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, 1996
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 17, 1996, the aggregate market value of the shares of common
stock of the registrant outstanding was $151,004,000 excluding the 522,625
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 17, 1996, which was $18.00 as reported in
the Wall Street Journal on September 18, 1996. The number of shares of the
registrant's common stock outstanding as of September 17, 1996 was 8,911,739
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 12, 1996 and the Annual Report to
Stockholders for fiscal year 1996 are incorporated herein by reference - Parts
II and III.
FORM 10-K CROSS REFERENCE INDEX
PART I
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Page No.
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Item 1. Business
Description of Business............................................................................................ 1
Statistical Data:
Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differential....................................................................... 25
Mortgage and Other Loan Activities................................................................................. 26
Loan Maturity and Repricing........................................................................................ 27
Summary of Allowance for Loan Losses............................................................................... 28
Composition of Loan Portfolio...................................................................................... 30
Money Market, Debt and Equity and Mortgage-Backed Securities Portfolio............................................. 31
Maturity Listing for Money Market Investments, Debt and Equity
and Mortgage-Backed Securities Portfolio....................................................................... 32
Deposit Activities................................................................................................. 33
Borrowings......................................................................................................... 35
Item 2. Properties............................................................................................................ 36
Item 3. Legal Proceedings..................................................................................................... 38
Item 4. Submission of Matters to a Vote of Security Holders................................................................... 38
PART II
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Item 5. Market for Company's Common Equity and Related
Stockholder Matters................................................................................................ 38
Item 6. Selected Financial Data............................................................................................... 39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................................ 39
Item 8. Financial Statements and Supplementary Data........................................................................... 39
Reliance Bancorp, Inc. and Subsidiary:
Independent Auditors' Report....................................................................................... 39
Consolidated Statements of Condition............................................................................... 39
Consolidated Statements of Income.................................................................................. 39
Consolidated Statements of Changes in Stockholders' Equity......................................................... 39
Consolidated Statements of Cash Flows.............................................................................. 39
Notes to Consolidated Financial Statements..................................................................... .... 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................................................... 39
PART III
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Item 10. Directors and Executive Officers of the Company....................................................................... 39
Item 11. Executive Compensation................................................................................................ 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................................................................... 39
Item 13. Certain Relationships and Related Transactions........................................................................ 40
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................................... 40
Signatures...................................................................................................................... 42
PART I
Item 1. Business
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized
on November 16, 1993 at the direction of the Board of Directors of Reliance
Federal Savings Bank (the "Bank") for the purpose of becoming a holding company
to own all of the outstanding capital stock of the Bank upon its conversion from
a mutual to a stock form of organization. The stock conversion was completed on
March 31, 1994 which raised $103.6 million of net proceeds from the sale of
10,750,820 common shares in the conversion including the issuance of 400,820
shares of stock to the Bank's Recognition and Retention Plans and Trusts from
authorized but unissued shares at $10.00 per share. 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.
In addition to directing, planning and coordinating the business activities
of the Bank, the Company invests primarily in U.S. Government securities and
repurchase agreements. In addition, the Company completed its acquisitions of
Bank of Westbury, a Federal Savings Bank, in August 1995 and Sunrise Bancorp,
Inc. in January 1996.
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, consumer loans (primarily home equity lines of
credit, home equity loans, auto and guaranteed student loans) and to a lesser
extent, commercial real estate and construction loans. In the past, the Bank has
also invested in loans secured by cooperative units ("co-op loans") and
commercial loans, but in recent years has discontinued its origination
activities in these areas. 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 information presented in the 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, 1996, the
Company had total assets of $1.8 billion.
Acquisition of Bank of Westbury
After the close of business on August 11, 1995, the Company completed its
acquisition of the Bank of Westbury, a Federal Savings Bank, with 6 banking
offices located in Nassau County, Long Island, New York in a transaction which
was accounted for utilizing the purchase method. The cost of the acquisition was
approximately $16.7 million in cash or $37.72 per share of common stock. The
excess of cost over the fair value of net assets acquired in the transaction was
$7.8 million, which will be amortized on a
1
straight line basis over 15 years. The Company provided funds for the
acquisition from its normal cash flow. As of the completion of the acquisition,
which was effected by merging the net assets acquired into the Bank, the Bank
continued to exceed each of its regulatory capital requirements.
Acquisition of Sunrise Bancorp, Inc.
After the close of business on January 11, 1996, the Company completed the
acquisition of Sunrise Bancorp, Inc. in a transaction which was accounted for
utilizing the purchase method. The cost of the acquisition was approximately
$106.3 million in cash, or $32.00 per share of Sunrise Bancorp, Inc. common
stock outstanding. The excess of cost over the fair value of net assets acquired
generated in the transaction was $43.6 million, which will be amortized on a
straight line basis over 15 years. The Company provided funds for the
acquisition from the sale of mortgage-backed securities classified as
available-for-sale. As of the completion of the acquisition, which was effected
by merging the net assets acquired into the Bank, the Bank has continued to
exceed each of its regulatory capital requirements.
Market Area and Competition
The Bank has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank's deposit gathering area is primarily
concentrated in the communities surrounding its full service banking offices in
the New York City Borough of Queens and the New York State Counties of Nassau
and Suffolk. The Bank's primary lending area extends beyond its deposit
gathering area to the New York City Boroughs of Brooklyn, Staten Island,
Manhattan and the Bronx and the New York State County of Westchester.
The New York City metropolitan area has historically benefited from having
a large number of corporate headquarters and a diversity of financial service
industries. In particular, Long Island has historically benefited from a large
and well-developed suburban market, a well-educated employment base and a
diversity of industrial, service and high technology businesses. In recent
periods, however, due in part to the effects of a prolonged decline in the
regional economy, layoffs in the financial services industry and corporate
relocations, the New York City metropolitan and Long Island areas have
experienced reduced levels of employment and significant workforce transition.
In particular, the counties of Nassau and Suffolk have experienced reduced
employment as a result of restructuring and downsizing in the high technology
defense related industries, which have historically been significant sources of
employment in the Bank's primary market area. These events, in conjunction with
a surplus of available commercial and residential property, brought about an
overall decline in the underlying values of properties located in the area
followed by the current stabilization of values at lower levels over the past
several years.
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 savings banks, savings and loan associations, mortgage
banking companies, commercial banks, credit unions and insurance companies. Its
most direct competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Bank also
faces additional competition for deposits from money market mutual funds,
corporate and government securities funds and other financial intermediaries
such as brokerage firms and insurance companies.
2
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, 1996,
consisted of a variety of consumer and other loans, primarily guaranteed student
loans, auto and loans on deposit accounts. At June 30, 1996, the Bank's loan
portfolio totalled $822.2 million, of which, $578.7 million were one- to
four-family loans, $131.3 million were consumer and other loans, $106.7 million
were multi-family and commercial real estate loans and $5.5 million were
construction loans.
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, 1996, $569.0 million, or 69.2% of the Bank's total loan
portfolio consisted of one-to four-family residential loans, of which $239.3
million, or 42.1%, 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 of 2.0% per adjustment period with a specified lifetime
cap. At June 30, 1996, the lifetime cap for point and no-point loans was 11.75%
and 12.75%, respectively. The Bank's ARM loans typically carry an initial
interest rate below the fully-indexed rate for the loan. However, the Bank
qualifies borrowers based upon the fully-indexed rate plus 200 basis points. The
Bank determines the initial discount rate in accordance
3
with market and competitive factors and, as of June 30, 1996, the rate offered
by the Bank on point loans was 275 basis points below the fully-indexed rate of
8.50% as of such date. The rate offered by the Bank on no-point loans during the
same period was 175 basis points below the fully-indexed rate. The volume and
types of ARM loans originated by the Bank have been affected by such market
factors as the level of interest rates, competition, consumer preferences and
the availability of funds. During the past several years, demand for ARM loans
has been weak due to a low interest rate environment and consumer preference for
fixed rate loans. Accordingly, although the Bank will continue to offer ARM
loans, there can be no assurance that the Bank will be able to originate a
sufficient volume of ARM loans in the future to increase or maintain the
proportion that these loans currently bear to total loans.
The Bank currently offers fixed rate mortgage loans with terms of 10 to 30
years, secured by one-to four-family residences and condominiums. The Bank also
offers these loans on a point or no-point basis with the respective interest
rates determined in accordance with prevailing market and competitive factors.
Fixed rate mortgage loans with terms exceeding 15 years are currently originated
by the Bank for sale in the secondary market to the FHLMC, FNMA and other
investors. The maximum loan amount for fixed rate loans offered by the Bank is
currently $750,000. For fixed rate loans to be retained for the Bank's
portfolio, the Bank's underwriting standards establish an 80.0% maximum
loan-to-value ratio or over 80% if private mortgage insurance is obtained. Fixed
rate loans which meet the eligibility requirements for sale to FHLMC or FNMA
will be considered for amounts up to 95.0% of the appraised value or sales
price, whichever is lower. Loan applications which meet the eligibility
requirements of the State of New York Mortgage Agency ("SONYMA") Low Interest
Rate Program will be considered for amounts up to 100.0% of the appraised value
or sales price, whichever is lower. At June 30, 1996, $329.7 million, or 57.9%,
of the Bank's one- to four-family residential mortgage loan portfolio consisted
of fixed rate loans.
In the past, the Bank originated co-op loans. However, since 1989, the Bank
has not originated, nor does it intend to originate in the future, any co-op
loans, with the exception of loans to facilitate the restructuring of a
classified asset or the sale of real estate owned. At June 30, 1996, the Bank's
co-op loans totalled $9.7 million, or 1.2% of total loans. The Bank also, from
1983 to 1989, originated a number of "low documentation" loans. As with co-op
loans, the Bank has ceased originations of such 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.
During fiscal 1996, the Bank increased its origination of multi-family
loans. For fiscal 1996, originations totalled $63.8 million as compared to $10.5
million in fiscal 1995 and $0 in fiscal 1994. 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
4
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. The Bank determines the initial discount rate in accordance with market
and competitive factors and, as of June 30, 1996, the rate offered by the Bank
on point loans was 100 basis points below the fully-indexed rate of 9.125% as of
such date. The rate offered by the Bank on no-point loans during the same period
was 75 basis points below the fully-indexed rate.
During fiscal 1996, the Bank originated commercial real estate loans
totalling $522,000. The Bank did not originate any commercial real estate loans
during fiscal year 1995 and 1994 other than a small loan for the sale of a real
estate owned property in fiscal 1995. 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, 1996, the Bank's multi-family loans, consisting of 79 loans,
totalled $79.6 million, or 9.7% of the Bank's total loan portfolio. Commercial
property loans, consisting of 134 loans, totalled $27.1 million, or 3.3% of the
Bank's total loan portfolio. At June 30, 1996, all multi-family loans were
current and performing in accordance with their terms. At June 30, 1996, the
Bank had 3 commercial real estate loans totalling $739,000 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 recent declines in real estate values have been more
pronounced with respect to commercial properties. The Bank seeks to minimize
these risks by originating such loans on a selective basis.
Construction Lending. The Bank currently offers construction loans secured
by one- to four-family, multi-family and commercial real estate properties on a
selective basis. The Bank's construction loan originations in recent periods
have primarily been made to finance the construction of one- to four- family
residential properties. As of June 30, 1996, construction loans totalled $5.5
million or 0.67% of total loans. At June 30, 1996, the Bank's largest
outstanding commitment was $5.1 million for the construction of 35 pre-sold,
two-family dwellings located in Brooklyn, New York.
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
5
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. Each line of credit loan is limited to a maximum loan-to-value ratio of
80.0%, less any prior lien(s); provided the maximum loan amount plus any prior
lien balance does not exceed $350,000. 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. At
June 30, 1996, the Bank's home equity lines of credit totalled $81.2 million, or
9.9% of total loans.
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 75.0%, less any
prior liens; provided that the loan amount plus any prior lien balance does not
exceed a total of $350,000. At June 30, 1996, the Bank's home equity loans
totalled $16.7 million, or 2.0% of total loans.
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, 1996, the Bank's
guaranteed student loans totalled $18.8 million, or 2.3% of total loans.
Additionally, the Bank offers loans fully secured by its deposit accounts
which, at June 30, 1996, totalled $5.8 million, or 0.70% of total loans. The
Bank offered other consumer loans in the form of home improvement, auto and boat
loans; however, the Bank currently offers only auto loans. At June 30, 1996,
such loans totalled $7.9 million or 0.97% 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 Committee and
Consumer Loan Committee. 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.
6
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.
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, 1996,
1995, and 1994, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totalled $554,000,
$130,000 and $122,000, respectively. These amounts were not included in the
Bank's interest income for the respective periods.
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At June 30,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accrual mortgage loans delinquent
more than 90 days .............................. $12,277 $ 3,210 $ 2,666 $ 4,073 $ 4,879
Non-accrual other loans delinquent
more than 90 days .............................. 352 -- 88 95 105
------- ------- ------- ------- -------
Total non-accrual loans ............................ 12,629 3,210 2,754 4,168 4,984
Loans 90 days or more delinquent
and still accruing ............................. 350 461 843 1,099 1,019
------- ------- ------- ------- -------
Total non-performing loans ......................... 12,979 3,671 3,597 5,267 6,003
------- ------- ------- ------- -------
Total foreclosed real estate, net of
related allowance for losses ................... 1,564 1,558 2,911 3,909 5,815
------- ------- ------- ------- -------
Total non-performing assets ........................ $14,543 $ 5,229 $ 6,508 $ 9,176 $11,818
======= ======= ======= ======= =======
Non-performing loans to total loans ................ 1.58% 1.10% 1.08% 1.43% 1.46%
Non-performing assets to total assets .............. 0.82% 0.56% 0.78% 1.25% 1.75%
Potential Problem Loans
As of June 30, 1996, there were approximately $2.2 million of other loans
not included in the table above where known information about possible credit
problems of the borrowers caused management to have concerns as to the ability
of the borrower to comply with present loan repayment terms. Set forth below is
a description of the largest potential problem loans.
At June 30, 1996, the Bank had two loans outstanding totalling $1.2 million
secured by a boat marina in Lindenhurst, NY. The loans were originated in
September 1994 in the form of a $687,500 first mortgage on the property and
$550,000 second mortgage building loan. As of June 30, 1996, the borrower is 29
days delinquent on the first mortgage loan and 59 days delinquent on the
building loan. Subsequent to year end, the Bank has commenced foreclosure
proceedings and a receiver has been appointed. The borrower has obtained a loan
commitment subject to certain conditions which is sufficient to satisfy the
principal due on the loan; however, there is no guarantee the borrower will meet
all of the conditions of the loan commitment.
At June 30, 1996, the Bank had two loans outstanding totalling $1.0 million
secured by a funeral home in Westbury, NY. The loans were originated in August
1995 in the form of a $580,000 first mortgage on the property and $500,000
second mortgage building loan. As of June 30, 1996, the borrower has $465,000
outstanding on the building loan. An appraisal dated March 1995, valued the
property at $1.7 million. As of June 30, 1996, the borrower is 59 days
delinquent on the first and second mortgage loans. Because of cash flow
problems, the Bank is presently monitoring the loans due to their size and
inability to obtain a takeout of the second mortgage position. The Bank is
currently working with the borrower to bring these loans current.
8
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, in reviewing the Bank's loan portfolio, will not request the
Bank to materially increase at that time its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings at that time.
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 investment policy of the Bank, which is approved by the Board of Directors
and implemented by the Bank's Investment Committee as authorized by the Board,
is designed primarily to generate a favorable return for the Bank without
compromising the Bank's business objectives or incurring undue interest rate or
credit risk, and to provide and maintain liquidity for the Bank.
The Investment Committee, which is comprised of the Bank's Chief Executive
Officer, President, Senior Vice President - Treasurer and Vice President -
Investment Officer, meets as needed but not less than on a monthly basis to
monitor the Bank's investment transactions, to establish future investment
strategies and to set future spending parameters. The Board of Directors reviews
the Bank's investment policy on a quarterly basis and the Bank's investment
activity on a monthly basis. In establishing its investment strategies, the
Committee considers the Bank's business and growth plans, its interest rate
9
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. SFAS 115 requires that investments in equity
securities that have readily determinable fair values and all investments in
debt securities are to be classified in one of the following three categories
and accounted for accordingly: (1) trading securities; (2) securities
available-for-sale; and (3) securities held-to-maturity. Unrealized gains or
losses on trading securities would be included in the determination of net
income. Unrealized gains and losses on available-for-sale securities are
excluded from the earnings and reported as a separate component of equity, net
of taxes. Upon the purchase of an investment security the Bank and the Company
will make a determination as to the classification of the securities. However,
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. With the exception of U.S. Treasury securities, the Bank currently
purchases securities with the intention and ability to hold them to maturity.
These securities are stated at cost, adjusted for amortization of premium and
accretion of discount using the level-yield method.
Debt and Equity Securities
At June 30, 1996, the Bank's debt and equity securities portfolio
classified held-to-maturity totalled $48.3 million. The debt and equity
securities held-to-maturity portfolio consisted of $35.0 million in U.S.
Government agency obligations, $391,000 in municipal obligations and $13.0
million of FHLB stock. At June 30, 1996, the Bank's debt and equity securities
portfolio classified available-for-sale totalled $13.3 million. The debt and
equity securities available-for-sale portfolio consisted of $10.2 million in
U.S. Government agency obligations, $3.0 million in U.S. Treasury notes, and
$61,000 in marketable equity securities. At June 30, 1996, the holding Company
did not hold any debt and equity securities. The Company sold debt and equity
securities available-for-sale during the year to repurchase its stock and pay
cash dividends. 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, 1996, the Company and the Bank also had money market investments which
consisted of $1.0 million in federal funds and $9.5 million in repurchase
agreements.
Mortgage-Backed Securities
The Bank invests in mortgage-backed securities 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. At June 30, 1996, the Bank's
entire mortgage-backed securities portfolio, was directly or indirectly insured
or guaranteed by the FNMA, GNMA or FHLMC. At June 30, 1996, mortgage-backed
securities totalled $776.2 million, or 43.5% of total assets, of which $184.5
million were classified as held-to-maturity and $591.7 million were classified
as available-for-sale. The Bank has increased its purchases of mortgage-backed
securities as a result of the lower demand for the types of loans held for
investment by the Bank, resulting in excess funding being invested in
adjustable-rate and shorter-
10
term mortgage-backed securities. In addition, 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, 1996, the
mortgage-backed securities portfolio classified as available-for-sale had an
unrealized loss of $9.3 million. The market value of all mortgage-backed
securities totalled approximately $776.7 million at June 30, 1996.
As of June 30, 1996, $363.6 million, or 46.8%, of the Bank's
mortgage-backed securities portfolio carried adjustable rates repricing
annually. The portfolio had a weighted average interest rate yield of 6.86% at
June 30, 1996. 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.
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 41.7% of total deposits at June 30, 1996 as compared to 36.1% of
total deposits at June 30, 1995.
Borrowings. The Bank has utilized borrowed funds to grow, leveraging the
Bank's capital and improving the return on equity. Borrowed funds, principally
from the FHLB-NY and reverse repurchase agreements are utilized as a source of
funding in order to take advantage of favorable rates of interest in comparison
to its other sources of funds. The Bank's FHLB-NY advances are generally secured
by a blanket lien against the Bank's mortgage portfolio, mortgage-backed and
investment securities portfolios and the Bank's investment in the stock of the
FHLB-NY. The maximum amount that the FHLB-NY will advance for purposes other
than for meeting withdrawals, fluctuates from time to time in accordance with
the policies of the FHLB-NY. At June 30, 1996, total advances from the FHLB-NY
was $3.0 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, 1996, borrowings under reverse
repurchase agreements totalled $263.2 million.
11
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 subsidiary.
RFS Insurance Agency Inc. RFS Insurance was organized by the Bank on April
15, 1983 for the purpose of engaging in the sale of savers life insurance issued
by American International Life Insurance ("AILI") through its Savers Life
Insurance Program. AILI terminated this program on January 1, 1989; since that
time the Bank has originated no new policies and has only accepted renewals of
existing policies. The Bank currently offers the sale of non-deposit investment
products (annuities and mutual funds) to Bank customers through this subsidiary
and recognizes fee income from such sales.
Personnel
As of June 30, 1996, the Bank had 325 full-time employees and 180 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 will report their income on a calendar
year basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. 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 Bank is being audited by the Internal Revenue Service
("IRS") for the calendar years 1989 and 1990. The IRS has specifically audited
the items related to joint ventures losses and has submitted the findings to a
joint committee for further action. Based upon preliminary discussions with the
IRS, management of the Bank believes that any actions taken by the IRS will not
materially affect the financial condition and results of operations of the
Company and the Bank. In addition, the Bank's and the Bank of Westbury's tax
returns are being audited by New York State for the 1992, 1993 and 1994 tax
years.
Tax Bad Debt Reserves. For calendar years ended December 31, 1995 and 1994,
the Bank was allowed a special bad debt deduction based on the greater of the
amount calculated under the experience method or the percentage of taxable
income method. The statutory percentage under the latter method was 8% for 1995
and 1994. The percentage of taxable income method was allowable only if the Bank
maintained at least 60% of its total assets in qualifying assets, as defined. If
qualifying assets fell below 60%, the Bank would have been required to recapture
its tax bad debt reserve into taxable income over a four-year period. The Bank's
qualifying assets as a percentage of total assets exceeded the 60% limitation as
of and during the fiscal years ended June 30, 1996, 1995 and 1994. The Bank used
the percentage of taxable income method in its 1994 and 1995 tax return.
12
Under legislation enacted subsequent to June 30, 1996, the Bank will no
longer be able to use the percentage of taxable income method for federal tax
purposes, but will be permitted to deduct bad debts only as they occur and will
additionally be 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 tax law has 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 tax liability. No amendments to the New
York City law have been made; therefore, the Company cannot predict whether such
changes to New York City law will be adopted and, if so, in what form.
Distributions. To the extent that (I) the Bank's tax bad debt reserve for
losses on qualifying real property loans exceeds the amount that would have been
allowed under the experience method and (ii) the Bank makes "nondividend
distributions" to the Company that are considered to have been made from the
excess bad debt reserve, i.e., that portion, if any, of the balance of the
reserve for qualifying real property loans attributable to certain deductions
under the percentage of taxable income method, or the supplemental reserve for
losses on loans ("Excess Distributions"), then an amount based on the
distribution 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, 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, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserves. Thus, any dividends to the Company that would
reduce amounts appropriated to the Bank's bad debt reserves and deducted for
federal income tax purposes would create a tax liability for the Bank.
The amount of additional taxable income created from an Excess Distribution
is an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if after the Conversion, the Bank makes a
"nondividend distribution", approximately one and one-half times the amount so
used would be includable in gross income for federal income tax purposes,
assuming a 35.0% corporate income tax rate (exclusive of state and city taxes).
See "Regulation and Supervision-Limitations on Capital Distributions" for limits
on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20.0%.
The excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
experience method is treated as a preference item for purposes of computing the
AMTI. Only 90.0% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75.0% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT.
The Bank was subject to an environmental tax liability for the tax year ended
December 31, 1995, which liability was not material.
13
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 70.0% 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 20.0% of the stock of a
corporation distributing a dividend, 80.0% of any dividends received may be
deducted.
State and Local Taxation
New York State and New York City Taxation. The Bank is subject to the New
York State Franchise Tax on Banking Corporations in an amount equal to the
greater of (I) 9.0% of "entire net income" allocable to New York State, during
the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 3.0% of "alternative
entire net income" allocable to New York State, (b) 0.01% of the value of the
Bank's assets allocable to New York State with certain modifications, or (C)
$250. Entire net income is similar to federal taxable income, subject to certain
modifications (including the addition of interest income on state and municipal
obligations, the partial exclusion of interest income on certain United States
Treasury, New York State, and New York City obligations, and an additional New
York State bad debt deduction). Alternative entire net income is equal to entire
net income without certain deductions which are allowable for the calculation of
entire net income. New York State also imposes several surcharges on the
Franchise Tax on Banking Corporations including a 17.0% Metropolitan
Transportation Business Tax Surcharge and an additional 7.5% surcharge which
currently apply to the Bank.
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. Currently, New York City does
not impose surcharges applicable to the Bank.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt 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.
14
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination and supervision by
the Office of Thrift Supervision ("OTS"), as its chartering agency, and the
Federal Deposit Insurance Corporation ("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 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 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.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by the Home Owner's Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act"). The HOLA and the FDI
Act were amended by the Financial Institution Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). FIRREA was enacted for the purpose of resolving problem
savings institutions, establishing a new thrift insurance fund, reorganizing the
regulatory structure applicable to savings institutions, and imposing bank-like
standards on savings institutions. FDICIA, among other things, requires that
federal banking regulators intervene promptly when a depository institution
experiences financial difficulties, mandates the establishment of a risk-based
deposit insurance assessment system and requires imposition of numerous
additional safety and soundness operational standards and restrictions. FIRREA
and FDICIA both contain provisions affecting numerous aspects of the operations
and regulations of federally-insured savings banks and empower the OTS and the
FDIC, among other agencies, to promulgate regulations implementing their
provisions. 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.
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 securities and bullion, but does
not include real estate. At June 30, 1996, the Bank's largest aggregate
15
amount of loans to one borrower consisted of $7.0 million, and the second
largest borrower had an aggregate balance of $4.4 million, which were below the
Bank's loans to one borrower limit of $14.6 million at such date. At June 30,
1996, 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, as modified by FDICIA, a savings bank
is required to maintain at least 65.0% of its "portfolio assets" (total assets
less (I) specified liquid assets up to 20.0% of total assets, (ii) intangibles,
including goodwill, and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
on a monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test must either convert to a bank
charter or operate under certain restrictions. If the savings institution does
not convert to a bank charter, generally it will be prohibited from: (I)
engaging in any new activity not permissible for a national bank, (ii) paying
dividends not permissible under national bank regulations, (iii) obtaining
advances from any FHLB, and (iv) establishing any new branch office in a
location not permissible for a national bank in the institution's home state. In
addition, beginning three years after the institution failed the QTL test, the
institution would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from an
FHLB as promptly as possible. As of June 30, 1996, the Bank maintained 92.40% of
its portfolio assets in qualified thrift investments and, therefore, met the QTL
test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice to the OTS, make
capital distributions during a calendar year equal to the greater of: (I) 100%
of its net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year; or
(ii) 75.0% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its fully phased-in requirement 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. Furthermore, under the OTS prompt
corrective action regulations, the Bank would be prohibited from making any
capital distribution if, after the distribution, the Bank would have (I) a total
risk-based capital ratio of less than 8.0%, (ii) a Tier 1 risk-based capital
ratio of less than 4.0% or (iii) a leverage ratio of less than 4.0%.
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
16
of member institutions, and is currently 5.0%. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1.0%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity and short-term liquidity ratios for
June 30, 1996 were 8.68% and 2.59%, respectively, 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, 1996, totalled $264,000.
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. The branching powers afforded federal
savings banks are broader than the branching authority currently available to
national banks and state chartered institutions, which generally lack the
authority to branch outside their state of domicile. However, national banks and
state chartered banks and savings banks will have increased authority under 1995
legislation to establish interstate branches beginning no later than June 1997.
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
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
17
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to 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. Such regulations also place individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position, and require certain Board approval procedures to be followed.
Loans to executive officers are subject to additional restrictions. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-affiliated parties," including
officers, directors and controlling stockholders and other parties participating
in the control of the affairs of the institution. Civil penalties cover a wide
range of violations and actions and range up to $25,000 per day unless a finding
of reckless disregard is made, in which case penalties may be as high as $1
million per day. Criminal penalties for most financial institution crimes
include fines of up to $1 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to impose enforcement action on
an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements, or engages in unsafe and
unsound purchases. Possible enforcement action ranges from the imposition of a
capital plan, capital directive or cease and desist order to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances.
Standards for Safety and Soundness. FDICIA as amended, required each
federal banking agency to prescribe for all insured depository institutions and
their holding companies standards relating to internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, and compensation, fees and benefits and such
other operational and managerial standards as the agency deems appropriate. In
February, 1995, the OTS, together with the other federal bank regulatory
agencies, adopted guidelines prescribing safety and soundness standards pursuant
to FDICIA, as amended. The guidelines establish general standards relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. In general, the guidelines require, among other things,
appropriate systems and practices to identify and mange the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and described compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal shareholder. Additional
18
guidelines to establish general standards for asset quality and earnings were
recently finalized. In addition, regulations were adopted pursuant to FDICIA to
require a savings association that is given notice by the OTS that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan to the OTS. If, after being so notified, a savings association fails to
submit an acceptable compliance plan or fails in any material respect to
implement an accepted compliance plan, the OTS may issue an order directing
corrective actions including certain types of restrictions which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
standard, a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based
capital standard. Core capital is defined as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain qualifying supervisory goodwill
and certain mortgage servicing rights ("MSRs") and purchased credit card
relationships. The OTS regulations require that, in meeting the leverage ratio,
tangible and risk-based capital standards, institutions must deduct investments
in and loans to subsidiaries engaged in activities as principal not permissible
for a national bank. The OTS also has the authority to establish higher
individual capital requirements for specific institutions which have been deemed
by the OTS to pose an unusual risk. In addition, the OTS prompt corrective
action regulation provides that a savings institution that has a leverage
capital ratio of less than 4.0% (3.0% for institutions receiving the highest
CAMEL examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions unless the institution has received the highest
examination rating. See "Prompt Corrective Regulatory Action".
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%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
FDICIA required that the OTS (and other federal banking agencies) revise
the risk-based capital standards, with appropriate transition rules, to ensure
that such standards take account of interest rate risk, concentration of risk
and the risks of nontraditional activities. 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.
19
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 the interest-rate risk component.
If the Bank had been subject to an interest-rate risk component as of June 30,
1996, the Bank would not have been subject to any deduction from capital as a
result of its interest rate risk position.
At June 30, 1996, 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, 1996.
At June 30, 1996
-----------------------------------------------------------
Capital Actual Excess
Requirement % Capital % Capital %
----------- --- ------- ---- ------- ------
Tangible ......... $ 26,118 1.5% $ 97,470 5.6% $ 71,352 4.1%
Leverage ......... 52,236 3.0 97,470 5.6 45,234 2.6
Risk-based ....... 55,478 8.0 101,911 14.70 46,433 6.7
Prompt Corrective Regulatory Action. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of under capitalization. Generally,
subject to a narrow exception, FDICIA requires the banking regulator to appoint
a receiver or conservator for an institution that is critically
undercapitalized. FDICIA authorizes the banking regulators to specify the ratio
of tangible capital to assets at which an institution becomes critically
undercapitalized and requires that ratio to be no less than 2.0% of assets.
Under the OTS final rule implementing FDICIA, a savings institution that
has a ratio of total risk-based capital to risk-based assets of less than 8.0%
or a leverage ratio or a Tier 1 capital to risk-based assets ratio that is less
than 4.0% is considered to be "undercapitalized". A savings institution that has
a total risk-based capital ratio of less than 6.0%, a Tier I risk-based capital
ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered
to be "significantly undercapitalized" and a savings institution that has a
tangible capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." Generally, a capital restoration plan must be
filed with the OTS within 45 days of the date an institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, capital distributions and management fees. 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.
20
Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC 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 and other criteria relevant to each institution's risk
profile as in regard to the insurance fund. Under the risk-based assessment
system, the average assessment paid by institutions insured under the SAIF and
Bank Insurance Fund (BIF) was increased. Under this 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, and 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 which 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. There
are nine assessment risk classifications (i.e., combinations of capital groups
and supervisory subgroups) to which different assessment rates are applied.
Assessment rates range from 23 basis points for an institution in the highest
category (i.e., well-capitalized and healthy) to 31 basis points for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The Bank's assessment rate for fiscal year 1996 is .23% of
deposits. The Bank paid $2.4 million for federal insurance premiums to the SAIF
for the fiscal year ended June 30, 1996.
The FDI Act requires that the SAIF and BIF funds each be recapitalized
until reserves are at least 1.25% of insured deposits. Upon reaching the 1.25%
reserve ratio, the assessment rates for that fund could be reduced. The FDIC has
concluded that the BIF has currently attained the 1.25% reserve ratio, but that
the SAIF is not likely to reach the 1.25% reserve ratio until sometime after the
year 2000, at the earliest. The FDIC has issued final regulations to reduce the
assessment rates for the BIF. Currently, over 90% of BIF members pay only the
statutory annual minimum of $2,000 for deposit insurance. Under the proposal,
BIF-insured institutions would pay an average of $0.04 per $100 of insured
deposits. The reduction in the BIF assessment rates occurred during the latter
half of calendar year 1995. The resulting disparity in deposit insurance
assessments between SAIF members and BIF members provide BIF-insured
institutions with certain competitive advantages in the pricing of loans and
deposits, because of lowered operating costs and may cause other competitive
inequities. SAIF-insured institutions continue to pay assessments at the current
SAIF assessment rates. Consequently, the Bank will be adversely affected in
comparison to BIF-insured institutions.
To recapitalize the SAIF, legislation is being considered by Congress to
assess a one time special assessment on SAIF insured institutions. The precise
amount of any such assessment is uncertain but some regulatory officials have
estimated that it would be 69 to 85 basis points of SAIF insured deposits held
on a specified date. If enacted, such legislation will would have a
significantly adverse effect on operating expenses and results of operations.
Congress is also considering legislation that would merge the SAIF and BIF,
eliminate the federal thrift charter and require savings associations to become
banks. If this legislation is enacted, it may have adverse tax effects, require
divestiture of certain activities or otherwise change the Company's operations.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue
21
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS. The management of the Bank does not
know of any practice, condition or violation that might lead to termination of
deposit insurance.
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, 1996, of $13.0 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, 1996, 1995 and 1994,
dividends from the FHLB to the Bank amounted to $725,000, $502,000 and $517,000,
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 $52.0 million or less (subject to adjustment by the FRB)
the reserve requirement is 3.0%; and for accounts greater than $52.0 million,
the reserve requirement is $1.6 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 $52.0 million. The first $4.3 million of otherwise reservable
balances (subject to adjustments by the FRB) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS. Because required
reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a FRB or a pass-through account as defined by
the FRB, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow from
the Federal Reserve "discount window," but FRB regulations require institutions
to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
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
22
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 without
prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; 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 nonsupervisory 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 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.
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. Certain
states do not authorize interstate acquisitions under any circumstances;
however, federal law authorizing acquisitions in supervisory cases would preempt
such state law.
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.
23
In addition, federal regulations governing conversions of mutual savings
institutions to the stock form of organization prohibit the direct or indirect
acquisition without prior OTS approval of more than 10.0% of any equity security
of a savings institution within three years of the savings institution's
conversion to stock form. This limitation applies to acquisitions of the stock
of the Company. Such acquisition may be disapproved if it is found, among other
things, that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions, (b) would be manipulative
or deceptive, (c) would subvert the fairness of the conversion, (d) would be
likely to result in injury to the savings institution, (e) would not be
consistent with economical home financing, (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the savings
institution's conversion proceeds.
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 does not cover the resale of
such shares. Shares of the Common Stock purchased by persons who are not
affiliates of the Company may be resold without registration. Shares purchased
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. 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.
24
STATISTICAL DATA
The detailed statistical data that follows is being presented in accordance with
Guide 3, prescribed by the Securities and Exchange Commission. This data should
be read in conjunction with the financial statements and related notes and the
discussion included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations incorporated herein by reference to the 1996
Annual Report to Stockholders included and as Exhibit 13.0 to this Form 10-K.
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential.
A, B. Page 16 of the Company's 1996 Annual Report presents the distribution
of assets, liabilities and stockholders' equity and interest differential,
under the caption "Analysis of Net Interest Income" and is incorporated
herein by reference.
C. Interest Differential
Page 17 of the Company's 1996 Annual Report presents the interest
differential under the caption "Rate/Volume Analysis" and is incorporated
herein by reference.
25
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:
For the year ended June 30,
--------------------------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
Mortgage loans (gross):
At beginning of period ...................................... $ 224,841 $ 231,615 $ 263,507
Mortgage loans originated:
One-to four-family ........................................ 38,557 10,913 22,907
Co-operatives ............................................. -- 86 45
Multi-family .............................................. 63,840 10,500 --
Construction .............................................. 4,159 12,589 6,846
Commercial ................................................ 522 155 --
--------- --------- ---------
Total mortgage loans originated ......................... 107,078 34,243 29,798
Mortgage loans purchased .................................... 426,328 1,236 --
--------- --------- ---------
Total mortgage loans originated
and purchased ......................................... 533,406 35,479 29,798
Transfer of mortgage loans
to real estate owned ...................................... (1,450) (646) (2,730)
Principal repayments ........................................ (59,984) (40,126) (52,710)
Sales of loans .............................................. (5,830) (1,481) (6,250)
--------- --------- ---------
At end of period ....................................... $ 690,983 $ 224,841 $ 231,615
========= ========= =========
Other loans (gross):
At beginning of period .................................... $ 108,653 $ 100,250 $ 103,645
Other loans originated .................................... 35,816 33,586 28,148
Other loans purchased ..................................... 23,489 -- --
Principal repayments ...................................... (37,548) (25,183) (31,543)
--------- --------- ---------
At end of period ....................................... $ 130,410 $ 108,653 $ 100,250
========= ========= =========
26
B. Loan Maturity and Repricing
The following table shows the maturity or period to repricing of the Bank's loan
portfolio at June 30, 1996. 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 $97.5 million
and $65.3 million, $84.3 million, respectively, for the years ended June 30,
1996, 1995 and 1994.
At June 30, 1996
--------------------------------------------------------------------------------
Mortgage Loans
--------------------------------------------------------------------------------
One- to Multi- Commercial
four-family Co-operative family Real Estate Construction
----------- ------------ ------ ----------- ------------
(In thousands)
Amounts due:
Within one year ............................... $221,495 $ 8,596 $ 5,300 $ 9,505 $ 5,560
After one year:
One to three years ......................... 10,999 361 733 7,029 --
Three to five years ........................ 17,904 272 73,430 9,600 --
Five to ten years .......................... 92,731 122 -- 136 --
Ten to twenty years ........................ 193,775 59 108 864 --
Over twenty years .......................... 32,127 277 -- -- --
-------- -------- -------- -------- --------
Total due after one year ...................... 347,536 1,091 74,271 17,629 --
-------- -------- -------- -------- --------
Total amounts due ............................. $569,031 $ 9,687 $ 79,571 $ 27,134 $ 5,560
======== ======== ======== ======== ========
Discounts, premiums and
deferred loan fees, net ....................
Allowance for loan losses .....................
Loans receivable, net ......................
At June 30, 1996
----------------------------------------------------------------------
Consumer and Other Loans
----------------------------------------------------------------------
Home
Equity Home
Lines of Equity Other Total
Credit Loans Loans Receivable
------ ----- ----- ----------
Amounts due:
Within one year ............................... $ 81,205 $ 123 $ 21,516 $ 353,300
After one year:
One to three years ......................... -- 1,265 6,410 26,797
Three to five years ........................ -- 3,959 3,277 108,442
Five to ten years .......................... -- 8,940 701 102,630
Ten to twenty years ........................ -- 2,460 554 197,820
Over twenty years .......................... -- -- -- 32,404
--------- --------- --------- ---------
Total due after one year ...................... -- 16,624 10,942 468,093
--------- --------- --------- ---------
Total amounts due ............................. $ 81,205 $ 16,747 $ 32,458 821,393
========= ========= ========= =========
Discounts, premiums and
deferred loan fees, net ..................... 848
Allowance for loan losses ..................... (4,495)
---------
Loans receivable, net ....................... $ 817,746
=========
The following table sets forth, at June 30, 1996, the dollar amount of all fixed
rate loans contractually due after June 30, 1996, and adjustable rate loans
repricing after June 30, 1996.
Due After June 30, 1996
--------------------------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Mortgage loans:
One- to four-family ..................................... $328,920 $ 18,616 $347,536
Co-operative ............................................ 465 626 1,091
Multi-family ............................................ 1,788 72,483 74,271
Commercial real estate .................................. 2,381 15,248 17,629
Consumer and other loans ................................... 27,566 -- 27,566
-------- -------- --------
Total loans ................................................ $361,120 $106,973 $468,093
======== ======== ========
27
C. Summary of Allowance for Loan Losses
The following table sets forth the Bank's allowances for loan, investment
in real estate and real estate owned losses at the dates indicated.
Year Ended June 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period .......................... $ 1,729 $ 1,417 $ 1,344 $ 1,110 $ 2,179
Charge-offs:
One- to four-family .................................. (67) (54) (241) (14) (145)
Multi-family ......................................... -- -- -- -- --
Co-op ................................................ (76) (28) (74) -- (767)
Commercial real estate ............................... -- -- -- -- (245)
Consumer and other loans ............................. (122) (31) (79) (54) (25)
-------- -------- -------- -------- --------
Total charge-offs ................................. (265) (113) (394) (68) (1,182)
Recoveries:
Mortgage loans ....................................... 35 17 14 51 --
Consumer and other loans ............................. 54 8 60 17 5
-------- -------- -------- -------- --------
Total recoveries .................................. 89 25 74 68 5
Allowances of acquired institutions ................. 2,217 -- -- -- --
Provision for loan losses ............................... 725 400 393 234 108
-------- -------- -------- -------- --------
Balance at end of the period ............................ $ 4,495 $ 1,729 $ 1,417 $ 1,344 $ 1,110
======== ======== ======== ======== ========
Ratio of net charge-offs during the period
to average loans outstanding during
the period ........................................... 0.03% 0.03% 0.09% -- 0.27%
Ratio of allowance for loan losses to total
loans at the end of the period ....................... 0.55% 0.52% 0.43% 0.37% 0.27%
Ratio of allowance for loan losses to non-
performing loans at the end of the period ............ 34.63% 47.10% 39.38% 25.52% 18.49%
Allowance for losses on investment
in real estate:
Balance at beginning of period .......................... $ -- $ -- $ -- $ 44,157 $ 44,157
Charge-offs .......................................... -- -- -- (44,157) --
Provision for losses .................................... -- -- -- -- --
-------- -------- -------- -------- --------
Balance at the end of the period ........................ $ -- $ -- $ -- $ -- $ 44,157
======== ======== ======== ======== ========
Allowance for losses on real estate owned:
Balance at beginning of period .......................... $ 589 $ 632 $ 2,288 $ 416 $ 1,061
Charge-offs .......................................... (384) (103) (2,740) (253) (901)
Recoveries ........................................... -- -- 11 -- --
Allowances of acquired institutions .................. 188 -- -- -- --
Provision for losses .................................... 375 60 1,073 2,125 256
-------- -------- -------- -------- --------
Balance at the end of the period ........................ $ 768 $ 589 $ 632 $ 2,288 $ 416
======== ======== ======== ======== ========
28
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,
---------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- -------------------------
% 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)
One- to-four-family(1) ................ $3,336 70.46% $1,249 60.84% $1,073 65.73%
Commercial real estate ................ 158 3.30 -- 0.68 -- 0.75
Multi-family .......................... 278 9.69 74 5.64 -- 2.71
Construction and land ................. 47 0.67 -- 0.22 -- 0.60
Consumer and other loans .............. 676 15.88 406 32.62 344 30.21
------ ------ ------ ------ ------ ------
Total allowances ................. 4,495 100.00% $1,729 100.00% $1,417 100.00%
====== ====== ====== ====== ====== ======
1993 1992
--------------------------------- -----------------------------
% of Loans in % of Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
One- to-four-family(1) ................ $1,104 67.27% $ 883 70.17%
Commercial real estate ................ -- 1.14 -- 1.20
Multi-family .......................... -- 3.13 -- 3.65
Construction and land ................. -- 0.23 -- --
Consumer and other loans .............. 240 28.23 227 24.98
------ ------ ------ ------
Total allowances ................. $1,344 100.00% $1,110 100.00%
====== ====== ====== ======
(1) Includes allocations for co-op loans.
29
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,
-----------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
One- to four-family............................ $ 569,031 69.28% $ 194,290 58.26% $ 208,550 62.85%
Co-operative................................... 9,687 1.18 8,774 2.63 9,567 2.88
Multi-family................................... 79,571 9.69 18,774 5.63 8,991 2.71
Commercial..................................... 27,134 3.30 2,258 0.68 2,504 0.75
Construction................................... 5,560 0.67 745 0.22 2,003 0.60
--------- ------ --------- ------ --------- ------
Total mortgage loans....................... 690,983 84.12 224,841 67.42 231,615 69.79
--------- ------ --------- ------ --------- ------
Consumer and other loans:
Home equity lines of credit.................... 81,205 9.89 70,954 21.28 61,338 18.48
Guaranteed student loans....................... 18,754 2.28 20,529 6.16 22,924 6.91
Home equity loans.............................. 16,747 2.04 15,774 4.73 14,334 4.32
Loans on deposit accounts...................... 5,782 0.70 980 0.29 982 0.30
Other loans.................................... 7,922 0.97 416 0.12 672 0.20
--------- ------ --------- ------ --------- ------
Total consumer and other loans................ 130,410 15.88 108,653 32.58 100,250 30.21
--------- ------ --------- ------ --------- ------
Total loans.................................... 821,393 100.00% 333,494 100.00% 331,865 100.00%
====== ====== ======
Discounts, premiums and
deferred loan fees, net....................... 848 315 272
Allowance for loan losses...................... (4,495) (1,729) (1,417)
--------- --------- ---------
Total loans, net............................... $ 817,746 $ 332,080 $ 330,720
========= ========= =========
June 30,
---------------------------------------------------
1993 1992
-------------------- ----------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
One- to four-family............................ $ 236,798 64.50% $ 276,079 67.24%
Co-operative................................... 10,163 2.77 12,035 2.93
Multi-family................................... 11,506 3.13 14,996 3.65
Commercial..................................... 4,183 1.14 4,934 1.20
Construction................................... 857 0.23 -- --
--------- ------ --------- ------
Total mortgage loans....................... 263,507 71.77 308,044 75.02
--------- ------ --------- ------
Consumer and other loans:
Home equity lines of credit.................... 59,513 16.21 54,509 13.28
Guaranteed student loans....................... 24,871 6.77 27,291 6.65
Home equity loans.............................. 16,661 4.54 16,789 4.08
Loans on deposit accounts...................... 1,146 0.31 1,280 0.31
Other loans.................................... 1,454 0.40 2,700 0.66
--------- ------ --------- ------
Total consumer and other loans................ 103,645 28.23 102,569 24.98
--------- ------ --------- ------
Total loans.................................... 367,152 100.00% 410,613 100.00%
====== ======
Discounts, premiums and
deferred loan fees, net....................... 105 116
Allowance for loan losses...................... (1,344) (1,110)
--------- ---------
Total loans, net............................... $ 365,913 $ 409,619
========= =========
30
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,
--------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- -------- --------
(In thousands)
Money Market Investments
Federal funds sold and repurchase agreements ............... $ 10,450 $ 10,450 $ 2,700 $ 2,700 $ 4,000 $ 4,000
======== ======== ======== ======== ======== ========
Debt and Equity Securities
Held-to-Maturity:
United State Agency Obligations .......................... $ 34,950 $ 34,612 $ -- $ -- $ -- $ --
United States Treasury Notes ............................. -- -- 14,997 14,972 30,002 29,902
Obligations of New York State and
local municipalities .................................. 391 435 1,394 1,412 1,397 1,451
Obligations of other states .............................. -- -- -- -- 1,891 1,971
FHLB stock ............................................... 12,989 12,989 7,499 7,499 6,202 6,202
-------- -------- -------- -------- -------- --------
Total debt and equity securities
held-to-maturity ................................... $ 48,330 $ 48,036 $ 23,890 $ 23,883 $ 39,492 $ 39,526
======== ======== ======== ======== ======== ========
Available-for-Sale:
United States Agency Obligations ........................ $ 10,319 10,227 $ -- $ -- $ -- $ --
United Sates Treasury Bills ............................. -- -- 10,531 10,547 24,448 24,393
United States Treasury Notes ............................ 2,992 2,983 13,377 13,333 13,346 13,195
Marketable equity securities ............................ 42 61 -- -- -- --
-------- -------- -------- -------- -------- --------
Total debt and equity securities
available-for-sale ................................. $ 13,353 $ 13,271 $ 23,908 $ 23,880 $ 37,794 $ 37,588
======== ======== ======== ======== ======== ========
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by
GNMA ................................................... $125,195 $125,700 $157,073 $160,939 $120,032 $118,175
FHLMC .................................................. 14,967 15,005 188,611 186,727 213,585 206,180
FNMA ................................................... 44,330 44,290 68,078 68,154 60,582 58,955
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities
held-to-maturity .................................. $184,492 $184,995 $413,762 $415,820 $394,199 $383,310
======== ======== ======== ======== ======== ========
Available-for-Sale:
Pass-through certificates guaranteed by
GNMA ................................................... $170,142 $169,753 $ -- $ -- $ -- $ --
FHLMC .................................................. 255,498 249,598 77,072 78,195 -- --
FNMA ................................................... 172,863 169,944 25,845 26,258 -- --
REMIC .................................................. 2,503 2,445 -- -- -- --
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities
available-for-sale ................................ $601,006 $591,740 $102,917 $104,453 $ -- $ --
======== ======== ======== ======== ======== ========
31
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 federal funds
sold and repurchase agreement, debt and equity securities and mortgage-backed
securities at June 30, 1996. 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, 1996.
At June 30, 1996
----------------------------------------------------------
One Year or Less One to Five Years
-------------------------- ---------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
(Dollars in thousands)
Money Market Investments
Federal funds sold and repurchase agreement ............ $10,450 5.29% -- --
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations ............ $ -- -- $ 9,931 6.00%
Obligations of New York State and local municipalities . -- -- 391 7.88
FHLB stock ............................................. -- -- -- --
------- -------
Total debt and equity securities held-to-maturity . $ -- -- $10,322 6.07%
======= =======
Available-for-Sale:
United States Treasury Notes ........................... $ 2,992 5.24% $ -- --
United States Government Agency Obligations ............ 3,342 6.08 6,977 6.05
Marketable Equities .................................... -- -- -- --
------- -------
Total debt and equity securities available-for-sale $ 6,334 5.68% $ 6,977 6.05%
======= =======
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by
GNMA ................................................... $ -- -- 4 9.85%
FHLMC .................................................. -- -- -- --
FNMA ................................................... -- -- --
------- -------
Total mortgage-backed securities held-to-maturity . $ -- -- $ 4 9.85%
======= =======
Available-for-Sale:
Pass-through certificates guaranteed by
GNMA ................................................... $ -- $ 254 7.85%
FHLMC .................................................. 1,959 8.00 23,626 6.16
FNMA ................................................... -- -- 30,785 6.50
FHLMC REMIC ............................................ -- -- -- --
------- -------
Total mortgage-backed securities available-for-sale $ 1,959 8.00% $54,665 6.36%
======= =======
At June 30, 1996
----------------------------------------------------------
Five to Ten Years More Than Ten Years
-------------------------- ---------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
(Dollars in thousands)
Money Market Investments
Federal funds sold and repurchase agreement ............ -- -- -- --
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations ............ $25,019 7.57% $ -- --
Obligations of New York State and local municipalities . -- -- -- --
FHLB stock ............................................. -- -- 12,989 6.50
------- --------
Total debt and equity securities held-to-maturity . $25,019 7.57% $ 12,989 6.50%
======= ========
Available-for-Sale:
United States Treasury Notes ........................... -- -- $ -- --
United States Government Agency Obligations ............ -- -- -- --
Marketable Equities .................................... -- -- 42 1.08
------- --------
Total debt and equity securities available-for-sale -- -- $ 42 1.08%
======= ========
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by
GNMA ................................................... -- -- $125,191 6.78%
FHLMC .................................................. 146 7.82 14,821 7.03
FNMA ................................................... -- -- 44,330 7.27
------- --------
Total mortgage-backed securities held-to-maturity . $ 146 7.82% $184,342 6.92%
======= ========
Available-for-Sale:
Pass-through certificates guaranteed by
GNMA ................................................... $ 2,381 7.76% $167,507 6.72%
FHLMC .................................................. -- -- 229,913 7.38
FNMA ................................................... -- -- 142,078 7.28
FHLMC REMIC ............................................ 2,503 6.50 -- --
------- --------
Total mortgage-backed securities available-for-sale $ 4,884 7.11% $539,498 7.15%
======= ========
At June 30, 1996
----------------------------------------------------------
Total Securities
----------------------------------------------------------
Annualized
Average Approx. Weighted
Life Carrying Market Average
(in years) Value Value Yield
---------- ----- ----- -----
Money Market Investments
Federal funds sold and repurchase agreement ............ -- $ 10,450 $ 10,450 5.29%
Debt and Equity Securities
Held-to-Maturity:
United States Government Agency Obligations ............ 7.9 $ 34,950 $ 34,612 7.12%
Obligations of New York State and local municipalities . 3.8 391 435 7.88
FHLB stock ............................................. -- 12,989 12,989 6.50
-------- --------
Total debt and equity securities held-to-maturity . 7.9 $ 48,330 $ 48,036 6.96%
======== ========
Available-for-Sale:
United States Treasury Notes ........................... 0.6 $ 2,992 $ 2,983 5.24%
United States Government Agency Obligations ............ 1.9 10,319 10,227 6.06
Marketable Equities .................................... -- 42 61 1.08
-------- --------
Total debt and equity securities available-for-sale 1.6 $ 13,353 $ 13,271 5.86%
======== ========
Mortgage-Backed Securities
Held-to-Maturity:
Pass-through certificates guaranteed by
GNMA ................................................... 5.86 $125,195 $125,700 6.78%
FHLMC .................................................. 4.57 14,967 15,005 7.04
FNMA ................................................... 5.52 44,330 44,290 7.27
-------- --------
Total mortgage-backed securities held-to-maturity . 5.67 $184,492 $184,995 6.92%
======== ========
Available-for-Sale:
Pass-through certificates guaranteed by
GNMA ................................................... 6.08 $170,142 $169,753 6.74%
FHLMC .................................................. 7.09 255,498 249,598 7.27
FNMA ................................................... 5.72 172,863 169,944 7.14
FHLMC REMIC ............................................ 5.50 2,503 2,445 6.50
-------- --------
Total mortgage-backed securities available-for-sale 6.38 $601,006 $591,740 7.08%
======== ========
32
G. Deposit Activities
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Years Ended
--------------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
Opening balance ........................................ $ 670,317 $ 587,221 $ 600,278
Bank of Westbury deposits assumed ...................... 151,992 -- --
Sunrise Bancorp, Inc. deposits assumed ................. 479,213 -- --
Excess of deposits (withdrawals) ....................... 1,679 61,084 (30,831)
Interest credited on deposits .......................... 42,425 22,012 17,774
---------- ---------- ----------
Ending balance ......................................... $1,345,626 $ 670,317 $ 587,221
========== ========== ==========
Net increase (decrease) in deposits .................... $ 675,309 $ 83,096 $ (13,057)
========== ========== ==========
Percentage increase (decrease) ......................... 100.7% 14.2% (2.2%)
At June 30, 1996, the Bank has outstanding $36.0 million in certificate of
deposit accounts in amounts of $100,000 or more, maturing as follows:
Weighted
Amount Average Rate
------ ------------
(In thousands)
Maturity Period:
Three months or less ....................... $ 9,247 5.12%
Over three through six months .............. 7,462 5.39
Over six through 12 months ................. 7,450 5.22
Over 12 months ............................. 11,858 6.00
------- ----
Total ................................ $36,017 5.48%
======= ====
33
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.
For the year ended June 30,
---------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ----------------------------- ----------------------------
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)
Passbook accounts............. $ 353,617 33.43% 2.50% $ 236,047 38.09% 2.50% $268,779 45.04% 2.57%
NOW accounts.................. 58,576 5.54 1.95 25,275 4.08 1.90 25,927 4.34 1.93
---------- ------ -------- ------ -------- ------
Total passbook and
NOW accounts................ 412,193 38.97 2.42 261,322 42.17 2.44 294,706 49.38 2.51
---------- ------ -------- ------ -------- ------
Money market accounts......... 97,975 9.26 2.54 91,051 14.69 2.50 105,594 17.69 2.51
---------- ------ -------- ------ -------- ------
Certificate accounts:
31 days.................. 70 0.01 2.50 85 0.01 2.50 317 0.05 2.51
91 days.................. 23,655 2.24 4.79 2,565 0.41 3.31 3,512 0.59 2.53
4 months................ 447 0.04 4.31 317 0.05 2.80 453 0.08 2.53
6 months................ 78,709 7.44 5.08 46,687 7.53 4.24 47,120 7.89 2.95
9 months................ 55,401 5.24 5.49 17,732 2.86 5.83 -- -- --
12 months................ 145,466 13.76 5.07 81,499 13.15 4.58 71,969 12.06 3.37
15 months................ 60,638 5.73 6.22 31,777 5.13 6.32 -- -- --
18 months................ 79,042 7.47 6.14 38,857 6.27 5.38 23,773 3.98 4.02
18 month variable IRA.... -- -- -- 37 0.01 4.91 508 0.09 3.41
24 months................ 10,655 1.01 5.75 -- -- -- -- -- --
30 months................ 11,990 1.13 5.16 10,303 1.66 4.83 9,908 1.66 4.84
36 months................ 11,576 1.09 5.09 10,943 1.77 4.98 11,753 1.97 5.23
42 months................ 2,962 0.28 5.34 3,337 0.54 5.46 3,941 0.66 6.43
48 months................ 20,553 1.94 5.42 22,683 3.66 5.48 22,312 3.74 5.73
60 months................ 43,425 4.11 6.28 -- -- -- -- -- --
72 months................ -- -- -- 232 0.04 7.75 296 0.05 7.75
96 months................ -- -- -- 286 0.05 8.00 663 0.11 8.00
Other certificates............ 2,973 0.28 5.28 -- -- -- -- -- --
---------- ------ -------- ------ -------- ------
Total certificates............ 547,562 51.77 5.48 $267,340 43.14 5.04 $196,525 32.93 3.87
---------- ------ -------- ------ -------- ------
Total deposits................ $1,057,730 100.00% 4.02 $619,713 100.00% 3.57 $596,825 100.00% 2.96
========== ====== ======== ====== ======== ======
34
The following table presents, by rate categories, the balances of the
Bank's certificate accounts outstanding, interest rate categories, at June 30,
1996, 1995 and 1994 and the remaining periods to maturity of certificate deposit
accounts outstanding at June 30, 1996.
Period to maturity from
June 30, 1996 June 30,
------------------------------------------------ --------------------------------------
One to Two to Over
Within Two Three Three
One Year Years Years Years 1996 1995 1994
-------- ----- ----- ----- ------ ------ -----
(In thousands)
Certificate accounts:
2.99% or less................... $ 1,410 $ -- $ -- $ -- $ 1,410 $ 837 $ 28,835
3.00% to 3.99%.................. 2,388 -- -- -- 2,388 2,907 80,172
4.00% to 4.99%.................. 156,029 10,184 475 2 166,690 37,255 60,691
5.00% to 5.99%.................. 254,913 73,346 18,561 16,100 362,920 160,180 17,730
6.00% to 6.99%.................. 62,978 21,504 5,757 45,581 135,820 145,378 7,906
7.00% to 7.99%.................. 4,914 236 -- 89 5,239 237 1,672
8.00% to 8.99%.................. 21 21 188 5 235 -- --
9.00% and greater............... -- -- 134 -- 134 142 747
-------- -------- -------- -------- -------- -------- --------
Total........................... $482,653 $105,291 $ 25,115 $ 61,777 $674,836 $346,936 $197,753
======== ======== ======== ======== ======== ======== ========
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,
-----------------------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
FHLB-NY advances:
Average balance outstanding .................................... $ 29,882 $ 95,554 $ 62,531
Maximum amount outstanding at any
month-end during the period ............................... 71,218 126,000 88,000
Balance outstanding at end of period .......................... 3,000 40,000 78,000
Weighted-average interest rate during the period .............. 7.29% 6.00% 3.57%
Weighted-average interest rate at end of period ............... 5.98% 7.60% 4.60%
Reverse repurchase agreements:
Average balance outstanding .................................... $150,173 $ 10,103 $ --
Maximum amount outstanding at any
month-end during the period ............................... 279,678 57,035 --
Balance outstanding at end of period .......................... 263,160 57,035 --
Weighted-average interest rate during the period .............. 5.58% 6.09% --
Weighted-average interest rate at end of period ............... 5.41% 6.04% --
Total borrowings:
Average balance outstanding .................................... $180,055 $105,657 $ 62,531
Maximum amount outstanding at any
month-end during the period ............................... 282,678 183,035 88,000
Balance outstanding at end of period .......................... 266,160 97,035 78,000
Weighted-average interest rate during the period .............. 5.87% 6.01% 3.57%
Weighted-average interest rate at end of period ............... 5.42% 6.68% 4.60%
35
Item 2. Properties
The Bank conducts its business through its administrative office and 28
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, 1996
-------- ----- -------- ------------- -------------
(In thousands)
Administrative Office:
585 Stewart Avenue
Garden City, NY 11530................................... Leased 1977 2002 $ 47
Banking Offices:
300 Garden City Plaza
Garden City, NY 11530
(Home Office)............................................ Leased 1979 2004 --
983 Willis Avenue
Albertson, NY 11507..................................... Owned 1965 -- 545
422 Hillside Avenue
Williston Park, NY 11596................................ Leased 1972 2017 284
380 Hillside Avenue(2)
Williston Park, NY 11596................................ Owned 1964 -- 211
570 Stewart Avenue
Bethpage, NY 11714...................................... Leased 1963 2008 38
341 Post Avenue
Westbury, NY 11590...................................... Owned 1995 -- 325
2530 Stewart Avenue
Westbury, NY 11590...................................... Owned 1995 -- 432
405 Jerusalem Avenue
Hicksville, NY 11801.................................... Leased 1995 2005 29
2843 Jerusalem Avenue
North Bellmore, NY 11710................................ Leased 1995 2012 6
172 New Hyde Park Road
Franklin Square, NY 11010............................... Leased 1995 2020 --
215 Glen Cove Road
Carle Place, NY 11514................................... Leased 1995 1996 1
312 Conklin Street
Farmingdale, NY 11735................................... Owned 1996 -- 185
195 Merritt Road
South Farmingdale, NY 11735............................ Owned 1996 -- 592
1074 Old Country Road
Plainview, NY 11803..................................... Owned 1996 -- 140
300 S. Wellwood Avenue
Lindenhurst, NY 11757................................... Owned 1996 -- 239
36
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, 1996
-------- ----- -------- ------------- -------------
(In thousands)
(Continued)
1134 Deer Park Avenue
North Babylon, NY 11703................................. Leased 1996 1998 --
2087 Deer Park Avenue
Deer Park, NY 11729..................................... Owned 1996 -- 189
2080 Deer Park Avenue(2)
Deer Park, NY 11729...................................... Owned 1996 -- 159
434 Union Boulevard
West Islip, NY 11795.................................... Leased 1996 2004 --
340 Washington Avenue
North Brentwood, NY 11717............................... Owned/Leased(6) 1996 2014 141
742 Route 25 A
Kings Park, NY 11754.................................... Leased 1996 2002 --
250 Smithtown Boulevard
Nesconset, NY 11767..................................... Owned 1996 -- 249
245 Lake Avenue
St. James, NY 11780..................................... Owned 1996 -- 206
335 Main Street
Farmingdale, NY 11735.................................... Leased 1996 2000 --
375 Fulton Avenue
Farmingdale, NY 11735.................................... Leased 1996 2002 --
233-15 Hillside Avenue
Queens Village, NY 11427................................ Owned 1961 -- 374
19-01 Utopia Parkway
Whitestone, NY 11357.................................... Leased(4) 1976 2026 --
32-02 Francis Lewis Blvd
Flushing, NY 11358...................................... Owned 1957 -- 205
69-09 164th Street
Flushing, NY 11365...................................... Owned 1967 -- 674
204-12 Hillside Avenue(3)
Hollis, NY 11423........................................ Owned/Leased 1954 2003 42
162-04 Jamaica Avenue
Jamaica, NY 11432....................................... Leased(5) 1989 2001 755
216-26 Jamaica Avenue
Queens Village, NY 11428................................ Owned 1939 -- 56
------
Total.......................................... $6,124
======
(Footnotes on next page)
37
(1) Leased property includes all option periods.
(2) Drive-up facility.
(3) The Bank owns one half of the property and leases the other half.
(4) The Bank pays all real estate taxes on this property.
(5) This branch was originally owned by the Bank. The Bank has subsequently
sold the property and is now leasing it. The transaction is being treated
as a capital lease (sale/leaseback).
(6) The Bank owns the building and leases the land. Option to purchase the land
at the end of the last lease option.
Item 3. Legal Proceedings
The Bank is involved in various legal actions arising in the ordinary
course of its business which, in the aggregate, involve amounts which are
believed by management to be not material to the financial condition of the
Bank.
Item 4. Submission of Matters to a Vote of Security Holders
None
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 17, 1996, the Company had 1,100
stockholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
Information regarding the Company's common stock and its price for the 1996
fiscal year appears on page 55 of the 1996 Annual Report under the caption
"Stockholder Information" and is incorporated herein by this reference.
On September 18, 1996, the Company's Board of Directors adopted a
Stockholder Protection Rights Plan and declared a dividend of one preferred
share purchase right ("Right") for each outstanding share of common stock of the
Company. Each Right, initially, will entitle stockholders to buy a one
one-hundredth interest in a share of a new series of preferred stock of the
Corporation at an exercise price of $60.00, upon the occurrence of certain
events described in the Plan. Initially, Rights will not be exercisable and will
transfer with and only with the shares of common stock. The Rights will be
exercisable and separately transferable ten business days after a person or
group of persons acquires 10% or more of the common stock of Reliance Bancorp,
Inc. ("Acquiring Person") or a person or group of persons announces a tender
offer, the consummation of which would result in ownership by a person or group
of persons of 10% or more of Company common stock. Subject to certain
limitations, the Company's Board of Directors may reduce the 10% threshold.
If a person or group of persons becomes an Acquiring Person, each Right,
unless redeemed by the Board of Directors at a price of $0.01 per Right, will
entitle its holder (other than such person or member of such group) to purchase,
at the then-current exercise price of the Right, a number of shares of common
stock of Reliance Bancorp, Inc. having a market value equal to twice the
exercise price of the Right. Alternatively, at any time after an Acquiring
Person becomes such, but prior to the acquisition by such person of 50% or more
of the Company's common stock, the Board of Directors may, at its option, direct
the issuance of one share of common stock in exchange for each Right other than
those held by the Acquiring Person.
38
The Rights dividend distribution will be payable to stockholders of record
on October 3, 1996. The Rights will expire ten years later on October 3, 2006.
The distribution of the Rights is not taxable to stockholders.
Item 6. Selected Financial Data
Information regarding selected financial data appears on page 10 of the
1996 Annual Report under the caption "Selected Financial Data" and is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 12 through 24 of the 1996
Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
Item 8. Financial Statements and Supplementary Data
Information regarding the financial statements and the Independent
Auditors' Report appears on pages 25 through 52 of the 1996 Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
Information regarding the directors and executive officers of the Company
appears on pages 5 through 9 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on November 12, 1996 under the caption
"Information With Respect to the Nominees, Continuing Directors, and Named
Executive Officers" and is incorporated herein by this reference.
Item 11. Executive Compensation
Information regarding executive compensation included under the caption
"Summary Compensation Table" appears on page 14 of the Company's Proxy Statement
for the Annual Meeting of Stockholders to be held on November 12, 1996 and is
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
appears on page 3 and 4 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held November 12, 1996 under the caption "Security
Ownership of Certain Beneficial Owners" and is incorporated herein by this
reference.
39
Information regarding security ownership of management appears on pages 5
through 7 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 12, 1996 under the caption "Information with
Respect to the Nominees, Continuing Directors and Named Executive Officers" and
is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions
appears on page 19 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 12, 1996 under the caption "Transactions
With Certain Related Persons" and is incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 1996 and are
incorporated by this reference:
- Consolidated Statements of Condition at June 30, 1996 and 1995
- Consolidated Statements of Income for each of the years in the three
year period ended June 30, 1996
- Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three year period ended June 30, 1996
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended June 30, 1996
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1996
None
40
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
------
3.1 Certificate of Incorporation of Reliance Bancorp, Inc. (1)
3.2 By-Laws of Reliance Bancorp, Inc. (1)
10.1(a) Reliance Federal Savings Bank Recognition and Retention Plan for
Officers and Employees (2)
10.1(b) Reliance Federal Savings Bank Recognition and Retention Plans for
Outside Directors (2)
10.2 Reliance Bancorp, Inc. 1994 Incentive Stock Option Plan (2)
10.3 Reliance Bancorp, Inc. 1994 Stock Option Plan for Outside Directors (2)
10.4(a) Form of Reliance Bancorp, Inc. Employee Stock Ownership Plan and
Trust (1)
10.4(b) Form of Reliance Federal Savings Bank Employee Stock Ownership
Trust Agreement (1)
10.5 Form of Employment Agreement between Reliance Federal Savings
Bank and Certain Officers (1)
10.6 Form of Employment Agreement between Reliance Bancorp, Inc.
and Certain Executive Officers (1)
10.7 Form of Change-in-Control Agreement between Reliance Federal
Savings Bank and Certain Officers (1)
10.8 Form of Change-in-Control Agreement among the Reliance Bancorp,
Inc. and Certain Officers (1)
10.9 Form of Reliance Federal Savings Bank Employee Severance
Compensation Plan (1)
10.10 Form of Reliance Federal Savings Bank Supplemental Executive
Retirement Plan (1)
10.11 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. Employment Agreement
11.0 Statement Re: Computation of Per Share Earnings
13.0 1996 Annual Report to Stockholders
21.0 Subsidiaries information incorporated herein by reference to Part 1 -
Subsidiaries
23.0 Consent of Independent Auditors
27.0 Financial Data Schedule
99.0 Proxy Statement for the Annual Meeting of Stockholders to be held on
November 12, 1996
99.1 Stockholders Protection Rights Agreement; dated as of September 18, 1996 (3)
(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 1996
Proxy Statement for the Annual Meeting of Stockholders to be held on November
12, 1996.
(3) Incorporated by reference into this document from the Exhibits filed with
the registration statement on Form 8-A, filed on September 27, 1996.
41
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 18, 1996
-------------------------------
Raymond A. Nielsen
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ Raymond A. Nielsen President and September 18, 1996
- -------------------------- Chief Executive Officer ------------------
Raymond A. Nielsen
/s/ Paul D. Hagan Chief Financial Officer September 18, 1996
- -------------------------- ------------------
Paul D. Hagan
/s/ Raymond L. Nielsen Chairman of the Board and former September 18, 1996
- -------------------------- Chief Executive Officer ------------------
Raymond L. Nielsen
/s/ Thomas G. Davis, Jr. Director September 18, 1996
- -------------------------- ------------------
Thomas G. Davis, Jr.
/s/ Conrad J. Gunther, Jr. Director September 18, 1996
- -------------------------- ------------------
Conrad J. Gunther, Jr.
/s/ Douglas G. LaPasta Director September 18, 1996
- -------------------------- ------------------
Douglas G. LaPasta
/s/ Donald LaPasta Director September 18, 1996
- -------------------------- ------------------
Donald LaPasta
/s/ Peter F. Neumann Director September 18, 1996
- -------------------------- ------------------
Peter F. Neumann
/s/ J. William Newby Director September 18, 1996
- -------------------------- ------------------
J. William Newby
42