federal regulation as applies to state commercial banks. A more recent
bill pending in a House of Representatives Senate Conference Committee would not
affect the federal thrift charter, but would subject unitary savings and loan
holding companies to the same activities restrictions applicable to multiple
savings and loan holding companies under the legislation. Unitary holding
companies existing on or applied for by March 4, 1999 would be grandfathered.
The Bank is unable to predict whether such legislation would be enacted or the
extent to which the legislation would restrict or disrupt its operations.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the
Exchange Act of 1934, as amended (the "Exchange Act"). The Company and its
officers and directors are subject to periodic reporting, proxy solicitation
regulations, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of 1933 (the "Securities
Act") of shares of the Common Stock issued in the Conversion or pursuant to the
Company's employee stock benefit plans does not cover the resale of such shares.
Shares purchased or acquired by an affiliate of the Company will be subject to
the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1.0% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Shares acquired from the Company that are deemed
to be restricted under the definition of that term in Rule 144, must be held for
a period of at least one year before they may be publicly resold. A provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain circumstances.
STATISTICAL DATA
The detailed statistical data that follows is being presented in accordance with
Guide 3, prescribed by the Securities and Exchange Commission. This data should
be read in conjunction with the financial statements and related notes and the
discussion included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations.
21
<PAGE>
A. Mortgage and Other Loan Activities
The following table sets forth the Bank's loan originations, loan purchases,
sales, and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------
1999 1998 1997
------- ------ ------
(In thousands)
Mortgage loans (gross):
<S> <C> <C> <C>
At beginning of period.................................. $ 791,893 $ 776,402 $ 690,983
Mortgage loans originated:
One- to four-family................................... 62,421 38,783 39,370
Multi-family.......................................... 89,980 60,715 115,887
Construction.......................................... 11,173 4,491 6,417
Commercial real estate................................ 12,398 1,066 650
------- ------- ---------
Total mortgage loans originated .................... 175,972 105,055 162,324
Mortgage loans purchased (1)............................ -- 32,656 16,956
---------- ------- -------
Total mortgage loans originated
and purchased .................................... 175,972 137,711 179,280
Transfer of mortgage loans
to real estate owned.................................. (725) (3,491) (820)
Principal repayments.................................... (127,191) (110,300) (85,766)
Sales of loans.......................................... (28,106) (8,429) (7,275)
-------- --------- --------
At end of period................................... $ 811,843 $ 791,893 $ 776,402
======= ======= =======
Commercial loans (gross):
At beginning of period................................ $ 49,887 $ -- $ --
Asset based loans originated.......................... 116,022 106,660 --
Other commercial loans originated.................... 22,290 18,744 --
Commercial loans purchased (1)....................... 4,671 55,842 --
Principal repayments.................................. (147,921) (131,359) --
--------- --------- ----------
At end of period................................ $ 44,949 $ 49,887 $ --
====== ====== =========
Other loans (gross):
At beginning of period................................ $ 137,212 $ 138,115 $ 130,410
Other loans originated................................ 41,741 46,726 47,718
Other loans purchased (1)............................. -- 706 --
Principal repayments.................................. (52,203) (48,335) (40,013)
-------- -------- --------
At end of period................................ $ 126,750 $ 137,212 $ 138,115
======= ======= =======
</TABLE>
(1) For fiscal year 1998, mortgage loans, commercial loans and consumer loans
include $26.1 million, $55.8 million and $706,000, respectively, of loans
acquired from the Continental acquisition.
22
<PAGE>
B. Loan Maturity and Repricing
The following table shows the maturity or period to repricing of the Bank's loan
portfolio at June 30, 1999. Loans that have adjustable rates are shown as being
due in the period during which the interest rates are next subject to change.
The table does not include prepayments or scheduled principal amortization.
Prepayments and scheduled principal amortization on loans totalled $325.5,
$290.0 million and $125.8 million, respectively, for the years ended June 30,
1999, 1998 and 1997.
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------------------------------------------------
Mortgage Loans Commercial
----------------------------------------------------- -----------------
Comm-
ercial Other
One- to Co- Multi- Real Const- Asset Comm-
four-family operative family Estate ruction Based ercial
----------- --------- ------ ------ ------- ----- ------
Amounts due: (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Within one year..................... $ 119,843 $ 5,333 $ 2,446 $ 15,680 $ 7,515 $11,056 $12,373
After one year:
One to three years............... 17,537 2 74,772 2,390 -- -- 5,323
Three to five years.............. 15,474 -- 85,904 7,297 -- -- 6,320
Five to ten years................ 124,950 55 93,137 16,241 -- -- 4,986
Ten to twenty years.............. 116,304 216 51,973 4,720 -- -- 4,891
Over twenty years................ 40,129 266 7,883 1,776 -- -- --
------ ----- -------- ------ ---- ------ ------
Total due after one year............ 314,394 539 313,669 32,424 -- -- 21,520
------- ----- ------- ------- ---- ------ ------
Total amounts due................... $ 434,237 $ 5,872 $ 316,115 $ 48,104 $ 7,515 $ 11,056 $ 33,893
======= ===== ======= ====== ===== ====== ======
June 30, 1999
----------------------------------------------
Consumer and Other Loans
-----------------------------
Home
Equity Home
Lines of Equity Other Total
Credit Loans Loans Receivable
------ ----- ----- ----------
(In thousands)
<S> <C> <C> <C> <C>
Within one year..................... $ 85,576 $ 303 $ 13,716 $ 273,841
After one year:
One to three years............... -- 2,142 3,307 105,473
Three to five years.............. -- 7,048 1,823 123,866
Five to ten years................ -- 8,725 700 248,794
Ten to twenty years.............. -- 3,312 98 181,514
Over twenty years................ -- -- -- 50,054
--------- --------- -------- --------
Total due after one year............ -- 21,227 5,928 709,701
--------- ------ ----- -------
Total amounts due................... $ 85,576 $ 21,530 $ 19,644 $ 983,542
====== ====== ====== =======
Discounts, premiums and
deferred loan fees, net...... (349)
Allowance for loan losses........... (9,120)
--------
Loans receivable, net.......... $974,073
=======
The following table sets forth, at June 30, 1999, the dollar amount of all fixed
rate loans contractually due after June 30, 2000, and adjustable rate loans
repricing after June 30, 2000.
Due After June 30, 2000
--------------------------------------
Fixed Adjustable Total
----- ---------- -----
Mortgage loans: (In thousands)
<S> <C> <C> <C>
One- to four-family............................................ $ 279,574 $ 34,820 $ 314,394
Co-operative................................................... 539 -- 539
Multi-family................................................... 96,828 216,841 313,669
Commercial real estate......................................... 18,839 13,585 32,424
Commercial loans............................................... 11,064 10,456 21,520
Consumer and other loans....................................... 27,155 -- 27,155
------- --------- -------
Total loans....................................................... $433,999 $ 275,702 $ 709,701
======= ======== ========
23
<PAGE>
C. Summary of Allowance for Losses
The following table sets forth the Bank's allowances for loan and real
estate owned losses at the dates indicated.
Year Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
Allowance for loan losses:
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $ 8,941 $ 5,182 $ 4,495 $ 1,729 $ 1,417
Charge-offs:
One- to four-family........................... (397) (696) (184) (67) (54)
Co-op......................................... -- -- -- (76) (28)
Commercial real estate........................ -- -- (107) -- --
Commercial.................................... (73) (19) -- -- --
Consumer and other loans...................... (43) (58) (15) (122) (31)
------ ------ -------- ------- --------
Total charge-offs.......................... (513) (773) (306) (265) (113)
Recoveries:
Mortgage loans................................ 15 101 12 35 17
Commercial.................................... 3 21 -- -- --
Consumer and other loans...................... 24 15 31 54 8
---- ------ ------- ------- --------
Total recoveries........................... 42 137 43 89 25
Allowances of acquired institutions.............. -- 2,745 -- 2,217 --
Provision for loan losses........................ 650 1,650 950 725 400
----- ----- ------- ------ -------
Balance at end of the period..................... $9,120 $8,941 $ 5,182 $4,495 $1,729
===== ===== ===== ===== =====
Ratio of net charge-offs during the period
to average loans outstanding during
the period.................................... 0.05% 0.07% 0.03% 0.03% 0.03%
Ratio of allowance for loan losses to total
loans at the end of the period................ 0.93% 0.91% 0.57% 0.55% 0.52%
Ratio of allowance for loan losses to non-
performing loans at the end of the
period........................................ 139.08% 96.12% 35.18% 34.63% 47.10%
Allowance for losses on real estate owned:
Balance at beginning of period................... $ 123 $334 $768 $589 $632
Charge-offs...................................... (87) (304) (634) (384) (103)
Recoveries....................................... -- -- -- -- --
Allowances of acquired institutions.............. -- -- -- 188 --
Provision for losses............................. 35 93 200 375 60
---- ---- ---- ---- ----
Balance at the end of the period................. $71 $123 $334 $768 $589
== ==== === === ===
24
<PAGE>
The following table sets forth the Bank's allocation of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable at the dates indicated. The portion of the allowance for loan losses
allocated to each loan category does not represent the total available for
future losses which may occur within the loan category since the total loan loss
reserve is a valuation reserve applicable to the entire loan portfolio.
At June 30,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- ----------------------- ----------------------
% of Loans in % of Loans in % of Loans in
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to-four-family(1).............. $3,173 44.76% $3,457 51.10% $3,327 61.37%
Commercial real estate.............. 345 4.89 340 4.46 308 2.56
Multi-family........................ 1,150 32.15 851 24.83 666 20.81
Construction........................ 53 0.77 29 0.50 89 0.16
Commercial loans.................... 3,545 4.57 3,390 5.10 -- --
Consumer and other loans............ 854 12.86 874 14.01 792 15.10
------ ------ ------ ------ ------ ----
Total allowances............... $9,120 100.00% $8,941 100.00% $5,182 100.00%
===== ====== ===== ====== ===== ======
At June 30,
-------------------------------------------------
1999 1998
--------------------- -----------------------
% of Loans in % of Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to-four-family(1).............. $3,336 70.46% $1,249 60.84%
Commercial real estate.............. 158 3.30 -- 0.68
Multi-family........................ 278 9.69 74 5.64
Construction........................ 47 0.67 -- 0.22
Commercial loans.................... -- -- -- --
Consumer and other loans............ 676 15.88 406 32.62
--- ----- --- -----
Total allowances............... $4,495 100.00% $1,729 100.00%
====== ====== ====== ======
25
(1) Includes allocations for co-op loans.
<PAGE>
D. Composition of Loan Portfolio
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and in percentages of the portfolio at the dates indicated.
June 30,
1999 1998 1997
------------------- -------------------- -------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
Mortgage loans: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............................ $434,237 44.15% $492,804 50.33% $552,577 60.42%
Co-op.......................................... 5,872 0.60 7,516 0.77 8,647 0.95
Multi-family................................... 316,115 32.14 243,070 24.83 190,293 20.81
Commercial real estate......................... 48,104 4.89 43,624 4.46 23,445 2.56
Construction................................... 7,515 0.76 4,879 0.50 1,440 0.16
------- ----- ------- ----- ------- -----
Total mortgage loans....................... 811,843 82.54 791,893 80.89 776,402 84.90
------- ----- ------- ----- ------- -----
Commercial loans:
Asset based loans.............................. 11,056 1.12 21,339 2.18 -- --
Other commercial loans......................... 33,893 3.45 28,548 2.92 -- --
------ ---- ------ ----- ----
Total commercial loans..................... 44,949 4.57 49,887 5.10 -- --
------ ---- ------ ----- ------- ----
Consumer and other loans:
Home equity lines of credit.................... 85,576 8.70 93,862 9.59 91,782 10.04
Guaranteed student loans....................... 12,791 1.30 15,262 1.56 17,006 1.86
Home equity loans.............................. 21,530 2.19 19,050 1.95 19,505 2.13
Loans on deposit accounts...................... 4,788 0.49 5,416 0.55 5,514 0.60
Other loans.................................... 2,065 0.21 3,622 0.36 4,308 0.47
-------- ----- -------- ----- ------- -----
Total consumer and other loans............ 126,750 12.89 137,212 14.01 138,115 15.10
------- ----- ------- ----- ------- -----
Total loans.................................... 983,542 100.00% 978,992 100.0% 914,517 100.0%
====== ===== =====
Discounts, premiums and
deferred loan fees, net....................... (349) (254) (14)
Allowance for loan losses...................... (9,120) (8,941) (5,182)
-------- -------- ---------
Total loans, net............................... $ 974,073 $969,797 $909,321
======== ======= =======
June 30,
---------------------------------------------
1996 1995
------------------ ---------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
Mortgage loans:
<S> <C> <C> <C> <C>
One- to four-family............................ $569,031 69.28% $194,290 58.26%
Co-op.......................................... 9,687 1.18 8,774 2.63
Multi-family................................... 79,571 9.69 18,774 5.63
Commercial real estate......................... 27,134 3.30 2,258 0.68
Construction................................... 5,560 0.67 745 0.22
------- ----- ------- -----
Total mortgage loans....................... 690,983 84.12 224,841 67.42
------- ----- ------- -----
Commercial loans:
Asset based loans.............................. -- -- -- --
Other commercial loans......................... -- -- -- --
------- ------ ------- -----
Total commercial loans..................... -- -- -- --
------- ------ ------- -----
Consumer and other loans:
Home equity lines of credit.................... 81,205 9.89 70,954 21.28
Guaranteed student loans....................... 18,754 2.28 20,529 6.16
Home equity loans.............................. 16,747 2.04 15,774 4.73
Loans on deposit accounts...................... 5,782 0.70 980 0.29
Other loans.................................... 7,922 0.97 416 0.12
-------- ----- -------- -----
Total consumer and other loans............ 130,410 15.88 108,653 32.58
------- ----- ------- -----
Total loans.................................... 821,393 100.00% 333,494 100.00%
====== ======
Discounts, premiums and
deferred loan fees, net....................... 848 315
Allowance for loan losses...................... (4,495) (1,729)
--------- --------
Total loans, net............................... $817,746 $332,080
======= =======
26
<PAGE>
E. Money Market, Debt and Equity and Mortgage-Backed Securities Composition
Table.
The following table sets forth certain information regarding the carrying and
market values of the Company's money market investments and its portfolios of
debt and equity and mortgage-backed securities at the dates indicated:
At June 30,
-------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
Money Market Investments (In thousands)
Federal funds sold and
<S> <C> <C> <C> <C> <C> <C>
repurchase agreements............................. $ -- $ -- $9,500 $9,500 $1,100 $1,100
==== ==== ===== ===== ===== =====
Debt and Equity Securities
Held-to-Maturity:
United States Agency Obligations................... $8,885 $8,888 $22,493 $22,786 $29,952 $30,042
Obligation of New York State....................... 390 392 390 417 391 427
FHLB stock......................................... 19,560 19,560 17,306 17,306 15,683 15,683
------ ------- ------- ------- ------- -------
Total debt and equity securities
held-to-maturity............................. $28,835 $28,840 $40,189 $40,509 $46,026 $46,152
====== ====== ====== ====== ====== ======
Available-for-Sale:
United States Agency Obligations.................. $10,000 $10,010 $29,031 $29,290 $22,036 $22,080
Corporate Obligations............................. 113,855 111,281 103,070 103,167 -- --
United States Treasury Bills...................... -- -- -- -- 4,785 4,812
United States Treasury Notes...................... -- -- -- -- -- --
Marketable equity securities...................... 1,177 877 2,419 2,450 8 17
------- ------ -------- ------- --------- --------
Total debt and equity securities
available-for-sale........................... $125,032 $122,168 $134,520 $134,907 $26,829 $26,909
======= ======= ======= ======= ====== ======
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA............................................. $55,782 $56,838 $78,106 $80,232 $106,900 $109,978
FHLMC............................................ 7,792 7,940 10,304 10,571 12,963 13,139
FNMA............................................. 28,228 28,481 33,949 34,908 39,493 39,991
REMICs:
Agency Issuance........................... 91,476 87,214 53,021 52,799 -- --
Private Issuance.......................... 72,639 71,760 73,879 73,822 -- --
------ ------ ------ ------ ---------- ---------
Total mortgage-backed securities
held-to-maturity............................ $255,917 $252,233 $249,259 $252,332 $159,356 $163,108
======= ======= ======= ======= ======= =======
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA............................................. $285,238 $283,311 $187,562 $190,247 $233,572 $237,754
FHLMC............................................ 48,259 48,510 118,982 120,677 222,961 221,756
FNMA............................................. 83,555 83,008 140,597 142,183 131,066 131,085
REMICs:
Agency Issuance........................... 160,742 154,905 128,113 128,272 20,806 20,552
Private Issuance.......................... 373,053 365,304 358,033 358,968 110,481 110,672
------- ------- ------- ------- ------- -------
Total mortgage-backed securities
available-for-sale.......................... $950,847 $935,038 $933,287 $940,347 $718,886 $721,819
======= ======= ======= ======= ======= =======
27
<PAGE>
F. Maturity Listing for Money Market Investments, Debt and Equity and
Mortgage-Backed Securities Portfolio
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's repurchase
agreement, debt and equity securities and mortgage-backed securities at June 30,
1999. There were no debt and equity, exclusive of obligations of the U.S.
Treasury securities, issued by any one entity with a total carrying value in
excess of 10.0% of retained earnings at June 30, 1999.
At June 30, 1999
One Year or Less One to Five Years Five to Ten Years
-------------------- -------------------- -------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money Market Investments
Repurchase agreement................................. $ -- --% $ -- --% $ -- --%
====== ==== ===== ===== ===== =====
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations.......... $ -- --% $ -- --% $ 8,885 7.00%
Obligation of New York State......................... -- -- 390 7.90 -- --
FHLB stock........................................... -- -- -- -- --
----- ------ ----- ----- ----- ----
Total debt and equity securities held-to-maturity$ -- --% $ 390 7.90% $ 8,885 7.00%
===== ====== === ==== ===== ====
Available-for-Sale:
United States Government Agency Obligations.......... $ -- --% $ -- --% $ 10,000 7.46%
Corporate Bonds...................................... -- -- 2,046 8.65 22,753 5.50
Marketable Equity Securities......................... -- -- -- -- -- --
----- ------ ----- ---- ------ ----
Total debt and equity securities available-for-sale$ -- --% $ 2,046 8.65% $ 32,753 6.10%
===== ====== ===== ==== ====== ====
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA................................................. $ -- --% $ -- --% $ 1,860 6.50%
FHLMC................................................ -- -- -- -- 7,792 7.02
FNMA................................................. -- -- -- -- 20,028 7.02
REMICS:
Agency Issuance .................................. -- -- -- -- -- --
Private Issuance.................................. -- -- -- -- -- --
----- ------ ------ ----- ------ ----
Total mortgage-backed securities held-to-maturity $ -- --% $ -- --% $ 29,680 6.99%
===== ====== ====== ===== ====== ====
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA................................................. $ -- --% $ 146 6.87% $ -- --%
FHLMC................................................ 972 7.50 8,797 7.03 576 9.19
FNMA................................................. 7,768 6.50 7,862 6.37 9,897 7.00
REMICS:
Agency Issuance.................................... -- -- -- -- -- --
Private Issuance................................... -- -- -- -- -- --
----- ----- ------ ---- ------ ----
Total mortgage-backed securities available-for-sale $ 8,740 6.61% $ 16,805 6.72% $ 10,473 7.12%
===== ==== ====== ==== ====== ====
At June 30, 1999
--------------------------------------------------------------
More Than Ten Years Total Securities
--------------------- ---------------------------------------
Annualized Annualized
Weighted Average Approx. Weighted
Amortized Average Life Amortized Market Average
Cost Yield (in years) Cost Value Yield
--------- ------- --------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Money Market Investments
Repurchase agreement................................. $ -- --% -- $ -- $ -- --%
======= ===== ==== ====== ===== =====
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations.......... $ -- --% 5.6 $ 8,885 $ 8,888 7.00%
Obligation of New York State......................... -- -- 0.8 390 392 7.90
FHLB stock........................................... 19,560 6.50 -- 19,560 19,560 6.50
------ ---- ---- ------ ------ ----
Total debt and equity securities held-to-maturity$ $ 19,560 6.50% 5.4 $ 28,835 $ 28,840 6.67%
====== ==== === ====== ====== ====
Available-for-Sale:
United States Government Agency Obligations.......... $ -- --% 7.4 $ 10,000 $10,010 7.46%
Corporate Bonds...................................... 89,056 6.01 23.6 113,855 111,281 5.95%
Marketable Equity Securities......................... 1,177 0.02 -- 1,177 877 0.02
----- ---- ----- ----- ------- ----
Total debt and equity securities available-for-sale$ $ 90,233 5.93% 22.3 $ 125,032 $ 122,168 6.02%
====== ==== ==== ======= ======= ====
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by:
GNMA................................................. $ 53,922 6.60% 3.2 $ 55,782 $ 56,838 6.60%
FHLMC................................................ -- -- 3.5 7,792 7,940 7.02
FNMA................................................. 8,200 7.44 4.0 28,228 28,481 7.14
REMICS:
Agency Issuance .................................. 91,476 6.37 6.8 91,476 87,214 6.37
Private Issuance.................................. 72,639 6.82 5.4 72,639 71,760 6.82
------- ---- --- ------ ------ ----
Total mortgage-backed securities held-to-maturity $ 226,237 6.61% 5.2 $ 255,917 $ 252,233 6.65%
======= ==== === ======= ======= ====
Available-for-Sale:
Pass-through certificates guaranteed by:
GNMA................................................. $ 285,091 5.67% 5.9 $ 285,238 $ 283,311 5.67%
FHLMC................................................ 37,914 7.14 4.8 48,259 48,510 7.15
FNMA................................................. 58,029 6.71 4.4 83,555 83,008 6.69
REMICS:
Agency Issuance.................................... 160,742 6.47 6.1 160,742 154,905 6.47
Private Issuance................................... 373,053 6.55 5.9 373,053 365,304 6.55
------- ---- --- ------- ------- ----
Total mortgage-backed securities available-for-sale $ 914,829 6.30% 5.7 $ 950,847 $ 935,038 6.32%
======= ==== === ======= ======= ====
28
<PAGE>
G. Deposit Activities
The following table presents the deposit activity of the Bank for the
periods indicated.
Years Ended June 30,
------------------------------------------
1999 1998 1997
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Opening balance............................................... $ 1,628,298 $ 1,436,037 $ 1,345,626
Continental Bank deposits assumed............................. -- 137,011 --
(Withdrawals) in Excess of deposits........................... (140,851) (8,182) 36,272
Interest credited on deposits................................. 61,972 63,432 54,139
-------- -------- ----------
Ending balance................................................ $ 1,549,419 $ 1,628,298 $ 1,436,037
========= ========= =========
Net (decrease)increase in deposits............................ $ (78,879) $ 192,261 $ 90,411
======== ======= ======
Percentage (decrease)/increase................................ (4.85)% 13.4% 6.7%
At June 30, 1999, the Bank has outstanding $81.1 million in
certificates of deposit accounts in amounts of $100,000 or more, maturing as
follows:
Weighted
Amount Average Rate
------ ------------
Maturity Period: (In thousands)
<S> <C> <C>
Three months or less.......................................... $ 34,469 5.13%
Over three through six months................................. 10,153 4.80
Over six through 12 months.................................... 21,818 5.09
Over 12 months................................................ 14,741 5.49
------- ----
Total................................................... $ 81,181 5.14%
====== ====
29
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented.
Year ended June 30,
---------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Average of Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts..................... $ 443,352 27.35% 2.04% $435,844 28.06% 2.40% $441,921 32.01% 2.47
Demand Deposits and
NOW accounts....................... 165,580 10.21 0.95 140,977 9.08 0.89 102,119 7.39 1.10
------- ---- ---- ------- ----- ------- -----
Total passbook and Demand Deposits
and NOW accounts.................... 608,932 37.56 1.74 576,821 37.14 2.03 544,040 39.40 2.21
------- ----- ---- ------- ----- ------- -----
Money market accounts................. 90,442 5.58 2.03 93,715 6.03 2.40 99,536 7.21 2.48
------ ---- ---- ------- ----- ------- -----
Certificate accounts:
31 days......................... -- -- -- -- -- -- 38 0.00 2.50
91 days......................... 29,278 1.81 4.20 31,767 2.05 4.73 34,775 2.52 4.82
4 months....................... 2,069 0.13 4.01 795 0.05 4.20 880 0.06 4.28
6 months....................... 119,102 7.35 4.56 223,876 14.41 5.34 126,700 9.18 5.19
9 months....................... 26,461 1.63 4.81 15,134 0.97 5.10 65,202 4.72 5.15
12 months........................ 449,875 27.75 5.40 196,139 12.63 5.47 144,536 10.47 5.12
15 months........................ 9,287 0.57 4.89 15,128 0.97 4.88 44,691 3.24 5.32
18 months........................ 25,829 1.59 5.17 37,022 2.38 5.30 59,993 4.35 5.45
24 months........................ 147,172 9.08 5.87 233,293 15.02 6.04 129,499 9.38 6.08
30 months........................ 8,053 0.50 5.41 10,657 0.69 5.50 12,915 0.94 5.52
36 months........................ 6,190 0.38 5.32 7,578 0.49 5.55 8,857 0.64 5.38
42 months........................ 1,853 0.12 5.31 2,431 0.16 5.50 2,784 0.20 5.36
48 months........................ 11,056 0.68 5.72 13,090 0.84 5.74 16,507 1.20 5.50
60 months........................ 77,066 4.75 6.20 82,156 5.29 6.15 87,253 6.32 6.15
Other certificates.................... 8,491 0.52 5.51 13,709 0.88 5.54 2,388 0.17 4.87
----- ---- -------- ----- --------- ------
Total certificates.................... 921,782 56.86 5.37 882,775 56.83 5.60 737,018 53.39 5.47
------- ----- -------- ----- -------- -----
Total deposits........................ $1,621,156 100.00% 3.82 $1,553,311 100.00% 4.08 $1,380,594 100.00% 3.95
========= ====== ========= ====== ========= ======
30
<PAGE>
The following table presents, by rate categories, the balances of the
Bank's certificates of deposit accounts outstanding, interest rate categories,
at June 30, 1999, 1998 and 1997 and the remaining periods to maturity of
certificate deposit accounts outstanding at June 30, 1999.
Period to maturity from
June 30, 1999 June 30,
--------------------------------------------- -------------------------------
One to Two to Over
Within Two Three Three
One Year Years Years Years 1999 1998 1997
-------- ----- ----- ----- ------ ------ -----
(In thousands)
Certificates of deposit accounts:
<C> <C> <C> <C> <C> <C> <C> <C>
2.99% or less................ $ 612 $ 110 $ 3,664 $ 477 $ 4,863 $ 2,059 $ 1,341
3.00% to 3.99%............... 7,669 -- -- -- 7,669 -- --
4.00% to 4.99%............... 440,960 32,525 -- 5,623 479,108 171,881 65,449
5.00% to 5.99%............... 222,909 49,429 9,195 7,550 289,083 513,417 508,266
6.00% to 6.99%............... 38,487 15,263 7,923 259 61,932 246,743 230,989
7.00% to 7.99%............... 78 31 7 -- 116 111 341
8.00% to 8.99%............... 7 -- -- -- 7 208 228
9.00% and greater............ -- -- -- -- -- 139 136
--------- --------- --------- ----------- --------- -------- --------
Total........................ $710,722 $97,358 $20,789 $13,909 $842,778 $934,558 $806,750
======= ====== ====== ====== ======= ======= =======
H. Borrowings
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the fiscal years ended on the dates indicated:
At or For the
Year Ended June 30,
--------------------------------------
1999 1998 1997
------ ------ ------
FHLB-NY advances: (In thousands)
<S> <C> <C> <C>
Average balance outstanding.......................................... $309,323 $ 84,920 $ 22,519
Maximum amount outstanding at any
month-end during the period..................................... 383,826 182,136 43,000
Balance outstanding at end of period................................ 338,718 182,136 40,000
Weighted-average interest rate during the period.................... 5.35% 5.58% 5.61%
Weighted-average interest rate at end of period..................... 5.27% 5.49% 5.58%
Reverse repurchase agreements:
Average balance outstanding.......................................... $276,748 $309,618 $288,845
Maximum amount outstanding at any
month-end during the period..................................... 350,060 398,070 326,391
Balance outstanding at end of period................................ 313,716 398,070 311,913
Weighted-average interest rate during the period.................... 5.57% 5.79% 5.63%
Weighted-average interest rate at end of period..................... 5.23% 5.64% 5.78%
Company Obligated Mandatorily Redeemable Capital Securities:
Average balance outstanding.......................................... $ 50,000 $ 8,876 $ --
Maximum amount outstanding at any
month-end during the period...................................... 50,000 50,000 --
Balance outstanding at end of period................................ 50,000 50,000 --
Weighted-average interest rate during the period.................... 8.17% 8.17% --%
Weighted-average interest rate at end of period..................... 8.17% 8.17% --%
Total borrowings:
Average balance outstanding.......................................... $636,095 $403,414 $311,364
Maximum amount outstanding at any
month-end during the period..................................... 733,856 630,206 351,913
Balance outstanding at end of period................................ 702,434 630,206 351,913
Weighted-average interest rate during the period.................... 5.66% 5.80% 5.62%
Weighted-average interest rate at end of period..................... 5.46% 5.80% 5.76%
31
<PAGE>
Item 2. Properties
The Bank conducts its business through its administrative office and 29
full-service branch offices. Loan originations are processed at the
administrative office.
Net Book Value
of Property or
Original Date Date of Leasehold
Leased or Leased or Lease Improvements at
Location Owned Acquired Expiration(1) June 30, 1999
------------ ------- ---------- ------------- --------------
(In thousands)
Administrative Office:
585 Stewart Avenue
<S> <C> <C> <C> <C>
Garden City, NY 11530............................. Leased 1977 2002 $ 29
Banking Offices:
300 Garden City Plaza
Garden City, NY 11530
(Home Office)...................................... Leased 1979 2004 46
118 Seventh Street
Garden City, NY 11530............................. Leased 1997 2008 3
983 Willis Avenue
Albertson, NY 11507............................... Owned 1965 -- 540
422 Hillside Avenue
Williston Park, NY 11596.......................... Leased 1972 2017 232
380 Hillside Avenue(2)
Williston Park, NY 11596.......................... Owned 1964 -- 200
570 Stewart Avenue
Bethpage, NY 11714................................ Leased 1963 2008 26
341 Post Avenue
Westbury, NY 11590................................ Owned 1995 -- 577
2530 Stewart Avenue
Westbury, NY 11590................................ Owned 1995 -- 740
405 Jerusalem Avenue
Hicksville, NY 11801.............................. Leased 1995 2005 4
2843 Jerusalem Avenue
North Bellmore, NY 11710.......................... Leased 1995 2012 27
172 New Hyde Park Road
Franklin Square, NY 11010......................... Leased 1995 2019 24
32
<PAGE>
Net Book Value
of Property or
Original Date Date of Leasehold
Leased or Leased or Lease Improvements at
Location Owned Acquired Expiration(1) June 30, 1999
-------- ----- -------- ------------- -------------
(Continued) (In thousands)
312 Conklin Street
<S> <C> <C> <C> <C>
Farmingdale, NY 11735............................. Owned 1996 -- $ 772
195 Merritts Road
South Farmingdale, NY 11735...................... Owned 1996 -- 1,378
1074 Old Country Road
Plainview, NY 11803............................... Owned 1996 -- 571
300 S. Wellwood Avenue
Lindenhurst, NY 11757............................. Owned 1996 -- 656
1134 Deer Park Avenue
North Babylon, NY 11703........................... Leased 1996 2008 16
1383 Deer Park Avenue
North Babylon, NY 11703........................... Owned 1997 -- 1,053
2087 Deer Park Avenue
Deer Park, NY 11729............................... Owned 1996 -- 611
2080 Deer Park Avenue(2)
Deer Park, NY 11729................................ Owned 1996 -- 299
434 Union Boulevard
West Islip, NY 11795.............................. Leased 1996 2004 37
340 Washington Avenue
North Brentwood, NY 11717......................... Owned/Leased(6) 1996 2014 257
742 Route 25 A
Kings Park, NY 11754.............................. Leased 1996 2002 52
250 Smithtown Boulevard
Nesconset, NY 11767............................... Owned 1996 -- 487
245 Lake Avenue
St. James, NY 11780............................... Owned 1996 -- 496
335 Main Street
Farmingdale, NY 11735.............................. Leased 1996 2000 11
375 Fulton Avenue
Farmingdale, NY 11735.............................. Leased 1996 2002 --
33
<PAGE>
Net Book Value
of Property or
Original Date Date of Leasehold
Leased or Leased or Lease Improvements at
Location Owned Acquired Expiration(1) June 30, 1999
------------ ------- ---------- ------------- --------------
(Continued) (In thousands)
233-15 Hillside Avenue
Queens Village, NY 11427.......................... Owned 1961 -- $ 356
19-01 Utopia Parkway
Whitestone, NY 11357.............................. Leased(4) 1976 2026 63
32-02 Francis Lewis Blvd
Flushing, NY 11358................................ Owned 1957 -- 312
69-09 164th Street
Flushing, NY 11365................................ Owned 1967 -- 707
204-12 Hillside Avenue(3)
Hollis, NY 11423.................................. Owned/Leased 1954 2003 30
162-04 Jamaica Avenue
Jamaica, NY 11432................................. Leased(5) 1989 2001 286
216-26 Jamaica Avenue
Queens Village, NY 11428.......................... Owned 1939 -- 158
----
Total.................................... $ 11,056
======
</TABLE>
- -------------------
(1) Leased property includes all option periods.
(2) Drive-up facility.
(3) The Bank owns one half of the property and leases the other half.
(4) TheBank pays all real estate taxes on this property.
5) This branch was originally owned by the Bank. The Bank has subsequently
sold the property and is now leasing it. The transaction is being treated
as a capital lease (sale/leaseback).
(6) The Bank owns the building and leases the land. Option to purchase the land
at the end of the last lease option.
Item 3. Legal Proceedings
The Bank is involved in various legal actions arising in the ordinary
course of its business which, in the aggregate, involve amounts which are
believed by management to be not material to the financial condition of the
Bank.
Item 4. Submission of Matters to a Vote of Security Holders
None
34
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market and
quoted under the symbol "RELY". As of September 16, 1999, the Company had 1,500
stockholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
Shares of the common stock were made available to qualified subscribers at
$10.00 per share during the initial offering. The tables show the reported high
and low sales prices of the common stock during fiscal 1999 and 1998.
1999
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
High..........$38.50 $29.88 $31.63 $29.63
Low...........$23.88 $21.50 $28.00 $26.00
1998
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
High..........$33.00 $36.88 $38.75 $42.25
Low...........$27.69 $30.00 $29.69 $36.75
On September 18, 1996, the Company's Board of Directors adopted a Stockholder
Protection Rights Plan and declared a dividend of one preferred share purchase
right ("Right") for each outstanding share of common stock of the Company. Each
Right, initially, will entitle stockholders to buy a one one-hundredth interest
in a share of a new series of preferred stock of the Company at an exercise
price of $60.00, upon the occurrence of certain events described in the Plan.
Initially, Rights will not be exercisable and will transfer with and only with
the shares of common stock. The Rights will be exercisable and separately
transferable ten business days after a person or group of persons acquires 10%
or more of the common stock of Reliance Bancorp, Inc. ("Acquiring Person") or a
person or group of persons announces a tender offer, the consummation of which
would result in ownership by a person or group of persons of 10% or more of
Company common stock. Subject to certain limitations, the Company's Board of
Directors may reduce the 10% threshold.
If a person or group of persons becomes an Acquiring Person, each Right, unless
redeemed by the Board of Directors at a price of $0.01 per Right, will entitle
its holder (other than such person or member of such group) to purchase, at the
then-current exercise price of the Right, a number of shares of common stock of
Reliance Bancorp, Inc. having a market value equal to twice the exercise price
of the Right. Alternatively, at any time after an Acquiring Person becomes such,
but prior to the acquisition by such person of 50% or more of the Company's
common stock, the Board of Directors may, at its option, direct the issuance of
one share of common stock in exchange for each Right other than those held by
the Acquiring Person.
The Rights dividend distribution was made to stockholders of record on
October 3, 1996. The Rights will expire ten years later on October 3, 2006. The
distribution of the Rights is not taxable to stockholders. Pursuant to the terms
of the Stockholder Protection Rights Plan, the rights did not become exercisable
upon execution of the Merger Agreement and will not become exercisable upon the
completion of the transactions contemplated by the Merger agreement. The Rights
Plan will expire upon consummation of the merger with North Fork.
35
<PAGE>
Item 6. Selected Financial Data
Set forth below are the selected consolidated financial and other data of the
Company. This financial data is derived in part from, and it should be read in
conjunction with the Company's consolidated financial statements and related
notes.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------
Selected Financial Data: 1999 1998 1997 1996 1995
------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Total Assets...................................................... $2,451,773 $2,485,729 $1,976,764 $1,782,550 $931,436
Loans Receivable, Net............................................. 974,073 969,797 909,321 817,746 332,080
Debt and Equity Securities Available-for-Sale..................... 122,168 134,907 26,909 13,271 23,880
Debt and Equity Securities Held-to-Maturity....................... 28,835 40,189 46,026 48,330 23,890
Mortgage-Backed Securities Available-for-Sale..................... 935,038 940,347 721,819 591,740 104,453
Mortgage-Backed Securities Held-to-Maturity....................... 255,917 249,259 159,356 184,492 413,762
Excess of Cost Over Fair Value of Net Assets Acquired............. 54,373 58,936 45,463 49,429 --
Real Estate Owned, Net............................................ 177 755 450 1,564 1,558
Deposits.......................................................... 1,549,419 1,628,298 1,436,037 1,345,626 670,317
Borrowed Funds.................................................... 702,434 630,206 351,913 266,160 97,035
Total Stockholders' Equity........................................ 171,667 194,864 162,670 153,619 153,733
Year Ended June 30,
--------------------------------------------------------
Selected Operating Data: 1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest Income................................................... $167,310 $153,819 $133,289 $100,372 $ 61,260
Interest Expense ................................................. 98,006 86,828 71,653 52,985 28,361
------ ------ ------ ------ ------
Net Interest Income.......................................... 69,304 66,991 61,636 47,387 32,899
Less Provision for Loan Losses.................................... 650 1,650 950 725 400
------ ------ ------ ------- ------
Net Interest Income After Provision for Loan Losses.......... 68,654 65,341 60,686 46,662 32,499
Non-Interest Income:
Loan Fees and Service Charges..................................... 1,352 1,047 683 826 269
Other Operating Income............................................ 4,279 3,452 2,557 1,606 841
Income from Money Centers......................................... 2,650 1,882 -- -- --
Condemnation Award on Joint Venture............................... -- 1,483 -- -- --
Net Gain (Loss) on Securities..................................... 119 (5) 172 678 147
------ ------- ------- ------ ------
Total Non-Interest Income.................................... 8,400 7,859 3,412 3,110 1,257
------ ------ ------- ------ ------
Non-Interest Expense:
Compensation and Benefits......................................... 20,373 20,297 16,509 13,395 9,562
Occupancy and Equipment........................................... 7,064 6,531 5,719 4,481 2,462
Federal Deposit Insurance Premiums................................ 930 921 1,813 2,399 1,376
Advertising....................................................... 1,247 1,202 1,168 1,152 1,158
Other Operating Expenses.......................................... 6,675 6,274 5,778 4,169 3,039
------ ------ ------- ------ ------
Total General and Administrative Expenses.................... 36,289 35,225 30,987 25,596 17,597
Real Estate Operations, Net....................................... 111 218 383 579 (385)
Amortization of Excess of Cost Over Fair
Value of Net Assets Acquired.................................... 4,563 4,218 3,404 1,928 --
SAIF Recapitalization Charge...................................... -- -- 8,250 -- --
------ ------ ------ ------ ------
Total Non-Interest Expense................................... 40,963 39,661 43,024 28,103 17,212
------ ------ ------ ------ ------
Income Before Income Taxes .................................. 36,091 33,539 21,074 21,669 16,544
Income Tax Expense................................................ 15,940 14,810 10,138 9,946 6,842
------ ------- ------- ------ ------
Net Income................................................... $ 20,151 $ 18,729 $ 10,936 $ 11,723 $ 9,702
====== ====== ====== ====== =====
Earnings Per Share: Basic........................... $ 2.38 $ 2.11 $ 1.32 $ 1.36 $ 1.04
Diluted................. $ 2.26 $ 1.99 $ 1.25 $ 1.32 $ 1.03
(See footnotes on following page)
36
<PAGE>
At or for the Year Ended June 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
<S> <C> <C> <C> <C> <C>
Return on Average Assets.......................................... 0.81% 0.86% 0.58% 0.83% 1.08%
Return on Average Stockholders' Equity (1)........................ 11.22 10.42 7.02 7.58 6.17
Return on Average Tangible Stockholders' Equity (1)............... 16.40 15.14 10.10 9.18 6.17
Average Stockholders' Equity to Average Assets.................... 7.30 8.45 8.24 10.92 17.60
Stockholders' Equity to Total Assets.............................. 7.00 7.84 8.23 8.62 16.51
Tangible Stockholders' Equity to Tangible Assets.................. 4.89 5.60 6.07 6.01 16.51
Core Deposits to Total Deposits................................... 39.94 36.91 37.40 41.68 36.12
Net Interest Spread............................................... 2.67 2.98 3.22 3.17 3.11
Net Interest Margin (2)........................................... 2.95 3.28 3.47 3.52 3.77
General and Administrative Expenses to Average Assets............. 1.47 1.62 1.66 1.81 1.97
Operating Income to Average Assets (3)............................ 0.33 0.29 0.17 0.16 0.14
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities............................ 1.07X 1.07X 1.06X 1.09X 1.20X
Selected Financial Ratios, Excluding SAIF
Recapitalization Assessment
Return on Average Assets.......................................... 0.81% 0.86% 0.84% 0.83% 1.08%
Return on Average Stockholders' Equity (1)........................ 11.22 10.42 10.12 7.58 6.17
Return on Average Tangible Stockholders' Equity (1)............... 16.40 15.14 14.56 9.18 6.17
Asset Quality Ratios:
Non-Performing Loans to Total Loans (4)........................... 0.67 0.95% 1.61% 1.58% 1.10%
Non-Performing Loans to Total Assets.............................. 0.27 0.37 0.75 0.73 0.39
Non-Performing Assets to Total Assets (5)........................ 0.27 0.40 0.77 0.82 0.56
Allowance for Loan Losses to Total Loans.......................... 0.93 0.91 0.57 0.55 0.52
Allowance for Loan Losses to Non-Performing Loans................. 139.08 96.12 35.18 34.63 47.10
Other Data:
Number of Deposit Accounts........................................160,358 169,071 164,121 164,368 68,617
Full-Service Banking Offices...................................... 29 30 28 28 11
</TABLE>
- --------------------
(1) For purposes of these calculations, average stockholders' equity and average
stockholders' tangible equity exclude the effect of changes in the unrealized
appreciation (depreciation) on securities available-for-sale, net of taxes.
(2) Calculation is based upon net interest income before provision for loan
losses divided by average interest-earning assets.
(3) Operating income
represents total non-interest income less (plus) net gain (loss) on sale of
securities and condemnation award on joint venture.
(4) Non-performing loans consist of all loans 90 days or more past due and any
other loans, or any portion thereof, that have been determined to be doubtful of
collection.
(5) Non-performing assets consist of non-performing loans and real estate owned.
37
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Reliance Bancorp, Inc. is a Delaware corporation organized on November 16, 1993
and is the holding company for Reliance Federal Savings Bank. On March 31, 1994,
the Company issued 10,750,820 shares of common stock at $10.00 per share raising
total net proceeds of $103.6 million of which $51.8 million was retained by the
Company with the remaining net proceeds being used by the Company to purchase
all of the outstanding stock of the Bank.
The Company is headquartered in Garden City, New York and its primary business
currently consists of the operation of its wholly-owned subsidiary, the Bank. In
addition to directing, planning and coordinating the business activities of the
Bank, the Company currently invests primarily in U.S. Government securities,
corporate debt securities and repurchase agreements. In addition, the Company
completed the acquisitions of the Bank of Westbury, a Federal Savings Bank, in
August 1995, Sunrise Bancorp, Inc., in January 1996 and Continental Bank, a
commercial bank, in October 1997, which were all merged into the Bank.
The Bank's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from
operations, principal repayments and borrowings, primarily in mortgage,
consumer, multi-family, commercial, commercial real estate, construction and
guaranteed student loans. In connection with the acquisition of Continental
Bank, the Bank now offers both secured and unsecured commercial loans. In
addition, during periods in which the demand for loans which meet the Bank's
underwriting and interest rate risk standards and policies is lower than the
amount of funds available for investment, the Bank invests in mortgage-backed
securities, securities issued by the U.S. Government and agencies thereof and
other investments permitted by federal laws and regulations. The Bank also
operates, as a result of the Continental Bank acquisition, five check cashing
("Money Centers") operations which result in additional fee income to the Bank.
The Company's results of operations are dependent primarily on interest income
from its securities investments and earnings of the Bank. The Bank's results of
operations are primarily dependent on its net interest income, which is the
difference between the interest earned on its assets, primarily its loan and
securities portfolios, and its cost of funds, which consists of the interest
paid on its deposits and borrowings. The Bank's net income also is affected by
its provision for loan losses as well as non-interest income, general and
administrative expense, other non-interest expense, and income tax expense.
General and administrative expense consists primarily of compensation and
benefits, occupancy expenses, federal deposit insurance premiums, advertising
expense and other general and administrative expenses. Other non-interest
expense consists of real estate operations, net, amortization of excess of cost
over the fair value of net assets acquired, and in fiscal 1997, a one-time
pre-tax SAIF recapitalization charge. The earnings of the Company and Bank are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Financial Condition
As of June 30, 1999, total assets were $2.5 billion, a decrease of $34.0 million
from June 30, 1998. Investment securities decreased $24.1 million, or 13.8%,
from $175.1 million at June 30, 1998 to $151.0 million at June 30, 1999 as a
result of sales and calls of debt securities.
Deposits decreased $78.9 million, or 4.8%, during the fiscal year ended June 30,
1999 as a result of a reduction in certificate of deposit products while
borrowings increased $72.2 million, or 11.5%, from $630.2 million at June 30,
1998 to $702.4 million at June 30, 1999 as a result of additional FHLB advances.
Treasury stock increased from $24.0 million at June 30, 1998 to $50.6 million at
June 30, 1999 as a result of 1.0 million shares repurchased net of stock options
exercised during the fiscal year ended.
38
<PAGE>
Non-performing assets
Non-performing loans totaled $6.6 million, or 0.67% of total loans at June 30,
1999 as compared to $9.3 million, or 0.95% of total loans, at June 30, 1998.
Non-performing loans at June 30, 1999 were comprised of $4.0 million of loans
secured by one- to four-family residences, $1.9 million of commercial real
estate loans, $433,000 of commercial loans and $255,000 of guaranteed student
and other loans.
For the fiscal year ended June 30, 1999, the Company's loan loss provision was
$650,000 as compared to $1.7 million in the prior fiscal year. The Company
decreased its provision for loan losses due to the lower level of non-performing
loans and charge-offs. Net charge-offs were $471,000 for the fiscal year ended
June 30, 1999 as compared to $636,000 in the fiscal year ended June 30, 1998.
The Company's allowance for loan losses totalled $9.1 million at June 30, 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 139.08%
and 0.93% at June 30, 1999 compared to 96.12% and 0.91% at June 30, 1998,
respectively. Management believes the allowance for loan losses at June 30, 1999
is adequate and sufficient reserves are presently maintained to cover losses on
loans.
Asset/Liability Management
One of the Bank's primary long-term financial objectives has been and will
continue to be to monitor the sensitivity of its earnings to interest rate
fluctuations by maintaining an appropriate matching of the maturities and
interest rate repricing characteristics of its assets and liabilities in
relation to the current and anticipated interest rate environment. In an effort
to realize this objective and minimize the Bank's exposure to interest rate
risk, the Bank emphasizes the origination of adjustable-rate mortgage ("ARM"),
commercial and consumer loans, shorter-term fixed rate multi-family, mortgage,
commercial and consumer loans and the purchase of shorter-term fixed rate and
adjustable-rate mortgage-backed securities. However, there can be no assurances
that the Bank will be able to originate adjustable-rate loans or acquire
mortgage-backed securities with terms and characteristics which conform with the
Bank's underwriting standards, investment criteria or interest rate risk
policies.
The Company has attempted to limit its exposure to interest rate risk through
the origination and purchase of adjustable-rate mortgage loans ("ARMs") and
through purchases of adjustable-rate mortgage-backed and mortgage-related
securities and fixed rate mortgage-backed and mortgage-related securities with
short- and medium-term average lives. In the most recent fiscal year, the Bank
has not been able to originate a significant amount of ARM's due to customer
preference for fixed rate loans.
The actual duration of mortgage loans and mortgage-backed securities can be
significantly impacted by changes in mortgage prepayment and market interest
rates. Mortgage prepayment rates will vary due to a number of factors, including
the regional economy in the area where the underlying mortgages were originated,
seasonal factors, demographic variables and the assumability of the underlying
mortgages. However, the largest determinants of prepayment rates are prevailing
interest rates and related mortgage refinancing opportunities. Management
monitors interest rate sensitivity so that adjustments in the asset and
liability mix, when deemed appropriate, can be made on a timely basis.
At June 30, 1999, $922.2 million, or 39.5%, of the Bank's interest-earning
assets consisted of adjustable-rate loans and mortgage-backed securities. The
Bank's mortgage loan portfolio totalled $810.9 million, of which, $408.8
million, or 50.4%, were adjustable-rate loans and $402.1 million, or 49.6%, were
fixed-rate loans. In addition, at June 30, 1999, the Bank's consumer loan
portfolio totalled $127.3 million, of which, $99.6 million, or 78.2%, were
adjustable-rate home equity lines of credit and guaranteed student loans and
$27.7 million, or 21.8%, were fixed-rate home equity and other consumer loans.
At June 30, 1999, the Bank's commercial loan portfolio totalled $44.9 million of
which $32.5 million, or 72.3% were adjustable rate loans and $12.4 million, or
27.7% were fixed rate loans. At June 30, 1999, the mortgage-backed securities
portfolio totalled $1.2 billion of which $935.0 million were classified as
available-for-sale and $255.9 million was classified as held-to-maturity. Of the
$935.0 million classified as available-for-sale, $327.4 million, or 27.5% of the
total mortgage-backed portfolio, were adjustable-rate securities and $607.6
million, or 51.0%, were fixed-rate securities. Of the $255.9 million were
classified as held-to-maturity,
39
<PAGE>
$53.9 million, or 4.5% of the total mortgage-backed portfolio, were
adjustable-rate securities and $202.0 million, or 17.0%, were fixed-rate
securities. The Bank expects to continue to invest in shorter term fixed-rate
and adjustable-rate mortgage-backed securities to reduce credit risk as well as
minimize exposure to volatile interest rates. Recently, the Bank has purchased
longer term fixed-rate higher yielding mortgage-backed securities to offset the
prepayment risk of adjustable-rate securities during a falling interest rate
environment. It should be noted that adjustable-rate loans and mortgage-backed
securities backed by ARM loans initially bear rates of interest below that of
comparable fixed rate loans or mortgage-backed securities backed by fixed rate
loans. Accordingly, increased emphasis on adjustable-rate loans and
mortgage-backed securities may, under certain interest rate conditions, result
in the Bank's yield on interest-earning assets being lower than it could be if
fixed rate loans were emphasized.
Market Risk and Interest Rate Sensitivity Analysis
The Company's primary component of market risk is interest rate volatility. The
Company's net interest income, the primary component of its net income, is
subject to substantial risk due to changes in interest rates or changes in
market yield curves, particularly if there is a substantial variation in the
timing between the repricing of the Company's assets and the liabilities which
fund them. The Company seeks to manage this risk by monitoring and controlling
the variation in repricing intervals between its assets and liabilities. To a
lesser extent, the Company also monitors its interest rate sensitivity by
analyzing the estimated changes in market value of its assets and liabilities
assuming various interest rate scenarios. As previously discussed, there are a
variety of factors which influence the repricing characteristics and market
values of any given asset or liability. The matching of the repricing
characteristics of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice, either by its contractual terms, or based upon
certain assumptions made by management, within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated to mature or reprice within a specific time
period and the amount of interest-bearing liabilities anticipated to mature or
reprice within that same time period. A gap is considered positive when the
amount of interest rate sensitive assets maturing or repricing within a specific
time frame exceeds the amount of interest rate sensitive liabilities maturing or
repricing within that same time frame. Conversely, a gap is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
within a specific time frame exceeds the amount of interest rate sensitive
assets maturing or repricing within that same time frame. In a rising interest
rate environment, an institution with a negative gap would generally be
expected, absent the effects of other factors, to experience a greater increase
in the costs of its liabilities relative to the yields of its assets and thus a
decrease in the institution's net interest income, whereas an institution with a
positive gap would generally be expected to experience the opposite results.
Conversely, during a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income while a positive gap would tend
to adversely affect net interest income.
Management monitors interest rate sensitivity so that adjustments in the asset
and liability mix, when deemed appropriate, can be made on a timely basis. At
June 30, 1999, the Company's interest-bearing liabilities maturing or repricing
within one year exceeded net interest-earning assets maturing or repricing
within the same time period by $100.1 million, representing a negative
cumulative one-year gap of 4.08% of total assets. This compares to
interest-bearing liabilities maturing or repricing within one year exceeding net
interest-earning assets maturing or repricing within the same time period by
$213.7 million, representing a negative cumulative one-year gap of 8.60% of
total assets at June 30, 1998.
The following table ("the Gap table") sets forth the amount of interest-earning
assets and interest-bearing liabilities outstanding at June 30, 1999, that are
anticipated by the Company using certain assumptions based on its historical
experience and other data available to management to reprice or mature in each
of the future time periods shown. Except as stated below, the amount of assets
and liabilities shown which reprice or mature during a particular period was
determined in accordance with the earlier of the term to repricing or the
contractual terms of the asset or liability. Prepayment assumptions have been
applied in estimating the repricing of the Company's mortgage loans and
mortgage-backed securities. The estimated rates of prepayment assumed for loans
and mortgage-backed securities are based upon coupon rates. The Company utilized
deposit withdrawal assumptions for its deposit decay rate. For
40
<PAGE>
passbook accounts, NOW accounts and money market accounts, such assumed rates
were 8%, 15% and 18%, respectively. The assumptions used may not be indicative
of future withdrawals of deposits or prepayments of loans and mortgage-backed
securities. The Gap table does not necessarily indicate the impact of general
interest rate movements on the Company's net interest income because the actual
repricing dates of various assets and liabilities are subject to customer
discretion and competitive and other pressures. Callable features of certain
assets and liabilities, in addition to the foregoing, may cause actual
experience to vary from that indicated. Included in this table are $113.7
million of callable investment securities, classified according to their call
dates. Of such securities, $18.9 million, $0.0, $18.0 million, $0.0, $0.0, and
$76.8 million are callable in the "Up to One Year", "One to Two Years", "Two to
Three Years", "Three to Four Years", "Four to Five Years", and "Over Five Years"
categories, respectively. Also included in this table are $407.5 million of
callable borrowings, classified according to their call dates. Of such
borrowings, $244.0 million, $58.5 million, $0.0, $30.0 million, $25.0 million
and $50.0 million are callable in the "Up to One Year", "One to Two Years", "Two
to Three Years", "Three to Four Years", "Four to Five Years", and "Over Five
Years" categories, respectively.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
Up to One to Two to Three to Four to Over
One Two Three Four Five Five Fair
Year Years Years Years Years Years Total Value
---- ----- ----- ----- ----- ----- ----- -----
Interest-Earning Assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans(1)(2)..................... $290,673 $137,324 $110,199 $ 95,201 $ 55,715 $122,731 $811,843 $806,791
Commercial Loans(1)(2)................... 36,913 508 824 828 938 4,938 44,949 45,069
Other Loans(1)(2)........................ 112,770 5,663 3,047 1,743 1,036 2,405 126,664 127,120
Mortgage-Backed Securities(2)(3)......... 551,928 125,574 90,671 69,973 69,209 296,515 1,203,870 1,187,271
Debt and Equity Securities(2)(3)......... 145,107 -- -- 2,000 -- 7,700 154,807 151,008
---------- ----------- ----------- -------- ----------- --------- ---------- -------
Total Interest-Earning Assets........ 1,137,391 269,069 204,741 169,745 126,898 434,289 2,342,133 2,317,259
--------- ------- ------- ------- ------- ------- --------- ---------
Interest-Bearing Liabilities:
Passbook Accounts........................ 38,279 31,908 29,447 27,175 25,079 300,073 451,961 443,413
NOW Accounts............................. 14,877 12,792 11,000 9,459 58,055 -- 106,183 102,757
Money Market Accounts.................... 11,778 10,128 8,709 7,489 45,963 -- 84,067 81,931
Certificate of Deposit Accounts(2)....... 710,424 97,349 20,789 10,651 3,256 -- 842,469 841,259
Borrowed Funds........................... 462,156 58,500 76,182 30,000 25,000 50,596 702,434 693,564
---------- --------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing Liabilities... 1,237,514 210,677 146,127 84,774 157,353 350,669 2,187,114 2,162,924
--------- -------- -------- --------- -------- -------- --------- ---------
Interest Rate Sensitivity Gap............ $ (100,123) 58,392 58,614 84,971 (30,455) 83,620 155,019
========== ========= ====== ====== ======== ======= =======
Cumulative Interest Rate Sensitivity Gap. $ (100,123) (41,731) 16,883 101,854 71,399 155,019
========= ======== ====== ======= ======== =======
Cumulative Interest Rate Sensitivity Gap as
a Percentage of Total Assets.......... (4.08)% (1.70)% 0.69% 4.15% 2.91% 6.32%
Cumulative Net Interest-Earning Assets as
a Percentage of Cumulative Interest-
Bearing Liabilities................... 91.91% 97.12% 101.06% 106.07% 103.89% 107.09%
</TABLE>
- --------------------
(1) For purposes of the GAP analysis, mortgage and other loans are not reduced
for the allowance for loan losses and non-performing loans.
(2) For purposes of the GAP analysis, premiums, unearned discounts, deferred
loan fees and purchase accounting adjustments are excluded.
(3) Mortgage-backed and debt and equity securities were shown excluding the
market value depreciation of $18.7 million on securities claassified as
available-for-sale.
Certain shortcomings are inherent in the method of analysis presented in the Gap
table. For example, although certain assets and liabilities may have similar
contractual maturities or periods to repricing, they may react in different ways
to changes in market interest rates. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Additionally, certain
assets, such as ARMs, have contractual features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Finally,
the ability of borrowers to service their ARMs or other loan obligations may
decrease in the event of an interest rate increase. The Gap table reflects the
estimates of management as to periods to repricing at a particular point in
time. Among the factors considered are current trends and historical repricing
experience with respect to similar products. For example, the Company has a
number of deposit accounts, including savings, NOW accounts, and money market
which, subject to certain regulatory exceptions not relevant here, may be
withdrawn at any time. The Company, based upon its historical experience,
assumes that while all customers in these account categories could withdraw
their funds on any given day, they will not do so even if market interest rates
change. As a result, different assumptions may be used at different points in
time.
41
<PAGE>
The Company's interest rate sensitivity is also monitored by management through
analysis of the change in the net portfolio value ("NPV"). NPV is defined as the
net present value of the expected future cash flows of an entity's assets and
liabilities and, therefore, hypothetically represents the market value of an
institution's net worth. Increases in the market value of assets will increase
the NPV whereas decreases in market value of assets will decrease the NPV.
Conversely, increases in the market value of liabilities will decrease NPV
whereas decreases in the market value of liabilities will increase the NPV. The
changes in market value of assets and liabilities due to changes in interest
rates reflect the interest sensitivity of those assets and liabilities as their
values are derived from the characteristics of the asset or liability (i.e.
fixed rate, adjustable rate, caps, floors) relative to the interest rate
environment. For example, in a rising interest rate environment the fair market
value of a fixed rate asset will decline, whereas the fair market value of an
adjustable rate asset, depending on its repricing characteristics, may not
decline. The NPV ratio, under any interest rate scenario, is defined as the NPV
in that scenario divided by the market value of assets in the same scenario.
This analysis, referred to in the NPV table, initially measures percentage
changes from the value of projected NPV in a given rate scenario, and then
measures interest rate sensitivity by the change in the NPV ratio, over a range
of interest rate change scenarios. The OTS also produces a similar analysis
using its own model based upon data submitted on the Bank's quarterly Thrift
Financial Reports, the results of which may vary from the Company's internal
model primarily because of differences in assumptions utilized between the
Company's internal model and the OTS model, including estimated loan prepayment
rates, reinvestment rates and deposit decay rates. For purposes of the NPV
table, prepayment speeds and deposit decay rates similar to those used in the
Gap table were used. The NPV table is based on simulations which utilize
institution specific assumptions with regard to future cash flows, including
customer options such as loan prepayments, period and lifetime caps, puts and
calls, and deposit withdrawal estimates. The NPV table uses discount rates
derived from various sources including, but not limited to, treasury yield
curves, thrift retail certificate of deposit curves, national and local
secondary mortgage markets, brokerage security pricing services and various
alternative funding sources.
Specifically, for mortgage loans receivable, the discount rates used were based
on market rates for new loans of similar type and purpose, adjusted, when
necessary, for factors such as servicing cost, credit risk and term. The
discount rates used for certificates of deposit and borrowings were based on
rates which approximate the rates offered by the Company for deposits and
borrowings of similar remaining maturities. The table calculates the NPV at a
flat rate scenario by computing the present value of cash flows of interest
earning assets less the present value of interest bearing liabilities. Certain
assets, including fixed assets and real estate held for development, are assumed
to remain at book value (net of valuation allowance) regardless of interest rate
scenario. Other non-interest earning assets and non-interest bearing liabilities
such as deferred fees, unamortized premiums, goodwill and accrued expenses and
other liabilities are excluded from the NPV calculation. The following table
sets forth the Bank's NPV as of June 30, 1999, as calculated by the Bank, for
instantaneous and sustained changes in interest rates relative to the NPV in an
unchanging interest rate environment.
Changes in Interest Portfolio
Rates in Basis Net Portfolio Value Value of Assets
----------------------------- -------------------
Points $ $ % NPV %
(Rate Shock) Amount Change Change Ratio Change
------------ ------ ------ ------ ----- ------
(Dollar in Thousands)
200.................. 102,338 (77,424) (43.1) 4.42 40.8
100.................. 148,675 (31,087) (17.3) 6.28 15.9
0.................... 179,762 7.47
(100)................ 215,043 35,281 19.6 8.76 (17.3)
(200)................ 223,290 43,528 24.2 9.03 (20.9)
As with the Gap table, certain shortcomings are inherent in the methodology used
in the above interest rate risk measurements. Modeling of changes in NPV
requires the making of certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the NPV model assumes that the composition of the
Company's interest sensitive assets and liabilities existing at the beginning of
a period remains constant over the period being measured and also assumes that a
particular change in interest rates is immediate and is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
42
<PAGE>
specific assets and liabilities. In addition, prepayment estimates and other
assumptions within the model are subjective in nature, involve uncertainties
and, therefore, cannot be determined with precision. Accordingly, although the
NPV measurements in theory, may provide an indication of the Company's interest
rate risk exposure at a particular point in time, such measurements are not
intended to and do not provide for a precise forecast of the effect of changes
in market interest rates on the Company's net portfolio value and will differ
from actual results.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volume of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on them.
The following table sets forth certain information relating to the Company's
consolidated statements of condition and the consolidated statements of income
for the years ended June 30, 1999, 1998, and 1997 and reflects the average
yields on assets and average cost of liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the fiscal years shown.
Average balances are derived from daily balances. The average balance of loans
receivable includes loans on which the Bank has discontinued accruing interest.
The yields and costs include fees, premiums and discounts which are considered
adjustments to yields.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
Assets: (Dollars in thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans, Net.............. $ 791,419 $ 62,182 7.86% $ 785,119 $ 63,573 8.10% $ 709,471 $ 56,948 8.03%
Commercial Loans, Net............ 42,985 4,892 11.38 33,087 3,916 11.84 -- -- --
Consumer and Other Loans, Net.... 130,501 10,730 8.22 140,479 12,130 8.63 133,965 11,525 8.60
Mortgage-Backed Securities (1)... 1,222,199 78,948 6.46 986,567 67,185 6.81 850,094 59,392 6.99
Money Market Investments......... 5,213 284 5.43 11,126 615 5.53 11,590 618 5.33
Debt and Equity Securities (1)... 154,869 10,274 6.63 87,791 6,400 7.29 68,824 4,806 6.98
--------- ------- ------- ------- ------- --------
Total Interest-Earning Assets... 2,347,186 167,310 7.13 2,044,169 153,819 7.52 1,773,944 133,289 7.51
--------- --------- ---------
Non-Interest Earning Assets......... 128,460 134,093 96,082
-------- --------- ---------
Total Assets................ $2,475,646 $2,178,262 $1,870,026
========= ========= =========
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Passbook Accounts................ 443,352 9,175 2.07 $ 435,844 10,439 2.40 $ 441,922 10,937 2.47
NOW Accounts..................... 106,541 1,608 1.51 95,663 1,257 1.31 80,121 1,041 1.30
Money Market Accounts............ 90,442 1,879 2.07 93,715 2,249 2.40 99,536 2,493 2.50
Certificate of Deposit Accounts.. 921,782 49,310 5.35 882,775 49,487 5.60 737,018 39,668 5.38
Borrowed Funds................... 636,095 36,034 5.66 403,414 23,396 5.80 311,363 17,514 5.62
--------- ------- ------- ------- -------- -------
Total Interest-Bearing
Liabilities............... 2,198,212 98,006 4.46 1,911,411 86,828 4.54 1,669,960 71,653 4.29
--------- --------- ---------
Non-Interest Bearing Liabilities.... 96,740 82,853 46,036
--------- --------- ---------
Total Liabilities........... 2,294,952 1,994,264 1,715,996
Stockholders' Equity................ 180,694 183,998 154,030
--------- --------
Total Liabilities and
Stockholders' Equity...... $2,475,646 $2,178,262 $1,870,026
========= ========= =========
Net Interest Income/Interest
Rate Spread (2).................. $ 69,304 2.67% $ 66,991 2.98% $ 61,636 3.22%
====== ==== ====== ---- ====== ====
Net Interest-Earning Assets/
Net Interest Margin (3).......... $148,974 2.95% $ 132,758 3.28% $ 103,984 3.47%
======= ==== ======= ---- ======= ====
Ratio of Interest-Earning Assets to
Interest-Bearing Liabilities...... 1.07X 1.07X 1.06X
(1) Includes securities available-for-sale.
(2) Net interest rate spread represents the difference between the average yield
on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
43
<PAGE>
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Year Ended June 30, 1999 Year Ended June 30, 1998
Compared to Compared to
Year Ended June 30, 1998 Year Ended June 30, 1997
-------------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
in Net Interest Income in Net Interest Income
Due to Due to
-------------------- ------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans, Net.................. $ 507 $ (1,898) $ (1,391) $ 6,124 $ 501 $ 6,625
Commercial Loans, Net................ 1,133 (157) 976 3,916 -- 3,916
Consumer and Other Loans, Net........ (839) (561) (1,400) 565 40 605
Mortgage-Backed Securities........... 15,363 (3,600) 11,763 9,353 (1,560) 7,793
Money Market Investments............. (320) (11) (331) (25) 22 (3)
Debt and Equity Securities........... 4,500 (626) 3,874 1,373 221 1,594
------ ----- ----- ------ ------ ------
Total........................... 20,344 (6,853) 13,491 21,306 (776) 20,530
------- ------- ------ ------ ------- ------
Interest-Bearing Liabilities:
Passbook Accounts.................... 180 (1,444) (1,264) (163) (335) (498)
NOW Accounts......................... 150 201 351 208 8 216
Money Market Accounts................ (75) (295) (370) (145) (99) (244)
Certificate of Deposits Accounts..... 2,108 (2,285) (177) 8,137 1,682 9,819
Borrowed Funds....................... 13,213 (575) 12,638 5,307 575 5,882
------ ----- ------ ------ ----- -----
Total........................... 15,576 (4,398) 11,178 13,344 1,831 15,175
------ ------- ------- ------- ------ ------
Net Change in Net Interest Income......... $ 4,768 $ (2,455) $ 2,313 $ 7,962 $ (2,607) $ 5,355
===== ======= ===== ======== ======== =====
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1999 and 1998
General. Net income for fiscal 1999 was $20.2 million as compared to $18.7
million for fiscal 1998.
Interest Income. Interest income increased $13.5 million, or 8.8%, from $153.8
million for fiscal 1998 to $167.3 million for fiscal 1999. The increase resulted
primarily from a $303.0 million increase in average interest-earning assets from
$2.0 billion for fiscal 1998 to $2.3 billion for fiscal 1999. The average yield
on interest-earning assets decreased from 7.52% in fiscal 1998 to 7.13% in
fiscal 1999. Interest income on mortgage-backed securities increased $11.8
million, or 17.5%, from $67.2 million for fiscal 1998 to $78.9 million for
fiscal 1999, primarily due to an increase of $235.6 million, or 23.9%, in the
average balance of these securities, offset by a 35 basis point decrease in the
average yield on these securities from 6.81% for fiscal 1998 to 6.46% for fiscal
1999. Interest income on investment securities increased $3.9 million, or 60.5%,
from $6.4 million in fiscal 1998 to $10.3 million in fiscal 1999, primarily due
to an increase of $67.1 million in the average balance of investment securities,
offset by a 66 basis point decrease in the average yield on investment
securities from 7.29% for fiscal 1998 to 6.63% for fiscal 1999. The increase in
the average balance of investment securities was primarily due to purchases of
corporate debt securities.
44
<PAGE>
Interest Expense. Interest expense for fiscal 1999 was $98.0 million, an
increase of $11.2 million, or 12.9%, from $86.8 million in fiscal 1998. The
increase is primarily the result of a $286.8 million, or 15.0%, increase in the
average balance of interest-bearing liabilities from $1.9 billion for fiscal
1998 to $2.2 billion for fiscal 1999 offset by a 8 basis point decrease in the
cost of interest-bearing liabilities from 4.54% for fiscal 1998 to 4.46% for
fiscal 1999. The increase in the average balance of interest-bearing liabilities
was primarily due to new certificates of deposits and additional borrowings. The
decrease in the average yield of interest-bearing liabilities was primarily due
to lower interest rate environment during the year which resulted in lower
certificate of deposits and borrowing rates. Interest expense on total deposits
decreased $1.5 million, or 2.3%, from $63.4 million for fiscal 1998 to $62.0
million for fiscal 1999, primarily as a result of a 24 basis point decrease in
the average cost of such deposits from 4.21% in fiscal 1998 to 3.97% in fiscal
1999. The decrease in the average yield on deposits is primarily due to a
reduction in passbook savings rates during the year and lower rates offered on
certificates of deposits. Interest expense on borrowed funds increased $12.6
million, or 54.0%, from $23.4 million for fiscal 1998 to $36.0 million for
fiscal 1999. The average balance of borrowed funds increased $232.7 million, or
57.7% to $636.1 million for fiscal 1999 as compared to $403.4 million for fiscal
1998. The increase in borrowings is attributable to additional leveraging of the
balance sheet and the proceeds from the trust preferred securities. The Bank had
been using borrowings to leverage its capital and fund asset growth.
Net Interest Income. Net interest income for fiscal 1999 increased $2.3 million,
or 3.5%, from $67.0 million for fiscal 1998 to $69.3 million for fiscal 1999.
The increase in net interest income primarily relates to growth in the average
balances of interest-earning assets offset by a decrease in the net interest
spread. Average interest-earning assets increased $303.0 million, or 14.8%, from
$2.0 billion in fiscal 1998 to $2.3 billion in fiscal 1999 while average
interest-bearing liabilities increased $286.8 million, or 15.0%, from $1.9
billion in fiscal 1998 to $2.2 billion in fiscal 1999. The net interest rate
spread declined by 31 basis points from 2.98% for fiscal 1998 to 2.67% for
fiscal 1999 as a result of reinvestment of funds into lower yielding
interest-earning assets. As a result of further leveraging of the Bank's
capital, the net interest margin decreased from 3.28% in fiscal 1998 to 2.95% in
fiscal 1999.
Provision for Loan Losses. The provision for loan losses for fiscal 1999 was
$650,000, a decease of $1.0 million or 60.6%, from $1.7 for fiscal 1998. When
determining the provision for loan losses, management assesses the risk inherent
in its loan portfolio based on information available to management at such time
relating to trends in the national and local economies, trends in the real
estate market and trends in the Company's level of non-performing loans, assets
and net charge-offs. Management decreased the provision for loan losses for
fiscal 1999 due to the lower level of non-performing loans and charge-offs.
Non-performing loans decreased $2.7 million, or 29.5%, from $9.3 million at the
end of fiscal 1998 to $6.6 million at the end of fiscal 1999 and net charge-offs
decreased from $636,000 for fiscal 1998 to $471,000 for fiscal 1999. At June 30,
1999 and 1998, the allowance for loan losses was $9.1 million and $8.9 million,
respectively, which represented 139.08% of non-performing loans and 0.93% of
total loans at June 30, 1999 as compared to 96.12% of non-performing loans and
0.91% of total loans at June 30, 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. If general economic conditions and real estate values
within the Bank's primary lending area decline, the level of non-performing
loans may increase resulting in larger provisions for loan losses which, in
turn, would adversely affect net income.
Non-Interest Income. Non-interest income for fiscal 1999 increased $541,000, or
6.9%, from $7.9 million for fiscal 1998 to $8.4 million for fiscal 1999 due to
increased fee income generated from the check cashing operations, prepayment
penalties, ATM fees and deposit fee income offset by a condemnation award in the
prior fiscal year.
Non-Interest Expense. Non-interest expense totalled $41.0 million for fiscal
1999 as compared to $39.7 million for fiscal 1998, an increase of $1.3 million,
or 3.3%. For fiscal 1999, compensation and benefits expense increased to $20.4
million, an increase of $76,000, or 0.37%, from $20.3 million for fiscal 1998.
The increase in compensation
45
<PAGE>
and benefits expense is due to higher benefit expenses and normal salary
adjustments. For fiscal 1999, ESOP and RRP expense was $3.1 million as compared
to $3.7 million in the prior year, a decrease of $585,000, or 15.8%. Occupancy
and equipment expense increased $533,000, or 8.2%, from $6.5 million for fiscal
1998 to $7.1 million for fiscal 1999 due to costs associated with the full year
operation of two new banking offices and five check cashing facilities which
were acquired from Continental Bank. Federal deposit premium expense increased
$9,000, or 1.0%, from $921,000 million for fiscal 1998 to $930,000 for fiscal
1999. Other operating expenses increased $401,000, or 6.4%, from $6.3 million
during fiscal 1998 to $6.7 million for fiscal 1999 primarily as a result of
general expenses related to the full year operation of two new banking offices
and five check cashing facilities.
For fiscal 1999, expenses related to real estate operations, net was $111,000,
as compared to $218,000 in the prior fiscal year. The decrease is mainly the
result of a lower provision for REO losses and lower expenses due to faster
disposition of properties during the fiscal year ended June 30, 1999. During
fiscal 1999, the Bank established a provision for REO losses of $34,500 as
compared to $93,000 in the prior fiscal year period.
During fiscal 1999, the Bank recognized amortization of excess of cost over fair
value of net assets acquired of $4.6 million as compared to $4.2 million in
fiscal 1998. The amortization of cost over fair value of net assets acquired
relates to the Company accounting for the acquisitions of Bank of Westbury,
Sunrise Bancorp, Inc. and Continental Bank using the purchase method of
accounting.
Income Tax Expense. Income tax expense increased $1.1 million, or 7.6%, from
$14.8 million for fiscal 1998 to $15.9 million for fiscal 1999. The effective
income tax rate was 44.2% for fiscal 1999 and 1998. The effective income tax
rate is affected by certain tax benefits associated with the operations of a
subsidiary of the Bank and by amortization of excess of cost over fair value of
net assets acquired, which provides no tax benefit.
Comparison of Operating Results for the Years Ended June 30, 1998 and 1997.
General. Net income for fiscal 1998 was $18.7 million as compared to $10.9
million for fiscal 1997. Net income for fiscal 1997 reflects a one time pre-tax
charge to income of $8.25 million for the Company's share of recapitalizing the
Savings Association Insurance Fund ("SAIF"). The following discussion reflects
the results of operations exclusive of the SAIF recapitalization charge.
General Comparison Exclusive of the SAIF Recapitalization Charge. Net income
increased $3.0 million, or 18.8% from $15.7 million for fiscal 1997 to $18.7
million for fiscal 1998. Return on average equity increased to 10.42% for fiscal
1998 from 10.12% for fiscal 1997 and return on average tangible equity increased
to 15.14% for fiscal 1998 from 14.56% for fiscal 1997. Diluted earnings per
share rose to $1.99 for fiscal 1998 as compared to diluted earnings per share of
$1.81 for fiscal 1997.
Interest Income. Interest income increased $20.5 million, or 15.4%, from $133.3
million for fiscal 1997 to $153.8 million for fiscal 1998. The increase resulted
primarily from a $270.2 million increase in average interest-earning assets from
$1.8 billion for fiscal 1997 to $2.0 billion for fiscal 1998 and from a slight
increase in the average yield of interest-earning assets from 7.51% in fiscal
1997 to 7.52% in fiscal 1998. The increase in the average interest-earning
assets was primarily due to assets acquired in the Continental Bank acquisition,
increased purchases of mortgage-backed securities and increased originations of
multi-family loans. Interest income on mortgage-backed securities increased $7.8
million, or 13.1%, from $59.4 million for fiscal 1997 to $67.2 million for
fiscal 1998, primarily due to an increase of $136.5 million, or 16.1%, in the
average balance of these securities, offset by an 18 basis point decrease in the
average yield on these securities from 6.99% for fiscal 1997 to 6.81% for fiscal
1998. Interest income on mortgage loans increased $6.6 million, or 11.6% from
$56.9 million in fiscal 1997 to $63.5 million in fiscal 1998, primarily due to
an increase of $75.6 million in the average balance of mortgage loans, and a
slight 7 basis point increase in the average yield on mortgage loans from 8.03%
for fiscal 1997 to 8.10% for fiscal 1998. The increase in the average balance of
mortgage loans was primarily due to loans acquired in the Continental Bank
acquisition and increased originations of multi-family loans.
46
<PAGE>
Interest Expense. Interest expense for fiscal 1998 was $86.8 million, an
increase of $15.2 million, or 21.2%, from $71.6 million in fiscal 1997. The
increase is primarily the result of a $241.5 million, or 14.5%, increase in the
average balance of interest-bearing liabilities from $1.7 billion for fiscal
1997 to $1.9 billion for fiscal 1998 and from a 25 basis point increase in the
cost of interest-bearing liabilities from 4.29% for fiscal 1997 to 4.54% for
fiscal 1998. The increase in the average balance of interest-bearing liabilities
was primarily due to deposits acquired in the Continental Bank acquisition, new
certificate deposits and additional borrowings. Interest expense on total
deposits increased $9.3 million, or 17.2%, from $54.1 million for fiscal 1997 to
$63.4 million for fiscal 1998, primarily as a result of a $149.4 million, or
11.0%, increase in the average balance of deposits from $1.4 billion in fiscal
1997 to $1.5 billion in fiscal 1998 and a 23 basis point increase in the average
cost of such deposits from 3.98% in fiscal 1997 to 4.21% in fiscal 1998. The
average balance of certificate accounts increased $145.8 million, or 19.8%, from
$737.0 million for fiscal 1997 to $882.8 million for fiscal 1998. In addition to
the increase in the average balance of certificate accounts, the average balance
of interest-bearing core deposits also increased $9.5 million, or 1.8%, from
$522.0 million for fiscal 1997 to $531.5 million for fiscal 1998. The increase
in average core deposits relates to deposits acquired from Continental Bank.
Interest expense on borrowed funds increased $5.9 million, or 33.6%, from $17.5
million for fiscal 1997 to $23.4 million for fiscal 1998. The average balance of
borrowed funds increased $92.0 million, or 29.6% to $403.4 million for fiscal
1998 as compared to $311.4 million for fiscal 1997. The increase in borrowings
is attributable to additional leveraging of the balance sheet and the proceeds
from the trust preferred securities. The Bank had been using borrowings to
leverage its capital and fund asset growth.
Net Interest Income. Net interest income for fiscal 1998 increased $5.4 million,
or 8.7%, from $61.6 million for fiscal 1997 to $67.0 million for fiscal 1998.
The increase in net interest income primarily relates to the significant growth
in the average balances of interest-earning assets offset by a decrease in the
net interest spread. Average interest-earning assets increased $270.2 million,
or 15.2%, from $1.8 billion in fiscal 1997 to $2.0 billion in fiscal 1998 while
average interest-bearing liabilities increased $241.5 million, or 14.5%, from
$1.7 billion in fiscal 1997 to $1.9 billion in fiscal 1998. The net interest
rate spread declined by 24 basis points from 3.22% for fiscal 1997 to 2.98% for
fiscal 1998 as a result of increased costs of interest bearing liabilities. As a
result of further leveraging of the Bank's capital, the net interest margin
decreased from 3.47% in fiscal 1997 to 3.28% in fiscal 1998. As a result of the
Continental acquisition, the ratio of average interest-earning assets to
interest-bearing liabilities increased slightly from 1.06X in fiscal 1997 to
1.07X in fiscal 1998.
Provision for Loan Losses. The provision for loan losses for fiscal 1998 was
$1.65 million, an increase of $700,000, or 73.7%, from $950,000 for fiscal 1997.
When determining the provision for loan losses, management assesses the risk
inherent in its loan portfolio based on information available to management at
such time relating to trends in the national and local economies, trends in the
real estate market and trends in the Company's level of non-performing loans,
assets and net charge-offs. Non-performing loans decreased from $14.7 million at
the end of fiscal 1997 to $9.3 million at the end of fiscal 1998 and net
charge-offs increased from $263,000 for fiscal 1997 to $636,000 for fiscal 1998.
Management increased the provision for loan losses during fiscal 1998 due to its
assessment of the loan portfolio and to increase loan loss coverage on
non-performing loans. Additionally, during fiscal 1998, the Company increased
its origination of multi-family loans and as a result of the Continental
acquisition, the Company began to originate commercial loans. Multi-family loans
and commercial loans may possess a greater credit risk than one- to four-family
loans and require greater general reserve levels. Management believes that based
upon information currently available, its allowance for loan losses is adequate
to cover future loan losses. However, if general economic conditions and real
estate values within the Bank's primary lending area decline, the level of
non-performing loans may increase resulting in larger provisions for loan losses
which, in turn, would adversely affect net income.
Non-Interest Income. Non-interest income for fiscal 1998 increased $4.4 million,
or 130.3%, from $3.4 million for fiscal 1997 to $7.8 million for fiscal 1998,
due to a gain from a condemnation award received from an inactive joint venture,
fee income generated from the check cashing operations acquired from Continental
Bank and increased deposit fee income.
Non-Interest Expense. Non-interest expense totalled $39.7 million for fiscal
1998 as compared to $43.0 million for fiscal 1997, a decrease of $3.3 million,
or 7.8%. Included in non-interest expense for fiscal 1997 is the special SAIF
47
<PAGE>
pre-tax charge of $8.25 million. Excluding the SAIF charge, non-interest expense
increased $4.9 million, or 14.1%.The increase is mainly the result of banking
office personnel, goodwill amortization and other expenses associated with the
Continental Bank acquisition offset by a decrease in deposit insurance premiums.
Due to the increased asset base and the operational efficiencies realized from
the acquisition, the general and administrative expenses to average assets ratio
improved from 1.66% for the fiscal year ended June 30, 1997 to 1.62% for fiscal
1998. For fiscal 1998, compensation and benefits expense increased to $20.3
million, an increase of $3.8 million, or 23.0%, from $16.5 million for fiscal
1997. The increase in compensation and benefits expense is due to the addition
of banking office personnel from the Continental Bank acquisition, higher
benefit expenses and normal salary adjustments. For fiscal 1998, ESOP and RRP
expense was $3.7 million as compared to $2.5 million in the prior year, an
increase of $1.2 million, or 46.9%. Occupancy and equipment expense increased
$812,000, or 14.2%, from $5.7 million for fiscal 1997 to $6.5 million for fiscal
1998 due to costs associated with the operation of two new banking offices and
five check cashing facilities. Federal deposit premium expense decreased
$892,000, or 49.2%, from $1.8 million for fiscal 1997 to $921,000 for fiscal
1998 due to the reduction in SAIF. Other operating expenses increased $496,000,
or 8.6%, from $5.8 million during fiscal 1997 to $6.3 million for fiscal 1998
primarily as a result of general expenses related to the addition of two new
banking offices and five check cashing facilities.
For fiscal 1998, expenses related to real estate operations, net was $218,000, a
decrease of $165,000, or 43.1%, from $383,000 in the prior year period. The
decrease is the result of a lower provision for REO losses during the fiscal
year ended June 30, 1998. During fiscal 1998, the Bank established a provision
for REO losses of $93,000 as compared to $200,000 in the prior year period.
During fiscal 1998, the Bank recognized amortization of excess of cost over fair
value of net assets acquired of $4.2 million as compared to $3.4 million in
fiscal 1997. The amortization of cost over fair value of net assets acquired
relates to the Company accounting for the acquisitions of Bank of Westbury,
Sunrise Bancorp, Inc. and Continental Bank using the purchase method of
accounting.
Income Tax Expense. Income tax expense increased $4.7 million, or 46.1%, from
$10.1 million for fiscal 1997 to $14.8 million for fiscal 1998. The effective
income tax rate was 44.2% for fiscal 1998 as compared to 48.1% for fiscal 1997.
The decrease in the effective tax rate primarily relates to certain tax benefits
associated with the operations of a subsidiary of the Bank, offset by an
increase in amortization of excess of cost over fair value of net assets
acquired, which provides no tax benefit.
Liquidity and Capital Resources
The Company's current primary sources of funds are principal and interest
payments, sales of securities available-for- sale, borrowings and dividends from
the Bank. Dividend payments to the Company from the Bank are subject to the
profitability of the Bank and to applicable laws and regulations. During fiscal
1999, 1998 and 1997, the Bank made dividend payments of $13.0 million, $14.0
million and $6.7 million, respectively, to the Company.
On April 29, 1998, the Company completed a $50 million private placement of
8.17% capital securities (the "Capital Securities") due May 1, 2028. The
securities were issued by the Company's recently formed unit, Reliance Capital
Trust I. The securities were sold in an offering under Rule 144A and Regulation
D of the Securities Act of 1933. Proceeds of the issue were invested by Reliance
Capital Trust I in junior subordinated debentures issued by the Company. The
Capital Securities are guaranteed by the Company. Net proceeds from the sale of
the debentures were used for general corporate purposes.
The Company's liquidity is also available to, among other things, support future
expansion of operations or diversification into other banking related business,
pay dividends or repurchase its common stock. In this regard, the Company
declared cash dividends of $6.5 million, $6.0 million and $4.9 million during
fiscal years 1999, 1998 and 1997, respectively.
48
<PAGE>
On November 6, 1998, the Company completed its seventh five percent stock
repurchase plan purchasing 500,000 shares at an aggregate cost of $13.9 million.
The Company also announced its eighth stock repurchase plan to repurchase up to
500,000 of the Company's outstanding shares. As of June 30, 1999, 146,207 shares
under this program were repurchased at an aggregate cost of $4.1 million. During
fiscal years 1999, 1998 and 1997, the Company repurchased total shares of
1,040,207, 460,973 and 442,182, respectively, at an aggregate cost of $27.9
million, $15.3 million and $8.1 million, respectively.
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed securities and debt and equity securities,
advances from the FHLB-NY and borrowings under reverse repurchase agreements and
loan sales. While maturities and scheduled amortization of loans,
mortgage-backed securities and debt securities are predictable sources of funds,
deposit flows and mortgage prepayments are strongly influenced by changes in
general interest rates, economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid assets as a
percentage of net withdrawable deposit accounts plus short-term borrowings as
defined by OTS regulations. The minimum required liquidity is currently 4.0%.
The Bank's liquidity ratio averaged 9.3% for the year ended June 30, 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 June 30, 1999,
assets qualifying for liquidity, including cash, US government obligations and
other eligible securities, totalled $201.4 million.
The primary investment activity of the Bank is the origination of mortgage,
commercial and consumer and loans, and the purchase of mortgage loans and
mortgage-backed securities. During the fiscal year ended June 30, 1999, the Bank
originated and purchased mortgage loans, commercial and consumer loans in the
amount of $175.8 million, $141.2 million and $41.7 million, respectively. During
the fiscal year ended June 30, 1999, the Bank purchased $836.5 million of
mortgage-backed securities of which $730.2 million and $106.3 million,
respectively, were classified as available-for-sale and held-to-maturity and
purchased as part of the Bank's growth strategy. These activities were funded
primarily by deposits, principal repayments on loans and mortgage-backed
securities and borrowings from the FHLB-NY, reverse repurchase agreements and
proceeds from Capital Securities. At June 30, 1999, borrowings from the FHLB-NY
and reverse repurchase agreements totalled $338.7 million and $313.7 million,
respectively.
At June 30, 1999, the Bank had outstanding loan commitments of $45.2 million and
commercial and consumer open lines of credit of $18.1 million and $52.0 million,
respectively. The Bank anticipates that it will have sufficient funds available
to meet its current loan origination commitments. Certificates of deposit which
are scheduled to mature in one year or less from June 30, 1999 totalled $710.7
million. Management believes that a significant portion of such deposits will
remain with the Bank.
At June 30, 1999, the Bank exceeded each of the OTS capital requirements. The
Bank's tangible, core, and risked-based ratios were 6.78%, 6.78% and 17.14%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurements of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as the price of goods and services.
49
<PAGE>
Impact of New Accounting Standards
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 accounting and reporting standards
forderivative instruments and for hedging activities. It requires that an
entityrecognize all derivatives as either assets or liabilities in the statement
offinancial condition and measure those instruments at fair value. The
accountingfor changes in the fair value of a derivative (that is, unrealized
gains andlosses) 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.
In June 1999, the FASB issued SFAS No. 137, "Deferral of Effective Date of SFAS
No. 133", which defers the adoption of SFAS No. 133 by one year. 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.
Impact of the Year 2000 Issue
The Year 2000 Issue centers on the inability of computer systems to recognize
the year 2000. Many existing computer programs and systems were originally
programmed with six digit dates that provided only two digits to identify the
calendar year in the date field, without considering the upcoming change in the
century. With the impending millennium, these programs and computers will
recognize "00" as the year 1900 rather than the year 2000. Like most financial
service providers, the Company and its operations may be significantly affected
by the Year 2000 Issue due to the nature of financial information. Software,
hardware, and equipment both within and outside the Company's direct control and
with whom the Company electronically or operationally interfaces (e.g. third
party vendors providing data processing, information system management,
maintenance of computer systems, and credit bureau information) are likely to be
affected. Furthermore, if computer systems are not adequately changed to
identify the Year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on the date field
information, such as interest, payment or due dates and other operating
functions, will generate results which could be significantly misstated, and the
Company could experience a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition, under
certain circumstances, failure to adequately address the Year 2000 Issue could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Year
2000 Issue could result in a significant adverse impact on the Company's
products, services and competitive condition.
The Company has adopted a "Year 2000 Policy" and is in the process of reviewing
its internal systems. The Company completed testing of 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 has completed testing and implementation
of changes.
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.
50
<PAGE>
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 has 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 have
completed testing and will be Year 2000 compliant.
Private Securities 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
forward-looking statements contained in the Private Securities Litigation 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. Information regarding management's discussion and analysis of financial
condition and results of operations appears under Item 7 of this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See the information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Asset/Liability
Management /Market Risk and Interest Rate Sensitivity Analysis" in Item 7 of
this report.
Item 8.
Consolidated Financial Statements and Supplementary Data
51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
[LOGO] Arthur Andersen LLP
Independent Public Accountants
1345 Avenue of the Americas
New York, NY 10105
To the Board of Directors and Stockholders of
Reliance Bancorp, Inc.,
We have audited the accompanying consolidated statement of condition of Reliance
Bancorp, Inc. and subsidiary as of June 30, 1999, and the related consolidated
statements of income, changes in stockholders' equity, comprehensive income and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of Reliance Bancorp, Inc. and subsidiary as of June 30,
1998, and for each of the years in the two year period then ended were audited
by other auditors whose report dated July 23, 1998, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reliance Bancorp, Inc. and
subsidiary as of June 30, 1999, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
- --- -------------------
Arthur Andersen LLP
New York, New York
July 21, 1999
(except with respect to the matter
discussed in Note 2, as to which
the date is August 30, 1999)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
[LOGO] KPMG LLP
1305 Walt Whitman Road
Melville, NY 11747-4302
To the Board of Directors and Stockholders of
Reliance Bancorp, Inc.,
We have audited the accompanying consolidated statement of condition of
Reliance Bancorp, Inc. and subsidiary as of June 30, 1998, and the related
consolidated statements of income, changes in stockholders' equity,
comprehensive income and cash flows for each of the years in the two-year period
ended June 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statementsare free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Reliance Bancorp, Inc. and
subsidiary as of June 30, 1998, and the results of their operations and their
cash flows for each of the years in the two-year period ended June 30, 1998, in
conformity with generally accepted accounting principles.
/s/ KMPG LLP
KPMG LLP
July 23, 1998
52
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Condition
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30,
--------------------
1999 1998
------ ------
Assets
<S> <C> <C>
Cash and due from banks............................................................. $ 33,255 $ 37,596
Money market investments............................................................ -- 9,500
Debt and equity securities available-for-sale....................................... 122,168 134,907
Debt and equity securities held-to-maturity (with estimated
market values of $28,840 and $40,509, respectively).............................. 28,835 40,189
Mortgage-backed securities available-for-sale....................................... 935,038 940,347
Mortgage-backed securities held-to-maturity (with estimated
market values of $252,233 and $252,332, respectively)............................ 255,917 249,259
Loans receivable:
Mortgage loans................................................................. 810,894 790,951
Commercial loans............................................................... 44,949 49,887
Consumer and other loans....................................................... 127,350 137,900
Less allowance for loan losses............................................... (9,120) (8,941)
--------- ---------
Loans receivable, net.................................................. 974,073 969,797
Accrued interest receivable, net.................................................... 13,095 14,958
Office properties and equipment, net................................................ 16,368 15,436
Prepaid expenses and other assets................................................... 16,960 11,732
Mortgage servicing rights........................................................... 1,514 2,317
Excess of cost over fair value of net assets acquired............................... 54,373 58,936
Real estate owned, net.............................................................. 177 755
------- -----------
Total assets........................................................... $ 2,451,773 $ 2,485,729
========= =========
Liabilities and Stockholders' Equity
Deposits............................................................................ $ 1,549,419 $ 1,628,298
Borrowed Funds...................................................................... 702,434 630,206
Advance payments by borrowers for taxes and insurance............................... 6,399 9,806
Accrued expenses and other liabilities.............................................. 21,854 22,555
-------- ---------
Total liabilities...................................................... 2,280,106 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; 8,586,210 and 9,564,988
outstanding, respectively....................................................... 108 108
Additional paid-in capital.......................................................... 121,037 117,909
Retained earnings, substantially restricted......................................... 115,976 102,305
Accumulated other comprehensive income:
Net unrealized (depreciation) appreciation on securities
available-for-sale, net of taxes................................................ (10,546) 4,212
Less:
Unallocated common stock held by ESOP............................................... (3,726) (4,554)
Unearned common stock held by RRP................................................... (66) (713)
Common stock held by SERP (at cost)................................................. (550) (373)
Treasury stock, at cost (2,164,610 and 1,185,832 shares, respectively).............. (50,566) (24,030)
--------- --------
Total stockholders' equity..................................................... 171,667 194,864
-------- -------
Total liabilities and stockholders' equity.............................. $ 2,451,773 $ 2,485,729
========= =========
See accompanying notes to consolidated financial statements.
53
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(In thousands, except per share amounts)
Year Ended June 30,
----------------------------------------
1999 1998 1997
------ ------ ------
Interest Income:
<S> <C> <C> <C>
First Mortgage Loans............................................. $ 62,182 $ 63,573 $ 56,948
Commercial Loans................................................. 4,892 3,916 --
Consumer and Other Loans......................................... 10,730 12,130 11,525
Mortgage-Backed Securities....................................... 78,948 67,185 59,392
Money Market Investments......................................... 284 615 618
Debt and Equity Securities....................................... 10,274 6,400 4,806
------- ------- -------
Total Interest Income...................................... 167,310 153,819 133,289
------- ------- -------
Interest Expense:
Deposits......................................................... 61,972 63,432 54,139
Borrowed Funds................................................... 36,034 23,396 17,514
------ ------ ------
Total Interest Expense..................................... 98,006 86,828 71,653
------ ------ ------
Net Interest Income Before Provision for Loan Losses............. 69,304 66,991 61,636
Provision for Loan Losses............................................ 650 1,650 950
------ ------ ------
Net Interest Income After Provision for Loan Losses.............. 68,654 65,341 60,686
------ ------ ------
Non-Interest Income:
Loan Fees and Service Charges.................................... 1,352 1,047 683
Other Operating Income........................................... 4,279 3,452 2,557
Income from Money Centers........................................ 2,650 1,882 --
Condemnation Award on Joint Venture.............................. -- 1,483 --
Net Gain (Loss) on Securities.................................... 119 (5) 172
------ ------ -----
Total Non-Interest Income.................................. 8,400 7,859 3,412
------ ----- -----
Non-Interest Expense:
Compensation and Benefits........................................ 20,373 20,297 16,509
Occupancy and Equipment.......................................... 7,064 6,531 5,719
Federal Deposit Insurance Premiums............................... 930 921 1,813
Advertising...................................................... 1,247 1,202 1,168
Other Operating Expenses......................................... 6,675 6,274 5,778
------ ------ ------
Total General and Administrative Expenses.................. 36,289 35,225 30,987
Real Estate Operations, Net...................................... 111 218 383
Amortization of Excess of Cost Over Fair Value
of Net Assets Acquired......................................... 4,563 4,218 3,404
SAIF Recapitalization Charge..................................... -- -- 8,250
------ ------ ------
Total Non-Interest Expense................................. 40,963 39,661 43,024
------ ------ ------
Income Before Income Taxes........................................... 36,091 33,539 21,074
Income Tax Expense .................................................. 15,940 14,810 10,138
------ ------ -------
Net Income .......................................................... $ 20,151 $ 18,729 $ 10,936
====== ====== ======
Net Income per Common Share:
Basic................................................... $ 2.38 $ 2.11 $ 1.32
Diluted................................................. $ 2.26 $ 1.99 $ 1.25
See accompanying notes to consolidated financial
statements.
54
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share amounts)
Year Ended June 30,
-------------------------------------
Common Stock (Par Value: $.01): 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Balance at Beginning and End of Year............................ $ 108 $ 108 $ 108
--- --- ---
Additional Paid in Capital:
Balance at Beginning of Year.................................... 117,909 105,871 104,041
Net (Loss) Gain from Reissuance of Treasury Stock............... (675) 7,903 --
Allocation of ESOP Stock and Earned Portion of RRPs............. 1,646 2,023 868
Common Stock Acquired by SERP................................... 177 164 209
Tax Benefits on Stock Plans..................................... 1,980 1,948 753
------- ------- -------
Balance at End of Year.......................................... 121,037 117,909 105,871
------- ------- -------
Retained Earnings, Substantially Restricted:
Balance at Beginning of Year.................................... 102,305 89,660 83,966
Net Income...................................................... 20,151 18,729 10,936
Dividends Declared.............................................. (6,480) (6,044) (4,930)
Loss on Reissuance of Treasury Stock............................ -- (40) (312)
------- ------- --------
Balance at End of Year.......................................... 115,976 102,305 89,660
------- ------- ------
Accumulated Other Comprehensive Income:
Net Unrealized (Depreciation) Appreciation on
Securities Available-for-Sale, Net of Tax:
Balance at Beginning of Year.................................... 4,212 1,705 (5,281)
Change in Net Unrealized (Depreciation)
Appreciation,Net of Tax........................................ (14,758) 2,507 6,986
-------- ------ -----
Balance at End of Year.......................................... (10,546) 4,212 1,705
-------- ------ -----
Unallocated Common Stock Held by ESOP:
Balance at Beginning of Year.................................... (4,554) (5,382) (6,210)
Allocation of ESOP Stock........................................ 828 828 828
----- ------ -----
Balance at End of Year.......................................... (3,726) (4,554) (5,382)
------- ------- -------
Unearned Common Stock Held by RRPs:
Balance at Beginning of Year.................................... (713) (1,567) (2,392)
Earned Portion of RRPs.......................................... 647 854 825
------ ---- -----
Balance at End of Year.......................................... (66) (713) (1,567)
------ ----- -------
Common Stock Held by Supplemental Executive Retirement Plan:
Balance at Beginning of Year................................... (373) (209) --
Common Stock Acquired by SERP (6,312, 4,433 and
11,021 shares).......................................... (177) (164) (209)
------ ----- -----
Balance at End of Year......................................... (550) (373) (209)
------ ----- -----
Treasury Stock:
Balance at Beginning of Year................................... (24,030) (27,516) (20,613)
Reissuance of stock for Continental Bank acquisition
(1,013,909 shares)....................................... -- 14,711 --
Common Stock Purchased, at Cost (1,040,207, 460,973 and
442,182 shares)......................................... (27,936) (15,269) (8,113)
Exercise of Stock Options...................................... 1,400 4,044 1,210
------- ------- -------
Balance at End of Year......................................... (50,566) (24,030) (27,516)
-------- -------- --------
Total Stockholders' Equity...................................... $ 171,667 $ 194,864 $ 162,670
======= ======= =======
See accompanying notes to consolidated financial
statements.
55
<PAGE>
Reliance Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Years Ended June 30,
-----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income......................................................... $ 20,151 $18,729 $10,936
Other Comprehensive Income, Net of Income Taxes:
Unrealized (Losses)/Gains on Securities Available-for-Sale......... (14,758) 2,507 6,986
-------- ----- -----
Comprehensive Income............................................... $ 5,393 $21,236 $17,922
======== ======= =======
See accompanying notes to consolidated financial
statements.
56
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
Year Ended June 30,
-----------------------------------
1999 1998 1997
---- ---- ----
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net Income.................................................................. $ 20,151 $ 18,729 $ 10,936
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses................................................. 650 1,650 950
Provision for Losses on Real Estate Owned ................................ 35 93 200
Amortization of Premiums, Net............................................. 2,060 2,755 1,448
Net (Gain) Loss on Securities............................................. (118) 5 (172)
Expense Charge Relating to Allocation and Earned
Portions of Stock Plans............................................... 3,120 3,705 2,521
Amortization of Excess of Cost Over Fair Value of
Net Assets Acquired ................................................. 4,564 4,218 3,404
Amortization of Mortgage Servicing Rights................................. 803 729 859
Acquisition Related Tax Benefits not Previously Recognized................ -- -- 562
Depreciation and Amortization............................................. 1,844 1,635 1,417
Net Gain on Loans Sold.................................................... (134) (44) (28)
Proceeds from Loans Sold.................................................. 28,240 8,473 7,303
Net Gain on Sale of Real Estate Owned..................................... (84) (146) (56)
Decrease (Increase) in Accrued Interest Receivable, Net.................. 1,863 (1,837) (728)
Decrease (Increase) in Prepaid Expenses and Other Assets.................. 3,862 (1,345) 3,174
Increase in Accrued Expenses and
Other Liabilities....................................................... 3,251 2,670 7,164
------ ------ ------
Net Cash Provided by Operating Activities............................ 70,107 41,290 38,954
------ ------ ------
Cash Flows From Investing Activities:
(Originations and Purchased Loans) Net of Principal Payments................. (33,733) 5,417 (101,583)
Purchases of Mortgage-Backed Securities Held-to-Maturity.................... (106,292) (147,163) --
Purchases of Mortgage-Backed Securities Available-for-Sale.................. (730,157) (623,759) (277,483)
Proceeds from Sales of Mortgage-Backed Securities Available-for-Sale........ 322,180 190,245 59,810
Principal Repayments from Mortgage-Backed Securities........................ 488,009 351,591 123,823
Proceeds from Call of Debt Securities....................................... 38,145 12,500 7,313
Proceeds from Sales of Debt and Equity Securities Available-for-Sale........ 15,229 4,870 5,028
Purchases of Debt Securities Available-for-Sale............................. (24,743) (115,500) (19,715)
Purchases of Debt and Equity Securities Held-to-Maturity.................... (11,138) -- (5,007)
Proceeds from Maturities of Debt Securities................................. 3,400 1,205 1,350
Purchases of Premises and Equipment......................................... (2,837) (1,623) (1,734)
Proceeds from Sale of Real Estate Owned .................................... 1,199 3,402 1,899
Cash and Cash Equivalents Acquired from Continental Bank Acquisition........ -- 9,106 --
------- ------- --------
Net Cash Used in Investing Activities................................. (40,738) (309,709) (206,299)
-------- --------- ---------
57
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows, Continued
(In thousands)
Year Ended June 30,
----------------------------------
1999 1998 1997
---- ---- ----
Cash Flows from Financing Activities:
<S> <C> <C> <C>
(Decrease) Increase in Deposits............................................. $ (78,422) $ 55,717 $ 91,009
(Decrease) Increase in Advance Payments by Borrowers
for Taxes and Insurance.................................................. (3,407) 789 171
Proceeds from FHLB Advances................................................. 1,095,981 143,336 60,000
Repayment of FHLB Advances.................................................. (939,399) (22,025) (23,000)
Proceeds from Reverse Repurchase Agreements................................. 743,772 1,077,963 1,177,298
Repayment of Reverse Repurchase Agreements.................................. (828,126) (1,002,606) (1,128,545)
Proceeds from Capital Securities............................................ -- 50,000 --
Purchases of Treasury Stock................................................. (27,936) (15,269) (8,113)
Net Proceeds from Issuance of Common Stock Upon
Exercise of Stock Options................................................ 725 2,670 898
Dividends Paid.............................................................. (6,398) (5,725) (4,578)
------- ------- ----------
Net Cash (Used in) Provided by Financing Activities................... (43,210) 284,850 165,140
-------- ------- --------
Net (Decrease) Increase in Cash and Cash Equivalents......................... (13,841) 16,431 (2,205)
Cash and Cash Equivalents at Beginning of Year............................... 47,096 30,665 32,870
------- ------ -------
Cash and Cash Equivalents at End of Year..................................... $ 33,255 $ 47,096 $ 30,665
====== ====== ======
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest................................................................... $97,218 $ 85,449 $ 71,005
====== ====== ======
Income Taxes .............................................................. $14,390 $ 11,077 $ 4,745
====== ====== =====
Non-cash Investing Activities:
Transfers from Loans to Real Estate Owned................................... $ 571 $ 3,654 $ 929
=== ===== ===
Supplemental Information to the Consolidated Statement of Cash Flows Relating to
Continental Bank Acquisition.
Non-cash investing and financing transactions relating to the Continental Bank
acquisition for the year ended June 30, 1998 not reflected in the Consolidated
Statement of Cash Flows are listed below:
1998
----------
Fair Value of Assets Acquired, Excluding Cash and Cash
Equivalents Acquired........................................... $ 168,240
Liabilities Assumed............................................... (171,083)
Excess of Cost Over Fair Value of Net Assets Acquired............. 17,691
Stock Consideration............................................... (23,954)
-------
Cash and Cash Equivalents Acquired................................ $ (9,106)
=======
</TABLE>
See accompanying notes to consolidated financialstatements.
58
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Reliance and subsidiary conform to
generally accepted accounting principles and to general practice within the
financial institution industry. The following is a description of the more
significant policies which the Company follows in preparing and presenting its
consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Reliance Federal Savings Bank. All
significant intercompany transactions and balances are eliminated in
consolidation.
As more fully discussed in Note 3, Reliance Bancorp Inc., a Delaware
corporation, was organized by the Bank for the purpose of acquiring all of the
capital stock of the Bank pursuant to the conversion of the Bank from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Company is subject to the financial reporting requirements of the
Securities and Exchange Act of 1934, as amended.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of condition and
income and expense for the years presented. Estimates that are susceptible to
change include primarily the determination of the allowances for losses on loans
and the valuation of real estate acquired in connection with foreclosures.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, federal funds sold and repurchase agreements with an original
term to maturity of less than three months.
(c) Securities Available-for-Sale
The Company follows Statement of Financial Accounting Standards ("SFAS") No.115,
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires securities, including debt, equity and mortgage-backed securities,
classified as available-for-sale to be recorded at estimated fair value with
changes in unrealized gains or losses reported net of tax as a separate
component in stockholders' equity.
Debt securities are classified as available-for-sale when management intends to
hold the securities for indefinite periods of time or when the securities may be
utilized for tactical asset/liability management strategy and may be sold from
time to time to effectively manage interest rate exposure and resultant
prepayment risk and liquidity needs. Premiums and discounts are amortized or
accreted, respectively, using the level-yield method. Readily marketable equity
securities are also classified as available-for-sale. Gains or losses on the
sales of the securities are recognized when sold using the specific
identification method.
(d) Debt and Equity Securities Held-to-Maturity
Debt and equity securities classified as held-to-maturity are carried at cost
unless there is a permanent impairment of value, at which time they are valued
at the lower of cost or market value resulting in a new cost basis for the
security. The debt securities are adjusted for amortization of premiums and
accretion of discounts over the term of the security using the level-yield
method. The Company currently has the ability and intent to hold the debt
securities until maturity. Equity securities classified held-to-maturity are not
readily marketable.
(e) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities. Mortgage-backed securities held-to-maturity are carried at current
unpaid
59
<PAGE>
principal balances, adjusted for unamortized premiums and unaccreted discounts.
Premiums are amortized and discounts are accreted to income over the estimated
life of the respective securities using the level-yield method. The Company
currently has the ability and intent to hold the securities until maturity.
(f) Loans
Loans are stated at the principal amount outstanding, less unearned discounts
and net deferred loan origination fees, if applicable. Interest on loans is
credited to income based on the principal amount outstanding during the period.
Gains and losses on the sale of loans are determined using the specific
identification method.
Interest on loans is recognized on the accrual basis. Loans are placed on
nonaccrual status when principal or interest becomes 90 days or more past due
for mortgage loans and commercial loans and 120 days past due for other loans,
unless the obligation is both well secured and in the process of collection.
Accrued interest receivable previously recognized is reserved when a loan is
placed on nonaccrual status. Loans remain on nonaccrual status until principal
and interest payments are current or the obligation is considered both well
secured and in the process of collection. A loan is considered a troubled debt
restructuring when changes, such as reduction in interest rates or deferral of
interest or principal payments, are made to contractual terms due to a
borrower's weakened financial condition.
The Company defers loan origination fees on multi-family loans, less certain
direct costs, and subsequently recognizes them as an adjustment of the loan's
yield over the contractual life of the loan using the level-yield method or, in
the case of loans with below-market introductory rates, generally over the
applicable introductory period, using the interest method.
The Company follows SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures". Under SFAS No. 114 and SFAS No. 118, a loan is
considered impaired when, based upon current information and events, it is
probable that a creditor will be unable to collect all amounts due including
principal and interest, according to the contractual terms of the loan
agreement. These statements require that impaired loans that are within their
scope be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or as a practical expedient, at
the loan's current observable market price, or the fair value of the collateral
if the loan is collateral dependent. The amount by which the recorded investment
of an impaired loan exceeds the measurement value is recognized by creating a
valuation allowance through a charge to the provision for loan losses. Interest
income received on impaired loans is recognized on a cash basis.
(g) Allowance for Loan Losses
A provision for loan losses charged to income is reflected as an addition to a
valuation allowance which is netted against loans receivable. Management's
periodic evaluation of the adequacy of the valuation allowance considers the
Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations which may affect the borrower's ability to repay, estimated
value of the underlying collateral and the current real estate markets and
economic condition in the Bank's lending areas. In addition, the Bank's
regulators, as an integral part of their examination process, periodically
review the Bank's allowance for losses on loans and real estate. Accordingly,
the Bank may be required to take certain charge-offs and recognize additions to
the allowance based on the regulators' judgments concerning information
available to them during their examination.
(h) Office Properties and Equipment
Land is carried at cost. Buildings, leasehold improvements, furniture and
fixtures and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
method over the estimated useful lives of the assets. The cost of leasehold
improvements is being amortized using the straight-line method over the shorter
of the term of the related leases or the estimated useful lives.
(i) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired in the
acquisitions of the Bank of Westbury, Sunrise Bancorp, Inc. and Continental Bank
is amortized using the straight line method over fifteen years. The excess of
cost
60
<PAGE>
over the fair value of net assets acquired is evaluated periodically by the
Company for impairment in response to changes in circumstances or events.
(j) Real Estate Owned
Real estate acquired through foreclosure is recorded at the lower of cost
(unpaid loan balance plus foreclosure costs) or fair market value at the time of
acquisition. The carrying value of individual properties is subsequently
adjusted to the extent it exceeds estimated fair market value less costs to
sell. Operating expenses of holding real estate, net of related income, are
charged against income as incurred. Gains on sales of real estate are recognized
when down payment and other requirements are met; otherwise such gains are
deferred and recognized on the installment method of accounting. Losses on the
disposition of real estate, including expenses incurred in connection with the
disposition, are charged to income. A valuation allowance is maintained through
provisions for real estate losses charged to income for any decrease in the fair
value of property less costs to sell, which is netted against real estate owned.
(k) Taxes on Income
The Company files a calendar-year Federal income tax return on a consolidated
basis with its subsidiary.
The Company follows SFAS No. 109, "Accounting for Income Taxes" which requires
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities. Under SFAS
No. 109, the effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
(l) Employee Benefits
The Bank's pension plan is non-contributory and covers substantially all
eligible employees. The plan conforms to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. The Bank's policy is to
accrue for all pension costs and to fund the maximum amount allowable for tax
purposes. In the interest of maintaining a comprehensive benefit package for
employees, the Bank periodically evaluates the overall effectiveness and
economic value of the pension plan. Based on an evaluation of the pension plan
in fiscal 1998, the Bank concluded that future benefit accruals under the plan
would cease, or "freeze" on May 31, 1998. In its stead, Reliance Federal Savings
Bank 401(k) Retirement Savings Plan (the "401(k) Plan") was formed. Effective
June 1, 1998, all Reliance Federal Savings Bank employees who are at least 21
years of age and have completed one year of service are eligible to participate
in the 401(k) Plan.
Actuarial gains and losses that arise from changes in assumptions concerning
future events, used in estimating pension costs, have been amortized over a
period that reflects the long range nature of pension expense. However, as a
result of the freezing of the plan, the Bank recognized a curtailment gain in
fiscal 1998. (See Note 17).
The Company follows AICPA Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP 93-6") to account for the established
Employee Stock Ownership Plan ("ESOP"). SOP 93-6 requires that compensation
expense be recognized for shares committed to be released to directly compensate
employees equal to the fair value of the shares committed. In addition, SOP 93-6
requires that leveraged ESOP debt and related interest expense be reflected in
the employer's financial statements. The application of SOP 93-6 results in
fluctuations in compensation expense as a result of changes in the fair value of
the Company's common stock; however, such compensation expense fluctuations
result in an offsetting adjustment to paid in capital. Therefore, total
stockholders' equity is not affected.
The Bank follows SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
No. 123 applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price, except for
employee stock ownership plans. SFAS No. 123 established a fair value-based
method of accounting for stock-based compensation arrangements with employees,
rather than the intrinsic value-based method that is contained in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). SFAS No. 123 does not require an entity to adopt
61
<PAGE>
the new fair value-based method for purposes of preparing its basic financial
statements; an entity is allowed to continue to use the APB No. 25 method for
preparing its basic financial statements. The Company has chosen to continue to
use the APB No. 25 method, however, SFAS No. 123 requires presentation of pro
forma net income and earnings per share information, in the notes to the
financial statements, as if the fair value-based method had been adopted.
(m) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost.
(n) Comprehensive Income
The Company follows 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.
(o) Earnings Per Share
The Company follows SFAS No. 128, "Earnings per Share" which specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock or potential common stock.
This statement simplifies the standard for computing EPS previously found in
Accounting Principles Board Opinion No. 15 ("APB No. 15"). It replaces the
presentation of primary EPS with a presentation of basic EPS and the
presentation of fully diluted EPS with a presentation of diluted EPS. Basic EPS
is computed by dividing net income by the weighted average number of common
shares outstanding for the period, adjusted for the unallocated portion of
shares held by the ESOP in accordance with SOP 93-6. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Potential common stock due to the dilutive effect of stock options is computed
using the treasury stock method. SFAS No. 128 was effective for financial
statements issued for periods ending after December 15, 1997 and requires the
restatement of all prior-period EPS data presented. The Company adopted SFAS No.
128 effective December 31, 1997.
(p) Segment Reporting
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No.131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 requires public companies to report certain financial
information about significant revenue-producing segments of the business for
which such information is available and utilized by the chief operating decision
maker. Specific information to be reported for individual operating segments
includes a measure of profit and loss, certain revenue and expense items, and
total assets. As a community-oriented financial institution, substantially all
of the Company's operations involve the delivery of loan and deposit products to
customers. Management makes operating decisions and assesses performance base on
an ongoing review of these community banking operations, which constitute the
Company's only operating segment for financial reporting purposes under SFAS
No.131.
2. Subsequent Event
Acquisition of Reliance Bancorp, Inc. by North Fork Bancorporation, Inc.
On August 30, 1999, the Company announced that it had signed a definitive
Agreement and Plan of Merger, dated as of August 30, 1999, with North Fork
Bancorporation, Inc. NFB is the bank holding company parent of North Fork
62
<PAGE>
Bank and Trust Company, a New York State chartered stock commercial bank. The
Merger Agreement provides, among other things, that Reliance will merge with and
into NFB, with NFB being the surviving corporation.
Pursuant to the Merger Agreement, each share of Reliance common stock, par value
$0.01 per share, issued and outstanding immediately prior to the Effective Time
will be converted into and become the right to receive 2.0 shares of NFB common
stock, par value $2.50 per share.
The Merger will be structured as a tax-free reorganization and will be accounted
under the purchase method of accounting. Consummation of the Merger is subject
to the satisfaction of certain customary conditions, including approval of the
Merger Agreement by the stockholders of Reliance and approval of the appropriate
regulatory agencies. Following consummation of the Merger, the Bank will be
merged with and into North Fork Bank and Trust Company. It is anticipated that
the Merger will be completed in 2000.
Reliance has the right to terminate the Merger Agreement if the closing price of
NFB's shares decline beyond a specified price and index, unless NFB elects to
increase the Merger Consideration to be received by Reliance's stockholders as
set forth in the Merger Agreement.
The Merger Agreement also provides that options to purchase shares of Reliance
Common Stock under Reliance's stock option plans that are outstanding at the
Effective Time shall be converted into options to purchase shares of NFB Common
Stock in accordance with the procedure set forth in the Merger Agreement. In
connection with the Merger Agreement, Reliance granted to NFB a stock option
pursuant to a Stock Option Agreement, dated as of August 30, 1999, which, under
certain defined circumstances, would enable NFB to purchase up to 19.9% of
Reliance's issued and outstanding shares of common stock. The Stock Option
Agreement provides that the total profit receivable thereunder may not exceed
$17.4 million plus reasonable out-of-pocket expenses.
3. Stock Form of Ownership
On September 16, 1993, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of a
holding company. As part of the conversion, the Company was incorporated under
Delaware law on November 16, 1993. The Company completed its initial public
offering on March 31, 1994 and issued 10,750,820 shares of common stock
resulting in net proceeds of approximately $103.6 million. The Company retained
$51.8 million of the net proceeds and used the remaining net proceeds to
purchase all of the outstanding stock of the Bank. The financial position and
results of operations of the Company as of and for the year ended June 30, 1999,
1998 and 1997 are presented in Note 22.
On November 6, 1998, the Company completed its seventh five percent stock
repurchase plan purchasing 500,000 shares at an aggregate cost of $13.9 million.
The Company also announced its eighth stock repurchase plan to repurchase up to
500,000 of the Company's outstanding shares. As of June 30, 1999, 146,207 shares
under this program were repurchased at an aggregate cost of $4.1 million. During
fiscal years 1999, 1998 and 1997, the Company repurchased total shares of
1,040,207, 460,973 and 442,182, respectively, at an aggregate cost of $27.9
million, $15.3 million and $8.1 million, respectively.
At the time of the conversion, the Bank established a liquidation account with a
balance equal to its retained earnings reflected in its statement of condition.
The balance in the liquidation account at June 30, 1999 and 1998 was
approximately $18.3 million and $21.4 million, respectively. The liquidation
account will be maintained for the benefit of eligible account holders who
continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
63
<PAGE>
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements, the
amount required for the liquidation account, or if such declaration and payment
would otherwise violate regulatory requirements. During fiscal 1999, the Company
declared cash dividends totalling $6.5 million.
4. Acquisition
Acquisition of Continental Bank
On October 17, 1997, the Company completed the acquisition of Continental Bank
("Continental"), a commercial bank with two full service banking offices located
in Nassau and Suffolk counties in Long Island, New York, a commercial lending
facility and five check cashing facilities ("Money Centers") in Manhattan. The
transaction was accounted for as a purchase. Under the terms of the merger,
Reliance issued 1.10 shares (1,013,909 shares) of its common stock for each
outstanding common share of Continental. The cost of the acquisition was
approximately $24.4 million. Assets acquired in the transaction, principally
loans and mortgage-backed securities aggregated $177.8 million and liabilities
assumed, substantially all deposits and borrowings, aggregated $171.1 million.
The excess of cost over fair value of net assets acquired in the transaction was
$17.7 million, which is being amortized on a straight line basis over 15 years.
5. Money Market Investments
Money market investments generally have original maturities of three months or
less, and at 1998 consist solely of securities purchased under agreements to
resell (repurchase agreements). There were no money market investments at June
30,1999. These agreements represent short-term loans and are reflected as an
asset in the consolidated statements of condition. The same securities are to be
resold at maturity of the repurchase agreements.
Securities purchased under repurchase agreements averaged $1.4 million for the
year ended June 30, 1999 and $4.5 million for the year ended June 30, 1998. The
maximum amount of such agreements outstanding at any month-end during the fiscal
year ended June 30, 1999 and 1998 was $8.0 million and $23.0 million,
respectively.
6. Debt and Equity Securities
A summary of the amortized cost and estimated market values of debt and equity
securities are as follows:
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
---- ---- ---- -----
Held-to-Maturity: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government Agency Obligations...... $ 8,885 $ 3 $ -- $ 8,888
Obligation of New York State............ 390 2 -- 392
FHLB Stock.............................. 19,560 -- -- 19,560
------ --- -- ------
$28,835 $ 5 $ -- $28,840
====== == === ======
Available-for-Sale:
U.S. Government Agency Obligations...... $ 10,000 $ 10 $ -- $ 10,010
Corporate Obligations................... 113,855 138 (2,712) 111,281
Marketable Equity Securities............ 1,177 19 (319) 877
------- --- ------ --------
$125,032 $167 $(3,031) $122,168
======== ==== ======= ========
64
<PAGE>
June 30, 1998
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
---- ---- ---- -----
Held-to-Maturity: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government Agency Obligations....... $ 22,493 $ 293 $ -- $ 22,786
Obligation of New York State............. 390 27 -- 417
FHLB Stock............................... 17,306 -- -- 17,306
------ ----- ---- ------
$ 40,189 $ 320 $ -- $ 40,509
====== === ==== ======
Available-for-Sale:
U.S. Government Agency Obligations....... $ 29,031 $ 260 $ (1) $ 29,290
Corporate Obligations.................... 103,070 343 (246) 103,167
Marketable Equity Securities............. 2,419 31 -- 2,450
----- ---- ----- --------
$134,520 $ 634 $(247) $134,907
The amortized cost and estimated market value of debt and equity securities at
June 30, 1999 and 1998, by contractual maturity, are shown below:
June 30, 1999 June 30, 1998
------------------------------------------ ---------------------------------------------
Held-to-maturity Available-for-sale Held-to-maturity Available-for-sale
-------------------- -------------------- ---------------------- ---------------------
Estimated Estimated Estimated Estimated
Amortized market Amortized market Amortized market Amortized market
cost value cost value cost value cost value
---- ----- ---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due in One Year or Less.... $ 390 $ 392 $ -- $ -- $ 2,493 $ 2,499 $ 5,892 $ 5,902
Due After One Year
Through Five Years....... -- -- 2,046 1,970 390 417 18,466 18,493
Due After Five Years
Through Ten Years........ 8,885 8,888 32,753 32,901 20,000 20,287 13,144 13,378
Due After Ten Years........ -- -- 89,056 86,420 -- -- 94,599 94,684
Equity Securities.......... 19,560 19,560 1,177 877 17,306 17,306 2,419 2,450
------- ------- ------- ------ ------ ------ ------- -------
$28,835 $28,840 $125,032 $122,168 $40,189 $40,509 $134,520 $134,907
====== ====== ======= ======= ====== ====== ======= =======
In fiscal 1999, 1998 and 1997 gross proceeds from the sale of debt and equity
securities available-for-sale totalled $15.2 million, $4.9 million and $5.0
million, respectively. For fiscal 1999, 1998 and 1997 gross realized gains
totalled $172,000, $11,000 and $17,000, respectively, and gross realized losses
totalled $127,000, $0, and $16,000, respectively.
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<PAGE>
7. Mortgage-Backed Securities
The amortized cost and estimated market values of mortgage-backed securities are
summarized as follows:
June 30, 1999
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
---- ---- ---- -----
Held- to-Maturity: (In thousands)
Pass-through Certificates Guaranteed by:
<S> <C> <C> <C> <C>
GNMA.................................................... $ 55,782 $ 1,056 $ -- $ 56,838
FHLMC................................................... 7,792 148 -- 7,940
FNMA.................................................... 28,228 269 (16) 28,481
REMICs:
Agency Issuance.................................. 91,476 27 (4,289) 87,214
Private Issuance................................. 72,639 15 (894) 71,760
------- -------- ------- -------
$255,917 $1,515 $5,199) $252,233
Available-for-Sale:
Pass-through Certificates Guaranteed by:
GNMA.................................................... $285,238 $ 601 $ (2,528) $283,311
FHLMC................................................... 48,259 403 (152) 48,510
FNMA.................................................... 83,555 160 (707) 83,008
REMICs:
Agency Issuance................................... 160,742 47 (5,884) 154,905
Private Issuance.................................. 373,053 13 (7,762) 365,304
------- ----- -------- -------
$950,847 $1,224 $(17,033) $935,038
June 30, 1998
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
---- ---- ---- -----
Held- to-Maturity: (In thousands)
Pass-through Certificates Guaranteed by:
<S> <C> <C> <C> <C>
GNMA.................................................... $ 78,106 $2,126 $ -- $ 80,232
FHLMC................................................... 10,304 267 -- 10,571
FNMA.................................................... 33,949 959 -- 34,908
REMICs:
Agency Issuance.................................. 53,021 85 (307) 52,799
Private Issuance................................. 73,879 353 (410) 73,822
------ --- ----- ------
$249,259 $3,790 $(717) $252,332
Available-for-Sale:
Pass-through Certificates Guaranteed by:
GNMA.................................................... $187,562 $2,732 $(47) $190,247
FHLMC................................................... 118,982 1,702 (7) 120,677
FNMA.................................................... 140,597 1,618 (32) 142,183
REMICs:
Agency Issuance................................... 128,113 198 (39) 128,272
Private Issuance.................................. 358,033 1,404 (469) 358,968
------- ----- ----- -------
$933,287 $7,654 $(594) $940,347
======== ====== ===== ========
In fiscal 1999, 1998 and 1997 gross proceeds from the sale of mortgage-backed
securities available-for-sale totalled $322.2 million, $190.2 million and $59.8
million, respectively. For fiscal 1999, 1998 and 1997 gross realized gains
totalled $1.2 million, $540,000 and $466,000, respectively, and gross realized
losses totalled $1.1 million, $556,000 and $295,000, respectively.
66
<PAGE>
8. Loans Receivable
Loans receivable, net are summarized as follows:
June 30,
----------------------
1999 1998
------ ------
Mortgage Loans: (In thousands)
<S> <C> <C>
One- to four-family..................................... $ 434,237 $ 492,804
Multi-family............................................ 316,115 243,070
Commercial Real Estate.................................. 48,104 43,624
Co-op................................................... 5,872 7,516
Construction............................................ 7,515 4,879
------- --------
811,843 791,893
Less:
Unearned Discount, Premiums and
Deferred Loan Origination Fees, Net..................... (949) (942)
------- ------
Total Mortgage Loans............................... 810,894 790,951
------- -------
Commercial Loans:
Asset Based Loans....................................... 11,056 21,339
Other Commercial Loans.................................. 33,893 28,548
------ ------
Total Commercial Loans............................. 44,949 49,887
------ ------
Consumer and Other Loans:
Home Equity Lines of Credit............................. 85,576 93,862
Guaranteed Student Loans................................ 12,791 15,262
Home Equity Loans....................................... 21,530 19,050
Loans on Deposit Accounts............................... 4,788 5,416
Other Loans............................................. 2,065 3,622
------ ------
126,750 137,212
Deferred Loan Origination Costs, Net..................... 600 688
------- ------
Total Consumer and Other Loans..................... 127,350 137,900
------- -------
Less:
Allowance for Loan Losses............................... (9,120) (8,941)
------- -------
$974,073 $969,797
======= =======
June 30,
---------------------
1999 1998
---- ----
Commitments Outstanding: (In thousands)
<S> <C> <C>
Mortgage Loans.......................................... $ 40,412 $ 33,386
====== ======
Consumer and Other Commercial Loans..................... $ 4,793 $ 7,056
====== ======
Unused Consumer Lines of Credit......................... $ 52,014 $ 53,361
====== ======
Unused Commercial Lines of Credit....................... $ 18,105 $ 22,622
====== ======
</TABLE>
At June 30, 1999 and 1998, the Company had commitments to sell loans of $2.2
million and $3.7 million, respectively. At June 30, 1999 and 1998, the Company
had no commitments to purchase loans.
67
<PAGE>
The principal balance of loans in arrears three months or more:
June 30,
-------------------------------------
1999 1998
---------------- -----------------
No. of No. of
loans Amount loans Amount
----- ------ ----- ------
(Dollars in thousands)
One- to four-family Mortgages............ 44 $3,693 70 $6,256
Consumer and Other Loans................. 59 564 62 517
Commercial Real Estate................... 8 1,868 7 1,962
Commercial............................... 10 433 9 567
--- ----- --- ----
121 $6,558 148 $9,302
=== ===== === =====
Interest income that would have been recorded under the original terms of loans
classified as non-accrual and interest income actually recognized are as
follows:
Year Ended June 30,
-----------------------
1999 1998 1997
---- ---- ----
(In thousands)
Interest Income that would have been Recorded... $792 $1,159 $838
Interest Income Recognized...................... (294) (360) (265)
----- ----- ----
Interest Income Foregone........................ $498 $ 799 $573
=== === ===
In accordance with SFAS No. 114, the Company deems certain loans impaired when,
based upon current information and events, it is probable that the Company will
be unable to collect all amounts due, both principal and interest, according to
the contractual terms of the loan agreement. SFAS No. 114 generally does not
apply to large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment, such as one- to four-family mortgage loans and
consumer loans. Loans individually reviewed for impairment by the Company are
limited to multi-family loans, commercial loans, construction and land loans,
loans modified in a troubled debt restructuring and selected large one- to
four-family loans. Examples of measurement techniques utilized by the Company
include present value of expected future cash flows, the loan's market price if
one exists, and the estimated fair value of the collateral.
At June 30, 1999, 1998 and 1997 the Company had seven, four and four impaired
commercial real estate loans totalling $1.6 million, $1.9 million and $2.9
million, respectively, with no related allowance. The Company had 10 impaired
commercial loans totalling $433,000 and $567,000, respectively, at June 30, 1999
and 1998 and no impaired commercial loans at June 30, 1997, with no related
allowances. The Company's average recorded investment in impaired loans for the
years ended June 30, 1999, 1998 and 1997 was $2.5 million, $2.5 million and $1.9
million, respectively. The Company did not recognize any interest income on
impaired loans for the years ended June 30, 1999, 1998 and 1997.
The Bank generally originates fixed rate loans with terms greater than 15 years
for sale to FHLMC, FNMA or other secondary market investors. At June 30, 1999
and 1998, there were no fixed rate loans classified as held for sale.
Included in mortgage loans at June 30, 1999 and 1998 are $408.8 million and
$425.2 million, respectively, of adjustable rate mortgage loans.
Proceeds from the sale of first mortgage loans were $28.2 million, $8.5 million
and $7.3 million during the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Gross realized gains and losses resulting from sale of first
mortgage loans were as follows:
Year Ended June 30,
--------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Gross Realized Gains............ $144 $ 44 $ 31
Gross Realized Losses........... (10) -- (3)
---- --- ----
$134 $ 44 $ 28
=== === ===
68
<PAGE>
The Bank services mortgage loans for investors which are not included in the
accompanying consolidated statements of condition. A summary of the principal
balances, custodial escrow, servicing income and number of loans serviced for
others by the Bank are as follows:
Year Ended June 30,
-------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Principal Balances............................... $298,635 $355,149 $410,229
======= ======= =======
Custodial Escrow................................. $ 3,242 $ 4,290 $ 4,493
===== ===== =====
Servicing Income (Excludes MSR Amortization)..... $ 959 $ 1,183 $ 1,399
=== ===== =====
Number of Loans.................................. 5,186 6,085 6,842
===== ===== =====
Fees earned for servicing loans are reported as income when the related mortgage
payments are collected. Mortgage Servicing Rights ("MSRs") are amortized as a
reduction to loan service fee income on a method that approximates the
level-yield basis over the estimated remaining life of the underlying mortgage
loans. MSRs are carried at fair value and impairment, if any, is recognized
through a valuation allowance. For the year ended June 30, 1999 and 1998, no
impairment existed in the MSRs and as a result, no valuation allowance was
required.
MSR activity is summarized as follows:
Year Ended June 30,
--------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Balance at Beginning of the Year......... $2,317 $3,046 $3,905
Amortization............................. (803) (729) (859)
------ ----- ------
Balance at End of the Year............... $1,514 $2,317 $3,046
===== ===== =====
9. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Year Ended June 30,
---------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Balance at Beginning of the Year........... $8,941 $5,182 $4,495
Provision for Loan Losses.................. 650 1,650 950
Allowances of Acquired Institutions........ -- 2,745 --
Charge-offs................................ (513) (773) (306)
Recoveries................................. 42 137 43
----- ----- -----
Balance at End of the Year................. $9,120 $8,941 $5,182
===== ===== =====
10. Real Estate Owned
Real estate owned, net is summarized as follows:
June 30,
------------------
1999 1998
---- ----
(In thousands)
One- to four-family Residences................... $185 $505
Co-ops........................................... 63 73
Commercial....................................... -- 300
Allowance for Losses on Real Estate Owned........ (71) (123)
---- ----
$177 $755
==== ====
69
<PAGE>
Results of operating real estate owned for the years ended June 30, 1999, 1998
and 1997 are summarized as follows:
Year Ended June 30,
--------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Net Gain on Sale on Real Estate Owned....... $ 84 $ 146 $ 56
Net Expenses of Holding Property............ (160) (271) (239)
Provision for Losses........................ (35) (93) (200)
----- ----- -----
$(111) $(218) $(383)
Activity in the allowance for losses in real estate owned is summarized as
follows:
Year Ended June 30,
---------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Balance at Beginning of the Year............. $123 $334 $768
Provision for Losses......................... 35 93 200
Charge-offs.................................. (87) (304) (634)
---- ----- -----
Balance at End of the Year................... $ 71 $123 $334
== === ===
11. Accrued Interest Receivable
Accrued interest receivable, net is summarized as follows:
June 30,
----------------
1999 1998
---- ----
(In thousands)
Debt Securities........................................ $ 932 $1,708
Mortgage-Backed Securities............................. 6,533 7,137
Loans Receivable, Net of Reserves for Uncollectible
Interest of $1,078 and $1,293, respectively.......... 5,630 6,113
------ ------
$13,095 $14,958
====== ======
12. Office Properties and Equipment
A summary of office properties and equipment, net is as follows:
June 30,
----------------
1999 1998
---- ----
(In thousands)
Land................................................... $ 4,489 $ 4,489
Buildings.............................................. 10,943 10,477
Furniture, Fixtures and Equipment...................... 15,852 13,853
Leasehold Improvements................................. 4,649 4,407
Capital Lease.......................................... 1,470 1,470
------ ------
Office Properties and Equipment, at Cost............... 34,403 34,696
Accumulated Depreciation and Amortization.............. (21,035) (19,260)
--------- -------
$16,368 $15,436
In October 1989, the Bank sold a building used for a branch operation located in
Jamaica, New York for approximately $2.3 million, and subsequently leased back a
portion of the building to conduct the branch operation. The Bank received
approximately $2.0 million in cash from the transaction, after expenses of the
sale, which generated a gain of approximately $1.1 million. The gain has been
deferred and is being amortized over the twelve-year lease period. Deferred gain
on sale amounted to approximately $217,000 and $311,000 at June 30, 1999 and
1998, respectively, and is included in accrued expenses and other liabilities.
The leaseback is recorded as a capital lease in the amount of $1.5 million at
June 30, 1999 and 1998 (refer to the above table) and the related obligation
under capital leases of $387,000 and $535,000, respectively, at June 30, 1999
and 1998 is reflected in accrued expenses and other liabilities.
70
<PAGE>
Depreciation and amortization of office properties and equipment, included in
occupancy and equipment expense, was approximately, $1.8 million, $1.6 million
and $1.4 million for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
13. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1999 1998
--------------------------- ------------------------
Weighted Weighted
average average
rate Amount Percent rate Amount Percent
---- ------ ------- ---- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW........................................ 1.39% $ 102,473 7% 1.52% $104,955 7%
Passbook................................... 2.00 451,961 29 2.22 443,745 27
Money Market............................... 2.00 87,777 6 2.22 92,815 6
Certificates of Deposit.................... 5.56 842,778 54 5.56 934,558 57
Non-Interest Bearing Demand Deposit........ -- 64,430 4 -- 52,225 3
------- --- ------- ---
$1,549,419 100% $1,628,298 100%
========= === ========= ===
June 30,
-----------------------------------------
1999 1998
-------------------- ------------------
Amount Percent Amount Percent
(Dollars in thousands)
Contractual Maturity of Certificates of Deposit Accounts:
<S> <C> <C> <C> <C>
Under 12 months............................................ $710,722 84% $797,860 85%
Over 12 months to 36 months................................ 118,147 14 112,097 12
Over 36 months............................................. 13,909 2 24,601 3
------- --- -------- ---
$842,778 100% $934,558 100%
======= === ======= ===
The aggregate amount of certificates of deposit accounts with a minimum
denomination of $100,000 was approximately $81,181,000 and $78,052,000 at June
30, 1999 and 1998, respectively.
Interest expense on deposits is summarized as follows:
Year Ended June 30,
-----------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
NOW.................................. $1,608 $ 1,257 $ 1,041
Passbook............................. 9,175 10,439 10,937
Money Market......................... 1,879 2,249 2,493
Certificates of Deposit.............. 49,310 49,487 39,668
------ ------ ------
$61,972 $63,432 $54,139
On September 30, 1996, Congress passed, and the President signed, legislation
that recapitalized the Savings Association Insurance Fund (the "SAIF"). Under
the major provisions of the legislation, savings institutions, such as the Bank,
were assessed a one-time assessment of 65.7 basis points per $100 of insured
SAIF deposits. The Company recorded a one-time pre-tax charge of $8.25 million
during the first quarter of fiscal year 1997.
71
<PAGE>
14. Borrowed Funds
The Bank was obligated for borrowings as follows:
June 30, 1999 June 30, 1998
------------------ -------------------
Weighted Weighted
average average
rate Amount rate Amount
---- ------ ---- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Advances from FHLB - NY................................... 5.27% $338,718 5.49% $182,136
Reverse Repurchase Agreements............................. 5.23 313,716 5.64 398,070
Company Obligated Mandatorily Redeemable Capital
Securities of Reliance Capital Trust I............... 8.17 50,000 8.17 50,000
------- ------
$702,434 $630,206
======= =======
Information concerning borrowings under reverse repurchase agreements is
summarized as follows:
At or for the Year Ended
-----------------------------
June 30, 1999 June 30, 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Average Balance during the Year...................................... $276,748 $309,618
Average Interest Rate during the Year................................ 5.57% 5.79%
Maximum Month-end Balance during the Year............................ $350,060 $398,070
Mortgage-Backed Securities Pledged as Collateral under Reverse
Repurchase Agreements at Year End:
Carrying Value.................................................. $339,052 $418,883
Estimated Market Value.......................................... $334,736 $421,931
FHLB advances and reverse repurchase agreements at June 30, 1999 have
contractual maturities as follows:
Reverse
Year Ended FHLB Repurchase
June 30, Advances Agreements
-------- -------- ----------
(In thousands)
2000 $72,000 $171,156
2001 20,000 --
2002 62,622 67,560
2003 -- 75,000
2004 -- --
Thereafter 184,096 --
------- -------
Total $338,718 $313,716
======= =======
As a member of the Federal Home Loan Bank System (FHLB), the Bank borrows from
the FHLB on a secured basis. Borrowings at June 30, 1999 and 1998 were secured
by a blanket lien over all assets equal to 110% of borrowings.
On April 29, 1998, Reliance Capital Trust I, a trust formed under the laws of
the State of Delaware (the "Capital Trust") issued $50 million of 8.17% capital
securities. The Holding Company is the owner of all the beneficial interests
represented by common securities of the Trust. The Trust exists for the sole
purpose of issuing the Trust securities (comprised of the capital securities and
the common securities) and investing the proceeds thereof in the 8.17% junior
subordinated deferrable interest debentures issued by the Holding Company on
April 23, 1998 which are scheduled to mature on May 1, 2028. Interest on the
capital securities is payable in semiannual installments, commencing on November
1, 1998. The Trust securities are subject to mandatory redemption (i) in whole,
but not in part upon repayment in full, at the stated maturity of the junior
subordinated debentures at a redemption price equal to the principal amount of,
plus accrued interest on, the junior subordinated debentures,(ii) in whole, but
not in part, at any time prior to May 1, 2008, contemporaneously with the
occurrence and continuation of a special event, defined
72
<PAGE>
as a tax event or regulatory capital event, at a special event redemption price
equal to the greater of 100% of the principal amount of the junior subordinated
debentures or the sum of the present values of the principal amount and premium
payable with respect to an optional redemption of the junior subordinated
debentures on the initial optional repayment date to and including the initial
optional prepayment date, discounted to the prepayment date plus accrued and
unpaid interest thereon, and (iii) in whole or in part, on or after May 1, 2008,
contemporaneously with the optional prepayment by the Corporation of the junior
subordinated debentures at a redemption price equal to the optional prepayment
price. Subject to prior required regulatory approval, the junior subordinated
debentures are redeemable during the 12-month periods beginning on or after May
1, 2008 at 104.085% of the principal amounts outstanding, declining ratably each
year thereafter to 100%, plus accrued and unpaid interest thereon to the date of
redemption. Deferred issuance costs in the amount of $1.0 million, are being
amortized over ten years and are included in Prepaid Expenses and Other Assets
in the Company's Consolidated Statement of Condition as of June 30, 1998.
15. Income Taxes
The Company files a consolidated Federal income tax return on a calendar-year
basis.
Under legislation enacted subsequent to June 30, 1996, the Bank is no longer
able to use the percentage of taxable income method previously allowed for
Federal tax purposes, but is permitted to deduct bad debts only as they occur
and is additionally required to recapture (that is, take into taxable income)
the excess balance of its bad debt reserves as of December 31, 1995 over the
balance of such reserves as of December 31, 1987. However, such recapture
requirements would be suspended for each of two successive taxable years
beginning January 1, 1996 in which the Bank originates a minimum amount of
certain residential loans based upon the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding January 1,
1996. As a result of this legislation, the Bank will incur additional Federal
tax liability, but with no impact on the Bank's results of operations. The New
York State and New York City tax laws have been amended to prevent a similar
recapture of the Bank's bad debt reserve, and to permit continued future use of
the bad debt reserve methods for purposes of determining the Bank's New York
State and New York City tax liabilities.
The Company files state and local tax returns on a calendar-year basis. State
and local taxes imposed on the Company consist of New York State franchise tax,
New York City Financial Corporation tax and Delaware franchise tax. The
Company's annual liability for New York State and New York City purposes is the
greater of a tax on income or an alternative tax based on a specified formula.
The Company's liability for Delaware franchise tax is based on the lesser of a
tax based on an authorized shares method or an assumed par value capital method;
however under either method, the Company's total tax will not exceed $150,000.
The Company provided for New York State and New York City taxes based on
alternative taxable income for the year ended June 30, 1999 and 1998 and based
on taxable income for the years ended June 30, 1997.
In connection with the acquisitions of the Bank of Westbury, Sunrise Bancorp,
Inc and Continental Bank, a net deferred tax asset of $911,000, a net deferred
tax liability of $2,285,000 and a net deferred tax asset of $1,050,000,
respectively, were recognized for temporary differences between the book basis
and tax basis of assets and liabilities acquired.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1999 and
June 30, 1998 are presented below:
73
<PAGE>
June 30,
-------------------
1999 1998
---- ----
Deferred Tax Assets: (In thousands)
<S> <C> <C>
Unrealized Loss on Available-for-Sale Securities........... $8,120 $ --
Provisions for Losses on Loans and Real Estate Owned....... 2,603 1,833
Book Deferred Gain on Sale of Building..................... 263 368
Deposits................................................... 134 333
Deferred Fees.............................................. -- 71
Other Assets............................................... -- 6
------ -----
Total Deferred Tax Assets.................................. 11,120 2,611
------ -----
Deferred Tax Liabilities:
Unrealized Gain on Available-for-Sale Securities........... -- 3,235
Mortgage Loans............................................. 297 483
Office Properties and Equipment............................ 447 335
Benefit Plans.............................................. 263 39
Mortgage Servicing Rights.................................. 195 298
Intangible Assets.......................................... 108 94
Debt and Equity and Mortgage-Backed Securities............. 66 185
Other...................................................... 656 614
----- -----
Total Deferred Tax Liabilities.............................. 2,032 5,283
----- -----
Net Deferred Tax Asset (Liability)............................. $9,088 $(2,672)
===== =======
The total income tax provision for the years ended June 30, 1999, 1998 and 1997
differs from the amount of tax provision that would result by applying the
statutory United States Federal income tax rate of 35.0% for fiscal 1999, 1998
and 1997 to income before income taxes:
Year Ended June 30,
-------------------------------------------------------------
1999 1998 1997
--------------- ---------------- -----------------
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax Provision Statutory Rate............... $12,632 35.0% $11,739 35.0% $7,376 35.0%
Amortization of Excess of Cost Over
Fair Value of Net Assets Acquired........ 1,551 4.3 1,444 4.3 1,191 5.7
State and Local Income Tax, Net of
Federal Income Tax Benefit............... 982 2.7 924 2.8 1,228 5.8
Non-Deductible Expense of ESOP............. 462 1.3 643 1.9 302 1.4
Other, Net................................. 323 0.9 71 0.2 52 0.3
Tax Exempt Interest on Municipal
Investments.............................. (11) -- (11) -- ( 1) (0.1)
------- ---- ------- ---- ------ -----
Income Tax Expense ..................... $15,940 44.2% $14,810 44.2% $10,138 48.1%
====== ==== ====== ==== ====== ====
The components of the provision for income taxes for the years ended June 30,
1999, 1998 and 1997 are as follows:
Year Ended June 30,
------------------------------
1999 1998 1997
---- ---- ----
Current: (In thousands)
Federal.................... $14,856 $13,876 $8,193
State and Local............ 1,489 1,459 1,861
------ ------ ------
16,345 15,335 10,054
Deferred:
Federal.................... (426) (488) 56
State and Local............ 21 (37) 28
---- ----- ----
(405) (525) 84
---- ---- --
$15,940 $14,810 $10,138
======= ======= =======
74
<PAGE>
16. Commitments
At June 30, 1999, the Company was obligated under a number of non-cancelable
operating leases on property used for banking purposes. Rental expense under
these leases for the fiscal years ended June 30, 1999, 1998 and 1997 was
approximately $1.4 million, $1.3 million and $1.0 million, respectively. The
projected minimum annual rentals under the terms of these leases, exclusive of
taxes and other charges, are summarized as follows:
Amount
------
Year ended June 30: (In thousands)
2000........................ $1,286
2001........................ 1,227
2002........................ 1,156
2003........................ 757
2004........................ 570
Thereafter.................. 2,140
-----
$7,136
======
The Bank is a party to financial instruments with off-balance sheet risk in
order to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of the
purchaser to a third party. The Bank, in connection with its service
corporations, at June 30, 1999 and 1998, has outstanding balances on letters of
credits of $500,000 and $500,000, respectively. In addition, at June 30, 1999,
the Bank had $565,000 in commercial standby letters of credit. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers (See note 8).
17. Retirement Plans
Pension Plan
The following table sets forth the Pension Plan's funded status and amounts
recognized in the Company's consolidated statements of condition:
June 30,
-------------------
1999 1998
---- ----
(In thousands)
Actuarial Present Value of Benefits Obligations:
<S> <C> <C>
Vested Benefit Obligation........................................ $5,692 $ 4,991
Accumulated Benefit Obligation................................... 5,692 4,991
===== =====
Plan Assets at Fair Value............................................. 5,956 5,658
Projected Benefit Obligation for Service Rendered to Date............. 5,692 4,991
----- -----
Plan Assets Greater (Less) Than Projected Benefit Obligation.......... 264 667
Unrecognized Prior Service Cost....................................... 146 (40)
Unrecognized Net Loss Due to Past Experience
Different from Assumptions Made and Changes in Assumptions......... 487 169
--- ----
Prepaid Pension Cost.................................................. $ 897 $ 796
==== ===
</TABLE>
The components of net pension expense are as follows:
Year Ended June 30,
------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Service Cost-benefits Earned during the Year...... $ -- $ 627 $ 327
Interest Cost on Projected Benefit Obligation..... 358 710 627
Net Amortization and Deferral..................... (61) 20 (290)
Actual Return on Plan Assets...................... (398) (710) (482)
Curtailment Gain Recognized....................... -- (739) --
Settlement Loss Recognized........................ -- 117 --
---- --- ----
Net Pension Expense............................... $(101) $25 $182
===== == ===
75
<PAGE>
Year Ended June 30,
-------------------------
1999 1998 1997
---- ---- ----
Assumptions Used:
Weighted Average Discount Rate................. 7.0% 7.0% 7.0%
Rate of Increase in Compensation Levels........ 5.0% 5.0% 5.0%
Expected Long-term Rate of Return on Assets.... 8.0% 8.0% 9.0%
Based on an evaluation of the pension plan in fiscal 1998, the Bank concluded
that future benefit accruals under the plan would cease, or "freeze" on May 31,
1998. In connection with the freezing of the Plan, the Bank recognized a
curtailment gain of approximately $739,000 and a settlement loss of
approximately $117,000 as of May 31, 1998.
In connection with the acquisitions of Bank of Westbury, Sunrise Bancorp, Inc.
and Continental Bank, their respective pension plans were terminated and are not
included in the above tables. All former employees of Bank of Westbury and
Sunrise Bancorp, Inc. remaining in the employment of the Company were eligible
to participate in the Company's pension plan effective June 1, 1997. However, as
a result of the pension plan's eligibility requirements and the freezing of the
pension plan on May 31, 1998, no Continental employees were eligible to
participate in the plan.
Reliance Federal Savings Bank 401(k) Retirement Plan
Effective June 1, 1998, employees of the Bank who are at least 21 years of age
and have completed one year of service are eligible to participate in the
Reliance Federal Savings Bank 401(k) Retirement Plan (the "401(k) Plan").
Eligible employees may make pre-tax contributions equal to the lesser of ten
percent of their annual compensation or the amount permitted by law. As a base
amount, the Bank will make contributions (on account for eligible employees)
equal to two percent of all eligible employees earnings regardless of whether
employees make contributions on their own behalf. Additionally, the Bank will
make matching contributions equal to 75% of employee contributions that do not
exceed four percent of their annual earnings. Employees are immediately vested
in their own contributions and after five years of service they will be vested
in the Bank's base and matching contributions. During fiscal 1999 and 1998, the
Bank incurred $420,000 and $40,000, respectively, in 401(k) Plan costs.
18. Stock Benefit Plans
The following are the stock based benefit plans maintained by the Company:
Stock Option Plan
The Company maintains the Reliance Bancorp, Inc. 1994 Incentive Stock Option
Plan and the Reliance Bancorp, Inc. 1996 Incentive Stock Option Plans Amended
and Restated as of February 19, 1997 (the "Stock Option Plans"). Under the Stock
Option Plans, stock options (which expire ten years from the date of grant) have
been granted to the executive officers and officers of the Company and its
affiliate, the Bank. Each option entitles the holder to purchase one share of
the Company's common stock at an exercise price equal to the fair market value
of the stock at the date of grant. Options will be exercisable in whole or in
part over the vesting period. However, all options become 100% exercisable in
the event that the employee terminates his employment due to death, disability,
normal retirement, or in the event of a change in control of the Bank or the
Company. Simultaneous with the grant of these options, the Personnel Committee
of the Board of Directors granted "Limited Rights" with respect to the shares
covered by the options. Limited Rights granted are subject to terms and
conditions and can be exercised only in the event of a change in control of the
Company. Upon exercise of a limited right, the holder shall receive from the
Company a cash payment equal to the difference between the exercise price of the
option and the fair market value of the underlying shares of common stock.
Stock Option Plan for Outside Directors
The Company maintains the Amended and Restated Reliance Bancorp, Inc. 1994 and
1996 Stock Option Plans for Outside Directors (the "Directors' Option Plans").
Each member of the Board of Directors who is not an officer or employee of the
Company or the Bank is granted non-statutory options to purchase shares of the
Company's common stock. Members of the Board of Directors of the Company are
granted options to purchase shares of the common stock of the Company at an
exercise price equal to the fair market value of the stock at the date of grant.
All of the
76
<PAGE>
options granted under the Directors' Option Plan become exercisable over the
vesting period and expire upon the earlier of 10 years following the date of
grant or one year following the date the optionee ceases to be a director.
<TABLE>
<CAPTION>
Number of Shares of
-----------------------------------
Non- Non- Weighted
Incentive Statutory Qualified Average
Stock Stock Options to Exercise
Options Options Directors Price
------- ------- --------- -----
<S> <C> <C> <C> <C>
Balance Outstanding at June 30, 1995........ $608,505 $216,390 $196,650 $ 10.00
Granted..................................... -- -- 6,727 15.25
Forfeited................................... -- -- -- --
Exercised................................... -- -- -- --
------ ------ ------ -----
Balance Outstanding at June 30, 1996........ $608,505 $216,390 $203,377 $10.03
Granted..................................... 70,398 213,402 40,500 18.22
Forfeited................................... -- -- -- --
Exercised................................... (48,780) (35,000) (6,000) 10.00
-------- -------- ------- -----
Balance Outstanding at June 30, 1997........ $630,123 $394,792 $237,877 $11.96
Granted..................................... 13,647 3,353 40,500 29.87
Forfeited................................... -- -- -- --
Exercised................................... (131,399) (102,816) (1,500) 11.33
--------- --------- ------- -----
Balance Outstanding at June 30, 1998........ $512,371 $295,329 $276,877 $13.17
Granted..................................... 631 13,569 60,728 38.00
Forfeited................................... -- -- -- --
Exercised................................... (53,959) (7,470) -- 11.79
-------- ------- ------- -----
Balance Outstanding at June 30, 1999........ $459,043 $301,428 $337,605 $14.94
======= ======= ======= ======
Shares Exercisable at June 30, 1999......... $452,881 $299,590 $337,605 $14.82
</TABLE>
Had compensation cost for the Company's three stock-based compensation plans
been determined consistent with SFAS No. 123 for awards made after July 1, 1995,
the Company's net income per common share would have been reduced to the pro
forma amounts indicated below for the years ended June 30:
1999 1998 1997
-------- -------- ------
(Dollars in thousands, except per share data)
Net Income As Reported $20,151 $ 18,729 $ 10,936
Pro forma 19,681 18,492 8,672
Net Income per Common Share:
Basic As Reported $ 2.38 $ 2.11 $ 1.32
Pro forma $ 2.32 $ 2.08 1.04
Diluted As Reported $ 2.26 $ 1.99 $ 1.25
Pro forma $ 2.21 $ 1.96 0.99
The fair values of the share grants were estimated on the date of grant using
the Black-Scholes option - pricing model using the following assumptions in
fiscal 1999, 1998 and 1997: dividend yield of 3.00% for all years; expected
volatility of 29.14% for fiscal 1999, 22.05% for fiscal 1998 and 16.64% for
fiscal 1997; risk-free interest rates of 6.25% for all years; and expected
option lives of 6 years for all years.
77
<PAGE>
Employees Stock Ownership Plan ("ESOP")
The Bank has established an ESOP for eligible employees. Full-time employees
employed with the Bank as of January 1, 1993, and full-time employees of the
Company or the Bank employed after such date who have been credited with at
least 1,000 hours during a twelve-month period and who have attained age 21 are
eligible to participate.
The ESOP borrowed $8.3 million from the Company and used the funds to purchase
828,000 shares of the Company's common stock issued in the Conversion. The loan
is repaid principally from the Bank's discretionary contributions to the ESOP
over a 10 year period. At June 30, 1999 and 1998, the loan had an outstanding
balance of $4.0 million and $4.8 million, respectively, and an interest rate of
7.75% and 8.50%, respectively. Interest expense for the obligation was $348,000,
$441,000 and $502,000, respectively, for the year ended June 30, 1999, 1998 and
1997. Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is paid. Contributions to the ESOP and
shares released from the loan collateral in an amount proportional to the
repayment of the ESOP loan is allocated among participants on the basis of
compensation, as described in the plan, in the year of allocation. Benefits
generally become 100% vested after five years of credited service. However, in
the event of a change in control, as defined in the plan, any unvested portion
of benefits shall vest immediately. Forfeitures are reallocated among
participating employees, in the same proportion as contributions. Benefits are
payable upon death, retirement, disability, or separation from service based on
vesting status and share allocations made.
As of June 30, 1999, 366,019 shares remaining in the ESOP were allocated to
participants and 41,400 shares were committed to be released. As shares are
released from collateral, the shares become outstanding for earnings per share
computations. As of June 30, 1999 and 1998, the fair market value of the 372,600
and 455,400 unallocated shares, respectively, was $10.3 million and $17.4
million, respectively.
Recognition and Retention Plans and Trusts ("RRPs")
The Bank maintains the Reliance Federal Savings Bank Recognition and Retention
Plan for Officers and Employees and the Amended and Restated Reliance Federal
Savings Bank 1994 Recognition and Retention Plan for Outside Directors (the
"RRPs"). The purpose of the RRPs is to provide executive officers, officers, and
directors of the Bank with a proprietary interest in the Company in a manner
designed to encourage such persons to remain with the Bank. The RRPs acquired an
aggregate of 414,000 shares of the Company's common stock in the Conversion of
which 412,447 shares have been awarded to Officers and Directors (327,715 at the
time of the Conversion and 84,732 thereafter). Such amounts represent deferred
compensation and have been accounted for as a reduction of stockholders' equity.
Awards vest at a rate of 20% per year for directors and officers, commencing one
year from the date of award. Awards become 100% vested upon termination of
employment due to death, disability, or following a change in control of the
Bank or the Company.
The Company recorded compensation expenses for the ESOP and RRP of $3.1 million,
$3.7 million and $2.5 million, respectively, for the years ended June 30, 1999,
1998 and 1997.
19. Earnings Per Share
The Company follows SFAS No. 128, "Earnings Per Share", which establishes new
standards for computing and presenting earnings per share ("EPS"). All earnings
per share amounts have been restated to conform to the new requirements.
Basis EPS is computed by dividing net income by the weighted average number of
common shares outstanding. The weighted average number of common shares
outstanding includes the average number of shares of common stock outstanding
adjusted for the weighted average number of unallocated shares held by the ESOP.
Diluted EPS is computed by dividing net income by the weighted average number of
common shares and common equivalent shares outstanding during the year. For the
diluted EPS calculation, the weighted average number of common shares and common
equivalent shares outstanding include the average number of shares of common
stock outstanding adjusted for the weighted average number of unallocated shares
held by the ESOP and the dilutive effect
78
<PAGE>
of unexercised stock options using the treasury stock method. When applying the
treasury stock method, the Company's average stock price is utilized, and the
Company adds to the proceeds the tax benefit that would have been credited to
additional paid-in capital assuming exercise of non-qualified stock options.
The computation of basis and diluted EPS for the fiscal years ended June 30,
1999, 1998 and 1997 are presented in the following table:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net income....................................... $20,151 $ 18,729 $10,936
Weighted average common shares................... 8,467 8,890 8,299
----- ----- -----
Basic earnings per share......................... $2.38 $2.11 $1.32
==== ==== ====
Net income....................................... $20,151 $18,729 $10,936
Weighted average common shares - basic........... 8,467 8,890 8,299
Effect of dilutive stock options................. 447 535 425
---- ----- -----
Weighted average common shares and common
equivalent shares............................. 8,914 9,425 8,724
----- ----- -----
Diluted earnings per share....................... $2.26 $1.99 $1.25
==== ==== ====
20. Regulatory Matters
Federal regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5% of total assets, a 3% core capital ratio and an 8%
risk-based capital ratio. The OTS prompt corrective action standards effectively
establish a minimum 2% tangible capital ratio, a minimum 4% leverage ratio
(core) capital ratio and a minimum 4% Tier 1 risked based capital ratio. As of
June 30, 1999 and 1998, the Bank was in compliance with the regulatory capital
requirements.
Additionally, under prompt corrective action regulations, the regulators have
adopted rules, which require them to take action against undercapitalized
institutions, based upon five categories of capitalization: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized",
and "critically undercapitalized". The rules adopted generally provide that an
insured institution whose risk-based capital ratio is 10% or greater, Tier 1
risk-based capital is 6% or greater, and leverage ratio is 5% or greater is
considered a "well capitalized" institution. As of June 30, 1999, 1998 and 1997,
the Bank was considered a "well capitalized" institution.
Dividend payments to the Company from the Bank are subject to the profitability
of the Bank and by applicable laws and regulations. During fiscal 1999 and 1998,
the Bank made dividend payments to the Company of $13.0 million and $14.0
million, respectively.
During fiscal 1998, the Company invested $18.8 million of the proceeds from the
issuance of its Junior Subordinated debt in the Bank which increased the Bank's
capital and capital ratios.
The following table sets forth the required ratios and amounts and the Bank's
actual capital amounts and ratios at June 30, 1999 and 1998:
June 30, 1999
---------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- --- ------- --- ------- ---
(Dollars in thousands)
Tangible........ $36,113 1.5% $163,267 6.8% $127,154 5.3%
Leverage........ 72,226 3.0 163,267 6.8 91,041 3.8
Risk-based...... 80,415 8.0 172,333 17.1 91,918 9.1
79
<PAGE>
June 30, 1998
---------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- --- ------- --- ------- ---
(Dollars in thousands)
Tangible......... $35,825 1.5% $145,337 6.1% $109,512 4.6%
Leverage......... 71,650 3.0 145,337 6.1 73,687 3.1
Risk-based....... 80,724 8.0 154,245 15.3 73,521 7.3
21. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No.
107"), requires disclosure of estimated fair value information for the Company's
financial instruments. Fair values are most commonly derived from quoted market
prices available in the formal trading marketplaces. In many cases, the
Company's financial instruments are not bought or sold in formal trading
marketplaces. Accordingly, in cases where quoted market prices are not
available, fair values are derived or estimated based on a variety of valuation
techniques. These techniques are sensitive to the various assumptions and
estimates used and the resulting fair value estimates may be materially affected
by minor variations in those assumption or estimates. In that regard, it is
likely that amounts different from the fair value estimates would be realized by
the Company in immediate settlement of the financial instruments.
SFAS No. 107 excludes certain financial instruments as well as all nonfinancial
instruments from fair value disclosure. Accordingly, the fair values presented
do not represent the Company's fair value as a going concern. In addition, the
differences between the carrying amounts and the fair values presented may not
be realized since the Company generally intends to hold these financial
instruments to maturity and realize their recorded value.
SFAS No. 107 provides minimal guidance and no limitations with regard to
assumptions and estimates to be used. Therefore, while disclosure of estimated
fair values is required, the fair value amounts presented in the financial
statements do not represent the underlying value of the Company, nor do they
provide any basis for comparison of the value of this Company with similar
companies.
June 30,
--------------------------------------------------------
1999 1998
------------------------ -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In thousands)
On Balance Sheet:
Financial Assets:
<S> <C> <C> <C> <C>
Cash and Due from Banks.............................. $33,255 $33,255 $37,596 $37,596
Money Market Investments............................. -- -- 9,500 9,500
Debt and Equity Securities Available-for-Sale........ 122,168 122,168 134,907 134,907
Debt and Equity Securities Held-to-Maturity.......... 28,835 28,840 40,189 40,509
Mortgage-Backed Securities Available-for-Sale........ 935,038 935,038 940,347 940,347
Mortgage-Backed Securities Held-to-Maturity.......... 255,917 252,233 249,259 252,332
Loans Receivable, Net................................ 974,073 978,980 969,797 984,224
Mortgage Servicing Rights............................ 1,514 1,612 2,317 2,632
Financial Liabilities:
Deposits............................................. 1,549,419 1,469,360 1,628,298 1,630,087
Borrowed Funds....................................... 702,434 693,564 630,206 631,407
Off Balance Sheet:
Outstanding Commitments.............................. $115,324 115,324 116,425 116,425
Letters of Credit.................................... 1,065 1,065 1,382 1,382
80
<PAGE>
Methods and assumptions used to produce fair value are stated below:
Cash and Due from Banks
The carrying amounts reported in the consolidated statements of condition
approximate the assets' fair values.
Money Market Investments
The carrying amounts of federal funds sold and repurchase agreements approximate
their fair values because these investments all mature in three months or less.
Debt, Equity and Mortgage-Backed Securities
Fair values for debt, equity and mortgage-backed securities are based on
published market or securities dealers' estimated prices.
Loans
Fair value estimates are calculated for pools of loans with similar
characteristics. The loans are first segregated by type, such as 1-4 family
residential, other residential, commercial, construction, and consumer, and then
further segregated into fixed and adjustable rate categories.
Fair value is estimated by discounting expected future cash flows. Expected
future cash flows are based on contractual cash flows, adjusted for prepayments.
Prepayment estimates are based on a variety of factors including the Bank's
experience with respect to each loan category, the effect of current economic
and lending conditions, and regional statistics for each loan category, if
available. The discount rates used are based on market rates for new loans of
similar type and purpose, adjusted, when necessary, for factors such as
servicing cost, credit risk, and term.
As mentioned previously, this technique of estimating fair value is extremely
sensitive to the assumptions and estimates used. While management has attempted
to use assumptions and estimates which are the most reflective of the loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than those determined in formal trading marketplaces. As such,
readers are again cautioned in using this information for purposes of evaluating
the financial condition and/or value of the Company in and of itself or in
comparison with any other company.
Mortgage Servicing Rights
The fair value is estimated based upon a valuation which stratifies the mortgage
servicing portfolio based upon the predominate risk characteristics of the
underlying cash flows utilizing current market assumptions regarding discount
rates, prepayment speeds, delinquency rates, etc.
Other Receivables and Payables
The carrying amounts of short-term receivables and payables, including accrued
interest approximate their fair values.
Deposits
SFAS No. 107 stipulates that the fair values of deposits with no stated
maturity, such as demand deposits, savings, NOW accounts and money market
accounts, are equal to the amount payable on demand. The relative insensitivity
of the majority of these deposits to interest rate changes creates a significant
inherent value which is not reflected in the fair value reported.
The fair value of certificates of deposit are based on discounted contractual
cash flows using rates which approximate the rates offered by the Company for
deposits of similar remaining maturities.
Other Borrowings
Fair value estimates are based on discounting contractual cash flows using rates
which approximate the rates offered for borrowings of similar remaining
maturities.
Outstanding Commitments
Fair value of commitments outstanding are estimated based on the fees that would
be charged for similar agreements, considering the remaining term of the
agreement, the rate offered and the creditworthiness of the parties.
81
<PAGE>
22. Parent-Only Financial Information
The following condensed statements of condition at June 30, 1999 and 1998 and
condensed statements of income and cash flows for the years ended June 30, 1999,
1998 and 1997 for Reliance Bancorp, Inc. (parent company only) reflects the
Company's investment in its wholly-owned subsidiary, the Bank, using the equity
method of accounting.
CONDENSED STATEMENTS OF CONDITION
June 30,
---------------------
1999 1998
---- ----
ASSETS (In thousands)
<S> <C> <C>
Cash.............................................................. $1,961 $1,294
Money Market Investments.......................................... -- 9,500
Debt Securities Available-for-Sale................................ 10,076 24,374
ESOP Loan Receivable.............................................. 3,979 4,799
Other Assets...................................................... 2,046 2,210
Investment in Reliance Federal Savings Bank....................... 205,096 205,355
Investment in Reliance Capital Trust I............................ 1,547 1,547
------- -------
Total Assets.............................................. $224,705 $249,079
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued Expenses.................................................. $1,491 $2,668
Junior Subordinated Debt Issued to Reliance Capital Trust I....... 51,547 51,547
Stockholders' Equity.............................................. 171,667 194,864
------- -------
Total Liabilities and Stockholders' Equity................ $224,705 $249,079
======= =======
CONDENSED STATEMENTS OF INCOME
Year Ended June 30,
--------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest Income - Securities and Repurchase Agreements.......... $1,316 $615 $230
Interest Income - ESOP Loan Receivable.......................... 348 441 502
----- ----- ----
Total Interest Income................................... 1,664 1,056 732
Interest Expense................................................ (4,086) (724) --
Cash Dividends from the Bank.................................... 13,000 14,000 6,700
Other Operating Income.......................................... 45 11 --
Other Operating Expense......................................... (630) (418) (521)
----- ----- -----
Income Before Income Taxes and Equity in Undistributed
Earnings of the Bank......................................... 9,993 13,925 6,911
(Recovery) Provision for Income Taxes........................... (1,214) (30) 90
------- ----- ----
Income before Equity in Undistributed
Earnings of the Bank........................................ 11,207 13,955 6,821
Equity in Undistributed Earnings of Reliance
Federal Savings Bank........................................ 8,944 4,774 4,115
----- ----- -----
Net Income...................................... $20,151 $18,729 $10,936
====== ====== ======
82
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended June 30,
---------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Cash from Operating Activities:
<S> <C> <C> <C>
Net Income...................................................... $ 20,151 $ 18,729 $ 10,936
Equity in Undistributed Earnings of the Bank ................... (8,944) (4,774) (4,115)
Accretion of Discounts.......................................... 44 (47) (70)
Net Gain on Sale of Securities.................................. (44) (11) --
Decrease (Increase) in Other Assets............................. 685 (1,655) 544
(Decrease) Increase in Accrued Expenses......................... (1,165) 2,550 122
------- ------ -----
Net Cash Provided by Operating Activities.................. 10,727 14,792 7,417
------ ------ -----
Cash Flows from Investing Activities:
Purchase of Debt Securities Available-for-Sale.................. (2,000) (24,187) (4,715)
Proceeds from Sales of Debt Securities Available-for-Sale....... 15,229 4,870 --
Principal Payments on ESOP Loan Receivable...................... 820 823 850
Payments for Investments in Reliance Capital Trust I............ -- (1,547) --
Payments for Investments in Bank................................ -- (18,750) --
------ -------- ------
Net Cash Provided by (Used in) Investing Activities......... 14,049 (38,791) (3,865)
------ -------- -------
Cash Flows from Financing Activities:
Proceeds from Issuance of Junior Subordinated Debt.............. -- 51,547 --
Purchase of Treasury Stock...................................... (27,936) (15,269) (8,113)
Net Proceeds from Issuance of Common Stock
Upon Exercise of Stock Options............................... 725 2,670 898
Dividends Paid.................................................. (6,398) (5,725) (4,578)
------- ------- -------
Net Cash (Used in) Provided by Financing Activities........ (33,609) 33,223 (11,793)
-------- ------ -------
Net (Decrease) Increase in Cash and Cash Equivalents............ (8,833) 9,224 (8,241)
Cash and Cash Equivalents at Beginning of Year.................. 10,794 1,570 9,811
------ ----- -----
Cash and Cash Equivalents at the End of Year.................... $1,961 $10,794 $1,570
===== ====== =====
83
<PAGE>
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Quarterly Financial Data
(Unaudited)
(Dollars in thousands, except per share data)
Fiscal 1999 Quarter Ended
------------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Interest Income............................................. $ 42,868 $42,374 $ 41,439 40,629
Interest Expense............................................ 25,665 24,774 23,958 23,609
------- ------ ------- -------
Net Interest Income......................................... 17,203 17,600 17,481 17,020
Provision for Loan Losses................................... 150 350 150 --
------ ----- ------- ------
Net Interest Income after Provision for Loan Losses......... 17,053 17,250 17,331 17,020
Non-Interest Income......................................... 1,871 1,937 2,117 2,475
General and Administrative Expense.......................... 9,127 8,790 9,192 9,180
Real Estate Operations, net................................. 87 (14) 17 21
Amortization of Excess of Cost Over Fair Value
of Net Assets Acquired.................................... 1,140 1,141 1,141 1,141
------- ----- ------ ------
Income Before Provision for Income Taxes.................... 8,570 9,270 9,098 9,153
Income Tax Expense.......................................... 3,799 4,051 4,022 4,068
------ ----- ------ ------
Net Income.................................................. $4,771 $5,219 $ 5,076 $ 5,085
===== ===== ===== =====
Basic Earnings Per Share.................................... $0.53 $0.63 $ 0.61 $ 0.62
==== ==== ==== ====
Diluted Earnings Per Share ................................. $0.50 $0.60 $ 0.58 $ 0.59
==== ==== ==== ====
Fiscal 1998 Quarter Ended
------------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Interest Income........................................... $36,183 $39,266 $38,446 $39,924
Interest Expense.......................................... 20,169 22,078 21,424 23,157
------ ------ ------ ------
Net Interest Income....................................... 16,014 17,188 17,022 16,767
Provision for Loan Losses................................. 900 300 300 150
------ ----- ------ ------
Net Interest Income after Provision for Loan Losses....... 15,114 16,888 16,722 16,617
Non-Interest Income....................................... 2,263 1,692 1,922 1,982
General and Administrative Expense........................ 8,047 8,816 9,087 9,275
Real Estate Operations, net............................... 225 (67) 12 48
Amortization of Excess of Cost Over Fair Value
of Net Assets Acquired.................................. 846 1,090 1,141 1,141
----- ----- ----- -----
Income Before Provision for Income Taxes.................. 8,259 8,741 8,404 8,135
Income Tax Expense........................................ 3,518 3,854 3,746 3,692
----- ----- ----- -----
Net Income................................................ $4,741 $4,887 $4,658 $4,443
===== ===== ===== =====
Basic Earnings Per Share.................................. $0.58 $0.54 $0.51 $0.48
==== ==== ==== ====
Diluted Earnings Per Share ............................... $0.54 $0.51 $0.48 $0.46
==== ==== ==== ====
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
84
<PAGE>
PART III
Item 10.
Directors and Executive Officers of the Company
The following table sets forth the names of current directors and certain
executive officers, their ages, a brief description of their recent business
experience, including present occupations and employment, certain directorships
held by each, the year in which each became a director and the year in which
their terms as director of the Company expire. The table also sets forth the
amount of Common Stock and the percent thereof beneficially owned by each
director and each executive officer of the Company.
Shares of
Name and Principal Expiration Common Stock Ownership
Occupation at Present and Director of Term as Beneficially As a Percent
for the Past Five Years Age Since(1) Director Owned(2) of Class(3)
----------------------- --- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Thomas G. Davis, Jr. 65 1991 2002 80,609(5) *
Retired President and Director of
Institutional Mortgage Investors
Management Corporation, a national
investment firm involved in the
purchase of mortgages for pension
and other types of funds.
Donald LaPasta 81 1958 2002 85,719(5) *
Retired Chairman of the Board and
Chief Executive Officer of the Bank.
Raymond L. Nielsen 73 1961 2001 193,846 (6)(7) 2.00%
Chairman of the Board and former
Chief Executive Officer of the
Company and the Bank.
Conrad J. Gunther, Jr. 53 1996 2001 32,658 (5) *
Vice President of Allied Coverage Corp.,
an independent insurance brokerage
J. William Newby 71 1979 2001 84,196 (5) *
Owner/President of Beacon
Mortgage Company, a national
mortgage brokerage and servicing firm.
Raymond A. Nielsen (8) 48 1983 2000 239,365 (6)(7) 2.47%
President and Chief Executive (9)(10)
Officer of the Company and the Bank.
Douglas G. LaPasta (11) 53 1983 2000 76,875 (5) *
Principal of Stonehill Management
Consultants, a management
consulting firm.
Peter F. Neumann 65 1982 2000 92,651 (5) *
Retired - President of Bradley Parker,
Flynn-Neumann, Inc., an insurance agency
and director of Vicon Industries, Inc.
85
<PAGE>
Shares of
Name and Principal Expiration Common Stock Ownership
Occupation at Present and Director of Term as Beneficially As a Percent
for the Past Five Years Age Since(1) Director Owned(2) of Class(3)
- ----------------------- --- -------- -------- -------- -----------
Named Executive Officers Who Are Not Directors
<S> <C> <C> <C>
Gerald M. Sauvigne 46 -- -- 128,065 (7)(9) 1.32%
Executive Vice President and (10)
Treasurer of the Company
and the Bank.
Joseph F. Lavelle 48 -- -- 53,823 (7)(9) *
Senior Vice President Retail
Banking and Secretary of the
Company and the Bank.
Paul D. Hagan 37 -- -- 64,115 (7)(9) *
Senior Vice President and
Chief Financial Officer of the
Company and the Bank.
John F. Traxler 51 -- -- 79,581 (7)(9) *
Vice President and Investment
Officer of the Company
and the Bank.
All directors and executive officers -- -- -- 1,211,503 (12) 12.52%
as a group (12 persons)
- ------------------------
* Does not exceed 1.0% of the Company's voting securities.
(1) Includes years of service as a director of the Company's wholly-owned
subsidiary, the Bank.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting or dispositive power as to shares reported.
(3) For purposes of calculating the aggregate ownership percentage, all options
exercisable within 60 days have been added to the amount of outstanding common
stock as of the September 15, 1999.
(4) Includes 621 unvested shares awarded to Mr. Gunther under the Amended and
Restated Reliance Federal Savings Bank 1994 Recognition and Retention Plan for
Outside Directors (the "DRP"). Unvested shares will vest equally on June 19,
2000 and June 19, 2001. Mr. Gunther presently has voting power as to the shares
awarded.
(5) Includes 40,451; 7,848; 40,452; 32,951; 40,451 and 40,452 shares subject to
options held by Messrs. Davis, Gunther, Donald LaPasta, Douglas G. LaPasta,
Neumann, and Newby, respectively, under the Amended and Restated Reliance
Bancorp, Inc. 1994 Stock Option Plan for Outside Directors (the "1994 Directors'
Option Plan") which are currently exercisable. Also includes 22,500 options held
by Messrs. Davis, Gunther, Donald LaPasta, Douglas G. LaPasta, Neumann, and
Newby each under the Reliance Bancorp, Inc. 1996 Incentive Stock Option Plan
Amended and Restated as of February 19, 1997 (the "1996 Stock Option Plan")
which are currently exercisable.
(6) Includes 8,318 unvested shares awarded to Messrs. R.L. Nielsen, and R.A.
Nielsen under the Reliance Federal Savings Bank Recognition and Retention Plan
for Officers and Employees (the "MRP"). Such unvested shares vest on November 9,
1999. Messrs. R.L. Nielsen, and R.A. Nielsen presently have voting power as to
the shares awarded. (Footnotes continued on next page)
86
<PAGE>
(7) Includes 42,100; 110,250; 55,890; 17,805; 23,805 and 36,225 shares subject
to options held by Messrs. R.L. Nielsen, R.A. Nielsen, Sauvigne, Lavelle, Hagan
and Traxler, respectively, under the Reliance Bancorp, Inc. 1994 Incentive Stock
Option Plan (the "1994 Stock Option Plan") which are currently exercisable. Also
includes 33,198; 33,198; 33,198; 21,282; 21,282 and 15,132 shares subject to
options held by Messrs. R.L. Nielsen, R.A. Nielsen, Sauvigne, Lavelle, Hagan and
Traxler, respectively, under the 1996 Stock Option Plan which are currently
exercisable.
(8) Raymond A. Nielsen is the son of Raymond L. Nielsen.
(9) Includes 11,226; 11,226; 8,313; 6,714 and 8,699 shares beneficially owned by
Messrs. R.A. Nielsen, Sauvigne, Lavelle, Hagan and Traxler, respectively, under
the ESOP.
(10) Includes 18,515 and 3,251 shares beneficially owned by Messrs. R.A. Nielsen
and Sauvigne, respectively, under the Reliance Federal Savings Bank Supplemental
Executive Retirement Plan (the "SERP").
(11) Douglas G. LaPasta is the nephew of Donald LaPasta.
(12) Includes a total of 17,257 unvested shares awarded under the MRP and DRP,
as to which voting may be directed.
Item 11.
Executive Compensation
Summary Compensation Table. The following table shows, for the fiscal years
ending June 30, 1999, 1998 and 1997, the cash compensation paid, as well as
certain other compensation paid or accrued for those years, to the Chief
Executive Officer and the other highest paid Executive Officers of the Company
and/or the Bank who received an amount in salary and bonus in excess of $100,000
in fiscal 1999.
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------------
Awards Payouts
------ -------
Other Restricted Securities
Annual Stock Underlying All Other
Name and Bonus Compensation Awards Options/ LTIP Compensation
Principal Office Year Salary ($) ($)(1) ($)(2) ($) SARs (#)(3) Payouts(4) $ (5)
- --------------------------------------- ---------- ------ ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Raymond A. Nielsen 1999 475,000 101,375 -- -- -- -- 126,816
President and Chief 1998 425,000 100,000 -- -- -- -- 105,858
Executive Officer 1997 375,000 85,000 -- -- 31,600 -- 88,982
Gerald M. Sauvigne 1999 235,000 49,375 -- -- -- -- 50,709
Executive Vice President 1998 205,000 47,500 -- -- -- -- 20,718
and Treasurer 1997 175,000 36,375 -- -- 31,600 -- 11,747
Joseph F. Lavelle 1999 135,000 21,500 -- -- -- -- --
Senior Vice President 1998 120,000 22,750 -- -- -- -- --
and Secretary 1997 107,500 17,313 -- -- 20,250 -- --
Paul D. Hagan 1999 150,000 25,000 -- -- -- -- --
Senior Vice President and 1998 135,000 22,638 -- -- -- -- --
Chief Financial Officer 1997 107,500 15,888 -- -- 20,250 -- --
John F. Traxler 1999 114,000 14,690 -- -- -- -- --
Vice President and 1998 109,000 14,640 -- -- -- -- --
Investment Officer 1997 107,500 14,863 -- -- 20,250 -- --
</TABLE>
- -----------------------------
(1) Consists of payments under the Bank's Incentive Compensation Plan.
(2) For fiscal years 1999, 1998 and 1997, there were no (a) perquisites over the
lesser of $50,000 or 10% of the individual's total salary and bonus for the
year; (b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive plans
prior to settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock.
(footnotes continued on next page)
87
<PAGE>
(3) Includes stock options granted under the 1996 Stock Option Plan. Each stock
option was granted in tandem with a limited rights, which is exercisable only in
the event of a change in control of the Company.
(4) The Bank did not make any payment of long-term incentive plans in fiscal
1999, 1998 and 1997.
(5) For fiscal year 1999 amount includes SERP contributions for Messrs. R.A.
Nielsen and Sauvigne for the reduction of benefits related to the Bank's ESOP.
Employment Agreements. The Bank and the Company have entered into
employment agreements with Messrs. R.A. Nielsen, Sauvigne, Lavelle, Hagan and
Traxler. These employment agreements are intended to ensure that the Bank and
the Company will be able to maintain a stable and competent management base. The
continued success of the Bank and the Company depends to a significant degree on
the skills and competence of these individuals.
The Company employment agreements provide for five-year terms for
Messrs. R.A. Nielsen and Sauvigne and two-year terms for Messrs. Lavelle, Hagan
and Traxler, except that the term is three years with respect to the obligation
to make payments based on termination of employment after a change in control as
discussed below. The Bank agreements provide for a three year term for Messrs.
R.A. Nielsen and Sauvigne and two year terms for Messrs. Lavelle, Hagan and
Traxler. The Bank agreements further provide that commencing on July 1, 1999 and
continuing on July 1 of each year thereafter, the Board of Directors of the Bank
may, with the consent of the respective employees, extend the employment
agreements with the Company and the Bank for an additional year, such that the
remaining terms of the respective agreements shall be the amount of the original
term unless written notice of non-renewal is given by the Board of Directors
after conducting a performance evaluation of the executive. The employment
agreements with the Company provide for automatic daily extensions such that the
remaining terms shall be the amount of the original term unless written notice
of non-renewal is given by the Board of Directors or the employee. In such case,
the term shall end on the second anniversary of the date of written notice. The
Company and Bank employment agreements provide that Messrs. R.A. Nielsen,
Sauvigne, Lavelle, Hagan and Traxler will receive annual base salaries of
$500,000, $250,000, $150,000, $160,000, and $118,000, respectively, which will
be reviewed annually by the Board. In addition to the base salary, the Company
and Bank employment agreements provide for, among other things, disability
payments, participation in retirement plans, stock benefit plans and other
compensation plans applicable to executive personnel from time to time. The
Company and Bank employment agreements provide for termination by the Bank or
the Company for "cause", as defined in such agreements, at any time. In the
event the Bank or the Company chooses to terminate the executive's employment
for reasons other than a change in control, retirement or for cause or in the
event of the executive's resignation from the Bank and the Company subsequent
to: (i) the failure to re-elect the executive to his current offices or the
extent this executive serves as a director of the Company, failure to renominate
or reelect the executive as a director; (ii) a material adverse change in the
executive's functions, duties or responsibilities, or relocation of his
principal place of employment, by more than 30 miles, or a material reduction in
benefits or perquisites; (iii) liquidation or dissolution of the Bank or the
Company; or (iv) a breach of the agreement by the Bank or the Company, the
executive or, in the event of death, his beneficiary, would be entitled to
receive an aggregate payment amount equal to the amount of the remaining
payments (or benefits) that the executive would have earned if he had continued
his employment with the Bank or Company during the remaining unexpired term of
the agreement based on the executive's defined base salary on the date the
executive was terminated. Additionally, the Company employment agreement of
Messrs. R.A. Nielsen and Sauvigne provide that in the event of their termination
of employment, the Company or any of its subsidiaries amend any employee benefit
plan maintained by the Company or any of its subsidiaries such that it reduces
the benefits payable to the executives, the Company will provide the executive
with an economic benefit equal to the amount of any such reduction on an annual
basis.
88
<PAGE>
Under the terms of the Company employment agreements, if termination of
employment, whether voluntary or involuntary, follows a "change in control" of
the Bank or the Company, as defined in the employment agreements, the executive
or, in the event of death, his beneficiary, would be entitled to an aggregate
payment equal to the greater of (1) the payments due under the remaining term of
the agreement, (2) five times the average annual compensation with respect to
Messrs. R.A. Nielsen and Sauvigne or (3) three times the average compensation
with respect to Messrs. Lavelle, Hagan and Traxler. Such average annual
compensation will be determined, in the case of the Bank employment agreements,
over the five most recent taxable years, and, in the case of the Company
employment agreements, for the three or two preceding taxable years, whichever
is applicable to the term of the respective employment agreement. Such average
annual compensation shall include any commissions, bonuses, pension and profit
sharing plan benefits, severance payments, retirement benefits, director or
committee fees and fringe benefits paid or to be paid to the executive in any
such years. The Bank and the Company would also continue the executive's life,
health, and disability coverage and any dependent that is currently covered by
such plans, for the remaining unexpired term of the agreements to the extent
allowed by the plans or policies maintained by the Company or Bank from time to
time. Payments to the executive under the Bank's employment agreements will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. The agreements also provide that the Bank and the Company shall
indemnify the executive to the fullest extent allowable under federal and
Delaware law, respectively.
In addition, upon a change in control, certain awards of Common Stock
and options to purchase Common Stock made to each of the executives under the
Company's and Bank's various non-qualified stock based benefit plans would vest
immediately. If any amounts payable in connection with any change in control are
determined to be "excess parachute payments" under Section 280G of the code
resulting in the imposition of the 20% excise tax on such payments under Section
4999 of the code, each officer will receive from the Company an additional
amount such that the effect of the imposition of that excise tax is effectively
eliminated.
The following table provides certain information with respect to the
number of shares of Common Stock represented by outstanding stock options
granted under the 1994 Stock Option Plan and the 1996 Stock Option Plan held by
the Named Executive Officers as of June 30, 1999. Also reported are the values
for "in-the-money" options which represent the positive spread between the
exercise price of any such existing stock options and the year-end price of the
Common Stock. There were no options exercised by any of the Named Executive
Officers in Fiscal Year 1999.
FISCAL YEAR END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at June 30, 1999 at June 30, 1999
Exercisable Exercisable
Name (#) ($)(1)
------ ----- ------
Raymond A. Nielsen 143,448 2,219,902
Gerald M. Sauvigne 89,088 1,261,807
Joseph F. Lavelle 39,087 492,462
Paul D. Hagan 45,087 598,212
John F. Traxler 51,357 744,084
(1) Market Value of underlying securities at fiscal year-end ($27.625) minus the
exercise or base prices of $10.00, $15.75, $19.375 and $38.00 per share.
Pension Plan. The Bank maintains the Reliance Federal Savings Bank
Retirement Plan (the "Pension Plan"), for the benefit of the employees of the
Bank. The Pension is a noncontributory defined benefit pension plan. All
employees over the age of 21 who have worked 1,000 hours at the Bank for a
twelve month period are eligible to participate in the Pension Plan. The Bank
annually contributes an amount to the Pension Plan necessary to satisfy the
actuarially determined minimum funding requirements in accordance with ERISA.
89
<PAGE>
Upon the attainment of normal retirement age (age 65), a participant is
entitled to a retirement benefit in an amount equal to 50.0% of the
participant's average annual base wage (determined by using the participant's
earnings for the highest five complete consecutive plan years out of the last
ten plan years of a participant's employment) multiplied by a ratio, the
numerator of which is the number of months of the participant's service, and the
denominator of which is 240. Under the Pension Plan, benefits are also payable
for termination due to early retirement or death of a married participant.
Benefits become vested after a participant completes five years of service. In
the case of death, or early retirement occurring on or after attainment of age
60, but after the completion of five years of service, benefits are reduced if
they commence prior to age 65.
Based on an evaluation of the pension plan in fiscal 1998, the Bank
concluded that future benefit accruals under the plan would cease, or "freeze"
on May 31, 1998.
401(k) Plan. The Bank maintains the Reliance Federal Savings Bank
401(k) Retirement Savings Plan (the "401(k) Plan"), a tax-qualified defined
contributions plan governed by Section 401(k) of the Internal Revenue Code. The
401(k) Plan allows salaried employees to make pre-tax salary contributions,
limited to 10% of compensation, with a maximum of $10,000 per year. The Bank
contributes 2% per employee and matches seventy-five percent of employee
contributions up to 4%, subject to a maximum total employer contribution of 5%
of employee compensation. Employees are fully vested in their contributions and
become vested in the Bank's contributions after the completion of five years of
service. Employees select the investments made with their account balances from
a fixed menu of options.
Supplemental Executives' Retirement Plan. The Bank maintains the
Reliance Federal Savings Bank Supplemental Executives' Retirement Plan (the
"SERP"), which is intended to provide an additional retirement benefit to
designated executives who are participants in the Bank's tax qualified plans,
and whose benefits under such plans are reduced due to the limitations imposed
by Section 415 of the Code on the maximum annual benefits and contributions that
may be made with regard to such plans and the limitations imposed by Section
401(a)(17) of the Code on the maximum amount of compensation that may be taken
into account in determining benefits and contributions with respect to such
plans. The SERP is intended to provide a benefit equal to the benefit the
participant would have received under the applicable tax qualified plans if the
Code's limitations did not apply and the amounts such individuals will actually
receive with the application of the Code's limitations.
The following table sets forth the estimated annual benefits payable
under the Pension Plan and SERP described above upon retirement at age 65 in
calendar year 1999, expressed in the form of a 10-year certain and continuous
annuity, for the average annual earnings and years of service classifications
specified.
Creditable Years of Service at Age 65
---------------------------------------------------------
Average
Annual
Earnings(1)(2) 15 20 25 30 35
---- ---- ---- ---- ----
$25,000 $ 9,375 $ 12,500 $ 12,500 $ 12,500 $ 12,500
50,000 18,750 25,000 25,000 25,000 25,000
100,000 37,500 50,000 50,000 50,000 50,000
150,000 56,250 75,000 75,000 75,000 75,000
200,000 75,000 100,000 100,000 100,000 100,000
250,000 93,750 125,000 125,000 125,000 125,000
300,000 112,500 150,000 150,000 150,000 150,000
350,000 131,250 175,000 175,000 175,000 175,000
400,000 150,000 200,000 200,000 200,000 200,000
450,000 171,000 225,000 225,000 225,000 225,000
510,000 191,250 255,000 255,000 255,000 255,000
570,000 213,750 285,000 285,000 285,000 285,000
(1) The covered salary under the Pension Plan is the amounts shown in the column
entitled "Salary" in the Summary Compensation Table and does not include amounts
shown in the column entitled "Bonus" in such table.
(2) The benefits listed in the retirement benefit table are not subject to
Social Security or other offset amounts.
90
<PAGE>
The following table sets forth the years of certified service (i.e.,
benefit service) as of the fiscal year ended June 30, 1999, for each of the
individuals named in the Summary Compensation Table.
Credited Service
----------------
Years Months
----- ------
Raymond A. Nielsen................. 29 0
Gerald M. Sauvigne................. 21 10
Joseph F. Lavelle.................. 30 5
Paul D. Hagan...................... 5 8
John F. Traxler.................... 26 4
Item 12.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as to those persons who are
beneficial owners of more than 5% of the Company's outstanding shares of Common
Stock on the Record Date based solely upon disclosure in certain reports
received by the Company regarding such ownership filed with the Company and with
the Securities and Exchange Commission, in accordance with Sections 13(d) or
13(g) of the Securities Exchange Act of 1934, as amended, ("Exchange Act") by
such persons and groups. Other than those persons listed below, the Company is
not aware of any person or group, as such term is defined in the Exchange Act,
that owns more than 5% of the Company's Common Stock as of the Record Date.
<TABLE>
<CAPTION>
Number of Shares and Percent
Name and Address Nature of of
Title of Class of Beneficial Owner Beneficial Ownership Class(1)
- -------------- ------------------- -------------------- --------
<S> <C> <C>
Common Stock Marine Midland Bank as Trustee for the 780,019 9.08%
Reliance Federal Savings Bank Employee Stock
Ownership Plan ("ESOP") (2)
585 Stewart Avenue
Garden City, NY 11530
(1) As of September 15, 1999, there were 8,589,490 shares of common stock
outstanding.
(2) A Committee of the Board of Directors has been appointed to administer the
ESOP (the "ESOP Committee"). An unrelated third party has been appointed as the
corporate trustee for the ESOP ("ESOP Trustee"). The ESOP Committee may instruct
the ESOP Trustee regarding investment of funds contributed to the ESOP. The ESOP
Trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participants. As of September 15, 1999, 448,819 shares of
Common Stock in the ESOP have been allocated to participants. Under the ESOP,
unallocated shares held in the suspense account will be voted by the ESOP
Trustee in a manner calculated to most accurately reflect the instructions
received from participants regarding the allocated stock so long as such vote is
in accordance with the provisions of Employee Retirement Income Security Act of
1974, as amended ("ERISA").
Information regarding security ownership of management appears in Item 10 above.
Item 13.
Certain Relationships and Related Transactions
Federal law and regulation require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features; and such law
and regulation places limitations on the amounts of certain extensions of credit
to executive officers and directors. Although the Company does not currently
lend funds to its executive officers and directors, the Bank, from time to time,
lends funds to executive officers. The Bank's policy regarding
91
<PAGE>
loans to directors and executive officers is in accordance with such
requirements. Loans made by the Bank to its directors and executive officers
shall be made in the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and do not involve more than the
normal risk of collectibility.
During fiscal 1999, the Bank engaged Conrad Gunther to perform consulting
services related to the expansion of the Bank's services and products. Such
contract provides for a term of six (6) months at a fee of $12,000.00 per month.
Such contract may be terminated by the Bank upon six (6) months advance notice.
Nielsen and Shoemaker Architects P.C., of which the son of Raymond L. Nielsen is
a principal, has been engaged by the Bank on a periodic basis in the past to
provide professional services and is currently so engaged for the modernization
of multiple branch facilities and installation of automated teller machines. The
engagement was approved by the Board of Directors of the Bank and architectural
fees paid by the Bank during fiscal year 1999 totalling approximately $57,326
were fixed in accordance with professional standards.
PART IV
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following financial statements are filed as part of this report:
Page
No.
----
<S> <C>
o Independent Auditors' Report............................................................52
o Consolidated Statements of Financial Condition at June 30, 1999 and 1998................53
o Consolidated Statements of Income for each of the years in the three year period
ended June 30, 1999.....................................................................54
o Consolidated Statements of Changes in Stockholders' Equity for each of the years
in the three year period ended June 30, 1999............................................55
o Consolidated Statements of Comprehensive Income for each of the years in the
three year period ended June 30, 1999...................................................56
o Consolidated Statements of Cash Flows for each of the years in the three year
period ended June 30, 1999..............................................................57
o Selected Consolidated Quarterly Financial Data (Unaudited) for each of the
years in the two year period ended June 30, 1999........................................85
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable
or the required information is shown in the Consolidated Financial Statements or
notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1999
1) The Company filed an 8-K on May 17, 1999 announcing a change in our
independent accountants from KPMG LLP to Arthur Andersen LLP.
2) The Company filed an 8-K/A on May 25, 1999 to file the termination
letter from our former principal accountants KPMG LLP.
92
<PAGE>
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
------
<S> <C>
3.1 Certificate of Incorporation of Reliance Bancorp, Inc. (1)
3.2 Reliance Bancorp, Inc. By-Laws (1)
10.1(a) Reliance Federal Savings Bank Recognition and Retention Plan for Officers
and Employees (2)
10.1(b) Amended and Restated Reliance Federal Savings Bank 1994 Recognition and Retention Plans
for Outside Directors (6)
10.2 Reliance Bancorp, Inc. 1994 Incentive Stock Option Plan (2)
10.3 Amended and Restated Reliance Bancorp, Inc. 1994 Stock Option Plan for Outside Directors
(filed herewith)
10.4(a) Form of Reliance Federal Savings Bank Employee Stock Ownership Plan (1)
10.4(b) Form of Reliance Federal Savings Bank Employee Stock Ownership Trust Agreement (1)
10.5 Form of [Three/Two Year] Employment Agreement between Reliance Federal Savings Bank
and Certain Officers (1)
10.6 Form of [Three/Two Year] Employment Agreement between Reliance Bancorp, Inc. and
Certain Executive Officers (1)
10.7 Form of Reliance Federal Savings Bank Change-in-Control Agreement (1)
10.8 Form of Reliance Bancorp, Inc. Change-in-Control Agreement (1)
10.9 Form of Reliance Federal Savings Bank Severance Compensation Plan (1)
10.10 Form of Reliance Federal Savings Bank Supplemental Executive Retirement
Plan (1)
10.11 Draft ESOP Loan Commitment Letter and Form of ESOP Loan Documents (1)
10.12 Form of Reliance Federal Savings Bank Outside Directors' Consultation and
Retirement Plan (1)
10.13 Form of Reliance Bancorp, Inc. Five Year Employment Agreement (3)
10.14 Reliance Bancorp, Inc. 1996 Incentive Stock Option Plan Amended and Restated as of
February 19, 1997 (6)
11.0 Statement Re: Computation of Per Share Earnings (filed herewith)
21.0 Subsidiaries information incorporated herein by reference to Part 1 - Subsidiaries
23.0 Consent of Independent Auditors (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99.1 Stockholder Protection Rights Agreement, dated as of September 18, 1996 (5)
- ----------------------
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, Registration No. 33-72476.
(2) Incorporated by reference into this document from the Exhibits to the 1994
Proxy Statement for the Annual Meeting of Stockholder held on November 9, 1994,
filed on October 7, 1994.
(3) Incorporated by reference into this document from the Exhibits to the Form
10K for the fiscal year ended June 30, 1996, filed on September 30, 1996.
(4) Incorporated by reference into this document from the Exhibits to the 1996
Proxy Statement for the Annual Meeting of Stockholders held on November 12,
1996, filed on October 11, 1996.
(5) Incorporated by reference into this document from the Exhibits filed with
the registration statement on Form 8-A, filed on September 27, 1996.
(6) Incorporated by reference into this document from the Exhibits to the Form
10K for the fiscal year ended June 30, 1998, filed on September 28, 1998.
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<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Reliance Bancorp, Inc.
(Registrant)
/s/ Raymond A. Nielsen September 22, 1999
----------------------------- ------------------
Raymond A. Nielsen
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Raymond A. Nielsen President and September 22, 1999
- ---------------------------- ------------------
Raymond A. Nielsen Chief Executive Officer
/s/ Paul D. Hagan Chief Financial Officer September 22, 1999
- ------------------------------- ------------------
Paul D. Hagan
/s/ Raymond L. Nielsen Chairman of the Board and former September 22, 1999
- ---------------------------- ------------------
Raymond L. Nielsen Chief Executive Officer
/s/ Thomas G. Davis, Jr. Director September 22, 1999
- ----------------------------- ------------------
Thomas G. Davis, Jr.
/s/ Conrad J. Gunther, Jr. Director September 22, 1999
- ----------------------------- ------------------
Conrad J. Gunther, Jr.
/s/ Douglas G. LaPasta Director September 22, 1999
- ----------------------------- ------------------
Douglas G. LaPasta
/s/ Donald LaPasta Director September 22, 1999
Donald LaPasta
/s/ Peter F. Neumann Director September 22, 1999
- ----------------------------- ------------------
Peter F. Neumann
/s/ J. William Newby Director September 22, 1999
- ---------------------------- ------------------
J. William Newby
94
</TABLE>
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended June 30,
------------------
1999 1998
---- ----
(In thousands, except
per share amount)
Net Income............................................. $20,151 $18,729
====== ======
Weighted average common shares outstanding............. 8,467 8,890
Basic earnings per common share........................ $2.38 $2.11
==== ====
Weighted average common shares outstanding............. 8,467 8,890
Dilutive shares using average market value for
the period when utilizing the treasury stock
method regarding stock options..................... 447 535
---- ----
Total shares for diluted earnings per share............ 8,914 9,425
===== =====
Diluted earnings per common and
common share equivalents........................... $2.26 $1.99
==== ====
95
<PAGE>
EXHIBIT 23.0
[LOGO] Arthur Andersen LLP
Independent Public Accountants
1345 Avenue of the Americas
New York, NY 10105
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements (Nos.33-81278 and 333-20379) on Form
S-8 of Reliance Bancorp, Inc of our report dated July 21, 1999 included in
Reliance Bancorp, Inc's June 30, 1999 Annual Report on Form 10-K and to all
references to our Firm included in these registrations statements.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
New York, NY 10105
September 22, 1999
96
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