UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Exchange Act")
For the quarterly period ended September 30, 1996
Commission File Number: 0-23126
RELIANCE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3187176
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
585 Stewart Avenue, Garden City, New York 11530
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 222-9300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days. Yes [X] No [ ]
As of November 7, 1996 there were 8,911,739 shares of common stock, $.01 par
value, outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - Unaudited
Consolidated Statements of Condition at September 30, 1996 and
June 30, 1996 (Unaudited)
Consolidated Statements of Operation for the Three Months Ended
September 30, 1996 and 1995 (Unaudited)
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1996 and 1995 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
1
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
(Dollars in thousands, except per share data)
September 30, June 30,
Assets 1996 1996
------------- --------
Cash and due from banks ............................................. $ 17,271 $ 22,420
Money market investments ............................................ 6,800 10,450
Debt and equity securities available-for-sale ....................... 15,367 13,271
Debt and equity securities held-to-maturity (estimated market
values of $45,842 and $48,036, respectively) ..................... 46,003 48,330
Mortgage-backed securities available-for-sale ....................... 647,180 591,740
Mortgage-backed securities held-to-maturity (estimated market
values of $179,669 and $184,995, respectively) ................... 178,296 184,492
Loans receivable:
Mortgage loans ................................................. 695,277 690,967
Consumer and other loans ....................................... 132,581 131,274
Less allowance for loan losses ............................... (4,504) (4,495)
----------- -----------
Loans receivable, net .................................. 823,354 817,746
Accrued interest receivable, net .................................... 11,653 11,312
Office properties and equipment, net ................................ 13,981 13,821
Prepaid expenses and other assets ................................... 15,745 14,070
Mortgage servicing rights ........................................... 3,731 3,905
Excess of cost over fair value of net assets acquired ............... 48,573 49,429
Real estate owned, net .............................................. 1,486 1,564
----------- -----------
Total assets ........................................... $ 1,829,440 $ 1,782,550
=========== ===========
Liabilities and Stockholders' Equity
Deposits ............................................................ $ 1,358,443 $ 1,345,626
FHLB advances ....................................................... 3,000 3,000
Securities sold under agreements to repurchase ...................... 287,750 263,160
Advance payments by borrowers for taxes and insurance ............... 14,397 8,846
Accrued expenses and other liabilities .............................. 16,298 8,299
----------- -----------
Total liabilities ...................................... 1,679,888 1,628,931
----------- -----------
Commitments
Stockholders' Equity
Preferred Stock, $.01 par value, 4,000,000 shares
authorized; none issued ........................................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 10,750,820 shares issued; 8,911,739 and 9,128,739
outstanding at September 30, 1996 and June 30, 1996, respectively 108 108
Additional paid-in capital .......................................... 104,205 104,041
Retained earnings, substantially restricted ......................... 81,417 83,966
Unrealized depreciation on securities
available for sale, net of taxes ................................. (3,817) (5,281)
Less:
Unallocated common stock held by ESOP ............................... (6,003) (6,210)
Unearned common stock held by RRP ................................... (2,186) (2,392)
Treasury stock, at cost (1,839,081 and 1,622,081 shares
at September 30, 1996 and June 30, 1996, respectively) ............ (24,172) (20,613)
----------- -----------
Total stockholders' equity ..................................... 149,552 153,619
----------- -----------
Total liabilities and stockholders' equity .............. $ 1,829,440 $ 1,782,550
=========== ===========
2
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Operation
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
September 30,
--------------------
1996 1995
-------- --------
Interest income:
First mortgage loans ................................................ $ 13,751 $ 5,546
Consumer and other loans ............................................ 2,856 2,609
Mortgage-backed securities .......................................... 14,123 9,943
Money market investments ............................................ 125 176
Debt and equity securities .......................................... 1,105 682
-------- --------
Total interest income ............................................ 31,960 18,956
-------- --------
Interest expense:
Deposits ............................................................ 13,079 7,963
Borrowed funds ...................................................... 3,935 1,899
-------- --------
Total interest expense ........................................... 17,014 9,862
-------- --------
Net interest income before provision for loan losses ............. 14,946 9,094
Provision for loan losses ........................................... 100 100
-------- --------
Net interest income after provision for loan losses .............. 14,846 8,994
-------- --------
Non-interest income:
Loan fees and service charges ....................................... 208 71
Other operating income .............................................. 494 243
Net gain (loss) on securities ....................................... (16) 2
-------- --------
Total non-interest income ........................................ 686 316
-------- --------
Non-interest expense:
Compensation and benefits ........................................... 4,097 2,679
Occupancy and equipment ............................................. 1,424 859
Federal deposit insurance premiums .................................. 772 428
Advertising ......................................................... 338 266
Other operating expense ............................................. 1,366 865
-------- --------
Total general and administrative expenses ........................ 7,997 5,097
Real estate operations, net ......................................... 104 48
Amortization of excess of cost over fair value of net assets acquired 856 86
SAIF recapitalization charge ........................................ 8,250 --
-------- --------
Total non-interest expense .......................................... 17,207 5,231
-------- --------
Income (loss) before income taxes ...................................... (1,675) 4,079
Income tax expense (benefit) ........................................... (271) 1,719
-------- --------
Net income (loss) ...................................................... $ (1,404) $ 2,360
======== ========
Net income (loss) per common share ..................................... $ (0.17) $ 0.26
======== ========
3
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended
September 30,
----------------------
1996 1995
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ............................................................. $ (1,404) $ 2,360
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Provision for loan losses ..................................................... 100 100
Provision for losses on real estate owned ..................................... 50 --
(Accretion of discounts) amortization of premiums, net ........................ 34 (362)
Amortization relating to allocation and earned portion of stock plans ......... 577 497
Amortization of excess of cost over fair value of net assets acquired ......... 856 86
Amortization of purchased mortgage servicing rights ........................... 174 --
Depreciation and amortization ................................................. 336 201
Net (gain) loss on securities ................................................. 16 (2)
Net gain on loans sold ........................................................ (3) --
Increase in accrued interest receivable ....................................... (341) (313)
Increase in prepaid expense and other assets .................................. (2,803) (441)
Increase in accrued expenses and other liabilities ............................ 7,801 485
--------- ---------
Net cash provided by operating activities ................................. 5,393 2,611
--------- ---------
Cash flows from investing activities:
Originated and purchased loans, net of principal repayments on loans .......... (7,606) (5,733)
Purchases of mortgage-backed securities available-for-sale .................... (75,612) (70,584)
Principal repayments from mortgage-backed securities .......................... 28,698 25,755
Purchases of debt securities available-for-sale ............................... (5,000) --
Proceeds from calls of debt securities ........................................ 2,313 --
Proceeds from sales of debt securities available-for-sale ..................... 2,984 1,977
Proceeds from maturities of debt securities ................................... -- 10,000
Purchases of premises and equipment ........................................... (509) (338)
Proceeds from loans sold ...................................................... 1,408 521
Proceeds from sales of real estate owned ...................................... 508 144
Cash paid for Bank of Westbury net of cash and cash
equivalents acquired ..................................................... -- (165)
--------- ---------
Net cash used in investing activities ..................................... (52,816) (38,423)
--------- ---------
Cash flows from financing activities:
Increase in deposits .......................................................... 12,989 19,851
Increase in advance payments by borrowers
for taxes and insurance ..................................................... 5,551 1,201
Proceeds from reverse repurchase agreements ................................... 256,473 120,609
Repayment of reverse repurchase agreements .................................... (231,883) (99,316)
Purchases of treasury stock ................................................... (3,559) (1,688)
Dividends paid ................................................................ (947) (980)
--------- ---------
Net cash provided by financing activities .................................. 38,624 39,677
--------- ---------
Net increase (decrease) in cash and cash equivalents .......................... (8,799) 3,865
Cash and cash equivalents at beginning of period .............................. 32,870 16,937
--------- ---------
Cash and cash equivalents at end of period .................................... $ 24,071 $ 20,802
========= =========
4
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
Three Months Ended
September 30,
--------------------
1996 1995
------- -------
(Unaudited)
Supplemental disclosures of cash flow information
Cash paid during the quarters for:
Interest ............................................ $16,898 $ 9,637
======= =======
Income taxes ........................................ $ 3,420 $ 1,063
======= =======
Non-cash investing activities:
Transfers from loans to real estate owned ........... $ 480 $ 277
======= =======
See accompanying notes to unaudited consolidated financial statements.
5
RELIANCE BANCORP, INC. and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Reliance Bancorp, Inc. (the "Company"), its direct wholly-owned
subsidiary Reliance Federal Savings Bank (the "Bank"), and the subsidiaries
of the Bank.
The unaudited consolidated financial statements included herein reflect all
normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. The results of operations for the three months ended September
30, 1996 are not necessarily indicative of the results of operations that
may be expected for the entire fiscal year. Certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These unaudited consolidated financial
statements should be read in conjunction with audited consolidated
financial statements and notes thereto, included in the Company's 1996
Annual Report on Form 10-K.
2. EARNINGS PER SHARE
Earnings per common and common equivalent shares are calculated by dividing
net income by the weighted average number of shares of common stock
outstanding and common stock equivalents, when dilutive. Stock options are
regarded as common stock equivalents and are therefore considered in both
earnings per share calculations if dilutive. Common stock equivalents are
computed using the treasury stock method.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Reliance Bancorp, Inc. (the "Company") is a Delaware corporation organized on
November 16, 1993 at the direction of the Board of Directors of Reliance Federal
Savings Bank (the "Bank") for the purpose of becoming a holding company to own
all of the outstanding capital stock of the Bank upon its conversion from a
mutual to a stock form of organization. The stock conversion was completed on
March 31, 1994 which raised $103.6 million of net proceeds from the sale of
10,750,820 common shares. As of September 30, 1996, the Company had 8,911,739
shares outstanding, all of which were common shares.
The Company is headquartered in Garden City, New York and its primary business
currently consists of the operations of its wholly owned subsidiary, the Bank.
In addition to directing, planning and coordinating the business activities of
the Bank, the Company invests primarily in U.S. Government securities and
repurchase agreements. The Company has also recently expanded its operations
with the acquisition of two financial institutions. On January 11, 1996, the
Company completed its acquisition of Sunrise Bancorp, Inc. and previously
completed the acquisition of Bank of Westbury on August 11, 1995.
The Bank's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from
operations, principal repayments and borrowings, primarily in mortgage and
consumer loans, multi-family and guaranteed student loans, and to a lesser
extent, commercial real estate and construction loans. In the past, the Bank has
also invested in loans secured by cooperative units ("co-op loans") and
commercial loans, but in recent years has discontinued its origination
activities in these areas. In addition, during periods in which the demand for
loans which meet the Bank's underwriting, investment and interest rate risk
standards is lower than the amount of funds available for investment, the Bank
invests excess funding in mortgage-backed securities, securities issued by the
U.S. Government and agencies thereof and other investments permitted by federal
laws and regulations.
The Company's results of operations are dependent primarily 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 Company'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 expenses, and
income tax expense. General and administrative expense consists primarily of
compensation and benefits, occupancy, federal deposit insurance premiums,
advertising and other general and administrative expenses. Other non-interest
expense consists of real estate operations, net, and amortization of excess of
cost over fair value of net assets acquired. The earnings of the Company may
also significantly be affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
7
Acquisitions
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.
A summary of the net assets acquired (at their 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
========
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 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
8
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.
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 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
========
Financial Condition
As of September 30, 1996, total assets were $1.8 billion, deposits were $1.4
billion and total stockholders' equity was $149.6 million. The mortgage-backed
securities portfolio increased $49.2 million, or 6.3%, from $776.2 million at
June 30, 1996 to $825.5 million at September 30, 1996 with the increase
primarily due to increased purchases of adjustable-rate and longer term
fixed-rate mortgage-backed securities offset by amortization and prepayments.
Mortgage loans increased $4.3 million from $691.0 million at June 30, 1996 to
$695.3 million at September 30, 1996. The increase in mortgage loans is
primarily due to increased multi-family loan originations offset by
amortizations.
Funding for the purchases of mortgage-backed securities and loans was through a
combination of new deposit growth, borrowings and cash flows. Deposits increased
$12.8 million, or 1.0% during the quarter as a result of growth in new
certificate of deposit products. Borrowings increased from $266.2 million
9
at June 30, 1996 to $290.8 million at September 30, 1996, an increase of $24.6
million, or 9.2%. The Bank continues to use borrowings to leverage its capital
and fund asset growth.
Non-Performing Assets
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more on which the Bank is accruing interest at the dates
indicated and real estate owned. It is the Bank's policy to classify any loans,
or any portion thereof, determined to be uncollectible, in whole or in part, as
non-accrual loans. With the exception of guaranteed student loans, the Bank also
classifies as non-accrual loans all loans 90 days or more past due. When a loan
is placed on non-accrual status, the Bank ceases the accrual of interest owed
and previously accrued interest is charged against interest income.
September 30,June 30,
1996 1996
---- ----
(Dollars in thousands)
Non-accrual mortgage loans delinquent more than 90 days ......... $15,382 $12,277
Non-accrual other loans delinquent more than 90 days ............ 296 352
------- -------
Total non-accrual loans ..................................... 15,678 12,629
Loans 90 days or more delinquent and still accruing ............. 255 350
------- -------
Total non-performing loans ...................................... 15,933 12,979
Total foreclosed real estate, net of related allowance for losses 1,486 1,564
------- -------
Total non-performing assets ..................................... $17,419 $14,543
======= =======
Non-performing loans to total loans ............................. 1.92% 1.58%
Non-performing assets to total assets ........................... 0.95% 0.82%
Allowance for loan losses to non-performing loans ............... 28.27% 34.63%
Allowance for loan losses to total loans ........................ 0.54% 0.55%
Non-performing loans totalled $15.9 million, or 1.92% of total loans at
September 30, 1996, an increase of $2.9 million, or 22.8% from $13.0 million, or
1.58% of total loans at June 30, 1996. Non-performing loans at September 30,
1996 were comprised of $12.9 million of loans secured by one- to four-family
residences, $255,000 of guaranteed student loans and $2.8 million of commercial
properties. Of the $2.9 million increase in non-performing loans, $1.8 million
relates to two commercial loans placed on non-accrual status during the quarter.
The Bank is presently monitoring such loans and has commenced foreclosure
proceedings. The following is a description of the two large commercial loans
and the status of each of these loans as of September 30, 1996.
At September 30, 1996, the Bank had two loans outstanding totalling $1.2 million
secured by a boat marina in Lindenhurst, NY. The loans were originated in
September 1994 in the form of a $687,500 first mortgage on the property and a
$550,000 second mortgage building loan. As of September 30, 1996, the borrower
was more than 90 days delinquent on the first and second mortgage loans. The
Bank has commenced foreclosure proceedings and a receiver has been appointed.
The borrower has obtained a loan commitment from another financial institution
subject to certain conditions with a principal amount slightly less than the
current principal due on the loan; however, there is no assurance that the
borrower will meet all of the conditions of the loan commitment. The Bank is
presently monitoring such property and has sufficient reserves necessary to
cover any losses.
10
At September 30, 1996, the Bank had two loans outstanding totalling $1.0 million
secured by a funeral home in Westbury, NY. The loans were originated in August
1995 in the form of a $580,000 first mortgage on the property and a $500,000
second mortgage building loan. As of September 30, 1996, the borrower has
$465,000 outstanding on the building loan. An appraisal dated March 1995, valued
the property at $1.7 million. As of September 30, 1996, the borrower was more
than 90 days delinquent on the first mortgage and 30 days delinquent on the
second mortgage loan. Because of the borrower's cash flow problems, the Bank is
presently monitoring the loans due to their size and inability to obtain a
takeout of the second mortgage position. The Bank is currently working with the
borrower to bring these loans current although there is no assurance that this
can be accomplished.
The Company's allowance for loan losses totalled $4.5 million at September 30,
1996 which represents a ratio of allowance for loan losses to non-performing
loans and to total loans of 28.27% and 0.54%, respectively, as compared to
34.63% and 0.55%, respectively at June 30, 1996. The decrease in the ratio of
the allowance to non-performing loans and total loans is primarily the result of
the aforementioned commercial loans which became non-performing during the
quarter. As a result of the increase in non-performing loans, the non-performing
assets to total assets ratio increased to 0.95% at September 30, 1996 from 0.82%
at June 30, 1996. Management believes the allowance for loan losses at September
30, 1996 is adequate and sufficient reserves are presently maintained to cover
losses on any non-performing loans. For the quarter ended September 30, 1996,
the Company experienced net charge-offs of $91,000.
Impact of Legislation
Recapitalization of SAIF Fund. Legislation was signed into law during the
quarter ended September 30, 1996 to mitigate the effect of the Bank Insurance
Fund ("BIF") and Savings Association Insurance Fund ("SAIF") premium disparity.
Under the legislation a special assessment was imposed on the amount of deposits
held by SAIF-member institutions, including the Bank, as of a specified date,
March 31, 1995, to recapitalize the SAIF. The special assessment is payable on
November 27, 1996. The amount of the special assessment determined by the FDIC
was 65.7 basis points of insured deposits. As a result of enactment of this
legislation on September 30, 1996, the Bank recorded a one-time non-recurring
charge of $8.25 million prior to recognition of a tax benefit. As a result of
recognition of such charge, the Company recorded a net loss for the quarter
which resulted in a reduction of retained earnings. The payment of the special
assessment had the effect of immediately reducing the capital of SAIF-member
institutions, net of any tax effect; however, the Bank remains in compliance
with its regulatory capital requirements. This legislation also spreads the
obligation for payment of the Financing Corporation ("FICO") bonds across all
SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will be
assessed for FICO payments at a rate of 20% of the rate assessed by SAIF
deposits. Based upon current estimates by the FDIC, BIF deposits will be
assessed a FICO payment of 1.3 basis points, while SAIF deposits will pay an
estimated 6.5 basis points on the FICO bonds. Full pro rata sharing of the FICO
payments will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged. This legislation specifies that the BIF and SAIF will be merged
on January 1, 1999 provided no savings associations remain as of that time.
As a result of this legislation, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management cannot predict the level of
FDIC insurance assessments on an on-going basis whether the savings association
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
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
11
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. 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.
Asset/Liability Management
One of the Bank's primary long-term financial objectives has been and will
continue to be to reduce the sensitivity of its earnings to interest rate
fluctuations by maintaining a matching of the maturities and interest rate
repricing characteristics of its assets and liabilities. In an effort to realize
this objective, the Bank emphasizes the origination of adjustable-rate mortgage
and consumer loans and the purchases of adjustable-rate and shorter-term
mortgage-backed securities. However, there can be no assurances that the Bank
will be able to acquire mortgage-backed securities with terms and
characteristics which conform with the Bank's investment criteria and interest
rate risk policies, such as mortgage-backed securities backed by ARMs or loans
with shorter terms.
At September 30, 1996, $870.1 million, or 50.6%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $695.3 million, of which, $353.9 million, or
50.9%, were adjustable-rate loans and $341.4 million, or 49.1%, were fixed-rate
loans. In addition, at September 30, 1996, the Bank's consumer loan portfolio
totalled $132.6 million, of which, $103.9 million, or 78.3%, were
adjustable-rate home-equity lines of credit and guaranteed student loans and
$28.7 million, or 21.7%, were fixed-rate home-equity and other consumer loans.
The Bank continues to invest in adjustable-rate mortgage-backed securities to
reduce credit risk as well as minimize exposure to volatile interest rates. The
Bank also continues to purchase 30 year fixed rate mortgage-backed securities in
order to provide a hedge against prepayment risk in its adjustable rate
mortgage-backed securities portfolio. During the three months ended September
30, 1996, the Bank purchased approximately $11.4 million and $64.2 million of 30
year fixed rate and 1 year adjustable rate mortgage-backed securities classified
as available-for-sale, respectively. At September 30, 1996, the mortgage-backed
securities held-to-maturity portfolio totalled $178.3 million, of which, $117.4
million, or 65.8%,
12
of the mortgage-backed portfolio was adjustable-rate securities and $60.9
million, or 34.2%, was fixed-rate securities. The Bank also has $647.2 million
of mortgage-backed securities classified as available-for-sale of which $295.0
million, or 45.6%, were adjustable rate securities and $352.2 million, or 54.4%,
were fixed-rate securities. The Bank has funded the purchase of these securities
through a combination of internal deposit growth and borrowings, primarily
reverse repurchase agreements.
At September 30, 1996, the Bank's estimated one year interest sensitivity "gap"
(the difference between interest-earning assets and interest-bearing liabilities
that reprice or mature within such period expressed as a percentage of total
assets) declined to a negative gap of $136,000 or (0.01)%, of total assets at
September 30, 1996 as compared to a positive gap of $49.1 million, or 2.76% of
total assets at June 30, 1996 and $130.4 million, or 11.8%, at September 30,
1995. The prepayment rates for mortgage loans, mortgage-backed securities and
consumer loans are based upon the Bank's historical performance.
The Bank's exposure to the risks of changing interest rates may be analyzed, in
part, by examining the extent to which its assets and liabilities are "interest
rate sensitive" and by monitoring the Bank's interest rate sensitivity "gap". An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest-earning
assets maturing or repricing exceeds the amount of interest-bearing liabilities
maturing or repricing within the same period. A gap is considered negative when
the amount of interest-bearing liabilities maturing or repricing exceed the
amount of interest-bearing assets maturing or repricing within the same period.
Accordingly, a positive gap may enhance net interest income in a rising rate
environment and reduce net interest income in falling rate environment.
Conversely, a negative gap may enhance net interest income in a falling rate
environment and reduce net interest income in a rising rate environment.
Comparison of Operating Results for the Three Months Ended September 30, 1996
and 1995.
General. The Company reported a net loss of $1.4 million for the quarter ended
September 30, 1996, as compared to net income of $2.4 million in the prior year
quarter. The net loss for the quarter reflects a one-time non-recurring charge
to income of $8.25 million for the Company's share of recapitalizing the Savings
Association Insurance Fund ("SAIF"). It is anticipated that the Company will
benefit from reduced deposit insurance premiums in subsequent quarters as a
result of the recapitalization of the SAIF insurance fund. Excluding the impact
of the SAIF charge, the Company's earnings would have been $3.4 million, or
$0.39 per common share as compared to $0.26 per common share in the prior year
quarter.
Interest Income. Interest income increased $13.0 million, or 68.6%, from $19.0
million for the three months ended September 30, 1995, to $32.0 million for the
three months ended September 30, 1996. The increase resulted primarily from an
increase of $692.7 million, or 68.5%, in the average balance of interest-earning
assets from $1.0 billion for the 1995 period to $1.7 billion for the 1996
period. The yield on average interest-earning assets remained relatively flat
from the prior year with a yield of 7.49% in 1995 and 7.50 % in 1996. Interest
income from mortgage loans increased by $8.2 million, or 147.9%, from $5.5
million for the 1995 period to $13.7 million for the 1996 period due to a $429.4
million, or 162.6%, increase in the average balance of mortgage loans, offset by
a 47 basis point decrease in the average yield on mortgage loans from 8.45% for
the 1995 period to 7.98% for the 1996 period. The increase in the average
balance of mortgage loans is due to the acquisitions of mortgage loans from Bank
13
of Westbury and Sunrise Bancorp, Inc. as well as increased originations of
multi-family loans. For the three months ended September 30, 1996, interest
income from mortgage-backed securities increased $4.2 million, or 42.0%, from
$9.9 million for the 1995 period to $14.1 million for the 1996 period, primarily
due to an increase of $216.9 million, or 37.1%, in the average balance of
mortgage-backed securities and an increase in the average yield on these
securities of 15 basis points from 6.81% for the 1995 period to 6.96% for the
1996 period due to the adjustable-rate mortgage-backed securities repricing at
higher rates and increased purchases of higher yielding 30 year fixed rate
securities. The increase in the average balance of mortgage-backed securities is
due to increased purchases of adjustable-rate and longer term securities and
also securities acquired from the Bank of Westbury and Sunrise Bancorp, Inc.
Mortgage-backed securities generally bear interest rates lower than loans.
Accordingly, to the extent the demand for loans which meet the Bank's
underwriting standards remains low in the Bank's primary market area and the
Bank continues to increase its investment of mortgage-backed securities, yields
on interest-earning assets may tend to be lower than if the Bank increased its
investment of funds in loans. Interest income from consumer loans increased
$247,000, or 9.5%, from $2.6 million for the 1995 period to $2.9 million for the
1996 period due to a $20.1 million, or 18.0%, increase in the average balance of
consumer loans offset by a 67 basis point decrease in the average yield on
consumer loans from 9.40% for the 1995 period to 8.73% for the 1996 period. The
increase in income is a result of consumer loans acquired from Bank of Westbury
and Sunrise Bancorp, Inc. as well as increased originations of home equity lines
of credit offset by the repricing downward of prime rate based loans.
Interest Expense. Interest expense for the three months ended September 30,
1996, was $17.0 million, an increase of $7.1 million, or 72.5%, from $9.9
million for the three months ended September 30, 1995. The increase in interest
expense is related to a $731.3 million, or 83.3%, increase in the average
balance of interest-bearing liabilities from $878.5 million in 1995 to $1.6
billion in 1996 offset by a 26 basis point decrease in the cost of
interest-bearing liabilities from 4.49% for the 1995 period to 4.23% for the
1996 period. The decrease in the average cost of interest-bearing liabilities
resulted primarily from a lower interest rate environment during the quarter
ended September 30, 1996 whereby the cost of borrowed funds and certificates of
deposit rates decreased from the prior year period. Interest expense on total
deposits increased $5.1 million, or 64.3%, from $8.0 million for the 1995 period
to $13.1 million for the 1996 period, primarily as a result of a $585.5 million,
or 76.7%, increase in the average balance of deposits offset by a 24 basis point
decrease in the average cost of such deposits from 4.18% in the 1995 period to
3.94% in the 1996 period. Interest expense on borrowed funds increased $2.0
million, or 107.2%, from $1.9 million for the 1995 period to $3.9 million for
the 1996 period primarily due to an increase of $166.2 million, or 143.8% in the
average balance of borrowings from $115.6 million for the three months ended
September 30, 1995 to $281.7 million for the three months ended September 30,
1996 offset by a 98 basis point decrease in the cost of borrowed fund from 6.57%
for the 1995 period to 5.59% for the 1996 period. Borrowed funds, principally
reverse repurchase agreements, have been reinvested by the Bank in
mortgage-backed securities and loans leveraging the Bank's capital and improving
the return on equity.
Net Interest Income. Net interest income was $14.9 million for the three months
ended September 30, 1996 as compared to $9.1 million for the three months ended
September 30, 1995, an increase of $5.9 million, or 64.4%. The increase in net
interest income was attributable to a $692.7 million, or 68.5%, increase in
average interest-earning assets to $1.7 billion for the quarter ended September
30, 1996 from $1.0 billion for the quarter ended September 30, 1995. The
increase in interest-earning assets is related to increased purchases of
mortgage-backed securities, increased origination of multi-family loans and
assets acquired from Bank of Westbury and Sunrise Bancorp, Inc. Interest-bearing
liabilities increased $731.3 million, or 83.3%, to $1.6 billion for the 1996
period from $878.5 million for the 1995 period. The
14
Bank's ratio of average interest-earning assets to average interest-bearing
liabilities declined to 1.06X for the quarter ended September 30, 1996 from
1.15X for the quarter ended September 30, 1995 as a result of the Bank
leveraging its excess capital with the Bank of Westbury and Sunrise Bancorp,
Inc. acquisitions. Also, net interest income increased as a result of an
increase in the net interest spread from 3.00% for the three months ended
September 30, 1995 to 3.27% for the three months ended September 30, 1996. The
increase in net interest spread is mainly due to higher yielding mortgage assets
acquired from Sunrise Bancorp, Inc. However, the net interest margin decreased
from 3.59% for the three months ended September 30, 1995 to 3.51% for the three
months ended September 30, 1996 as the Bank fully leveraged its excess capital
from the prior year quarter.
Provision for Loan Losses. The provision for loan losses totalled $100,000 for
the three months ended September 30, 1996 as compared to $100,000 for the three
months ended September 30, 1995. The provision for loan losses for the three
months ended September 30, 1996 reflects management's qualitative assessment of
the Bank's loan portfolio, net charge-offs and collection of delinquent loans.
Non-performing loans at September 30, 1996 were comprised of $12.9 million of
loans secured by one- to four-family residences, $255,000 of guaranteed student
loans and commercial properties with loan balances totalling $2.8 million. The
Company's allowance for loan losses totalled $4.5 million at September 30, 1996
which represents a ratio of allowance for loan losses to non-performing loans
and to total loans of 28.27% and 0.54%, respectively. The Company's
non-performing assets to total assets ratio was 0.95% at September 30, 1996. Net
charge-offs were $91,000 for the quarter ended September 30, 1996 as compared to
$53,000 for the quarter ended September 30, 1995. Management believes that based
upon information currently available that 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 increased $370,000, or 117.1%, from
$316,000 recorded during the quarter ended September 30, 1995 to $686,000 for
the quarter ended September 30, 1996. The increase is due to increased deposit
fees and other income associated with deposit accounts and loans acquired from
Bank of Westbury and Sunrise Bancorp, Inc.
Non-Interest Expense. Non-interest expense totalled $17.2 million for the
quarter ended September 30, 1996 as compared to $5.2 million for the quarter
ended September 30, 1995, an increase of $12.0 million, or 228.9%. Excluding the
one-time SAIF charge of $8.25 million, non-interest expense would have been $9.0
million, an increase of $3.7 million, or 71.2%. 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 declined from 1.95% to 1.78% for the quarter ended September
30,1996 due to the increased asset base and acquisition related efficiencies.
For the quarter ended September 30, 1996, compensation and benefits expense
increased to $4.1 million, an increase of $1.4 million or 52.9%, from $2.7
million for the quarter ended September 30, 1995. The increase in compensation
and benefits expense is due to the addition of banking office personnel from the
Sunrise Bancorp, Inc. and Bank of Westbury acquisitions, higher benefit expenses
and normal salary adjustments. Occupancy and equipment expense increased
$565,000, or 65.7%, from $859,000 for the quarter ended September 30, 1995 to
$1.4 million for the quarter ended September 30, 1996 due to costs associated
with the operation of the seventeen new banking offices. Federal deposit
insurance premiums increased $344,000, or 80.4%, from $428,000 recorded for the
quarter ended September 30, 1995 to $772,000 for the quarter ended September 30,
1996 due to the
15
increased deposit base. For the quarter ended September 30, 1996, advertising
totalled $338,000, an increase of $72,000, or 27.1%, from $266,000 recorded for
the quarter ended September 30, 1995 due to a higher level of newspaper
advertising. Other operating expenses increased $501,000, or 57.9%, from
$865,000 during the quarter ended September 30, 1995 to $1.4 million for the
quarter ended September 30, 1996 as a result of the addition of the seventeen
new banking offices.
Income Tax Expense (Benefit). For the three months ended September 30, 1996 the
Bank recorded an income tax benefit of $271,000 due to a loss from operations
recognized during the quarter. The net loss during the quarter was primarily due
to the one-time SAIF assessment charge of $8.25 million of which the Bank
recognized a tax benefit of approximately $3.4 million resulting in a decrease
in income tax expense from the prior year quarter. During the prior year
quarter, the Bank recorded income from operations and recognized income tax
expense of $1.7 million for the three months ended September 30, 1995.
Liquidity And Capital Resources
The Company's current primary sources of funds are principal and interest
payments and sales of investments securities and dividends from the Bank.
Dividend payments to the Company from the Bank are subject to the profitability
of the Bank and by applicable laws and regulations. The Company's liquidity is
available to, among other things, support future expansion of operations or
diversification into other banking related business, payments of dividends or
repurchase its common stock.
In this regard, as of September 30, 1996, the Company has repurchased a total of
1.8 million shares of the Company's outstanding common stock in open market
transactions for a total cost of $24.2 million and at an average price of
approximately $13.14 per share. The Company is presently in its fourth stock
repurchase plan and has approximately 127,000 common shares remaining to be
repurchased under such plan.
On September 18, 1996, the Board of Directors declared a regular cash dividend
of $0.14 per common share for the quarter ending September 30, 1996, an increase
of $0.025 or 21.7% from the regular cash dividend paid for the first quarter of
fiscal year 1996. The dividend was payable on October 18, 1996 to stockholders
of record on October 4, 1996.
The Company has also used available liquidity and capital to expand its
operations with the acquisition of two financial institutions. On August 11,
1995, the Company acquired Bank of Westbury, for approximately $16.7 million in
cash and on January 11, 1996, the Company acquired Sunrise Bancorp, Inc. for
approximately $106.3 million in cash. The Company had sufficient liquidity
available to fund these purchases and as of September 30, 1996, the Bank met all
of its regulatory capital requirements. The Company was required to sell
mortgage-backed securities classified as available-for-sale to fund the purchase
of Sunrise Bancorp, Inc.
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed securities and investment securities,
advances from the FHLB-NY, borrowings under reverse repurchase agreements and
mortgage-backed securities and loan sales. While maturities and scheduled
amortization of loans, mortgage-backed securities and investment securities are
predictable sources of funds, deposit flows and mortgage prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition.
16
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
5.38%, and 1.29%, respectively, for the three months ended September 30, 1996.
The Bank's short-term liquidity ratio was 1.36%, at September 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 September 30, 1996,
assets qualifying for short-term liquidity, including cash and short term
investments, totalled $22.3 million.
The primary investment activity of the Bank is the origination of mortgage loans
and consumer loans, and the purchase of mortgages and mortgage-backed
securities. During the three months ended September 30, 1996, the Bank
originated and purchased mortgage loans and consumer loans in the amount of
$31.2 million and $11.9 million, respectively. During the three months ended
September 30, 1996, the Bank purchased $75.6 million of mortgage-backed
securities all of which were classified as available-for-sale. These activities
were funded primarily by deposits, principal repayments on loans and
mortgage-backed securities, and borrowings under reverse repurchase agreements.
At September 30, 1996, borrowings from the FHLB-NY and reverse repurchase
agreements totalled $290.7 million.
At September 30, 1996, the Bank had outstanding loan commitments of $18.1
million and open lines of credit of $47.7 million. In addition, the Bank had
commitments to purchase $30.0 million of mortgage-backed securities classified
as available-for-sale. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination and mortgage-backed securities
purchase commitments. Certificates of deposit which are scheduled to mature in
one year or less from September 30, 1996 totalled $490.6 million. Management
believes that a significant portion of such deposits will remain with the Bank.
At September 30, 1996, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 5.44%, 5.44% and 14.67%,
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 New Accounting Standards
In October 1995, FASB issued SFAS 123 "Accounting for Stock-Based Compensation".
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all arrangements by
which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of the employer's stock. Examples are stock purchase plans, stock options,
restricted stock and stock appreciation rights.
This Statement defines fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No.25, Accounting for Stock Issued to Employees. Entities electing
to remain with the accounting in Opinion 25 must make
17
pro forma disclosures of net income, and if presented, earnings per share, as if
the fair value based method of accounting defined in this SFAS 123 had been
applied. SFAS 123 is effective for transactions entered into fiscal years that
begin after December 15, 1995, though they may be adopted on issuance.
Management has not yet determined the impact of adopting SFAS 123.
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.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Holding Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.0 Statement re Computation of Per Share Earnings
(b) Reports on Form 8-K
1) The Company filed Form 8-K on September 30, 1996 to
disclose the payment of a cash dividend. On September 18,
1996, the Company declared a regular cash dividend of $0.14
per common share for the quarter ending September 30, 1996,
an increase of $0.025 or 21.7% from the regular cash
dividend paid for the first quarter of fiscal year 1996. The
dividend will be payable on October 18, 1996 to stockholders
of record on October 4, 1996.
2) The Company filed Form 8-A on September 27, 1996 to
disclose the adoption of a shareholders rights plan. On
September 18, 1996, the Board of Directors adopted a
Stockholder Protection Rights Plan and declared a dividend
of one right ("Right") for each share of common stock, par
value $.01 per share of the Company. The dividend was
payable on October 3, 1996 ('the Record Date") to the
stockholders of record on that date.
19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reliance Bancorp, Inc.
----------------------
(Registrant)
/s/ Raymond A. Nielsen 11/12/96 /s/ Paul D. Hagan 11/12/96
---------------------- -----------------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
20