Reliance Bancorp, Inc. and Subsidiary
Financial Section
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Contents
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Selected Consolidated Financial and Other Data
of the Company.......................................... 10
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Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 12
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Consolidated Statements of Condition as of
June 30, 1996 and 1995.................................. 25
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Consolidated Statements of Income for
the years ended June 30, 1996, 1995 and 1994............ 26
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Consolidated Statements of Changes in
Stockholders' Equity for the years ended
June 30, 1996, 1995 and 1994............................ 27
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Consolidated Statements of Cash Flows for
the years ended June 30, 1996, 1995 and 1994............ 28
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Notes to Consolidated Financial Statements.............. 30
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Independent Auditors' Report............................ 51
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Selected Consolidated Quarterly Financial Data.......... 52
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9
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Financial and Other Data of the Company
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Set forth below are the selected consolidated financial and other data of the
Company. This financial data is derived in part from, and it should be read in
conjunction with the Company's consolidated financial statements and related
notes.
At June 30,
----------------------------------------------------
Selected Financial Data: 1996 1995 1994 1993 1992
====================================================
Total Assets....................................................... $1,782,550 $931,436 $830,501 $736,276 $676,054
Loans Receivable, Net.............................................. 817,746 332,080 330,720 365,913 409,619
Debt and Equity Securities Available-for-Sale...................... 13,271 23,880 37,588 -- --
Debt and Equity Securities Held-to-Maturity(1)..................... 48,330 23,890 39,492 38,819 48,613
Mortgage-Backed Securities Held-to-Maturity........................ 184,492 413,762 394,199 304,490 169,858
Mortgage-Backed Securities Available-for-Sale...................... 591,740 104,453 -- -- --
Excess of Cost Over Fair Value of Net Assets Acquired.............. 49,429 -- -- -- --
Real Estate Owned, Net............................................. 1,564 1,558 2,911 3,909 5,815
Deposits........................................................... 1,345,626 670,317 587,221 600,278 610,908
FHLB Advances...................................................... 3,000 40,000 78,000 65,000 --
Securities Sold Under Agreements to Repurchase..................... 263,160 57,035 -- -- --
Total Stockholders' Equity(2)...................................... 153,619 153,733 157,851 61,412 54,779
For the Year Ended June 30,
----------------------------------------------------
Selected Operating Data: 1996 1995 1994 1993 1992
====================================================
Interest Income.................................................... $ 100,372 $ 61,260 $ 47,224 $ 48,178 $ 55,058
Interest Expense................................................... 52,985 28,361 20,024 21,322 32,313
----------------------------------------------------
Net Interest Income.............................................. 47,387 32,899 27,200 26,856 22,745
Less Provision for Loan Losses..................................... 725 400 393 234 108
----------------------------------------------------
Net Interest Income After Provision for Loan Losses.............. 46,662 32,499 26,807 26,622 22,637
Non-Interest Income:
Loan Fees and Service Charges...................................... 826 269 260 234 219
Other Operating Income............................................. 1,606 841 859 960 908
Net Gain on Securities............................................. 678 147 -- -- 3,634
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Total Non-Interest Income...................................... 3,110 1,257 1,119 1,194 4,761
----------------------------------------------------
Non-Interest Expense:
Compensation and Benefits.......................................... 13,395 9,562 7,068 6,534 6,382
Occupancy and Equipment............................................ 4,481 2,462 2,336 2,252 2,670
Federal Deposit Insurance Premiums................................. 2,399 1,376 1,374 820 1,282
Advertising........................................................ 1,152 1,158 670 658 413
Other Operating Expenses........................................... 4,169 3,039 2,366 2,078 2,165
----------------------------------------------------
Total General and Administrative Expenses...................... 25,596 17,597 13,814 12,342 12,912
Real Estate Operations, Net........................................ 579 (385) 1,080 3,598 3,317
Amortization of Excess of Cost Over Fair
Value of Net Assets Acquired..................................... 1,928 -- -- -- --
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Total Non-Interest Expense..................................... 28,103 17,212 14,894 15,940 16,229
----------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle....................... 21,669 16,544 13,032 11,876 11,169
Income Tax Expense................................................. 9,946 6,842 5,538 5,243 4,643
----------------------------------------------------
Income Before Cumulative Effect of
Change in Accounting Principle................................... 11,723 9,702 7,494 6,633 6,526
Cumulative Effect of Change in
Accounting Principle(3).......................................... -- -- 1,200 -- --
----------------------------------------------------
Net Income..................................................... $ 11,723 $ 9,702 $ 8,694 $ 6,633 $ 6,526
====================================================
Earnings Per Share(4).............................................. $ 1.31 $ 1.03 $ 0.22 N/A N/A
(See footnotes on following page)
10
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Financial and Other Data of the Company
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At or for the Year Ended June 30,
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1996 1995 1994 1993 1992
=============================================================
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on Average Assets(3) ................................. 0.83% 1.08% 1.15% 0.97% 0.96%
Return on Average Stockholders' Equity(3) ................... 7.58 6.17 9.82 11.19 12.05
Return on Average Tangible Stockholders' Equity(3) .......... 9.18 6.17 9.82 11.19 12.05
Average Stockholders' Equity to Average Assets .............. 10.92 17.60 11.68 8.65 7.98
Stockholders' Equity to Total Assets ........................ 8.62 16.51 19.01 8.34 8.10
Tangible Stockholders' Equity to Tangible Assets ............ 6.01 16.51 19.01 8.34 8.10
Core Deposits to Total Deposits ............................. 41.68 36.12 49.08 47.92 40.79
Net Interest Spread ......................................... 3.17 3.11 3.36 3.77 3.10
Net Interest Margin(5) ...................................... 3.52 3.77 3.69 4.03 3.45
Operating Expense to Average Assets(6) ...................... 1.81 1.97 1.82 1.80 1.90
Operating Income to Average Assets(7) ....................... 0.16 0.14 0.15 0.17 0.17
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities ...................... 1.09X 1.20X 1.12X 1.08X 1.07X
Asset Quality Ratios:
Non-Performing Loans to Total Loans(8) ...................... 1.58% 1.10% 1.08% 1.43% 1.46%
Non-Performing Loans to Total Assets ........................ 0.73 0.39 0.43 0.72 0.89
Non-Performing Assets to Total Assets(9) .................... 0.82 0.56 0.78 1.25 1.75
Allowance for Loan Losses to Total Loans .................... 0.55 0.52 0.43 0.37 0.27
Allowance for Loan Losses to Non-Performing Loans ........... 34.63 47.10 39.38 25.52 18.49
Other Data:
Number of Deposit Accounts .................................. 164,368 68,617 63,416 67,143 71,813
Full-Service Banking Offices ................................ 28 11 11 11 11
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(1) Includes marketable equity securities of $5.0 million at June 30, 1992.
(2) For 1992 and 1993, amounts represent only retained earnings, substantially
restricted, and at June 30, 1996, 1995 and 1994 includes retained earnings
of $84.0 million, $76.2 million and $70.1 million, respectively,
substantially restricted.
(3) Reflects the cumulative effect of the Company's adoption of Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes," in
the fiscal year ended June 30, 1994.
(4) Earnings per share for fiscal year ended 1994 is based on net income from
March 31, 1994 to June 30, 1994.
(5) Calculation is based upon net interest income before provision for loan
losses divided by average interest- earning assets.
(6) Operating expense represents total non-interest expense less real estate
operations, net and amortization of excess of cost over fair value of net
assets acquired.
(7) Operating income represents total non-interest income less net gain on sale
of debt and equity securities.
(8) Non-performing loans consist of all loans 90 days or more past due and any
other loans, or any portion thereof, that have been determined to be
uncollectible.
(9) Non-performing assets consist of non-performing loans, investments in real
estate and real estate owned.
11
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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General
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized
on November 16, 1993 and is the holding company for Reliance Federal Savings
Bank (the "Bank"). On March 31, 1994, the Company issued 10,750,820 shares of
common stock at $10.00 per share raising total net proceeds of $103.6 million of
which $51.8 million was retained by the Company with the remaining net proceeds
being used by the Company to purchase all of the outstanding stock of the Bank.
The Company is headquartered in Garden City, New York and its primary
business currently consists of the operation of its wholly-owned subsidiary, the
Bank. In addition to directing, planning and coordinating the business
activities of the Bank, the Company currently invests primarily in U.S.
Government securities and repurchase agreements. In addition, the Company
completed the acquisitions of the Bank of Westbury, a Federal Savings Bank, in
August 1995 and Sunrise Bancorp, Inc. in January 1996, both of which were merged
into the Bank. The Company had no operations prior to March 31, 1994 and,
accordingly, the results of operations prior to that date reflect only those of
the Bank and its subsidiaries.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations and borrowings, primarily in mortgage, multi-family and consumer
loans (primarily in the form of home equity loans and home equity lines of
credit, secured by one- to four-family, owner occupied, residential properties,
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 co-operative units ("co-op loans") and commercial loans, however, in
recent years the Bank has discontinued its origination activities in these
areas. In addition, during periods in which the demand for loans which meet the
Bank's underwriting and interest rate risk standards and policies is lower than
the amount of funds available for investment, the Bank invests in
mortgage-backed securities, securities issued by the U.S. Government and
agencies thereof and other investments permitted by federal laws and
regulations.
The Company's results of operations are dependent primarily on interest
income from its securities investments and earnings of the Bank. The Bank's
results of operations are primarily dependent on its net interest income, which
is the difference between the interest earned on its assets, primarily its loan
and securities portfolios, and its cost of funds, which consists of the interest
paid on its deposits and borrowings. The Bank's net income also is affected by
its provision for loan losses as well as non-interest income, general and
administrative expense, other non-interest expense, and income tax expense.
General and administrative expense consists primarily of compensation and
benefits, occupancy expenses, federal deposit insurance premiums, advertising
expense and other general and administrative expenses. Other non-interest
expense consists of real estate operations, net and amortization of excess of
cost over the fair value of net assets acquired. The earnings of the Company and
Bank are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
Acquisition of Bank of Westbury
At the close of business on August 11, 1995, the Company completed its
acquisition of the Bank of Westbury, a Federal Savings Bank, with 6 banking
offices located in Nassau County, Long Island, New York in a transaction which
was accounted for as a purchase. 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 is being amortized on a 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.
On January 11, 1996, the Company completed the acquisition of Sunrise
Bancorp, Inc., with 11 banking offices located in the counties of Nassau and
Suffolk, Long Island, New York, in a transaction which was accounted for as a
purchase. The cost of the acquisition was approximately $106.3 million in cash,
or $32.00 per share of
12
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 is being 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
continued to exceed each of its regulatory capital requirements. See Note 3 of
the Notes to the Consolidated Financial Statements for the pro forma unaudited
combined condensed consolidated financial information of the Company and the
Bank of Westbury and Sunrise Bancorp, Inc. for the fiscal years ended June 30,
1996 and 1995.
Financial Condition
As of June 30, 1996, total assets were $1.8 billion, deposits were $1.3
billion and total stockholders' equity was $153.6 million.
In accordance with an implementation guide for Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," released by the Financial Accounting Standards Board
(FASB) on November 15, 1995, the Bank realigned its mortgage-backed securities
portfolio in December 1995 by transferring approximately $283.2 million from the
held-to-maturity to the available-for-sale category. The Bank realigned its
mortgage-backed securities portfolio in order to be more flexible and better
positioned for managing the portfolio under changing interest rates and other
market conditions. Mortgage-backed securities held-to-maturity decreased from
$413.8 million at June 30, 1995 to $184.5 million at June 30, 1996, a decrease
of $229.3 million, or 55.4%; mortgage-backed securities available-for-sale
increased to $591.7 million at June 30, 1996, from $104.5 million at June 30,
1995, an increase of $487.3 million, or 466.5%. At June 30, 1996, the unrealized
depreciation on securities available-for-sale, net of taxes was $5.3 million as
compared to unrealized appreciation of $839,000 at June 30, 1995. The increase
in the unrealized depreciation on available-for-sale securities was due to the
increase in interest rates during the second half of year ended June 30, 1996.
The mortgage-backed securities portfolio increased $258.0 million, or
49.8%, from $518.2 million at June 30, 1995 to $776.2 million at June 30, 1996
with the increase primarily due to $197.3 million of mortgage-backed securities
acquired from Bank of Westbury and Sunrise Bancorp, Inc. and increased purchases
of adjustable-rate and longer term fixed-rate mortgage-backed securities offset
by amortization and prepayments and sales. The Company sold approximately $180.6
million of mortgage-backed securities available-for-sale in order to fund the
purchase of Sunrise Bancorp, Inc. as well as reposition the portfolio
composition.
Mortgage loans increased from $224.4 million at June 30, 1995 to $691.0
million at June 30, 1996, an increase of $466.4 million, or 207.9%. The increase
in mortgage loans is primarily due to $423.0 million of mortgage loans acquired
from the Sunrise Bancorp, Inc. and Bank of Westbury as well increased
multi-family loan originations.
Funding for the purchases of mortgage-backed securities and loans was
through a combination of new deposit growth, borrowings and cash flows. Deposits
increased $675.3 million, or 100.7%, from $670.3 million at June 30, 1995 to
$1.3 billion at June 30, 1996. The increase in deposits is mainly the result of
the $628.9 million in deposits acquired from Sunrise Bancorp, Inc. and Bank of
Westbury as well as new certificate of deposit products. Borrowings increased
from $97.0 million at June 30, 1995 to $266.2 million at June 30, 1996, an
increase of $169.2 million, or 174.3%, as the Bank leveraged its capital and
improved returns on average tangible equity.
Non-performing loans totalled $13.0 million, or 1.58% of total loans at
June 30, 1996, an increase of $9.3 million, or 253.6% from $3.7 million, or
1.10% of total loans at June 30, 1995, primarily due to non-performing loans
acquired from Sunrise Bancorp, Inc. and Bank of Westbury. Non-performing loans
at June 30, 1996 were comprised of $12.0 million of loans secured by one- to
four-family residences, $350,000 of guaranteed student loans and two commercial
properties with loan balances totalling $655,000. The Company's allowance for
loan losses totalled $4.5 million at June 30, 1996 which represents a ratio of
allowance for loan losses to non-performing loans and to total loans of 34.63%
and 0.55%, respectively, as compared to 47.10% and 0.52%, respectively at June
30, 1995. The decrease in the ratio of the allowance to non-performing loans is
the result of the generally lower reserve levels maintained by the Sunrise
Bancorp, Inc. and the Bank of Westbury. Management believes the reserve at June
30, 1996 is adequate on non-performing loans and total loans. The Company's
non-performing assets to total assets ratio was 0.82% at June 30, 1996. For the
fiscal year ended June 30, 1996, the Company experienced net loan charge-offs of
$176,000.
13
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
Asset/Liability Management
One of the Bank's primary long-term financial objectives has been and will
continue to be to monitor the sensitivity of its earnings to interest rate
fluctuations by maintaining an appropriate matching of the maturities and
interest rate repricing characteristics of its assets and liabilities in
relation to the current and anticipated interest rate environment. In an effort
to realize this objective and minimize the Bank's exposure to interest rate
risk, the Bank emphasizes the origination of adjustable-rate mortgage ("ARMs")
and consumer loans, shorter-term fixed rate mortgage and consumer loans and the
purchase of adjustable-rate and shorter-term fixed rate mortgage-backed
securities. However, there can be no assurances that the Bank will be able to
originate adjustable rate loans or acquire mortgage-backed securities with terms
and characteristics which conform with the Bank's underwriting standards,
investment criteria or interest rate risk policies.
At June 30, 1996, $819.3 million, or 49.2%, of the Bank's interest-earning
assets consisted of adjustable-rate loans and mortgage-backed securities. The
Bank's mortgage loan portfolio totalled $691.0 million, of which, $354.5
million, or 51.3%, were adjustable-rate loans and $336.4 million, or 48.7%, were
fixed-rate loans. In addition, at June 30, 1996, the Bank's consumer loan
portfolio totalled $131.3 million, of which, $102.0 million, or 77.7%, were
adjustable-rate home equity lines of credit and guaranteed student loans and
$29.3 million, or 22.3%, were fixed-rate home equity and other consumer loans.
At June 30, 1996, the mortgage-backed securities portfolio totalled $776.2
million of which $591.7 million was classified as available-for-sale and $184.5
million was classified as held-to-maturity. Of the securities classified as
available-for-sale, $241.3 million, or 40.8%, of the mortgage-backed portfolio
were adjustable-rate securities and $350.4 million, or 59.2%, were fixed-rate
securities. Of the $184.5 million classified as held-to-maturity, $121.4
million, or 65.8%, of the mortgage-backed portfolio were adjustable-rate
securities and $63.1 million, or 34.2%, were fixed-rate securities. The Bank
expects to continue to invest in adjustable-rate and shorter term fixed-rate
mortgage-backed securities to reduce credit risk as well as minimize exposure to
volatile interest rates. However, during the year ended June 30, 1996 the Bank
increased its investment in 30 year fixed rate mortgage-backed securities in
order to hedge its adjustable rate portfolio against prepayment risk. It should
be noted that adjustable-rate loans and mortgage-backed securities backed by ARM
loans initially bear rates of interest below that of comparable fixed rate loans
or mortgage-backed securities backed by fixed rate loans. Accordingly, increased
emphasis on adjustable-rate loans and mortgage-backed securities may, under
certain interest rate conditions, result in the Bank's yield on interest-earning
assets being lower than it could be if fixed rate loans were emphasized.
At June 30, 1996, the Bank's estimated one year interest sensitivity "gap"
(the difference between assets that reprice or mature within such period
expressed as a percentage of total assets) was $49.3 million, or a positive
2.78%, of total assets, based on the following table setting forth the
interest-earning assets and interest-bearing liabilities outstanding at June 30,
1996. A gap is considered positive when the amount of interest rate sensitive
assets maturing or repricing within a specified time frame exceeds the amount of
interest rate sensitive liabilities repricing or maturing within that same time
period. A gap is considered negative when interest rate sensitive liabilities
maturing or repricing within a specified time period exceeds the amount of
interest rate sensitive assets repricing or maturing within that same time
period. Accordingly, in a rising interest rate environment, the Bank's positive
gap position will better position the Bank to have the yield on its assets
increasing at a pace more closely matching the increase in the cost of
interest-bearing liabilities than if the Bank had a negative gap.
Interest Rate Sensitivity Analysis
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1996, which are anticipated
by the Bank, using certain assumptions based on its historical experience and
other data available to management, to reprice or mature in each of the future
time periods shown. This table does not necessarily indicate the impact of
general interest rate movements on the Bank's net interest income because the
actual repricing of various assets and liabilities is subject to customer
discretion and competitive and other pressures and, therefore, actual experience
may vary from that indicated.
14
At June 30, 1996
---------------------------------------------------------------------------------------
More Than
3 Months More Than More Than More Than
3 Months to 12 1 Year to 3 Years to 5 Years to More Than
or Less Months 3 Years 5 Years 10 Years 10 Years Total
=======================================================================================
(Dollars in thousands)
Interest-Earning Assets:
Mortgage Loans(1) ..................... $109,624 $240,520 $ 144,323 $103,652 $ 66,754 $ 26,110 $ 690,983
Other Loans(1) ........................ 89,199 26,941 8,488 2,595 1,805 1,382 130,410
Mortgage-Backed Securities ............ 162,445 263,754 125,719 53,668 75,288 100,929 781,803
Federal Funds Sold .................... 1,000 -- -- -- -- -- 1,000
Debt and Equity Securities ............ -- 19,339 9,600 7,890 25,000 42 61,871
---------------------------------------------------------------------------------------
Total Interest-Earning Assets ....... 362,268 550,554 288,130 167,805 168,847 128,463 1,666,067
Net Premiums, Unearned Discount
and Deferred Fees(2) ................ 978 1,450 726 342 352 506 4,354
---------------------------------------------------------------------------------------
Net Interest-Earning Assets ......... 363,246 552,004 288,856 168,147 169,199 128,969 1,670,421
---------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Passbook Accounts ..................... 33,479 86,468 153,953 83,937 78,558 22,129 458,524
NOW Accounts .......................... 4,030 10,938 22,234 14,854 18,989 10,908 81,953
Money Market Accounts ................. 8,043 20,767 36,951 20,124 18,801 5,267 109,953
Certificate of Deposit Accounts ....... 187,643 295,010 130,406 61,777 -- -- 674,836
Borrowed Funds ........................ 169,234 50,304 46,622 -- -- -- 266,160
---------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities .. 402,429 463,487 390,166 180,692 116,348 38,304 1,591,426
---------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap ........... $(39,183) $ 88,517 $(101,310) $(12,545) $ 52,851 $ 90,665 $ 78,995
=======================================================================================
Cumulative Interest Rate Sensitivity Gap $(39,183) $ 49,334 $ (51,976) $(64,521) $(11,670) $ 78,995
=========================================================================
Cumulative Interest Rate Sensitivity Gap
as a Percentage of Total Assets ....... (2.20)% 2.78% (2.92)% (3.63)% (0.66)% 4.44%
Cumulative Net Interest-Earning Assets as
a Percentage of Cumulative Interest-
Bearing Liabilities ..................... 90.26% 105.70% 95.86% 95.51% 99.25% 104.96%
---------------------------------------------------------------------------------------
(1) For purposes of the GAP analysis, mortgage and other loans are not reduced
for the allowance for loan losses and non-performing loans.
(2) For purposes of the GAP analysis, premiums, unearned discount and deferred
loan fees are pro rated.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which limit adjustments to interest rates on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. Finally, the ability of borrowers to service
their ARM loans may decrease in the event of an interest rate increase. The
table reflects the estimates of management as to periods to repricing at
particular points in time. Among the factors considered, management monitors
both current trends and its historical repricing experience with respect to
particular or similar products. For example, the Bank has a number of deposit
accounts, including passbook savings, NOW accounts and money market accounts
which, subject to certain regulatory exceptions not relevant here, may be
withdrawn at any time. The Bank, based upon its historical experience, assumes
that while all customers in these account categories could withdraw their funds
on any given day, they will not do so, even if market interest rates were to
change. As a result, different assumptions may be used at different points in
time.
15
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the
Company's consolidated statements of condition and the consolidated statements
of income for the years ended June 30, 1996, 1995, and 1994 and reflects the
average yields on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the fiscal years
shown. Average balances are derived from daily balances. The average balance of
loans receivable includes loans on which the Bank has discontinued accruing
interest. The yields and costs include fees, premiums and discounts which are
considered adjustments to yields.
For the year ended June 30
----------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-Earning Assets:
Mortgage Loans, Net................... $ 473,427 $ 39,073 8.25% $226,299 $17,701 7.82% $242,627 $17,552 7.23%
Consumer and Other Loans, Net......... 121,565 10,942 9.00 104,754 9,540 9.11 101,773 8,059 7.92
Mortgage-Backed Securities(1)......... 685,348 46,084 6.72 459,468 29,469 6.41 333,635 18,440 5.53
Money Market Investments.............. 17,349 991 5.71 14,590 804 5.51 12,358 422 3.41
Debt and Equity Securities(1)......... 49,203 3,282 6.67 67,508 3,746 5.55 47,236 2,751 5.82
---------- --------- --------- -------- -------- -------
Total Interest-Earning Assets....... 1,346,892 100,372 7.45 872,619 61,260 7.02 737,629 47,224 6.40
--------- -------- -------
Non-Interest Earning Assets............. 63,883 21,930 20,520
---------- --------- --------
Total Assets........................ $1,410,775 $894,549 $758,149
========== ========= ========
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Passbook Accounts................... 353,617 8,942 2.53 $236,047 5,926 2.51 $268,779 7,012 2.61
NOW Accounts........................ 58,576 1,161 1.98 25,275 485 1.92 25,927 488 1.88
Money Market Accounts............... 97,975 2,515 2.57 91,051 2,283 2.51 105,594 2,666 2.52
Certificate of Deposit Accounts..... 547,562 29,807 5.44 267,340 13,318 4.98 196,525 7,625 3.88
Borrowed Funds...................... 180,055 10,560 5.87 105,657 6,349 6.01 62,531 2,233 3.57
--------- --------- --------- -------- ------- -------
Total Interest-Bearing
Liabilities....................... 1,237,785 52,985 4.28 725,370 28,361 3.91 659,356 20,024 3.04
--------- -------- -------
Non-Interest Bearing Liabilities........ 18,919 11,719 10,259
---------- --------- --------
Total Liabilities................... 1,256,704 737,089 669,615
Stockholders' Equity.................... 154,071 157,460 88,534
---------- --------- --------
Total Liabilities and
Stockholders' Equity.............. $1,410,775 $894,549 $758,149
========== ======== ========
Net Interest Income/Interest
Rate Spread(2)........................ $ 47,387 3.17% $32,899 3.11% $27,200 3.36%
======== ==== ======= ==== ======= ====
Net Interest-Earning Assets/
Net Interest Margin(3)................ $ 109,107 3.52% $147,249 3.77% $ 78,273 3.69%
========== ==== ======== ==== ======== ====
Ratio of Interest-Earning Assets to
Interest-Bearing Liabilities.......... 1.09x 1.20x 1.12x
==== ==== ====
(1) Includes securities available-for-sale.
(2) Net interest rate spread represents the difference between the average yield
on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
16
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Year ended June 30, 1996 Year ended June 30, 1995
Compared to Compared to
Year ended June 30, 1995 Year ended June 30, 1994
================================= ===============================
Increase (Decrease) Increase (Decrease)
in Net Interest Income in Net Interest Income
--------------------------------- -------------------------------
Due to Due to
-------------------- --------------------
Volume Rate Net Volume Rate Net
--------------------------------- -------------------------------
(In Thousands)
Interest-Earning Assets:
Mortgage Loans, Net....................... $20,347 $1,025 $21,372 $(1,227) $1,376 $ 149
Consumer and Other Loans, Net............. 1,518 (116) 1,402 242 1,239 1,481
Mortgage-Backed Securities................ 15,127 1,488 16,615 7,756 3,273 11,029
Money Market Investments.................. 156 31 187 87 295 382
Debt and Equity Securities................ (1,133) 669 (464) 1,128 (133) 995
--------------------------------- -------------------------------
Total................................... 36,015 3,097 39,112 7,986 6,050 14,036
--------------------------------- -------------------------------
Interest-Bearing Liabilities:
Passbook Accounts......................... 2,969 47 3,016 (827) (259) (1,086)
NOW Accounts.............................. 660 16 676 (12) 9 (3)
Money Market Accounts..................... 177 55 232 (372) (11) (383)
Certificate of Deposits Accounts.......... 15,154 1,335 16,489 3,186 2,507 5,693
Borrowed Funds............................ 4,363 (152) 4,211 2,067 2,049 4,116
--------------------------------- -------------------------------
Total................................... 23,323 1,301 24,624 4,042 4,295 8,337
--------------------------------- -------------------------------
Net Change in Net Interest Income........... $12,692 $1,796 $14,488 $ 3,944 $1,755 $ 5,699
================================= ===============================
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995.
General. Net income for fiscal 1996 was $11.7 million, an increase of $2.0
million, or 20.8%, from $9.7 million for fiscal 1995. Net income for fiscal 1996
and fiscal 1995 represent a return on average assets of 0.83% and 1.08%,
respectively, and a return on average equity of 7.58% and 6.17%, respectively.
Interest Income. Interest income increased by $39.1 million, or 63.8%, from
$61.3 million for fiscal 1995, to $100.4 million for fiscal 1996. The increase
resulted primarily from a $474.3 million increase in average interest-earning
assets from $872.6 million for fiscal 1995 to $1.3 billion for fiscal 1996 and
from a 43 basis point increase in the average yield of interest-earning assets
from 7.02% in fiscal 1995 to 7.45% in fiscal 1996. The increase in the average
interest-earning assets was primarily due to assets acquired in the Bank of
Westbury and Sunrise Bancorp, Inc. acquisitions. Interest income on
mortgage-backed securities increased $16.6 million, or 56.4%, from $29.5 million
for fiscal 1995 to $46.1 million for fiscal 1996, primarily due to an increase
of $225.9 million, or 49.2%, in the average balance of these securities, and an
increase in the average yield on these securities of 31 basis points from 6.41%
for fiscal 1995 to 6.72% for fiscal 1996 due to upward repricing of these
assets. Mortgage-backed securities generally bear interest rates lower than
loans. Accordingly, to the extent the demand for loans which meet the Bank's
underwriting standard remains low and the Company continues to increase its
investments in mortgage-backed securities, yields on interest-earning assets may
tend to be lower than if loan demand were to be stronger. Interest income from
mortgage loans increased by $21.4 million, or 120.7%, due to a $247.1 million,
or 109.2%, increase in the average balance of mortgage loans and from a 43 basis
point increase in the average yield on mortgage loans from 7.82% for fiscal 1995
to 8.25% for fiscal 1996. The increase in the average mortgage loans was
primarily due to loans acquired in the Bank of Westbury and Sunrise Bancorp,
Inc. acquisitions and increased originations of multi-family loans. The increase
in the average
17
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
yield resulted primarily from the upward repricing of the Company's
adjustable-rate loans and higher rates earned on the multi-family loans.
Interest Expense. Interest expense for fiscal 1996 was $53.0 million, an
increase of $24.6 million, or 86.8%, from the $28.4 million recorded for fiscal
1995. The increase is primarily the result of a $512.4 million, or 70.6%,
increase in the average balance of interest-bearing liabilities from $725.4
million for fiscal 1995 to $1.2 billion for fiscal 1996 and from a 37 basis
point increase in the cost of interest-bearing liabilities from 3.91% for fiscal
1995 to 4.28% for fiscal 1996. The increase in the average balance of
interest-bearing liabilities was primarily due to deposits acquired in the Bank
of Westbury and Sunrise Bancorp, Inc. acquisitions and additional borrowings.
Interest expense on total deposits increased $20.4 million, or 92.7%, from $22.0
million for fiscal 1995 to $42.4 million for fiscal 1996, primarily as a result
of a $426.3 million, or 68.8% increase in the average balance of deposits from
$619.7 million in fiscal 1995 to $1.0 billion in fiscal 1996 and from a 46 basis
point increase in the average cost of such deposits from 3.55% in fiscal 1995 to
4.01% in fiscal 1996. The increase in the average cost of deposits resulted
primarily from the Bank competitively raising interest rates on certificate of
deposit accounts to attract new deposits. The average balance of certificate
accounts increased $280.2 million, or 104.8%, from $267.3 million for fiscal
1995 to $547.6 million for fiscal 1996. In addition to the increase in the
average balance of certificate accounts, the average balance of core deposits
also increased $150.9 million, or 57.7%, from $261.3 million for fiscal 1995 to
$412.2 million for fiscal 1996. The increase relates to core deposits acquired
in the Bank of Westbury and Sunrise Bancorp, Inc. acquisitions which resulted in
the core deposit ratio increasing from 36.12% at June 30, 1995 to 41.68% at June
30, 1996. Interest expense on borrowed funds increased $4.2 million, or 66.3%,
from $6.3 million for fiscal 1995 to $10.6 million for fiscal 1996. Borrowings
averaged $180.0 million for fiscal 1996, an increase of $74.4 million, or 70.4%,
from the $105.7 million for fiscal 1995. The Company continues to utilize
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, have been invested by the Company primarily in mortgage-backed
securities and multi-family loans.
Net Interest Income. Net interest income for fiscal 1996 increased $14.5
million, or 44.0%, from $32.9 million for fiscal 1995 to $47.4 million for
fiscal 1996. The increase in net interest income primarily relates to an
increase in the net interest spread coupled with the significant growth in the
average balances of interest-earning assets and interest-bearing liabilities.
The net interest rate spread increased from 3.11% for fiscal 1995 to 3.17% for
fiscal 1996 as a result of higher yielding loans acquired from the Bank of
Westbury and Sunrise Bancorp, Inc. acquisitions. Average interest-earning assets
increased $474.3 million, or 54.4%, from $872.6 million in fiscal 1995 to $1.3
billion in fiscal 1996 while average interest-bearing liabilities increased
$512.4 million, or 70.6%, from $725.4 in fiscal 1995 to $1.2 billion in fiscal
1996. As a result of leveraging the Bank's capital with the two acquisitions,
net interest margin decreased from 3.77% in fiscal 1995 to 3.52% in fiscal 1996.
In addition, the ratio of average interest-earning assets to interest-bearing
liabilities declined from 1.20x in fiscal 1995 to 1.09x in fiscal 1996.
Provision for Loan Losses. The provision for loan losses for fiscal 1996 was
$725,000, an increase of $325,000, or 81.3%, from $400,000 for fiscal 1995. When
determining the provision for loan losses, management assesses the risk inherent
in its loan portfolio based on information available to management at such time
relating to trends in the national and local economies, trends in the real
estate market and trends in the Company's level of non-performing loans and
assets and net charge-offs. Non-performing loans increased from $3.7 million at
the end of fiscal 1995 to $13.0 million at the end of fiscal 1996 and net
charge-offs increased from $88,000 for fiscal 1995 to $176,000 for fiscal 1996.
Management increased the provision for loan losses during fiscal 1996 due to its
assessment of the loan portfolio and to increase loan loss coverage on
non-performing loans acquired from Sunrise Bancorp, Inc. and Bank of Westbury to
bring such reserves in line with Company policy. In addition, the Company has
increased its origination of multi-family loans which may possess a greater
credit risk than one- to four-family loans and requires greater general reserve
levels. Management believes that based upon information currently available its
allowance for loan losses is adequate to cover future loan losses. However, if
general economic conditions and real estate values within the Bank's primary
lending area decline, the level of non-performing loans may increase resulting
in larger provisions for loan losses which, in turn, would adversely affect net
income.
Non-Interest Income. Non-interest income for fiscal 1996 increased $1.9 million,
or 147.4%, from $1.2 million for fiscal 1995 to $3.1 million for fiscal 1996.
The increase in non-interest income relates to a gain of $678,000 in fiscal 1996
from the sale of mortgage-backed securities classified as available-for-sale in
order to fund the purchase of Sunrise Bancorp, Inc. In addition, the increase
relates to increased servicing income, and deposit fee income as it relates to
the two acquisitions and a recovery of claim which was previously written off.
18
Non-Interest Expense. Non-interest expense totalled $28.1 million for the fiscal
year ended June 30, 1996 as compared to $17.2 million for the fiscal year ended
June 30, 1995, an increase of $10.9 million, or 63.3%. The increase is mainly
the result of banking office personnel, deposit insurance premiums, goodwill
amortization and other occupancy costs associated with the Sunrise Bancorp, Inc.
and Bank of Westbury acquisitions, however, the operating expense to average
assets ratio decreased from 1.97% for the fiscal year ended June 30, 1995 to
1.81% for the fiscal year ended June 30, 1996 primarily due to the increased
asset base and acquisition related efficiencies. For the fiscal year ended June
30, 1996, compensation and benefits expense increased to $13.4 million, an
increase of $3.8 million, or 40.1%, from $9.6 million for the fiscal year ended
June 30, 1995. The increase in compensation and benefits expense is due to the
aforementioned addition of banking office personnel, higher benefit expenses and
normal salary adjustments. Occupancy and equipment expense increased $2.0
million, or 82.0%, from $2.5 million for the fiscal year ended June 30, 1995 to
$4.5 million for the fiscal year ended June 30, 1996 due to costs associated
with the operation of the seventeen new banking offices as well as miscellaneous
data processing costs. Other operating expenses increased $1.2 million, or
37.2%, from $3.0 million during the fiscal year ended June 30, 1995 to $4.2
million for the fiscal year ended June 30, 1996 as a result of general expenses
related to the addition of the seventeen new banking offices.
For the fiscal year ended June 30, 1996, real estate owned expenses were
$579,000 as compared to income of $385,000 in the prior year period. The
increase in real estate owned expenses primarily relates to the reduction in net
gains on the sale of real estate owned from $657,000 in fiscal 1995 to $19,000
in fiscal 1996. In addition, during the fiscal year ended June 30, 1996, the
Bank established a provision for REO losses of $375,000 as compared to $60,000
for the prior year period. Additional reserves on real estate owned were
established in order to facilitate the sale of such properties in the current
market place.
During fiscal year 1996, the Bank recognized amortization of excess of cost
over fair value of net assets acquired of $1.9 million as compared to no
amortization in fiscal 1995. The amortization of cost over fair value of net
assets acquired relates to the Company accounting for the acquisitions of Bank
of Westbury and Sunrise Bancorp, Inc. using the purchase method.
Income Tax Expense. Income tax expense increased $3.1 million, or 45.4%,
from $6.8 million for fiscal 1995 to $9.9 million for fiscal 1996. The effective
income tax rate was 45.9% for fiscal 1996 as compared to 41.4% for fiscal 1995.
The increase in the effective tax rate primarily relates to no tax benefit
provided for the amortization of excess of cost over fair value of net assets
acquired and other employee benefit expenses.
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994.
General. Net income for fiscal 1995 was $9.7 million, an increase of $1.0
million, or 11.6%, from $8.7 million for fiscal 1994. Net income for fiscal 1995
and fiscal 1994 represent a return on average assets of 1.08% and 1.15%,
respectively, and a return on average equity of 6.17% and 9.82%, respectively.
Excluding the recording of a one time non-recurring benefit for the positive
cumulative effect of a change in accounting for income taxes of $1.2 million in
1994, net income increased $2.2 million, or 29.5%, primarily due to a $5.7
million, or 21.0%, increase in net interest income offset in part, by a $2.3
million increase in non-interest expense and a $1.3 million increase in income
tax expense.
Interest Income. Interest income increased by $14.0 million, or 29.7%, from
$47.2 million for fiscal 1994, to $61.2 million for fiscal 1995. The increase
resulted primarily from an increase in the average yield of interest-earning
assets from 6.40% to 7.02%, a 62 basis point increase, and from an increase of
$135.0 million, or 18.3%, in the average balance of such assets from $737.6
million for fiscal 1994 to $872.6 million for fiscal 1995. The increase in the
average yield on interest-earning assets was primarily due to the upward
repricing of the Company's adjustable-rate mortgage backed securities. Interest
income on mortgage-backed securities increased $11.0 million, or 59.8%, from
$18.4 million for fiscal 1994 to $29.4 million for fiscal 1995, primarily due to
an increase of $125.8 million, or 37.7%, in the average balance of these
securities, and an increase in the average yield on these securities of 88 basis
points from 5.53% for fiscal 1994 to 6.41% for fiscal 1995 due to upward
repricing of these assets. Mortgage-backed securities generally bear interest
rates lower than loans. Accordingly, to the extent the demand for loans which
meet the Bank's underwriting standard remains low and the Company continues to
increase its investments in mortgage-backed securities, yields on interest
earning assets may tend to be lower than if loan demand were to be stronger.
Interest income from mortgage loans increased by $149,000, or 0.8%, due to a 59
basis point increase in the average yield on
19
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
mortgage loans from 7.23% for fiscal 1994 to 7.82% for fiscal 1995 offset by a
$16.3 million, or 6.7%, decrease in the average balance of mortgage loans. The
increase in the average yield resulted primarily from the upward repricing of
the Company's adjustable rate loans. Interest income on consumer loans increased
$1.5 million, or 18.3%, from $8.0 million for fiscal 1994 to $9.5 million for
fiscal 1995. The increase is primarily due to the upward repricing of the prime
rate based home equity lines during fiscal 1995. Interest income on debt and
equity securities increased $1.0 million, or 36.2%, from $2.7 million for fiscal
1994 to $3.7 million for fiscal 1995. The increase is the result of the Company
purchasing U.S. Treasury securities with proceeds from the conversion.
Interest Expense. Interest expense for fiscal 1995, was $28.3 million, an
increase of $8.3 million, or 41.6% from the $20.0 million recorded for fiscal
1994. The increase is primarily the result of an 87 basis point increase in the
cost of interest-bearing liabilities from 3.04% for fiscal 1994 to 3.91% for
fiscal 1995, and by a $66.0 million, or 10.0%, increase in the average balance
of interest-bearing liabilities from $659.4 million for fiscal 1994 to $725.4
million for fiscal 1995. The increase in the average balance of interest-bearing
liabilities was primarily due to the leverage strategy employed during fiscal
1995 the effect of which was to increase the average balance of certificate of
deposit accounts and borrowed money, consisting primarily of FHLB advances and
reverse repurchase agreements. The average balance of certificate accounts
increased $70.8 million, or 36.0%, from $196.5 million for fiscal 1994 to $267.3
million for fiscal 1995. Borrowings averaged $105.6 million for fiscal 1995, an
increase of $43.1 million, or 69.0%, from the $62.5 million for fiscal 1994.
While the average balance of certificates accounts and borrowings increased,
core deposits decreased $33.4 million, or 11.3%, from $294.7 million for fiscal
1994 to $261.3 million for fiscal 1995 partially due to account holders
investing funds from core deposit accounts into higher yielding certificate
accounts. The increase in the average cost of interest-bearing liabilities
resulted primarily from increased utilization of FHLB advances and reverse
repurchase agreements which generally bear higher interest rates than deposits
and the generally higher interest rate environment which resulted in higher
borrowing costs. Additionally, such increase resulted from the Bank
competitively raising interest rates on certificate of deposit accounts to
attract new deposits and leverage the Bank's capital. Interest expense on total
deposits increased $4.2 million, or 23.7% from $17.8 million for fiscal 1994 to
$22.0 million for fiscal 1995, primarily as a result of a 57 basis point
increase in the average cost of such deposits and a $22.9 million increase in
the average balance of deposits. Interest expense on borrowed funds increased
$4.1 million, or 184.3%, from $2.2 million for fiscal 1994 to $6.3 for fiscal
1995. During this period, and from time to time in the past, the Company 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, have been invested by the Company primarily in
mortgage-backed securities in response to lower loan demand.
Net Interest Income. Net interest income for fiscal 1995 increased $5.7 million,
or 21.0%, from $27.2 million for fiscal 1994 to $32.9 million for fiscal 1995.
The increase in net interest income is the result of a $135.0 million, or 18.3%,
increase in average interest-earning assets from $737.6 million in fiscal 1994
to $872.6 million in fiscal 1995 as compared to a $66.0 million, or 10.0%,
increase in average interest-bearing liabilities. The higher increase in average
interest-earning assets was the result of the stock conversion proceeds being
invested in mortgage-backed securities and U.S. government securities. While the
Bank's leveraging strategy has had the effect of increasing net income and net
interest income, net interest spread has compressed as a result of a flattening
of the yield curve. The net interest rate spread decreased from 3.36% for fiscal
1994 to 3.11% for fiscal 1995 however, the net interest margin increased from
3.69% to 3.77%.
Provision for Loan Losses. The provision for loan losses for fiscal 1995 was
$400,000, as compared to $393,000 for fiscal 1994. When determining the
provision for loan losses, management assesses the risk inherent in its loan
portfolio based on information available to management at such time relating to
trends in the national and local economies, trends in the real estate market and
trends in the Company's level of non-performing loans and assets and net
charge-offs. Non-performing loans increased slightly from $3.6 million at the
end of fiscal 1994 to $3.7 million at the end of fiscal 1995 while net
charge-offs decreased from $320,000 for fiscal 1994 to $88,000 for fiscal 1995.
Although, non-performing loans increased slightly and net charge-offs decreased,
management determined to keep the provision for loan losses relatively stable
during fiscal 1995 due to its assessment of the loan portfolio in consideration
of the continued weakness in the local economy attributed to workforce
transition, high real property taxes and other occupancy costs. In addition, the
Company has increased its origination of multi-family loans which may possess a
greater credit risk than one- to four-family loans. Management believes that
based upon information
20
currently available its allowance for loan losses is adequate to cover future
loan losses. However, if general economic conditions and real estate values
within the Bank's primary lending area decline, the level of non-performing
loans may increase resulting in larger provisions for loan losses which, in
turn, would adversely affect net income.
Non-Interest Income. Non-interest income for fiscal 1995 increased $138,000, or
12.3%, from $1.1 million for fiscal 1994 to $1.3 million for fiscal 1995. The
increase is due to a gain on the call of a debt security.
Non-Interest Expense. Non-interest expense totalled $17.2 million for fiscal
1995 as compared to $14.9 million for fiscal 1994, an increase of $2.3 million,
or 15.6%. The increase is mainly the result of the increase in compensation and
benefits expense, advertising expense and other operating expenses offset by a
significant reduction in real estate operations expense. Expenses related to
real estate operations decreased from $1.1 million for fiscal 1994 to income of
$385,000 for fiscal 1995. This decrease was directly attributable to the gain on
the sale of real estate owned and lower provisions for losses associated with
real estate operations. For fiscal 1995 compensation and benefits expense
increased to $9.6 million as compared to $7.1 million for fiscal 1994. The
increase in compensation and benefits expense is due primarily to establishment
of stock based benefit plans in connection with the conversion of the Bank and
normal salary increases. Advertising expense totalled $1.2 million for fiscal
1995, an increase of $488,000, or 72.8%, due primarily to the Bank aggressively
marketing its deposit products and its "Lifetime Prime" home equity line of
credit. Other operating expenses increased $673,000, or 28.4%, due primarily to
costs associated with operating as a public company. The Company's operating
expenses to average assets ratio was 1.97% for fiscal 1995 as compared to 1.82%
for fiscal 1994.
Income Tax Expense. Income tax expense increased $1.3 million, or 23.5%, from
$5.5 million for fiscal 1994 to $6.8 million for fiscal 1995. The effective
income tax rates were 41.4% for fiscal 1995 as compared to 42.5% for fiscal
1994. The decrease in the effective tax rate primarily reflects the change in
the calculation of tax bad debt for state and local tax purposes.
Cumulative Effect of Change in Accounting for Income Taxes. Income from the
cumulative effect of change in accounting for income taxes occurred in fiscal
1994 due to the recording of the one-time benefit with the adoption of SFAS No.
109 "Accounting for Income Taxes" in fiscal 1994.
Liquidity and Capital Resources
The Company's current primary sources of funds are principal and interest
payments and sales of securities available-for-sale and dividends from the Bank.
Dividend payments to the Company from the Bank are subject to the profitability
of the Bank and to applicable laws and regulations. During fiscal year 1996,
1995 and 1994, the Bank did not make any dividend payments to the Company. The
Company's liquidity is also available to, among other things, support future
expansion of operations or diversification into other banking related
businesses, payments of dividends or repurchase its common stock. In this
regard, the Company declared cash dividends of $3,924,000 and $3,641,000 during
fiscal year 1996 and 1995, respectively. The Company did not declare any
dividends in fiscal year 1994.
During fiscal 1994, the Company repurchased 362,375 shares at an aggregate
cost of $3,744,000. During fiscal 1995, the Company repurchased 998,930 shares
at an aggregate cost of $13,040,000. On May 7, 1996, the Company announced the
approval of its fourth five percent stock repurchase plan which allows the
Company to repurchase up to 461,287 common shares. As of June 30, 1996, 97,000
shares under this program were repurchased at an aggregate cost of $1,488,000.
During fiscal 1996, the Company repurchased 260,776 shares at an aggregate cost
of $3,829,000. Through June 30, 1996, all repurchases were funded by the
Company, therefore, the capital and liquidity of the Bank were not affected. On
August 11, 1995, the Company completed the acquisition of Bank of Westbury for
approximately $16.7 million in cash. The Company had sufficient liquidity
available to fund the purchase and as of August 11, 1995, the Bank met all of
its regulatory capital requirements.
On January 11, 1996, the Company completed the acquisition of Sunrise
Bancorp, Inc. for approximately $106.3 million in cash. 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, the Bank
continued to exceed each of its regulatory capital requirements.
21
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed securities and debt and equity securities,
advances from the FHLB-NY, borrowings under reverse repurchase agreements and
loan sales. While maturities and scheduled amortization of loans,
mortgage-backed securities and debt securities are predictable sources of funds,
deposit flows and mortgage prepayments are strongly influenced by changes in
general interest rates, economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid assets
and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulations. The minimum
required liquidity and short-term liquidity ratios are currently 5.0% and 1.0%,
respectively. The Bank's liquidity and short-term liquidity ratios averaged
8.68% and 2.59%, respectively, for the fiscal year ended June 30, 1996. The
Bank's short-term liquidity ratio was 1.97% at June 30, 1996.
The Bank's most liquid assets are cash and short-term investments. The
levels of the Bank's liquid assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period. At June 30,
1996, assets qualifying for short-term liquidity, including cash and short-term
investments, totalled $31.5 million.
The primary investment activity of the Bank is the origination of mortgage
loans and consumer loans, and the purchase of mortgage-backed securities. During
the fiscal year ended June 30, 1996, the Bank originated mortgage loans and
consumer loans in the amount of $107.1 million and $35.8 million, respectively.
During the fiscal year ended June 30, 1996, the Bank purchased $399.1 million of
mortgage-backed securities of which $384.2 million, or 95.7%, were classified as
available-for-sale and purchased as part of the Bank's growth strategy. These
activities were funded primarily by deposits, principal repayments on loans and
mortgage-backed securities and borrowings from the FHLB-NY and reverse
repurchase agreements. At June 30, 1996, borrowings from the FHLB-NY and reverse
repurchase agreements totalled $3.0 million and $263.2 million, respectively. At
June 30, 1996, the Bank had outstanding loan commitments of $16.5 million and
open lines of credit of $45.0 million. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less from
June 30, 1996 totalled $482.7 million. Management believes that a significant
portion of such deposits will remain with the Bank.
At June 30, 1996, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 5.60%, 5.60% and 14.70%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurements of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as the price of goods and services.
Impact of New Accounting Standards
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long Lived Assets to be Disposed of." SFAS No. 121
establishes accounting standards for recognizing and measuring impairment of
long-lived assets and certain identifiable intangibles to be disposed of. SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 121 is effective for financial statements for fiscal
years beginning after December 15, 1995. SFAS No. 121, when adopted, is not
expected to have a material adverse effect on the Company's financial condition.
In June 1995, the FASB issued SFAS No.122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities" to eliminate the accounting distinction between rights to
service mortgage loans that are acquired through loan origination and those
acquired through purchase. Thus, if mortgage loans are sold or securitized but
the rights to service those loans are retained, the total cost of such loans
(whether originated or acquired) should be allocated to (1) the mortgage
servicing rights, and (2) the loan themselves based on their relative fair
value. SFAS 122 is effective for fiscal years beginning after December 15, 1995
to loan origination or securitization of mortgage servicing rights and to
impairment evaluations of all capitalized
22
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
mortgage servicing rights, including those purchased prior to the effective date
of SFAS No. 122. SFAS No. 122, when adopted, is not expected to have a material
adverse effect on the Company's financial condition.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 applies to all transactions in
which an entity acquires goods or services by issuing equity instruments or by
incurring liabilities where the payment amounts are based on the entity's common
stock price, except for employee stock ownership plans. SFAS No. 123 established
a fair value based method of accounting for stock-based compensation arrangement
with employees, rather then the intrinsic value based method that is contained
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No.25"). SFASNo. 123 does not require an entity to adopt the
new fair value based method for purposes of preparing its basic financial
statements. While the SFAS No. 123 fair value based method is considered by the
FASB to be preferable to the APB No. 25 method, entities are allowed to continue
to use the APB No. 25 method for preparing its basic financial statements.
Entities not adopting the fair value based method under SFAS No. 123 are
required to present pro forma net income and earnings per share information, in
the notes to the financial statements, as if the fair value based method had
been adopted.
The accounting requirements of SFAS No. 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995, but may
also be adopted upon the issuance of SFAS No. 123. The disclosure requirements
are effective for financial statements for fiscal years beginning after December
15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially
adopted for recognizing compensation cost. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using the APB No.
25 method must include the effects of all awards granted in fiscal years that
begin after December 15, 1994. Pro forma disclosures for awards granted in the
first fiscal year beginning after December 15, 1994 need not be included in
financial statements for that fiscal year but should be presented subsequently
whenever financial statements for that fiscal year are presented for comparative
purposes with financial statements for a later fiscal year. The Company
currently does not intend to adopt the provisions of this statement early.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). SFAS No. 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. Under this approach, an entity, subsequent to a transfer of financial
assets, must recognize the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. Standards for
distinguishing transfers of financial assets that are sales from those that are
secured borrowings are provided in SFAS No. 125. A transfer not meeting the
criteria for a sale must be accounted for as a secured borrowing with pledge of
collateral.
SFAS No. 125 requires that liabilities and derivatives incurred or obtained
by transferors as part of a transfer of financial assets be initially measured
at fair value, if practicable. It additionally requires that servicing assets
and other retained interests in transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Servicing assets and liabilities must be subsequently measured by amortization
in proportion to and over the period of estimated net servicing income or loss
and assessed for asset impairment, or increased obligation, based on their fair
value.
This Statement supersedes the FASB's SFAS No. 76, "Extinguishment of Debt",
and SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with
Recourse." SFAS No. 125 amends SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," ("SFAS No. 115") to prohibit the classification
of a debt security as held-to-maturity if it can be prepaid or otherwise settled
in such a way that the holder of the security would not recover substantially
all of its recorded investment. It further requires that loans and other assets
that can be prepaid or otherwise settled in such a way that the holder would not
recover substantially all of its recorded investment shall be subsequently
measured like debt securities classified as available-for-sale or trading under
SFAS No. 115, as amended by SFAS No. 125. SFAS No. 125 also amends and extends
to all servicing assets and liabilities the accounting standards for mortgage
servicing rights now in SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities," and supersedes SFAS No. 122, "Accounting for Mortgage Servicing
Rights."
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
The Company is currently reviewing the impact of the implementation of SFAS No.
125 on its consolidated financial statements.
23
Reliance Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------------------------------------
(continued)
Impact of Legislation
Recapitalization of SAIF Fund. Legislation is pending in Congress to mitigate
the effect of the Bank Insurance Fund ("BIF") and Savings Association Insurance
Fund ("SAIF") premium disparity. Under the legislation a special assessment
would be imposed on the amount of deposits held by SAIF-member institutions,
including the Bank, as of a specified date, currently March 31, 1995, to
recapitalize the SAIF. The amount of the special assessment would be left to the
discretion of the FDIC but is generally estimated at between 79 to 85 basis
points of insured deposits. The legislation would also require that the BIF and
SAIF be merged, provided that subsequent legislation is enacted requiring
federal savings associations to become national banks or state chartered banks
or thrifts, and that the Financing Insurance Company ("FICO") payments be spread
across all BIF and SAIF members. The payment of the special assessment would
have the effect of immediately reducing the capital of SAIF-member institutions,
net of any tax effect; however, it would not affect the Bank's compliance with
its regulatory capital requirements. Management cannot predict whether
legislation imposing such an assessment will be enacted, or, if enacted, the
specific terms of such legislation including the amount of any special
assessment and when and whether ongoing SAIF premiums will be reduced to a level
equal to that of BIF premiums. Management can also not predict whether or when
the BIF and SAIF will merge. A significant increase in SAIF insurance premiums
or a significant special assessment to recapitalize the SAIF would likely have
an adverse effect on the operating expenses of the Company. The assessment of a
79 to 85 basis point fee to recapitalize the SAIF would result in a $5.6 million
to $6.0 million payment on an after-tax basis.
Tax Bad Debt Reserves. Under Section 593 of the Internal Revenue Code, thrift
institutions such as the Bank, which meet certain definitional tests, primarily
relating to their assets and the nature of their business, are permitted to
establish a tax reserve for bad debts and to make annual additions thereto,
which additions may, within specified limitations, be deducted in arriving at
their taxable income. The Bank's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, may
currently be computed using an amount based on the Bank's actual loss experience
(the "Experience Method"), or a percentage equal to 8% of the Bank's taxable
income (the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve. Similar deductions for additions to the Bank's bad
debt reserve are permitted under the New York State Bank Franchise Tax and the
New York City Banking Corporation Tax; however, for purposes of these taxes, the
effective allowable percentage under the PTI method is 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 (the "1996 Act"),
signed into law in August, 1996, Section 593 of the Code was amended, and the
Bank, as a "large bank" (one with assets having an adjusted basis of more than
$500 million), will be unable to make additions to its tax bad debt reserve, 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) over a multi-year
period, beginning with the Bank's taxable year beginning on January 1, 1996, the
excess of the balance of its bad debt reserves (other than the supplemental
reserve) as of December 31, 1995 over the balance of such reserves as of
December 31, 1987, or over a lesser period if the Bank's loan portfolio has
decreased since 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 passage of the
1996 Act, the Bank will incur additional federal tax liability, which has been
accrued in the statements of condition. However, the Act will have 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. The Bank's officers and
industry leaders continue to seek such amendments to the New York City tax law;
however, the Company cannot predict whether such changes to New York City law
will be adopted and, if so, in what form.
24
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Condition
- --------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
June 30,
-------------------------------
1996 1995
===============================
Assets
Cash and due from banks.................................................................... $ 22,420 $ 14,237
Money market investments................................................................... 10,450 2,700
Debt and equity securities available-for-sale.............................................. 13,271 23,880
Debt and equity securities held-to-maturity (with estimated
market values of $48,036 and $23,883, respectively)...................................... 48,330 23,890
Mortgage-backed securities available-for-sale.............................................. 591,740 104,453
Mortgage-backed securities held-to-maturity (with estimated
market values of $184,995 and $415,820, respectively).................................... 184,492 413,762
Loans receivable:
Mortgage loans........................................................................... 690,967 224,448
Consumer and other loans................................................................. 131,274 109,361
Less allowance for loan losses......................................................... (4,495) (1,729)
-------------------------------
Loans receivable, net................................................................ 817,746 332,080
Accrued interest receivable, net........................................................... 11,312 6,668
Office properties and equipment, net....................................................... 13,821 4,765
Prepaid expenses and other assets.......................................................... 14,070 3,443
Purchased mortgage servicing rights........................................................ 3,905 --
Excess of cost over fair value of net assets acquired...................................... 49,429 --
Real estate owned, net..................................................................... 1,564 1,558
-------------------------------
Total assets......................................................................... $1,782,550 $931,436
===============================
Liabilities and Stockholders' Equity
Deposits................................................................................... $1,345,626 $670,317
FHLB advances.............................................................................. 3,000 40,000
Securities sold under agreements to repurchase............................................. 263,160 57,035
Advance payments by borrowers for taxes and insurance...................................... 8,846 3,468
Accrued expenses and other liabilities..................................................... 8,299 6,883
-------------------------------
Total liabilities.................................................................... 1,628,931 777,703
-------------------------------
Commitments
Stockholders' Equity
Preferred stock, $.01 par value, 4,000,000 shares authorized; none issued.................. -- --
Common stock, $.01 par value, 20,000,000 shares authorized;
10,750,820 shares issued; 9,128,739 and 9,389,515 shares outstanding, respectively....... 108 108
Additional paid-in capital................................................................. 104,041 103,655
Retained earnings, substantially restricted................................................ 83,966 76,167
Unrealized appreciation (depreciation) on securities available-for-sale, net of taxes...... (5,281) 839
Less:
Unallocated common stock held by ESOP...................................................... (6,210) (7,038)
Unearned common stock held by Recognition and Retention Plan (RRP)......................... (2,392) (3,214)
Treasury stock, at cost (1,622,081 and 1,361,305 shares, respectively)..................... (20,613) (16,784)
-------------------------------
Total stockholders' equity............................................................... 153,619 153,733
-------------------------------
Total liabilities and stockholders' equity............................................. $1,782,550 $931,436
===============================
See accompanying notes to consolidated financial statements.
25
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
- --------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
For the Year Ended June 30,
------------------------------------------------
1996 1995 1994
================================================
Interest Income:
First Mortgage Loans.................................................... $ 39,073 $ 17,701 $17,552
Consumer and Other Loans................................................ 10,942 9,540 8,059
Mortgage-Backed Securities.............................................. 46,084 29,469 18,440
Money Market Investments................................................ 991 804 422
Debt and Equity Securities.............................................. 3,282 3,746 2,751
------------------------------------------------
Total Interest Income................................................. 100,372 61,260 47,224
------------------------------------------------
Interest Expense:
Deposits................................................................ 42,425 22,012 17,791
Borrowed Funds.......................................................... 10,560 6,349 2,233
------------------------------------------------
Total Interest Expense................................................ 52,985 28,361 20,024
------------------------------------------------
Net Interest Income Before Provision for Loan Losses.................... 47,387 32,899 27,200
Provision for Loan Losses................................................. 725 400 393
------------------------------------------------
Net Interest Income After Provision for Loan Losses..................... 46,662 32,499 26,807
------------------------------------------------
Non-Interest Income:
Loan Fees and Service Charges........................................... 826 269 260
Other Operating Income.................................................. 1,606 841 859
Net Gain on Securities.................................................. 678 147 --
------------------------------------------------
Total Non-Interest Income............................................. 3,110 1,257 1,119
------------------------------------------------
Non-Interest Expense:
Compensation and Benefits............................................... 13,395 9,562 7,068
Occupancy and Equipment................................................. 4,481 2,462 2,336
Federal Deposit Insurance Premiums...................................... 2,399 1,376 1,374
Advertising............................................................. 1,152 1,158 670
Other Operating Expenses................................................ 4,169 3,039 2,366
------------------------------------------------
Total General and Administrative Expenses............................. 25,596 17,597 13,814
Real Estate Operations, Net............................................. 579 (385) 1,080
Amortization of Excess of Cost Over Fair Value of Net Assets Acquired... 1,928 -- --
------------------------------------------------
Total Non-Interest Expense........................................... 28,103 17,212 14,894
------------------------------------------------
Income Before Income Taxes and Cumulative Effect of
Change in Accounting Principle.......................................... 21,669 16,544 13,032
Income Tax Expense........................................................ 9,946 6,842 5,538
------------------------------------------------
Income Before Cumulative Effect of Change in Accounting Principle......... 11,723 9,702 7,494
Cumulative Effect of Change in Accounting for Income Taxes................ -- -- 1,200
------------------------------------------------
Net Income................................................................ $ 11,723 $ 9,702 $ 8,694
================================================
Earnings Per Share (1994 based on net income from
March 31, 1994 to June 30, 1994)........................................ $ 1.31 $ 1.03 $ 0.22
See accompanying notes to consolidated financial statements.
26
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
====================================================================================================================================
(Dollars in thousands, except share amounts)
For the Year Ended June 30,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
Common Stock (Par Value: $.01):
Balance at Beginning of Year ............................................ $ 108 $ 108 $ --
Shares Issued Pursuant to Initial Common
Stock Offering (10,750,820 shares) .................................... -- -- 108
----------------------------------------------------
Balance at End of Year .................................................... 108 108 108
----------------------------------------------------
Additional Paid in Capital:
Balance at Beginning of Year ............................................ 103,655 103,479 --
Initial Common Stock Offering ........................................... -- -- 103,467
Allocation of ESOP Stock and Earned Portion of RRPs ..................... 386 176 12
----------------------------------------------------
Balance at End of Year .................................................. 104,041 103,655 103,479
----------------------------------------------------
Retained Earnings:
Balance at Beginning of Year ............................................ 76,167 70,106 61,412
Net Income .............................................................. 11,723 9,702 8,694
Dividends Declared ...................................................... (3,924) (3,641) --
----------------------------------------------------
Balance at End of Year .................................................. 83,966 76,167 70,106
----------------------------------------------------
Unrealized Appreciation (Depreciation) in
Securities Available-for-Sale, Net of Tax:
Balance at Beginning of Year ............................................ 839 (118) --
Unrealized Appreciation on Securities Transferred from
Held-to-Maturity to Available-for-Sale, Net of Tax ...................... 1,144 -- --
Change in Unrealized Appreciation (Depreciation), Net of Tax ............ (7,264) 957 (118)
----------------------------------------------------
Balance at End of Year .................................................. (5,281) 839 (118)
----------------------------------------------------
Employee Stock Ownership Plan:
Balance at Beginning of Year ............................................ (7,038) (8,004) --
Common Stock Acquired by ESOP ........................................... -- -- (8,280)
Allocation of ESOP Stock ................................................ 828 966 276
----------------------------------------------------
Balance at End of Year .................................................. (6,210) (7,038) (8,004)
----------------------------------------------------
Recognition and Retention Plans:
Balance at Beginning of Year ............................................ (3,214) (3,976) --
Common Stock Acquired by RRPs ........................................... -- -- (4,140)
Earned Portion of RRPs .................................................. 822 762 164
----------------------------------------------------
Balance at End of Year .................................................. (2,392) (3,214) (3,976)
----------------------------------------------------
Treasury Stock:
Balance at Beginning of Year ............................................ (16,784) (3,744) --
Common Stock Purchased, at Cost (260,776, 998,930
and 362,375 shares) ..................................................... (3,829) (13,040) (3,744)
----------------------------------------------------
Balance at End of Year .................................................. (20,613) (16,784) (3,744)
----------------------------------------------------
Total Stockholders' Equity ................................................ $153,619 $153,733 $157,851
----------------------------------------------------
See accompanying notes to consolidated financial statements.
27
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
====================================================================================================================================
(Dollars in thousands)
For the Year Ended June 30,
-----------------------------------------------------
1996 1995 1994
=====================================================
Cash Flows From Operating Activities:
Net Income ................................................................ $ 11,723 $ 9,702 $ 8,694
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses .............................................. 725 400 393
Provision for Losses on Real Estate Owned .............................. 375 60 1,073
Amortization of Premiums (Accretion of Discounts), Net ................. (567) (1,459) 500
Depreciation and Amortization .......................................... 1,027 467 387
Net Gain on Securities ................................................. (678) (147) --
Amortization Relating to Allocation and Earned Portions of
Stock Plans ........................................................... 2,036 1,904 452
Amortization of Excess of Cost Over Fair Value of
Net Assets Acquired ................................................... 1,928 -- --
Amortization of Purchased Mortgage Servicing Rights ..................... 240 -- --
Net Gain on Loans Sold ................................................ (30) -- (35)
Net Gain on Sale of Real Estate Owned ................................. (19) (657) (34)
Cumulative Effect of Change in Accounting for Income Taxes ............ -- -- (1,200)
(Increase) Decrease in Accrued Interest Receivable .................... 738 (1,657) 181
(Increase) Decrease in Prepaid Expenses and Other Assets .............. 3,037 (263) (901)
Increase (Decrease) in Accrued Expenses and Other Liabilities ........... (6,413) 1,318 (1,896)
-----------------------------------------------------
Net Cash Provided by Operating Activities ............................. 14,122 9,668 7,614
-----------------------------------------------------
Cash Flows From Investing Activities:
Principal Repayments on Loans, Net of Originations
and Purchased Loans .......................................... (44,258) (3,820) 26,307
Purchases of Mortgage-Backed Securities Held-to-Maturity ...... (16,472) (63,894) (167,714)
Purchases of Mortgage-Backed Securities Available-for-Sale .... (382,645) (105,654) --
Proceeds from Sales of Mortgage-Backed Securities Available-for-Sale 180,590 -- --
Principal Repayments from Mortgage-Backed Securities .......... 148,059 47,586 77,230
Proceeds from Call of Debt Securities ......................... 21,800 -- --
Proceeds from Sales of Debt Securities Available-for-Sale ..... 29,245 11,146 --
Purchases of Debt Securities Available-for-Sale ............... -- (19,654) (37,565)
Purchases of Debt and Equity Securities Held-to-Maturity ...... (20,000) (1,296) (671)
Proceeds from Maturities of Debt Securities ................... 28,100 40,338 --
Purchases of Premises and Equipment ........................... (2,595) (1,610) (624)
Proceeds from Loans Sold ...................................... 5,860 1,481 6,250
Proceeds from Sale of Real Estate Owned ....................... 1,715 2,572 2,369
Cash Paid for Bank of Westbury Net of Cash and
Cash Equivalents Acquired .................................... (165) -- --
Cash Paid for Sunrise Bancorp, Inc. Net of Cash and
Cash Equivalents Acquired .................................... (94,259) -- --
-----------------------------------------------------
Net Cash Used in Investing Activities ....................... (145,025) (92,805) (94,418)
-----------------------------------------------------
28
Reliance Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows Continued
====================================================================================================================================
(Dollars in thousands)
For the Year Ended June 30,
-------------------------------------------------
1996 1995 1994
=================================================
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits ........................................... $ 44,558 $ 83,096 $(13,057)
Decrease in Advance Payments by Borrowers
for Taxes and Insurance .................................................. (9,210) (12) (261)
Net Proceeds from Issuance of Common Stock ................................ -- -- 103,575
Purchase of Stock for RRPs ................................................ -- -- (4,140)
Purchase of Stock for ESOP ................................................ -- -- (8,280)
Proceeds from FHLB Advances ............................................... -- 344,000 307,000
Repayment of FHLB Advances ................................................ (87,000) (382,000) (294,000)
Proceeds from Reverse Repurchase Agreements ............................... 824,727 98,694 --
Repayment of Reverse Repurchase Agreements ................................ (618,602) (41,659) --
Purchase of Treasury Stock ................................................ (3,829) (13,040) (3,744)
Dividends Paid ............................................................ (3,808) (2,707) --
--------
Net Cash Provided by Financing Activities ................................. 146,836 86,372 87,093
-------------------------------------------------
Net Increase in Cash and Cash Equivalents ................................. 15,933 3,235 289
Cash and Cash Equivalents at Beginning of Year ............................ 16,937 13,702 13,413
--------
Cash and Cash Equivalents at End of Year .................................. $ 32,870 $ 16,937 $ 13,702
=================================================
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest .................................................................. $ 50,847 $ 28,211 $ 20,077
=================================================
Income Taxes .............................................................. $ 8,384 $ 5,965 $ 6,366
Non-cash Investing Activities:
Transfers from Loans to Real Estate Owned ................................. $ 1,311 $ 622 $ 2,410
=================================================
Transfers of Mortgage-Backed Securities From Held-to-Maturity
to Available-for-Sale ................................................. $283,245 $ -- $--
=================================================
Supplemental Information to the Consolidated Statements of Cash Flows Relating
to the Bank of Westbury and Sunrise Bancorp, Inc. Acquisitions
Non-cash investing and financing transactions relating to the Bank of
Westbury and Sunrise Bancorp, Inc. acquisitions not reflected in the
Consolidated Statements of Cash Flows for the year ended June 30, 1996 are
listed below:
Fair Value of Assets Acquired, Excluding Cash and
Cash Equivalents Acquired .......................................... $745,341
Liabilities Assumed .................................................. (702,273)
--------
Excess of Cost Over Fair Value of Net Assets Acquired ................ 51,356
Cash Paid for Bank of Westbury and Sunrise Bancorp, Inc.,
Net of Cash and Cash Equivalents Acquired .......................... $ 94,424
========
See accompanying notes to financial statements.
29
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Reliance Bancorp, Inc. (the
"Company") and subsidiary conform to generally accepted accounting principles
and to general practice within the financial services industry. The following is
a description of the more significant policies which the Company follows in
preparing and presenting its consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary Reliance Federal Savings Bank (the
"Bank"). All significant intercompany transactions and balances are eliminated
in consolidation.
As more fully discussed in Note 2, Reliance Bancorp Inc., a Delaware
corporation, was organized by the Bank for the purpose of acquiring all of the
capital stock of the Bank pursuant to the conversion of the Bank from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Company is subject to the financial reporting requirements of the
Securities and Exchange Act of 1934, as amended.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of condition and
income for the years presented. Estimates that are susceptible to change include
the determination of the allowances for losses on loans and the valuation of
real estate acquired in connection with foreclosures. Certain reclassifications
have been made to prior year amounts to conform to the current year
presentation.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, federal funds sold and repurchase agreements with an
original term to maturity of less than three months.
(c) Securities Available-for-Sale
At June 30, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No.115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires securities, including debt, equity and
mortgage-backed securities, classified as available-for-sale to be recorded at
estimated fair value. Such securities, prior to the adoption of SFAS No. 115,
were recorded at the lower of cost or estimated market value with aggregate
declines in market value below amortized cost charged against earnings. Under
SFAS No. 115, changes in unrealized gains or losses of available-for-sale
securities are reported net of tax as a separate component in stockholders'
equity. The adoption of SFAS No. 115 had no impact on fiscal 1994 net income.
The Company's ability and intent as of June 30, 1994 regarding the holding of
securities to maturity was utilized to then classify securities as either
held-to-maturity or available-for-sale.
In accordance with an implementation guide for SFAS No. 115, released by
the Financial Accounting Standards Board (FASB) on November 15, 1995, the Bank
realigned its mortgage-backed securities portfolio in December 1995 by
transferring approximately $283.2 million from the held-to-maturity to the
available-for-sale category. The Bank realigned its mortgage-backed securities
portfolio in order to be more flexible and better positioned for managing the
portfolio under changing interest rates and other market conditions.
Debt securities are classified as available-for-sale when management
intends to hold the securities for indefinite periods of time or when the
securities may be utilized for tactical asset/liability management strategy and
may be sold from time to time to effectively manage interest rate exposure and
resultant prepayment risk and liquidity needs. Premiums and discounts are
amortized or accreted, respectively, using the level-yield method. Readily
marketable equity securities are also classified as available-for-sale. Gains or
losses on the sales of the securities are recognized when sold using the
specific identification method.
(d) Debt and Equity Securities Held-to-Maturity
Debt and equity securities classified as held-to-maturity are carried at
cost unless there is a permanent impairment of value, at which time they are
valued at the lower of cost or market value resulting in a new cost basis for
the security. The debt securities are adjusted for amortization of premiums and
accretion of discounts over the term of the security using the level-yield
method. The Company currently has the ability and intent to hold the debt
securities until maturity. Equity securities classified held-to-maturity are not
readily marketable.
(e) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities. Mortgage-backed securities held-to-maturity are carried at current
30
unpaid principal balances, adjusted for unamortized premiums and unaccreted
discounts. Premiums are amortized and discounts are accreted to income over the
estimated life of the respective securities using the level-yield method. The
Company currently has the ability and intent to hold the securities until
maturity.
(f) Loans
Loans are stated at the principal amount outstanding, less unearned
discounts and net deferred loan origination fees, if applicable. Interest on
loans not made on a discounted basis is credited to income based on the
principal amount outstanding during the period. Unearned income on discounted
loans originated by the Bank, principally education loans, is recognized as
income using the level-yield method. Gains and losses on the sale of loans are
determined using the specific identification method.
Interest on loans is recognized on the accrual basis. Loans are placed on
nonaccrual status when principal or interest becomes 90 days or more past due
for mortgage loans and commercial loans and 120 days past due for other loans,
unless the obligation is both well secured and in the process of collection.
Accrued interest receivable previously recognized is reserved when a loan is
placed on nonaccrual status. Loans remain on nonaccrual status until principal
and interest payments are current or the obligation is considered both well
secured and in the process of collection. A loan is considered a troubled debt
restructuring when changes, such as reduction in interest rates or deferral of
interest or principal payments, are made to contractual terms due to a
borrower's weakened financial condition.
The Company defers loan origination fees on multi-family loans, less
certain direct costs, and subsequently recognizes them as an adjustment of the
loan's yield over the contractual life of the loan using the level-yield method
or, in the case of loans with below-market introductory rates, generally over
the applicable introductory period, using the interest method.
Effective July 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114") and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" ("SFAS No. 118"). Under SFAS No. 114 and SFAS No. 118, a loan is
considered impaired when, based upon current information and events, it is
probable that a creditor will be unable to collect all amounts due including
principal and interest, according to the contractual terms of the loan
agreement. These statements require that impaired loans that are within their
scope be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or as a practical expedient, at
the loan's current observable market price, or the fair value of the collateral
if the loan is collateral dependent. The amount by which the recorded investment
of an impaired loan exceeds the measurement value is recognized by creating a
valuation allowance through a charge to the provision for loan losses. In
connection with the adoption of SFAS No. 114, the Company has, for all years
prior to its adoption, reclassified in-substance foreclosed loans, net of the
related allowance for losses, if any, from real estate owned to loans receivable
in the Company's statements of condition. Interest income received on impaired
loans is recognized on a cash basis. The adoption of SFAS No. 114 and No. 118
had no impact on fiscal 1996 net income.
(g) Allowance for Loan Losses
A provision for loan losses charged to income is reflected as an addition
to a valuation allowance which is netted against loans receivable. Management's
periodic evaluation of the adequacy of the valuation allowance considers the
Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations which may affect the borrower's ability to repay, estimated
value of the underlying collateral and the current real estate markets and
economic condition in the Bank's lending areas. In addition, the Bank's
regulators, as an integral part of their examination process, periodically
review the Bank's allowance for losses on loans and real estate. Accordingly,
the Bank may be required to take certain charge-offs and recognize additions to
the allowance based on the regulators' judgments concerning information
available to them during their examination.
(h) Office Properties and Equipment
Depreciation and amortization are provided on a straight-line method over
the estimated useful lives of the assets. The cost of leasehold improvements is
being amortized using the straight-line method over the shorter of the term of
the related leases or the estimated useful lives.
(i) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired in the fiscal
1996 acquisitions of Bank of Westbury and Sunrise Bancorp, Inc. is amortized
using the straight line method over fifteen years. The excess of cost over the
fair value of net assets acquired is evaluated periodically by the Company for
impairment in response to changes in circumstances or events.
31
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
(j) Real Estate Owned
Real estate acquired through foreclosure are recorded at the lower of cost
(unpaid loan balance plus foreclosure costs) or fair market value at the time of
acquisition. The carrying value of individual properties is subsequently
adjusted to the extent it exceeds estimated fair market value less costs to
sell. Operating expenses of holding real estate, net of related income, are
charged against income as incurred. Gains on sales of real estate are recognized
when down payment and other requirements are met; otherwise such gains are
deferred and recognized on the installment method of accounting. Losses on the
disposition of real estate, including expenses incurred in connection with the
disposition, are charged to income. A valuation allowance is maintained through
provisions for real estate losses charged to income for any decrease in the fair
value of property less costs to sell, which is netted against real estate owned.
(k) Taxes on Income
The Company files a calendar-year Federal income tax return on a
consolidated basis with its subsidiary.
Effective July 1, 1993, the Bank adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires a change from the deferred method to the
asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date, whereas under the deferred method, deferred
taxes were not adjusted for subsequent changes in tax rates. The cumulative
effect at July 1, 1993 of this change in the method of accounting for income
taxes has been included in the Consolidated Statements of Income for the year
ended June 30, 1994.
(l) Retirement Plan
The Bank's retirement plan is non-contributory and covers substantially all
eligible employees. The plan conforms to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. The Bank's policy is to
accrue for all pension costs and to fund the maximum amount allowable for tax
purposes.
Actuarial gains and losses that arise from changes in assumptions
concerning future events, used in estimating pension costs, are amortized over a
period that reflects the long range nature of pension expense.
(m) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost.
(n) Earnings Per Share
Earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding, adjusted for the unallocated portion of shares held by the Employee
Stock Ownership Plan ("ESOP") in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-6. For the years ended
June 30, 1996 and 1995 and for the period from March 31, 1994, (date of
conversion) to June 30, 1994, the weighted average number of shares of common
stock and common stock equivalents outstanding (adjusted for unallocated ESOP
shares) were 8,946,000, 9,404,000 and 9,762,000, respectively.
Earnings per share for fiscal year 1994 was computed on earnings for the
period March 31, 1994 (conversion date) through June 30, 1994. Earnings per
share are not presented for periods prior to conversion to stock form, as no
stock was outstanding.
2. Stock Form of Ownership
On September 16, 1993, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of a
holding company. As part of the conversion, the Company was incorporated under
Delaware law on November 16, 1993. The Company completed its initial public
offering on March 31, 1994 and issued 10,750,820 shares of common stock
resulting in net proceeds of approximately $103,575,000. The Company retained
$51,787,500 of the net proceeds and used the remaining net proceeds to purchase
all of the outstanding stock of the Bank. The financial position and results of
operations of the Company as of and for the years ended June 30, 1996 and 1995
and for the period from March 31, 1994 to June 30, 1994 are presented in Note
20.
32
During fiscal 1994, the Company repurchased 362,375 shares at an aggregate
cost of $3,744,000. During fiscal 1995, the Company repurchased 998,930 shares
at an aggregate cost of $13,040,000. On May 7, 1996, the Company announced the
approval of its fourth five percent stock repurchase plan which allows the
Company to repurchase up to 461,287 common shares. As of June 30, 1996, 97,000
shares under this program were repurchased at an aggregate cost of $1,488,000.
During fiscal 1996, the Company repurchased 260,776 shares at an aggregate cost
of $3,829,000. Through June 30, 1996, all repurchases were funded by the
Company, therefore, the capital and liquidity of the Bank were not affected.
At the time of the conversion, the Bank established a liquidation account
with a balance equal to its retained earnings reflected in its statement of
condition. The balance in the liquidation account at June 30, 1996 and 1995 was
approximately $30,416,000 and $36,969,000, respectively. The liquidation account
will be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of
its shares of common stock if the effect thereof would cause stockholders'
equity to be reduced below applicable regulatory capital maintenance
requirements, the amount required for the liquidation account, or if such
declaration and payment would otherwise violate regulatory requirements. During
fiscal 1996, the Company declared cash dividends totalling $3,924,000.
3. Acquisitions
Bank of Westbury Acquisition
After the close of business day on August 11, 1995, the Company completed
the acquisition of the Bank of Westbury in a transaction which was accounted for
as a purchase. The cost of the acquisition was $16.7 million. In addition, the
Company incurred approximately $422,000 of acquisition-related costs and
$225,000 for the lease buyout of data processing equipment. The excess of cost
over the fair value of net assets acquired generated in the transaction was $7.8
million, which will be amortized on a 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. The Company's consolidated results of operations include
Bank of Westbury's results of operations commencing August 12, 1995.
A summary of the net assets acquired (at their estimated fair values) in
the Bank of Westbury acquisition is as follows:
After the Close of Business
on August 11, 1995
===========================
(In thousands)
Assets acquired:
Cash and cash equivalents ................................ $ 17,219
Investment securities .................................... 2,713
Mortgage-backed securities ............................... 68,140
Loans receivable, net .................................... 72,741
Net deferred tax asset ................................... 911
Real estate owned ........................................ 376
Other assets ............................................. 4,106
--------
Total assets acquired .................................. 166,206
--------
Liabilities assumed:
Deposits ................................................. 151,992
Borrowed funds ........................................... 3,000
Other liabilities ........................................ 1,605
--------
Total liabilities assumed .............................. 156,597
--------
Net assets acquired .................................... $ 9,609
========
33
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
Sunrise Bancorp, Inc. Acquisition
After the close of business day on January 11, 1996, the Company completed
the acquisition of Sunrise Bancorp, Inc. in a transaction which was accounted
for as a purchase. The cost of the acquisition was approximately $106.3 million
in cash, or $32.00 per share of Sunrise Bancorp, Inc. common stock outstanding
at January 11, 1996. In addition, the Company incurred approximately $893,000 of
acquisition related expenses. 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 continued to exceed
each of its regulatory capital requirements. The Company's consolidated results
of operations include Sunrise Bancorp, Inc.'s results of operation commencing
January 12, 1996.
A summary of the net assets acquired (at their fair values) in the Sunrise
Bancorp, Inc. acquisition is as follows:
After the Close of Business
on January 11, 1996
===========================
(In thousands)
Assets acquired:
Cash and cash equivalents ................................ $ 12,906
Investment securities .................................... 69,880
Mortgage-backed securities ............................... 129,994
Loans receivable, net .................................... 373,826
Purchased mortgage servicing rights ...................... 3,404
Office properties and equipment .......................... 6,022
Real estate owned ........................................ 651
Other assets ............................................. 12,577
--------
Total assets acquired .................................. 609,260
--------
Liabilities assumed:
Deposits ................................................. 479,213
Borrowed funds ........................................... 47,000
Other liabilities ........................................ 17,178
Net deferred tax liability ............................... 2,285
--------
Total liabilities assumed .............................. 545,676
Net assets acquired .................................. $ 63,584
========
The following summarizes the actual and unaudited projected amortization of
discounts and premiums relating to the fair market value adjustments and the
excess of cost over fair value of net assets acquired:
Excess of Cost Total
Over Fair Value Net Discount Net Discount Net Net Net Decrease
of Net Assets (Premium) on (Premium) on Premium on Premium on In Income
Acquired Securities Loans Other Assets Liabilities Before Taxes
===================================================================================================================================
(In Thousands)
Amortization:
1996 actual....................... $ (1,928) $ 89 $ 45 $ (123) $ 454 $ (1,463)
1997 projected.................... (3,424) (334) (196) (310) 597 (3,667)
1998 projected.................... (3,424) (182) (169) (262) 467 (3,570)
1999 projected.................... (3,424) (92) (140) (241) 457 (3,440)
2000 projected.................... (3,424) (38) (112) (207) 300 (3,481)
thereafter estimated.............. (35,732) 144 (158) (1,367) 9 (37,104)
- -----------------------------------------------------------------------------------------------------------------------------------
$(51,356) $(413) $(730) $(2,510) $2,284 $(52,725)
====================================================================================================================================
Set forth below is unaudited pro forma combined condensed consolidated
results of operations of the Company, the Bank of Westbury and Sunrise Bancorp,
Inc. for the years ended June 30, 1996 and 1995. This information was prepared
as if the acquisitions of the Bank of Westbury and Sunrise Bancorp, Inc. had
been consummated at the beginning of each period and is based on the historical
financial statements of the Company, the Bank of Westbury and Sunrise Bancorp,
Inc. after giving effect to the acquisition under the purchase method of
accounting.
34
Subjective estimates have been utilized in determining the pro forma
adjustments applied to the historical results of operations of the Company, the
Bank of Westbury and Sunrise Bancorp, Inc. Accordingly, the following pro forma
unaudited combined condensed consolidated financial information is not intended
to be indicative of the results of operations which would have been attained had
the acquisition been consummated at either of the foregoing dates or which may
be attained in the future.
Year ended June 30, 1996 Year ended June 30, 1995
--------------------------------------------------------------------
(Unaudited) (Unaudited)
Historical Historical
Reliance Reliance
Bancorp, Inc. Pro forma Bancorp, Inc. Pro forma
and Subsidiary Combined(1) and Subsidiary Combined(1)
====================================================================
Interest income ............................................... $100,372 $121,074(2) $ 61,260 $107,106(2)
Interest expense .............................................. 52,985 65,124 28,361 51,168
--------------------------------------------------------------------
Net interest income ........................................... 47,387 55,950 32,889 55,938
Provision for loan losses ..................................... 725 846 400 880
--------------------------------------------------------------------
Net interest income after provision for loan losses ........... 46,662 55,104 32,499 55,058
Non-interest income ........................................... 3,110 4,538 1,257 3,838
Non-interest expense .......................................... 28,103 39,034(3) 17,212 40,131
--------------------------------------------------------------------
Income before income taxes .................................... 21,669 20,608 16,544 18,765
Income tax expense ............................................ 9,946 9,891(4) 6,842 9,007(4)
--------------------------------------------------------------------
Net income .................................................... $ 11,723 $ 10,717 $ 9,702 $ 9,758
====================================================================
Earnings per common share ..................................... $ 1.31 $ 1.20 $ 1.03 $ 1.04
====================================================================
(1) Pro forma combined results of operations for the year ended June 30, 1996
were calculated, in part, based upon actual unaudited results of operations
of the combined institutions since the date of each acquisition (the Bank
of Westbury on August 11, 1995 and Sunrise Bancorp, Inc. on January 11,
1996), and adding such results to the Bank of Westbury's earnings for the
month of July 1995 and the 11 day period from August 1, 1995 to August 11,
1995 and Sunrise Bancorp, Inc. earnings from July 1995 to December 1995 and
the 11 day period from January 1, 1996 to January 11, 1996; and applying
pro forma adjustments to amortize the excess of cost over fair value of net
assets acquired and purchase accounting premiums and discounts.
Pro forma combined results of operations for the year ended June 30,
1995 were calculated, in part, based upon actual unaudited results of
operations for the year ended June 30, 1995; and applying pro forma
adjustments to amortize the excess of cost over fair value of net assets
acquired and purchase accounting premiums and discounts. As such, the pro
forma results of operations stated herein reflect the valuation of the
assets and liabilities acquired in the Bank of Westbury and Sunrise
Bancorp, Inc. acquisitions and the subsequent accretion of discount, at a
point in time other than that assumed for the acquisition in the year end
data presented above and, in addition, regardless of later changes in the
affected assets or liabilities. As a result, the pro forma information set
forth should not be relied upon as an indication of what the performance of
the Company would have been had the acquisition of Bank of Westbury and
Sunrise Bancorp, Inc. occurred on the date assumed in calculating the year
ended pro forma data above.
(2) Pro forma interest income for the year ended June 30, 1996 and 1995 was
adjusted by approximately $3.6 million and $7.2 million, respectively, for
the effect on interest income for the sale of mortgage-backed securities
used to fund the purchase of Sunrise Bancorp, Inc.
(3) Pro forma non-interest expense for the year ended June 30, 1996 was\
adjusted for various non-recurring employee benefit expenses and other
transaction related expenses totalling approximately $19.0 million for the
Sunrise Bancorp, Inc. acquisition.
(4) An effective income tax rate of 48.0% was assumed for the pro forma
combined income for the years ended June 30, 1996 and 1995.
4. Money Market Investments
Money market investments generally have original maturities of three months
or less. The following presents the components of money market investments:
June 30,
-----------------
1996 1995
=================
(In thousands)
Federal Funds Sold.......................................... $ 1,000 $1,000
Repurchase Agreements....................................... 9,450 1,700
-----------------
Total Money Market Investments.............................. $10,450 $2,700
=================
The Company purchases securities under agreements to resell (repurchase
agreements). These agreements represent short-term loans and are reflected as an
asset in the consolidated statements of condition. The same securities are to be
resold at maturity of the repurchase agreements.
35
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
Securities purchased under repurchase agreements averaged $7,225,000 for
the year ended June 30, 1996 and $3,807,000 for the year ended June 30, 1995.
The maximum amount of such agreements outstanding at any month-end during the
fiscal year ended June 30, 1996 and 1995 was $11,000,000 and $13,300,000,
respectively.
5. Debt and Equity Securities
A summary of the amortized cost and estimated market values of debt and
equity securities are as follows:
June 30, 1996
-----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
=================================================================
(In thousands)
Held-to-Maturity:
U.S. Government Agency Obligations ............................ $ 34,950 $ -- $ (338) $ 34,612
Obligations of New York State and Local Municipalities ........ 391 44 -- 435
FHLB Stock .................................................... 12,989 -- -- 12,989
-----------------------------------------------------------------
$ 48,330 $ 44 $ (338) $ 48,036
=================================================================
Available-for-Sale:
U.S. Government Agency Obligations ............................ $ 10,319 $ -- $ (92) $ 10,227
United States Treasury Notes .................................. 2,992 -- (9) 2,983
Marketable Equity Securities .................................. 42 19 -- 61
$ 13,353 $ 19 $ (101) $ 13,271
=================================================================
June 30, 1996
-----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
=================================================================
(In thousands)
Held-to-Maturity:
U.S. Government Treasury Notes ................................ $ 14,997 $ -- $ (25) $ 14,972
Obligations of New York State and Local Municipalities ........ 1,394 18 -- 1,412
FHLB Stock .................................................... 7,499 -- -- 7,499
-----------------------------------------------------------------
Available-for-Sale:
United States Treasury Bills .................................. $ 10,531 $ 16 $ -- $ 10,547
United States Treasury Notes .................................. 13,377 -- (44) 13,333
-----------------------------------------------------------------
$ 23,908 $ 16 $ (44) $ 23,880
=================================================================
The amortized cost and estimated market value of debt and equity securities
at June 30, 1996 and 1995, by contractual maturity are shown below:
June 30, 1996 June 30, 1995
----------------------------------------- --------------------------------------------
Held-to-maturity Available-for-sale Held-to-maturity Available-for-sale
----------------------------------------- --------------------------------------------
Estimated Estimated Estimated Estimated
Amortized market Amortized market Amortized market Amortized market
cost value cost value cost value cost value
=======================================================================================
(In thousands)
Due in One Year or Less .................. $ -- $ -- $ 6,334 $ 6,318 $15,998 $15,988 $23,908 $23,880
Due After One Year
Through Five Years ..................... 10,322 10,220 6,977 6,892 393 396 -- --
Due after Five Years
Through Ten Years ...................... 25,019 24,827 -- -- -- -- -- --
Equity Securities ........................ 12,989 12,989 42 61 7,499 7,499 -- --
-------
$48,330 $48,036 $13,353 $13,271 $23,890 $23,883 $23,908 $23,880
=======
36
There were no sales of debt and equity securities in fiscal 1994. In fiscal
1996 and 1995, gross proceeds from the sale of debt and equity securities
available-for-sale totalled $30,345,000 and $11,146,000, respectively. For
fiscal 1996 and 1995 gross realized gains totalled $20,000 and $153,000,
respectively, and gross realized losses totalled $15,000 and $6,000,
respectively.
6. Mortgage-Backed Securities
The amortized cost and estimated market values of mortgage-backed
securities are summarized as follows:
June 30, 1996
------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
==================================================================
(In thousands)
Held-to-Maturity:
Pass-through Certificates Guaranteed by:
GNMA ................................................. $125,195 $ 511 $ (6) $125,700
FHLMC ................................................ 14,967 38 -- 15,005
FNMA ................................................. 44,330 71 (111) 44,290
------------------------------------------------------------------
$184,492 $ 620 $ (117) $184,995
==================================================================
Available-for-Sale:
Pass-through Certificates Guaranteed by:
GNMA ................................................. $170,142 $ 1,110 $ (1,499) $169,753
FHLMC ................................................ 255,498 828 (6,728) 249,598
FNMA ................................................. 172,863 756 (3,675) 169,944
REMIC ................................................ 2,503 -- (58) 2,445
------------------------------------------------------------------
$601,006 $ 2,694 $(11,960) $591,740
==================================================================
June 30, 1996
------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gain loss value
==================================================================
(In thousands)
Held-to-Maturity:
Pass-through Certificates Guaranteed by:
GNMA ................................................. $157,073 $ 3,866 $ -- $160,939
FHLMC ................................................ 188,611 601 (2,485) 186,727
FNMA ................................................. 68,078 410 (334) 68,154
------------------------------------------------------------------
$413,762 $4,877 $ (2,819) $415,820
==================================================================
Available-for-Sale:
Pass-through Certificates Guaranteed by:
FHLMC ................................................ $ 77,072 $ 1,123 $ -- $ 78,195
FNMA ................................................. 25,845 413 -- 26,258
------------------------------------------------------------------
$102,917 $ 1,536 $ -- $104,453
==================================================================
There were no sales of mortgage-backed securities during the fiscal years
ended June 30, 1995 and 1994. In fiscal 1996, gross proceeds from the sale of
mortgage-backed securities available-for-sale totalled $180,587,000. Gross
realized gains totalled $1,881,000 and gross realized losses totalled
$1,208,000.
37
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
7. Loans
Loans are summarized as follows:
June 30,
------------------------
1996 1995
(In thousands)
========================
Mortgage Loans:
One- to four-family................................. $569,031 $194,290
Co-op............................................... 9,687 8,774
Multi-family........................................ 79,571 18,774
Commercial Real Estate.............................. 27,134 2,258
Construction........................................ 5,560 745
------------------------
690,983 224,841
Less:
Unearned Discount, Premiums and Deferred Loan
Origination Fees, Net......................... (16) (393)
------------------------
Total Mortgage Loans......................... 690,967 224,448
------------------------
Consumer and Other Loans:
Home Equity Lines of Credit.................... 81,205 70,954
Guaranteed Student Loans....................... 18,754 20,529
Home Equity Loans.............................. 16,747 15,774
Loans on Deposit Accounts...................... 5,782 980
Other Loans.................................... 7,922 416
------------------------
130,410 108,653
Net Deferred Loan Origination Costs............ 864 708
------------------------
Total Consumer and Other Loans............... 131,274 109,361
Less Allowance for Loan Losses................... (4,495) (1,729)
Loans Receivable, Net.......................... $817,746 $332,080
========================
June 30,
------------------------
1996 1995
========================
(In thousands)
Commitments Outstanding:
Mortgage Loans................................. $ 8,650 $ 7,573
========================
Consumer and Other Loans....................... $ 7,865 $ 6,987
========================
Unused Lines of Credit......................... $45,044 $38,036
========================
At June 30, 1996 and 1995, the Company had commitments to sell loans of
$1,734,000 and $224,000, respectively. At June 30, 1996, the Company had
commitments to purchase loans of $1,945,000. At June 30, 1995, there were no
commitments to purchase loans.
The principal balance of loans in arrears three months or more:
June 30,
------------------------------------------------
1996 1995
================================================
No. of No. of
loans Amounts loans Amounts
------------------------------------------------
(Dollars in thousands)
One- to four-family Mortgages..................... 142 $11,538 30 $3,210
Consumer and Other Loans.......................... 77 702 84 461
Commercial Real Estate............................ 3 739 -- --
------------------------------------------------
222 $12,979 114 $3,671
================================================
38
Interest income that would have been recorded under the original terms of
loans classified as non-accrual and interest income actually recognized are as
follows:
Year Ended June 30,
------------------------
1996 1995 1994
=========================
(In thousands)
Interest Income that would have been Recorded..................................... $622 $175 $191
Interest Income Recognized........................................................ (68) (45) (69)
------------------------
Interest Income Foregone.......................................................... $554 $130 $122
=========================
In accordance with SFAS No. 114, the Company deems certain loans impaired
when, based upon current information and events, it is probable that the Company
will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. SFAS No. 114 generally
does not apply to large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, such as one- to four-family mortgage
loans and consumer loans. Loans individually reviewed for impairment by the
Company are limited to multi-family loans, commercial loans, construction and
land loans, loans modified in a troubled debt restructuring and selected large
one- to four-family loans. Examples of measurement techniques utilized by the
Company include present value of expected future cash flows, the loan's market
price if one exists, and the estimated fair value of the collateral. In
addition, SFAS No. 114 amended SFAS No. 15 to limit the application of the
concept of an in-substance foreclosure to those situations where the creditor
has obtained physical possession of the loan collateral, regardless of whether
formal foreclosure proceedings have occurred.
At June 30, 1996, the Company had two commercial loans totalling $655,000
with no related allowance which were considered impaired. The Company's average
recorded investment in impaired loans for the year ended June 30, 1996 was
$493,000. The Company did not recognize any interest income on impaired loans
for the year ended June 30, 1996.
The Bank generally originates fixed rate loans with terms greater than 15
years for sale to FHLMC, FNMA or other secondary market investors. At June 30,
1996 and 1995, there were no fixed rate loans classified as held for sale.
Included in mortgage loans at June 30, 1996 and 1995 are $354,551,000 and
$144,616,000, respectively, of adjustable rate mortgage loans.
Proceeds from the sale of first mortgage loans were $5,860,000, $1,481,000
and $6,250,000 during the fiscal years ended June 30, 1996, 1995 and 1994. Gross
realized gains and losses resulting from sale of first mortgage loans were as
follows:
Year ended June 30,
---------------------------------------
1996 1995 1994
=======================================
(In thousands)
Gross Realized Gains............................................................ $ 34 $ 1 $ 50
Gross Realized Losses........................................................... (4) (1) (15)
---------------------------------------
$ 30 $ -- $ 35
=======================================
The Bank services mortgage loans for investors which are not included in
the accompanying consolidated statements of condition. A summary of the
principal balance, custodial escrow, servicing income and number of loans
serviced for others by the Bank are as follows:
At or for the year ended June 30,
---------------------------------------
1996 1995 1994
=======================================
(Dollars in thousands)
Principal Balances.............................................................. $ 455,626 $ 32,367 $ 34,743
=======================================
Custodial Escrow................................................................ $ 6,980 $ 357 $ 375
=======================================
Servicing Income (Excludes PMSR Amortization)................................... $ 861 $ 120 $ 131
=======================================
Number of Loans................................................................. 7,497 333 352
=======================================
39
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
Fees earned for servicing loans are reported as income when the related
mortgage payments are collected. PMSRs are amortized as a reduction to loan
service fee income on a method that approximates the level-yield basis over the
estimated remaining life of the underlying mortgage loans. PMSRs are carried at
fair value and impairment, if any, is recognized through a valuation allowance.
For the year ended June 30, 1996, no impairment existed in the PMSRs and as a
result, no valuation allowance was required.
PMSR activity is summarized as follows:
Balance at July 1, 1995................................................................................. $ --
PMSRs Acquired in Acquisitions of Bank of Westbury and Sunrise Bancorp, Inc............................. 4,145
Less Amortization....................................................................................... 240
--------
Balance at June 30, 1996................................................................................ $ 3,905
========
8. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Year Ended June 30,
-----------------------------------
1996 1995 1994
===================================
(In thousands)
Balance at Beginning of the Year................................................ $1,729 $1,417 $ 1,344
Provision for Loan Losses....................................................... 725 400 393
Allowances of Acquired Institutions............................................. 2,217 -- --
Charge-offs..................................................................... (265) (113) (394)
Recoveries...................................................................... 89 25 74
-----------------------------------
Balance at End of the Year...................................................... $4,495 $1,729 $ 1,417
===================================
9. Real Estate Owned
Real estate owned, net is summarized as follows:
June 30,
----------------------
1996 1995
======================
(In thousands)
One- to four-family Residences.................................................. $1,293 $ 841
Co-ops.......................................................................... 1,039 1,306
Allowance for Losses on Real Estate Owned....................................... (768) (589)
----------------------
$1,564 $ 1,558
======================
Results of operating real estate owned for the years ended June 30, 1996,
1995 and 1994 are summarized as follows:
Year ended June 30,
-------------------------------
1996 1995 1994
===============================
(In thousands)
Net Gain on Sale on Real Estate Owned........................................... $ 19 $ 657 $ 34
Net Expenses of Holding Property................................................ (223) (212) (41)
Provision for Losses............................................................ (375) (60) (1,073)
-------------------------------
$ (579) $ 385 $(1,080)
===============================
Activity in the allowance for losses in real estate owned is summarized as
follows:
Year Ended June 30,
-------------------------------
1996 1995 1994
===============================
(In thousands)
Balance at Beginning of the Year................................................ $ 589 $ 632 $ 2,288
Provision for Losses............................................................ 375 60 1,073
Allowance of Acquired Institutions.............................................. 188 -- --
Charge-offs..................................................................... (384) (103) (2,740)
Recoveries...................................................................... -- -- 11
-------------------------------
Balance at End of the Year...................................................... $ 768 $ 589 $ 632
===============================
40
10. Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
June 30,
-----------------------
1996 1995
=======================
(In thousands)
Debt Securities.............................................................................. $ 657 $ 420
Mortgage-Backed Securities................................................................... 4,860 3,746
Loans Receivable, Net of Reserves for Uncollectible Interest of $1,030 and $243, respectively 5,795 2,502
-----------------------
Accrued Interest Receivable, Net............................................................. $11,312 $ 6,668
=======================
11. Office Properties and Equipment
A summary of office properties and equipment is as follows:
June 30,
-----------------------
1996 1995
=======================
(In thousands)
Land...................................................................................... $ 4,094 $ 574
Buildings................................................................................. 8,495 2,445
Furniture, Fixtures and Equipment......................................................... 11,047 4,458
Leasehold Improvements.................................................................... 2,812 1,746
Capital Lease............................................................................. 1,470 1,470
-----------------------
Office Properties and Equipment, at Cost.................................................. 27,918 10,693
Less Accumulated Depreciation and Amortization............................................ 14,097 5,928
-----------------------
Office Properties and Equipment, Net.................................................... $13,821 $ 4,765
=======================
In October 1989, the Bank sold a building used for a branch operation
located in Jamaica, New York for approximately $2.3 million, and subsequently
leased back a portion of the building to conduct the branch operation. The Bank
received approximately $2 million in cash from the transaction, after expenses
of the sale, which generated a gain of approximately $1.1 million. The gain has
been deferred and is being amortized over the twelve-year lease period. Deferred
gain on sale amounted to approximately $497,000, $590,000 and $683,000 at June
30, 1996, 1995 and 1994, respectively and is included in accrued expenses and
other liabilities. The leaseback is recorded as a capital lease in the amount of
$1,470,000 at June 30, 1996 and 1995 (refer to the above table) and the related
obligation under capital leases of $802,000 and $923,000 at June 30, 1996 and
1995 is reflected in accrued expenses and other liabilities. The projected
annual lease payments amount to $215,000 per year (including interest) and total
$1,148,000 through the duration of the lease.
Depreciation and amortization of office properties and equipment, included
in occupancy and equipment expense, was approximately, $995,000, $467,000 and
$387,000 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
12. Deposits
Deposits are summarized as follows:
June 30,
------------------------------------------------------------------------------------
1996 1995
------------------------------------------- ---------------------------------------
Weighted Weighted
average average
rate Amount Percent rate Amount Percent
=========================================== =======================================
(Dollars in thousands)
NOW .................................... 2.17% $ 81,953 6% 1.90% $ 25,685 4%
Passbook ............................... 2.50 458,524 34 2.50 216,414 32
Money Market ........................... 2.64 109,953 8 2.50 81,282 12
Certificates of Deposit ................ 5.40 674,836 50 5.74 346,936 52
Non-Interest Bearing Demand Deposit .... -- 20,360 2 -- -- --
------------------------------------------------------------------------------------
$1,345,626 100% $670,317 100%
=========================================== =======================================
41
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
June 30,
-------------------------------------------------
1996 1995
---------------------- ----------------------
Amount Percent Amount Percent
====================== ======================
(Dollars in thousands)
Contractual Maturity of Certificate of Deposit Accounts:
Under 12 months................................................................. $482,653 72% $284,342 82%
Over 12 months to 36 months..................................................... 130,406 19 55,342 16
Over 36 months.................................................................. 61,777 9 7,252 2
---------------------- ----------------------
$674,836 100% $346,936 100%
====================== ======================
The aggregate amount of certificates of deposit accounts with a minimum
denomination of $100,000 was approximately $36,017,000 and $15,420,000 at June
30, 1996 and 1995, respectively. Interest expense on deposits is summarized as
follows:
For the year ended June 30,
----------------------------------
1996 1995 1994
----------------------------------
(In thousands)
NOW............................................................................. $ 1,161 $ 485 $ 488
Passbook........................................................................ 8,942 5,926 7,012
Money Market.................................................................... 2,515 2,283 2,666
Certificates of Deposit......................................................... 29,807 13,318 7,625
----------------------------------
$42,425 $22,012 $17,791
==================================
13. Borrowed Funds
The Bank was obligated for borrowings as follows:
June 30, 1996 June 30, 1995
---------------------------------------------------------
Weighted Weighted
average average
rate Amount rate Amount
========================================================
(Dollars in thousands)
Advances from FHLB--NY ........................................ 5.98% $ 3,000 7.60% $ 40,000
Reverse Repurchase Agreements ................................. 5.41% 263,160 6.04% 57,035
-------- --------
$266,160 $ 97,035
======== ========
Information concerning borrowings under reverse repurchase agreements is
summarized as follows:
At or For the Year
Ended June 30,
---------------------------
1996 1995
===========================
(Dollars in thousands)
Average Balance during the Year..................................................................... $150,173 $10,103
Average Interest Rate during the Year............................................................... 5.58% 6.09%
Maximum Month-end Balance during the Year........................................................... $279,678 $57,035
Mortgage-Backed Securities Pledged as Collateral under Reverse Repurchase Agreements at Year End:
Carrying Value.................................................................................... $284,124 $59,600
Estimated Value................................................................................... $277,652 $59,524
As a member of the Federal Home Loan Bank System (FHLB), the Bank borrows
from the FHLB on a secured basis. Borrowings at June 30, 1996 and 1995 were
secured by a blanket lien over all assets equal to 110% of borrowings.
14. Income Taxes
The Company files a consolidated Federal income tax return on a
calendar-year basis. 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
42
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.
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.
The Company files state and local tax returns on a calendar-year basis.
State and local taxes imposed on the Company consist of New York State franchise
tax, New York City Financial Corporation tax and Delaware franchise tax. The
Company's annual liability for New York State and New York City purposes is the
greater of a tax on income or an alternative tax based on a specified formula.
The Company's liability for Delaware franchise tax is based on the lesser of a
tax based on an authorized shares method or an assumed par value capital method;
however under either method, the Company's total tax will not exceed $150,000.
For the fiscal year ended June 30, 1996 and 1995, the Company's Delaware
franchise tax was based on the assumed par value capital method. The Company
provided for New York State and New York City taxes based on taxable income for
the years ended June 30, 1996, 1995 and 1994.
As discussed in Note 1, the Company adopted SFAS No. 109 as of January 1,
1993. The cumulative effect of this change in accounting for income taxes of
$1,200,000 is determined as of July 1, 1993 and is reported separately in the
consolidated statement of income for the fiscal year ended June 30, 1994. The
cumulative effect of the change in accounting represents the difference between
the net deferred tax asset at July 1, 1993 of $95,000 and the net deferred tax
liability recorded at June 30, 1993 of $1,105,000.
In connection with the acquisitions of the Bank of Westbury and Sunrise
Bancorp, Inc. a net deferred tax asset of $911,000 and a net deferred tax
liability of $2,285,000, respectively, were recognized for temporary differences
between the book basis and tax basis of assets and liabilities acquired.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1996 and June 30, 1995 are presented below:
June 30, June 30,
1996 1995
=======================
(In thousands)
Deferred Tax Assets:
Provisions for Losses on Loans and Real Estate Owned ................................. $ -- $ 426
Office Properties and Equipment, Primarily due to Depreciation and Amortization ...... -- 469
Unrealized Loss on Available-for-Sale Securities ..................................... 4,058 12
Deferred Fees ........................................................................ 264 --
Deposits ............................................................................. 795 --
Other ................................................................................ 600 19
----------------------
Total Deferred Tax Assets .......................................................... 5,717 926
----------------------
Deferred Tax Liabilities:
Provision for Losses on Loans and Real Estate Owned .................................. $ 326 $ --
Mortgage Loans ....................................................................... 950 --
Debt and Equity and Mortgage-Backed Securities ....................................... 218 --
Office Properties and Equipment ...................................................... 690 --
Purchased Mortgage Servicing Rights .................................................. 629 --
Unrealized Gain on Available-for-Sale Securities ..................................... -- 667
Deferred Fees ........................................................................ -- 234
Other ................................................................................ 261 221
----------------------
Total Deferred Tax Liabilities ..................................................... 3,074 1,122
----------------------
Net Deferred Tax Asset (Liability) ..................................................... $ 2,643 $ (196)
=======================
43
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
The total income tax provision for the years ended June 30, 1996, 1995 and
1994 differs from the amount of tax provision that would result by applying the
statutory United States Federal income tax rate of 35% for fiscal 1996 and 34%
for fiscal 1995 and 1994 to income before income taxes and cumulative effect of
change in accounting principle for the following reasons:
For the years ended June 30,
1996 1995 1994
=======================================================
Amount % Amount % Amount %
-------------------------------------------------------
Dollars in thousands)
Tax Provision Statutory Rate............................................ $7,584 35.0% $5,625 34.0% $4,431 34.0%
Tax Exempt Interest on Municipal Investments............................ (23) (0.01) (73) (0.4) (75) (0.5)
Amortization of Excess of Cost Over Fair Value of Net Assets Acquired... 675 3.1 -- -- -- --
State and Local Income Tax, Net of Federal Income Tax Benefit........... 1,684 7.8 1,114 6.7 1,179 9.0
Other, Net.............................................................. 26 0.1 176 1.1 3 --
-------------------------------------------------------
Income Tax Expense.................................................... $9,946 45.9% $6,842 41.4% $5,538 42.5%
=======================================================
The components of the provision for income taxes for the years ended June
30, 1996, 1995 and 1994 are as follows:
June 30,
--------------------------------
1996 1995 1994
================================
(In thousands)
Current:
Federal.................................................................... $6,746 $4,708 $ 4,443
State and Local............................................................ 2,460 1,470 2,124
--------------------------------
9,206 6,178 6,567
--------------------------------
Deferred:
Federal.................................................................... 497 446 (691)
State and Local............................................................ 243 218 (338)
--------------------------------
740 664 (1,029)
--------------------------------
$9,946 $6,842 $ 5,538
================================
15. Commitments
At June 30, 1996 the Company was obligated under a number of non-cancelable
operating leases on property used for banking purposes. Rental expense under
these leases for the fiscal years ended June 30, 1996, 1995 and 1994 is
approximately $819,000, $577,000 and $571,000, respectively. The projected
minimum annual rentals under the terms of these leases, exclusive of taxes and
other charges, are summarized as follows:
Amount
=============
(In thousands)
Year ended June 30:
1997.................................................... $1,031
1998.................................................... 925
1999.................................................... 801
2000.................................................... 693
2001.................................................... 582
Thereafter.............................................. 1,159
-------------
$5,191
=============
The Bank is a party to financial instruments with off-balance sheet risk in
order to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of the
purchaser to a third party. The Bank, in connection with its service
corporations, at June 30, 1996 and 1995, has outstanding balances on letters of
credits of $500,000 at each year end. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers (See Note 7).
44
16. Retirement Plan
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated statements of condition at June 30:
1996 1995
===================
(In thousands)
Actuarial Present Value of Benefits Obligations:
Vested Benefit Obligation..................................................... $6,933 $6,391
Accumulated Benefit Obligation................................................ 7,000 6,444
===================
Plan Assets at Fair Value....................................................... 8,435 7,899
Projected Benefit Obligation for Service Rendered to Date....................... 8,655 7,845
-------------------
Plan Assets (Less Than) in Excess of Projected Benefit Obligation............... (220) 54
Unrecognized Net Asset Value Being Amortized over 15 Years...................... (26) (32)
Unrecognized Prior Service Cost................................................. (66) (74)
Unrecognized Net Loss Due to Past Experience Different from Assumptions Made.... 710 617
-------------------
Prepaid Pension Cost............................................................ $ 398 $ 565
===================
The components of net pension expense for the years ended June 30 are as
follows:
1996 1995 1994
============================
(In thousands)
Service Cost-benefits Earned during the Year.................................... $ 330 $ 282 $ 270
Interest Cost on Projected Benefit Obligation................................... 553 502 468
Net Amortization and Deferral................................................... 64 9 (460)
Actual Return on Plan Assets.................................................... (778) (680) (198)
----------------------------
Net Pension Expense............................................................. $ 169 $ 113 $ 80
============================
1996 1995 1994
============================
Assumptions Used:
Weighted Average Discount Rate.................................................... 7.0% 7.0% 7.0%
Rate of Increase in Compensation Levels........................................... 5.0% 5.0% 5.0%
Expected Long-term Rate of Return on Assets....................................... 9.0% 9.0% 9.0%
17. Stock Benefit Plans
The following plans became effective upon the Conversion of the Bank from
mutual to stock form.
Stock Option Plan
The Company maintains the 1994 Incentive Stock Option Plan (the "Stock Option
Plan"). Under the Stock Option Plan, 824,895 stock options (which expire ten
years from the date of grant, March 31, 1994) have been granted to the executive
officers and officers of the Company and its affiliate, the Bank. Each option
entitles the holder to purchase one share of the Common stock at an exercise
price equal to $10.00 per share (the initial public offering price). Options
will be exercisable in whole or in part over 5 years. However, all options
become 100% exercisable in the event that the employee terminates his employment
due to death, disability, normal retirement, or in the event of a change in
control of the Bank or the Company. Simultaneous with the grant of these
options, the Personnel Committee of the Board of Directors granted "Limited
Rights" with respect to the shares covered by the options. Limited Rights
Franted are subject to terms and conditions and can be exercised only in the
event of a change in control of the Company. Upon exercise of a limited right,
the holder shall receive from the Company a cash payment equal to the difference
between the exercise price of the option ($10.00) and the fair market value of
the underlying shares of common stock. At June 30, 1996, 329,958 options granted
were exercisable but none were exercised.
Stock Option Plan for Outside Directors
The Company maintains the 1994 Stock Option Plan for Outside Directors (the
"Directors' Option Plan"). Each member of the Board of Directors who is not an
officer or employee of the Company or the Bank was granted a non-statutory
option to purchase shares of the Common Stock. In the aggregate, members of the
Board of Directors of the Company were granted options to purchase 196,650
shares of the Common Stock of the Company at an exercise price equal to $10.00
per share (the initial public offering price). All of the options granted under
the Directors' Option Plan become exercisable in three equal installments
commencing one year after the date of grant and expire upon the earlier of 10
years following the date of grant or one year following the date the optionee
ceases to be a
45
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
director. On June 19, 1996, 6,727 options were granted to a new director at an
exercise price of $15.25 per share. An additional 6,728 options have been
reserved for future grant. At June 30, 1996, 131,100 options granted were
exercisable but none were exercised.
Employees Stock Ownership Plan ("ESOP")
The Bank has established an Employee Stock Ownership Plan and Trust ("ESOP") for
eligible employees. Full-time employees employed with the Bank as of January 1,
1993, and full-time employees of the Company or the Bank employed after such
date who have been credited with at least 1,000 hours during a twelve-month
period and who have attained age 21 are eligible to participate.
The ESOP borrowed $8,280,000 from the Company and used the funds to
purchase 828,000 shares of Common Stock issued in the Conversion. The loan will
be repaid principally from the Bank's discretionary contributions to the ESOP
over a 10 year period. At June 30, 1996 and 1995, the loan had an outstanding
balance of $6,472,000 and $7,303,000, respectively, and an interest rate of
8.25% and 9.0%, respectively. Interest expense for the obligation was $588,000
and $655,000, respectively, for the years ended June 30, 1996 and 1995. Shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is paid. Contributions to the ESOP and shares
released from the loan collateral in an amount proportional to the repayment of
the ESOP loan will be allocated among participants on the basis of compensation,
as described in the plan, in the year of allocation. Benefits generally become
100% vested after five years of credited service. However, in the event of a
change in control, as defined in the plan, any unvested portion of benefits
shall vest immediately. Forfeitures will be reallocated among participating
employees, in the same proportion as contributions. Benefits are payable upon
death, retirement, disability, or separation from service based on vesting
status and share allocations made.
In fiscal 1994, the Company adopted Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 provides
guidance for accounting for all ESOPs and significantly changes the way
employers report transactions with leveraged ESOPs. SOP 93-6 requires that the
issuance or sales of treasury shares to the ESOP be reported when the issuance
or sale occurs, and that compensation expense be recognized for shares committed
to be released to directly compensate employees equal to the fair value of the
shares committed. In addition, SOP 93-6 requires that leveraged ESOP debt and
related interest expense be reflected in the employer's financial statements.
Prior practice was to recognize compensation expense based on the employer's
contributions to the ESOP. The adoption by the Bank and the application of SOP
93-6 will result in fluctuations in compensation expense as a result of changes
in the fair value of the Company's common stock; however, any such compensation
expense fluctuations will result in an offsetting adjustment to paid in capital.
Therefore, total capital will not be affected.
As of June 30, 1996, 165,600 shares were allocated to participants and
41,400 shares were committed to be released. As shares are released from
collateral, the shares become outstanding for earnings per share computations.
As of June 30, 1996 and 1995, the fair market value of the 621,000 and 703,800
unearned shares, respectively, was $9,703,000 and $10,029,150, respectively.
Recognition and Retention Plans and trusts ("RRPs")
The Bank maintains a Recognition and Retention Plan for Officers and a
Recognition and Retention Plan for Outside Directors (the "RRPs"). The purpose
of the RRPs is to provide executive officers, officers, and directors of the
Bank with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Bank. The RRPs acquired an aggregate
of 414,000 shares of the Company's common stock in the Conversion of which
410,895 shares have been awarded to Officers and Directors (327,715 at the time
of the Conversion and 83,180 thereafter). On June 19, 1996, 1,552 shares were
awarded to a new director. An additional 1,550 shares have been reserved for
future awards to directors. Such amounts represent deferred compensation and
have been accounted for as a reduction of stockholders' equity. Awards vest at a
rate of 20% per year for directors and officers, commencing one year from the
date of award. Awards become 100% vested upon termination of employment due to
death, disability, or following a change in control of the Bank or the Company.
The Company recorded compensation expenses for the ESOP and RRP of $2.0 million,
$1.9 million and $452,000, respectively, for the years ended June 30, 1996 and
1995 and for the period from the Conversion date to June 30, 1994.
18. Regulatory Matters
Federal regulations require institutions to have a minimum regulatory
tangible capital equal to 1.5% of total assets, a 3% core capital ratio and an
8% risk-based capital ratio. The OTS prompt corrective action standards
effectively establish a minimum 2% tangible capital ratio, a minimum 4% leverage
ratio (core) capital ratio and a minimum 4%
46
Tier 1 risked based capital ratio. As of June 30, 1996 and 1995, the Bank was in
compliance with the regulatory capital requirements.
Additionally, under prompt corrective action regulations, the regulators
have adopted rules, which require them to take action against undercapitalized
institutions, based upon five categories of capitalization: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." The rules adopted generally provide that an
insured institution whose risk-based capital ratio is 10% or greater, Tier 1
risk-based capital is 6% or greater, and leverage ratio is 5% or greater is
considered a "well capitalized" institution. As of June 30, 1996, 1995 and 1994,
the Bank is considered a "well capitalized" institution.
Dividend payments to the Company from the Bank are subject to the
profitability of the Bank and by applicable laws and regulations. During fiscal
1996, 1995 and 1994, the Bank did not make any dividend payments to the Company.
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
19. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
("SFAS No. 107"), requires disclosure of estimated fair value information for
the Company's financial instruments. Fair values are most commonly derived from
quoted market prices available in the formal trading marketplaces. In many
cases, the Company's financial instruments are not bought or sold in formal
trading marketplaces. Accordingly, in cases where quoted market prices are not
available, fair values are derived or estimated based on a variety of valuation
techniques. These techniques are sensitive to the various assumptions and
estimates used and the resulting fair value estimates may be materially affected
by minor variations in those assumption or estimates. In that regard, it is
likely that amounts different from the fair value estimates would be realized by
the Company in immediate settlement of the financial instruments.
SFAS No. 107 excludes certain financial instruments as well as all
nonfinancial instruments from fair value disclosure. Accordingly, the fair
values presented do not represent the Company's fair value as a going concern.
In addition, the differences between the carrying amounts and the fair values
presented may not be realized since the Company generally intends to hold these
financial instruments to maturity and realize their recorded value.
SFAS No. 107 provides minimal guidance and no limitations with regard to
assumptions and estimates to be used. Therefore, while disclosure of estimated
fair values is required, the fair value amounts presented in the financial
statements do not represent the underlying value of the Company, nor do they
provide any basis for comparison of the value of this Company with similar
companies. June 30,
----------------------------------------------------------
1996 1995
==========================================================
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------------------
(In thousands)
On Balance Sheet:
Cash and Due from Banks ....................................... $ 22,420 $ 22,420 $ 14,237 $ 14,237
Money Market Investments ...................................... 10,450 10,450 2,700 2,700
Debt and Equity Securities Available-for-Sale ................. 13,271 13,271 23,880 23,880
Debt and Equity Securities Held-to-Maturity ................... 48,330 48,036 23,890 23,883
Mortgage-Backed Securities Available-for-Sale ................. 591,740 591,740 104,453 104,453
Mortgage-Backed Securities Held-to-Maturity ................... 184,492 184,995 413,762 415,820
Loans Receivable, Net ......................................... 817,746 814,988 332,080 338,153
Purchased Mortgage Servicing Rights ........................... 3,905 4,555 -- --
Deposits ...................................................... 1,345,626 1,342,419 670,317 671,499
Borrowed Funds ................................................ 266,160 265,867 97,035 97,409
Off Balance Sheet:
Outstanding Commitments ....................................... 61,559 61,559 52,596 52,596
Letters of Credit ............................................. 500 500 500 500
47
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
Methods and assumptions used to produce fair value are stated below:
Cash and Due from Banks
The carrying amounts reported in the consolidated statements of condition
approximate the assets' fair values.
Money Market Investments
The carrying amounts of federal funds sold and repurchase agreements approximate
their fair values because these investments all mature in three months or less.
Debt, Equity and Mortgage-Backed Securities
Fair values for debt, equity and mortgage-backed securities are based on
published market or securities dealers' estimated prices.
Loans
Fair value estimates are calculated for pools of loans with similar
characteristics. The loans are first segregated by type, such as 1-4 family
residential, other residential, commercial, construction, and consumer, and then
further segregated into fixed and adjustable rate categories.
Fair value is estimated by discounting expected future cash flows. Expected
future cash flows are based on contractual cash flows, adjusted for prepayments.
Prepayment estimates are based on a variety of factors including the Bank's
experience with respect to each loan category, the effect of current economic
and lending conditions, and regional statistics for each loan category, if
available. The discount rates used are based on market rates for new loans of
similar type and purpose, adjusted, when necessary, for factors such as
servicing cost, credit risk, and term.
As mentioned previously, this technique of estimating fair value is extremely
sensitive to the assumptions and estimates used. While management has attempted
to use assumptions and estimates which are the most reflective of the loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than those determined in formal trading marketplaces. As such,
readers are again cautioned in using this information for purposes of evaluating
the financial condition and/or value of the Company in and of itself or in
comparison with any other company.
Purchased Mortgage Servicing Rights
The fair value is estimated based upon a third party valuation which stratifies
the mortgage servicing portfolio based upon the predominate risk characteristics
of the underlying cash flows utilizing current market assumptions regarding
discount rates, prepayment speeds, delinquency rates, etc.
Other Receivables and Payables
The carrying amounts of short-term receivables and payables, including accrued
interest approximate their fair values.
Deposits
SFAS No. 107 stipulates that the fair values of deposits with no stated
maturity, such as demand deposits, savings, NOW accounts and money market
accounts, are equal to the amount payable on demand. The relative insensitivity
of the majority of these deposits to interest rate changes creates a significant
inherent value which is not reflected in the fair value reported.
The fair value of certificates of deposit are based on discounted
contractual cash flows using rates which approximate the rates offered by the
Company for deposits of similar remaining maturities.
Other Borrowings
Fair value estimates are based on discounting contractual cash flows using rates
which approximate the rates offered for borrowings of similar remaining
maturities.
Outstanding Commitments
Fair value of commitments outstanding are estimated based on the fees that would
be charged for similar agreements, considering the remaining term of the
agreement, the rate offered and the creditworthiness of the parties.
48
20. Parent-Only Financial Information
The following condensed statements of condition at June 30, 1996 and 1995
and condensed statements of income and cash flows for the years ended June 30,
1996 and 1995 and for the period March 31, 1994 (date of conversion) to June 30,
1994 for Reliance Bancorp, Inc. (parent company only) reflects the Company's
investment in its wholly-owned subsidiary, the Bank, using the equity method of
accounting. The Company had no results of operation prior to March 31, 1994.
CONDENSED STATEMENTS OF CONDITION
June 30,
---------------------------
1996 1995
===========================
(In thousands)
Assets
Cash ................................................................................ $ 361 $ 178
Money Market Investments ............................................................ 9,450 1,700
Debt Securities Available-for-Sale .................................................. -- 23,880
ESOP Loan Receivable ................................................................ 6,472 7,303
Other Assets ........................................................................ 909 836
Investment in Reliance Federal Savings Bank ......................................... 137,680 120,921
---------------------------
Total Assets ...................................................................... $154,872 $154,818
===========================
Liabilities and Stockholders' Equity
Accrued Expenses............................................................................. $ 1,253 $ 1,085
Stockholders' Equity......................................................................... 153,619 153,733
---------------------------
Total Liabilities and Stockholders' Equity................................................. $154,872 $154,818
===========================
CONDENSED STATEMENTS OF INCOME
For the Period
For the year For the year March 31,1994
Ended Ended (conversion date)
June 30, 1996 June 30, 1995 to June 30, 1994
======================================================
(In thousands)
Interest Income--Securities and Repurchase Agreements ..................... $ 958 $ 1,804 $ 471
Interest Income--ESOP Loan Receivable ..................................... 588 655 146
------------------------------------------------------
Total Interest Income ................................................... 1,546 2,459 617
Other Operating Income .................................................... 3 -- --
Other Operating Expense ................................................... (551) (497) (73)
------------------------------------------------------
Income Before Income Taxes and Equity in Undistributed Earnings of the Bank 998 1,962 544
Provision for Income Taxes ................................................ (445) (810) (231)
------------------------------------------------------
Income before Equity in Undistributed Earnings of the Bank ................ 553 1,152 313
Equity in Undistributed Earnings of Reliance Federal Savings Bank ......... 11,170 8,550 1,826
------------------------------------------------------
Net Income .............................................................. $ 11,723 $ 9,702 $ 2,139
======================================================
49
Reliance Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Period
For the year For the year March 31,1994
Ended Ended (conversion date)
June 30, 1996 June 30, 1995 to June 30, 1994
====================================================
(In thousands)
Cash from Operating Activities:
Net Income................................................................... $ 11,723 $ 9,702 $ 2,139
Equity in Undistributed Earnings of the Bank................................. (11,170) (8,550) (1,826)
Accretion of Discounts....................................................... (906) (229)
Net Gain on Sale of Securities............................................... (3) -- --
Increase in Other Assets..................................................... (73) (491) (332)
Increase (Decrease) in Accrued Expenses...................................... 52 (107) 258
----------------------------------------------------
Net Cash Provided by (Used in) Operating Activities........................ 529 (352) 10
----------------------------------------------------
Cash Flows from Investing Activities:
Purchase of Debt Securities Available-for-Sale............................... -- (19,654) (37,565)
Maturities of Debt Securities Available-for-Sale............................. -- 23,300 --
Proceeds from Sales of Debt Securities Available-for-Sale.................... 23,883 11,146 --
Principal Payments (Funding) of ESOP Loan Receivable......................... 831 977 (8,280)
Payments for Investments in Subsidiary....................................... (9,673) -- (51,788)
----------------------------------------------------
Net Cash Provided by (Used in) Investing Activities........................ 15,041 15,769 (97,633)
----------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from the Issuance of Common Stock................................... -- -- 103,575
Purchase of Treasury Stock................................................... (3,829) (13,040) (3,744)
Dividends Paid............................................................... (3,808) (2,707) --
----------------------------------------------------
Net Cash Provided by (Used in) Financing Activities........................ (7,637) (15,747 99,831
----------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents......................... 7,933 (330) 2,208
Cash and Cash Equivalents at Beginning of Period............................. 1,878 2,208 --
----------------------------------------------------
Cash and Cash Equivalents at the End of Period............................... $ 9,811 $ 1,878 $ 2,208
====================================================
50
Independent Auditors' Report
- --------------------------------------------------------------------------------
[LOGO] KPMG Peat Marwick LLP
Certified Public Accountants
One Jericho Plaza
Jericho, NY 11753
To the Board of Directors and Stockholders of
Reliance Bancorp, Inc.
We have audited the accompanying consolidated statements of condition of
Reliance Bancorp, Inc. and subsidiary as of June 30, 1996 and 1995 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended June 30, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Reliance
Bancorp, Inc. and subsidiary as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1(k) to the consolidated financial statements,
effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes). In
addition, as discussed in note 1(c) to the consolidated financial statements,
effective June 30, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115 (Accounting for Certain Investments in
Debt and Equity Securities).
/s/ KPMG Peat Marwick LLP
July 18, 1996
51
Reliance Bancorp, Inc. and Subsidiary
Selected Consolidated Quarterly Financial Data
- --------------------------------------------------------------------------------
(unaudited)
For the Fiscal 1996 Quarter Ended
--------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
(Dollars in thousands, except per share data)
==========================================================================
Interest Income......................................... $18,956 $21,132 $29,156 $31,128
Interest Expense........................................ 9,862 11,197 15,601 16,325
--------------------------------------------------------------------------
Net Interest Income..................................... 9,094 9,935 13,555 14,803
Provision for Loan Losses............................... 100 100 425 100
--------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses..... 8,994 9,835 13,130 14,703
Non-Interest Income..................................... 316 389 1,405 1,000
General and Administrative Expense...................... (5,097) (5,390) (7,286) (7,823)
Real Estate Operations, net............................. (48) (16) (366) (149)
Amortization of Excess of Cost Over Fair Value of
Net Assets Acquired................................... (86) (130) (856) (856)
--------------------------------------------------------------------------
Income Before Provision for Income Taxes................ 4,079 4,688 6,027 6,875
Income Tax Expense...................................... 1,719 2,048 2,904 3,275
--------------------------------------------------------------------------
Net Income.............................................. $ 2,360 $ 2,640 $ 3,123 $ 3,600
==========================================================================
Earnings Per Share...................................... $ 0.26 $ 0.30 $ 0.35 $ 0.40
==========================================================================
For the Fiscal 1995 Quarter Ended
--------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
==========================================================================
Interest Income......................................... $13,667 $14,404 $16,182 $17,007
Interest Expense........................................ 5,613 6,318 7,857 8,573
--------------------------------------------------------------------------
Net Interest Income..................................... 8,054 8,086 8,325 8,434
Provision for Loan Losses............................... 100 100 100 100
--------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses..... 7,954 7,986 8,225 8,334
Non-Interest Income..................................... 413 286 276 282
General and Administrative Expense...................... (4,372) (4,254) (4,463) (4,508)
Real Estate Operations, net............................. (114) (28) 556 (29)
--------------------------------------------------------------------------
Income Before Provision for Income Taxes................ 3,881 3,990 4,594 4,079
Income Tax Expense...................................... 1,703 1,604 1,871 1,664
--------------------------------------------------------------------------
Net Income.............................................. $ 2,178 $ 2,386 $ 2,723 $ 2,415
==========================================================================
Earnings Per Share...................................... $ 0.23 $ 0.25 $ 0.29 $ 0.26
==========================================================================
52
RELIANCE BANCORP, INC.
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Raymond L. Nielsen
Chairman of the Board and
former Chief Executive Officer
Raymond A. Nielsen
Chief Executive Officer
and President
Thomas G. Davis, Jr.
Retired--President and Director
Institutional Mortgage Investors
Management Corp.
Donald LaPasta
Retired--Chairman of the Board
and Chief Executive Officer
Reliance Federal Savings Bank
Douglas G. LaPasta
Principal of Stonehill
Management Consultants
Conrad J. Gunther, Jr.
Vice President
Allied Coverage Corp.
Peter F. Neumann
President
Bradley & Parker
Flynn-Neumann Agency, Inc.
J. William Newby
Owner/President
Beacon Mortgage Company
EXECUTIVE OFFICERS
Raymond A. Nielsen
Chief Executive Officer
and President
Joseph F. Lavelle
Senior Vice President
Retail Banking Division
Gerald M. Sauvigne
Executive Vice President and
Treasurer
Paul D. Hagan
Vice President
Chief Financial Officer
Robert F. Pelosi
Senior Vice President and
Corporate Secretary
John F. Traxler
Vice President
Investment Officer
RELIANCE FEDERAL SAVINGS BANK*
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
*Executive officers of Reliance bancorp, Inc.
also serve as executive officers
of Reliance Federal Savings Bank
VICE PRESIDENTS
John C. Correll
Home Mortgage
Frank A. Dreiss, Jr.
Data Processing
John J. Hogan
Marketing
James F. Kramer
Controller
William J. McKenna
Loan Servicing
Jeannette Sabatelli
Consumer Credit
Frances Secondo
Internal Audit
Kevin J. Talty
Mortgage Originations
ASSISTANT VICE PRESIDENTS
John Brackx
Dorothy J. Brown
Joseph C. Byrne
Christine Gerber
Diane M. Holland
Steven F. Leibow
John Martingale
Vincent Martucci
Francis J. McHale, Jr.
Stephen Plezia
Ronald Session
QUEENS
Auburndale
32-02 Francis Lewis Boulevard
Flushing, New York 11358
Mary Wright
AVP--Branch Manager
Hillcrest
69-09 164th Street
Flushing, New York 11365
Carol Murray
AVP--Branch Manager
Hollis
204-12 Hillside Avenue
Hollis, New York 11423
Pat Klos
AVP--Branch Manager
Jamaica
162-04 Jamaica Avenue
Jamaica, NY 11432
Ruby Griffin
AVP--Branch Manager
Queens Village
216-26 Jamaica Avenue
Queens Village, New York 11428
Lucille Rocco
AVP--Branch Manager
Whitestone
19-01 Utopia Parkway
Whitestone, New York 11357
Ligia Delgado
Branch Manager
Winchester
233-15 Hillside Avenue
Queens Village, New York 11427
Margaret Modesti
AVP--Branch Manager
NASSAU
Albertson
983 Willis Avenue
Albertson, New York 11507
Hope Scorcia
AVP--Branch Manager
Bethpage
570 Stewart Avenue
Bethpage, New York 11714
Joanne Alexander
AVP--Branch Manager
Carle Place
215 Glen Cove Road
Carle Place, New York 11514
Farmingdale
312 Conklin Street
Farmingdale, New York 11735
Sidney Johnsen
Branch Manager
South Farmingdale
195 Merritt Road
So. Farmingdale, New York 11735
Rosemary Demeo
AVP--Branch Manager
Franklin Square
172 New Hyde Park Road
Franklin Square, New York 11010
Janet Heck
Branch Manager
Hicksville
405 Jerusalem Avenue
Hicksville, New York 11801
Jacqueline Harrison
Branch Manager
North Bellmore
2843 Jerusalem Avenue
North Bellmore, New York 11710
Maureen Milo
Branch Manager
Roosevelt Field
300 Garden City Plaza
Garden City, New York 11530
Jean Hahn
Branch Manager
Salisbury
2530 Stewart Avenue
Westbury, New York 11590
Ann Marie Richartz
Branch Manager
Westbury
341 Post Avenue
Westbury, New York 11590
Thomas Rose
AVP--Branch Manager
Williston Park
422 Hillside Avenue
Williston Park, New York 11596
Dennis Holzbaur
AVP--Branch Manager
SUFFOLK
Deer Park
2087 Deer Park Avenue
Deer Park, New York 11729
Emil Savoia
AVP--Branch Manager
Kings Park
742 Route 25A
Kings Park, New York 11754
Rosemarie DiPiano
Branch Manager
Lindenhurst
300 S. Wellwood Avenue
Lindenhurst, New York 11757
Richard Griesche
Branch Manager
Nesconset
250 Smithtown Boulevard
Nesconset, New York 11767
Catherine Maidhof
Branch Manager
North Babylon
1134 Deer Park Avenue
North Babylon, New York 11703
Anthony Ferrante
Branch Manager
North Brentwood
340 Washington Avenue
North Brentwood, New York 11717
Richard Morrison
Branch Manager
Plainview
1074 Old Country Road
Plainview, New York 11803
Sandra McGrath
Branch Manager
St. James
245 Lake Avenue
St. James, New York 11780
Doreen Midili
Branch Manager
West Islip
434 Union Boulevard
West Islip, New York 11795
Lisa Guariglia
Branch Manager