1
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 MARCH 31, 1996
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Commission File Number: 0-23126
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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 May 9, 1996 there were 9,225,739 shares of common stock, $.01 par value,
outstanding.
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
--------------------------------
Consolidated Statements of Condition at March 31, 1996 and
June 30, 1995 (Unaudited)
Consolidated Statements of Income for the Three Months and
Nine Months Ended March 31, 1996 and 1995 (Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1996 and 1995 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
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RELIANCE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, June 30,
1996 1995
ASSETS --------- -------
------
Cash and due from banks............................... $ 26,219 $ 14,237
Money market investments.............................. 11,600 2,700
Debt securities available-for-sale.................... 13,307 23,880
Debt and equity securities held-to-maturity
(with estimated market values of $34,241
and $23,883, respectively)...................... 34,308 23,890
Mortgage-backed securities held-to-maturity
(with estimated market values of $178,141
and $415,820, respectively)..................... 176,207 413,762
Mortgage-backed securities available-for-sale......... 577,513 104,453
Loans receivable:
Mortgage loans................................... 678,338 224,015
Consumer and other loans......................... 132,838 109,361
Less allowance for loan losses................. 4,371 1,729
------- -------
Loans receivable, net.................... 806,805 331,647
Accrued interest receivable, net...................... 11,095 6,668
Office properties and equipment, net.................. 13,865 4,765
Prepaid expenses and other assets..................... 16,929 3,443
Purchased mortgage servicing rights................... 4,008 --
Excess of cost over fair value of net assets
acquired............................................ 50,285 --
Real estate owned, net................................ 2,224 1,991
------- ------
Total assets............................. $1,744,365 $931,436
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits.............................................. $1,345,182 $670,317
FHLB advances......................................... 3,000 40,000
Securities sold under agreements to repurchase........ 219,231 57,035
Advance payments by borrowers for taxes and
insurance............................................ 15,506 3,468
Accrued expenses and other liabilities................ 6,880 6,883
-------- ------
Total liabilities........................ 1,589,799 777,703
--------- -------
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;
9,225,739 and 9,389,515 outstanding,
respectively...................................... 108 108
Additional paid-in capital............................ 103,930 103,655
Retained earnings, substantially restricted........... 81,339 76,167
Unrealized appreciation (depreciation) on
securities available for sale, net of taxes........ (2,671) 839
Less:
Unallocated common stock held by ESOP................. (6,417) (7,038)
Unearned common stock held by RRP..................... (2,598) (3,214)
Treasury stock, at cost (1,525,081 shares
and 1,361,305, respectively)..................... (19,125) (16,784)
------- -------
Total stockholders' equity....................... 154,566 153,733
------- -------
Total liabilities and stockholders'
equity................................... $1,744,365 $931,436
========= =======
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RELIANCE BANCORP, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- --------- --------
(In thousands)
Interest income:
First mortgage loans................ $12,753 $ 4,463 $ 25,079 $ 13,075
Consumer and other loans............ 2,896 2,450 8,112 6,990
Mortgage-backed securities.......... 11,876 8,043 32,862 20,698
Money market investments............ 321 292 772 565
Investment securities............... 1,310 934 2,419 2,925
------ ------ ------ ------
Total interest income............ 29,156 16,182 69,244 44,253
------ ------ ------ ------
Interest expense:
Deposits............................ 12,725 5,765 29,582 15,363
Borrowed funds...................... 2,876 2,092 7,078 4,425
------ ----- ------ -----
Total interest expense........... 15,601 7,857 36,660 19,788
------- ----- ------ ------
Net interest income before
provision for loan losses....... 13,555 8,325 32,584 24,465
Provision for loan losses........... 425 100 625 300
------ ------ ------ ----
Net interest income after
provision for loan losses....... 13,130 8,225 31,959 24,165
------ ------ ------ ------
Non-interest income:
Loan fees and service charges....... 281 68 490 209
Other operating income.............. 448 208 942 619
Net gain on securities.............. 676 -- 678 147
------ ------ ------ -----
Total non-interest income........ 1,405 276 2,110 975
------ ------ ------ -----
Non-interest expense:
Compensation and benefits........... 3,783 2,353 9,362 7,117
Occupancy and equipment............. 1,428 603 3,129 1,821
Federal deposit insurance premiums.. 730 349 1,628 1,027
Advertising......................... 287 245 795 876
Other operating expense............. 1,058 913 2,859 2,248
------ ----- ------ -----
Total general and administrative
expenses........................ 7,286 4,463 17,773 13,089
Real estate operations, net......... 366 (556) 430 (414)
Amortization of excess of cost
over fair value of net assets
acquired.......................... 856 -- 1,072 --
------ ----- ------ ------
Total non-interest expense....... 8,508 3,907 19,275 12,675
------ ----- ------ ------
Income before income taxes ............ 6,027 4,594 14,794 12,465
Income tax expense .................... 2,904 1,871 6,671 5,178
------ ----- ------ ------
Net income ............................ $ 3,123 $ 2,723 $ 8,123 $ 7,287
===== ===== ====== ======
Net income per common share ........... $ 0.35 $ 0.29 $ 0.91 $ 0.77
==== ===== ===== =====
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RELIANCE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Nine Months Ended
March 31,
--------------------
1996 1995
------ ------
(Unaudited)
Cash flows from operating activities:
Net income............................................. $ 8,123 $ 7,287
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.............................. 625 300
Provision for losses on real estate owned.............. 325 60
(Accretion of discounts) amortization of
premiums, net......................................... (383) (1,024)
Amortization relating to allocation and earned
portion of stock plans................................ 1,512 1,428
Amortization of excess of cost over fair value of
net assets acquired................................... 1,072 --
Amortization of purchased mortgage servicing rights.... 137 --
Depreciation and amortization.......................... 675 341
Net gain on securities................................. (678) (147)
Net gain on loans sold................................. (19) (1)
Net gain on sale of real estate owned.................. (22) (657)
Decrease (increase) in accrued interest receivable.... 955 (1,873)
Decrease (increase) in prepaid expense and
other assets.......................................... 332 (421)
(Decrease) increase in accrued expenses and
other liabilities..................................... (7,856) 3,935
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Net cash provided by operating activities.......... 4,798 9,228
----- ------
Cash flows from investing activities:
Originated and purchased loans, net of principal
repayments on loans................................... (34,696) 1,421
Purchases of mortgage-backed securities
held-to-maturity...................................... -- (63,894)
Purchases of mortgage-backed securities
available-for-sale (334,637) --
Proceeds from sale of mortgage-backed securities
available-for-sale 180,590 --
Principal repayments from mortgage-backed securities... 110,974 34,135
Purchase of debt and equity securities
held-to-maturity...................................... -- (1,296)
Purchases of debt securities available-for-sale........ -- (94,958)
Proceeds from calls of debt securities................. 15,800 2,038
Proceeds from sales of debt securities
available-for-sale.................................... 30,345 11,146
Proceeds from maturities of debt securities............ 28,100 12,900
Purchases of premises and equipment.................... (2,320) (1,070)
Proceeds from loans sold............................... 4,213 780
Proceeds from sales of real estate owned............... 859 2,342
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.............. (95,196) (96,456)
-------- --------
Cash flows from financing activities:
Increase in deposits................................... 43,926 58,470
(Decrease) increase in advance payments by borrowers
for taxes and insurance.............................. (2,550) 1,059
Proceeds from FHLB advances............................ -- 317,000
Repayment of FHLB advances............................. (87,000) (297,000)
Proceeds from reverse repurchase agreements........... 564,833 26,939
Repayment of reverse repurchase agreements............. (402,637) --
Purchases of treasury stock............................ (2,341) (8,777)
Dividends paid......................................... (2,951) (2,784)
------- -------
Net cash provided by financing activities........... 111,280 94,907
------- ------
Net increase in cash and cash equivalents.............. 20,882 7,679
Cash and cash equivalents at beginning of period....... 16,937 13,702
------- ------
Cash and cash equivalents at end of period............. $ 37,819 $ 21,381
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RELIANCE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
Nine Months Ended
March 31,
-------------------
1996 1995
------ ------
(Unaudited)
Supplemental disclosures of cash flow information
Cash paid during the quarters for:
Interest............................................... $ 35,676 $ 19,286
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Income taxes........................................... $ 3,544 $ 2,799
====== ======
Non-cash investing activities:
Transfers from loans to real estate owned
including in-substance foreclosures................... $ 1,060 $ 789
====== ======
Transfer of mortgage-backed securities
from held-to-maturity to available-for-sale........... $ 283,245 $ --
======= ======
See accompanying notes to unaudited consolidated financial statements.
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RELIANCE BANCORP, INC. and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Reliance Bancorp, Inc. (the "Company"), its direct
wholly-owned subsidiary Reliance Federal Savings Bank (the "Bank"), and
the subsidiaries of the Bank.
The unaudited consolidated financial statements included herein reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. The results of operations for the nine months ended March 31,
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 1995
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.
3. SUNRISE BANCORP, INC. ACQUISITION
After the close of business day on January 11, 1996, the Company
successfully completed the acquisition of Sunrise Bancorp, Inc. in a
transaction which was accounted for under the purchase method. The cost of
the acquisition was approximately $106.3 million in cash, or $32.00 per
share of Sunrise Bancorp, Inc. common stock outstanding. The excess of
cost over the fair value of net assets acquired generated in the
transaction was approximately $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. Since the completion of the acquisition, the Bank has
continued to exceed each of its regulatory capital requirements.
4. SUBSEQUENT EVENT
Stock Repurchase
----------------
On May 7, 1996, the Bank announced that it has received regulatory
clearance to purchase up to 5%, or 461,287 shares, of the Company's
9,225,739 outstanding shares. The repurchase will be made in open-market
transactions, subject to the availability of stock, the then current
market value of the stock, and such timing limitations as may be
applicable.
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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 March 31, 1996, the Company had 9,225,739 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 had 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.
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ACQUISITIONS
- - ------------
BANK OF WESTBURY ACQUISITION
After the close of business day on August 11, 1995, the Company successfully
completed the acquisition of Bank of Westbury in a transaction which was
accounted for as a purchase. The cost of the acquisition was $16.7 million, and,
in addition, the Company incurred approximately $422,000 of acquisition-related
costs and $225,000 for the lease buyout of data processing equipment, which were
included in the excess of cost over the fair value of net assets acquired. As a
result of the acquisition, after the close of business on August 11, 1995, the
Company had approximately $1.1 billion in assets and $828.0 million in deposits.
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, the Bank continued to exceed
each of its regulatory capital requirements. A description of the acquisition
transaction is set forth in Item 2 to the Company's report on Form 8-K, dated as
of August 11, 1995.
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
======
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SUNRISE BANCORP, INC. ACQUISITION
After the close of business day on January 11, 1996, the Company successfully
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 which were included in
the excess of cost over fair value of net assets acquired. As a result of the
acquisition, after the close of business on January 11, 1996, the Company had
approximately $1.7 billion in assets and $1.3 billion in deposits. The excess of
cost over the fair value of net assets acquired generated in the transaction was
approximately $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, the Bank continued to exceed each of its
regulatory capital requirements. A description of the acquisition transaction is
set forth in Item 2 to the Company's report on Form 8-K, dated as of January 11,
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 $ 11,324
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 14,159
-------
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
======
Set forth below is unaudited pro forma combined condensed consolidated financial
information of the Company, Bank of Westbury and Sunrise Bancorp, Inc. for the
nine month periods ended March 31, 1996 and 1995. This information was prepared
as if the acquisition of Bank of Westbury and Sunrise Bancorp, Inc. had been
consummated at the beginning of each period and is based on the historical
unaudited financial statements of the Company, Bank of Westbury and Sunrise
Bancorp, Inc. after giving effect to the acquisition under the purchase method
of accounting.
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Subjective estimates have been utilized in determining the pro forma adjustments
applied to the historical unaudited results of operations of the Company, 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. The pro forma unaudited combined condensed
consolidated financial information should be read in conjunction with the
historical consolidated financial statements of the Company and the historical
financial statements of Bank of Westbury and Sunrise Bancorp, Inc.
Nine months Ended Nine months Ended
March 31, 1996 March 31, 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 $ 69,244 $ 90,485(2) $ 44,253 $ 77,335
Interest expense 36,660 49,253 19,788 35,908
------- ------- ------- -------
Net interest income 32,584 41,232 24,465 41,427
Provision for loan losses 625 746 300 632
------- ------- ------- -------
Net interest income after
provision for loan losses 31,959 40,486 24,165 40,795
Non-interest income 2,110 3,564 975 2,766
Non-interest expense 19,275 28,689(3) 12,675 29,692
------- ------- ------- -------
Income before income taxes 14,794 15,361 12,465 13,869
Income tax expense 6,671 6,927 5,178 5,812
------- ------- ------- -------
Net income $ 8,123 $ 8,434 $ 7,287 $ 8,057
======= ====== ====== ======
Earnings per common share $ 0.91 $ 0.94 $ 0.77 $ 0.84
====== ===== ===== =====
(1) Pro forma combined results of operations for the nine months ended March
31, 1996 were calculated, in part, based upon actual unaudited results of
operations of the combined institutions since the date of each acquisition
(Bank of Westbury on August 11, 1995 and Sunrise Bancorp, Inc. on January
11, 1996), and adding such results to 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.
Pro forma combined results of operations for the nine months ended March
31, 1995 were calculated, in part, based upon actual unaudited results of
operations for the nine months ended March 31, 1995 and applying pro forma
adjustments, equal to 75% of pro forma adjustments for the year ended June
30, 1995 as set forth in the Form 8-K/A as of August 11, 1995 for Bank of
Westbury and Form 8-K/A as of January 11, 1996 for Sunrise Bancorp, Inc.,
filed with the Securities and Exchange Commission, to such results. 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 nine months data presented above and, in addition, regardless of
later changes in the affected assets or liabilities. As a result, the
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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 nine months ended pro forma data above.
(2) Pro forma interest income for the nine months ended March 31, 1996 is
adjusted by approximately $3.6 million 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 is adjusted for various non-recurring
employee benefit expenses and other transaction related expenses totalling
approximately $19.0 million for the Sunrise Bancorp, Inc. acquisition.
FINANCIAL CONDITION
As of March 31, 1996, total assets were $1.7 billion, deposits were $1.3 billion
and total stockholders' equity was $154.6 million.
In accordance with an implementation guide for Statement of Financial Accounting
Standards (SFAS) 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
by transferring approximately $283.2 million from the held-to-maturity to the
available-for-sale category. As a result, mortgage-backed securities
held-to-maturity decreased from $413.8 million at June 30, 1995 to $176.2
million at March 31, 1996, a decrease of $237.6 million, or 57.4%. Consequently,
mortgage-backed securities available-for-sale increased to $577.5 million at
March 31, 1996, from $104.4 million at June 30, 1995, an increase of $473.1
million, or 452.9%. 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. At March 31, 1996,
the unrealized depreciation on securities available-for-sale, net of taxes was
$2.7 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 general increase in interest rates during the quarter
ended March 31,1996.
The mortgage-backed securities portfolio increased $235.5 million, or 45.4%,
from $518.2 million at June 30, 1995 to $753.7 million at March 31, 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.
Mortgage loans increased from $224.0 million at June 30, 1995 to $678.3 million
at March 31, 1996, an increase of $454.3 million, or 202.8%. 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
$674.9 million, or 100.7%, from $670.3 million at June 30, 1995 to $1.3 billion
at March 31, 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
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new certificate of deposit products. Borrowings increased from $97.0 million at
June 30, 1995 to $222.2 million at March 31, 1996, an increase of $125.2
million, or 129.0% as the Bank leveraged its capital and improved returns on
average tangible equity.
Non-performing loans totalled $12.3 million, or 1.52% of total loans at March
31, 1996, an increase of $9.1 million, or 280.0% from $3.2 million, or 0.97% 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 March
31, 1996 were comprised of $11.1 million of loans secured by one- to four-family
residences, $549,000 of guaranteed student loans and two commercial properties
with loan balances totalling $655,000. The Company's allowance for loan losses
totalled $4.4 million at March 31, 1996 which represents a ratio of allowance
for loan losses to non-performing loans and to total loans of 35.52% and 0.54%,
respectively, as compared to 53.38% 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. The Bank was able to increase its coverage on the
total loan portfolio with the $425,000 provision for loan losses during the
quarter ended March 31, 1996. Management believes the reserve at March 31, 1996
is adequate on non-performing loans and total loans. The Company's
non-performing assets to total assets ratio was 0.83% at March 31, 1996. Net
charge-offs were $151,000 and $199,000, respectively for the quarter and nine
months ended March 31, 1996.
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 March 31, 1996, $799.8 million, or 49.5%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $678.3 million, of which, $341.5 million, or
50.3%, were adjustable-rate loans and $336.8 million, or 49.7%, were fixed-rate
loans. In addition, at March 31, 1996, the Bank's consumer loan portfolio
totalled $132.8 million, of which, $101.5 million, or 76.4%, were
adjustable-rate home-equity lines of credit and guaranteed student loans and
$31.3 million, or 23.6%, 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.
However, the Bank has recently purchased 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 quarter and nine months
ended March 31, 1996, the Bank purchased approximately $131.2 million and $188.7
million, respectively, of 30 year fixed rate securities classified as
available-for-sale hedging the portfolio against prepayment risk and extending
the maturity of the portfolio. In addition, during the nine months ended March
31, 1996, the Bank realigned its mortgage-backed securities portfolio by
transferring $283.2 million from held-to- maturity to available-for-sale in
order to be more flexible and better positioned for managing the portfolio under
changing interest rates and other market conditions. In addition, in January
1996, the Bank sold approximately $179.9 million of 15 year fixed rate and 1
year adjustable mortgage-backed securities
12
14
classified as available-for-sale to fund the purchase of Sunrise Bancorp, Inc.
As such, at March 31, 1996, the mortgage-backed securities held-to-maturity
portfolio totalled $176.2 million, of which, $111.3 million, or 63.2%, of the
mortgage-backed portfolio was adjustable-rate securities and $64.9 million, or
36.8%, was fixed-rate securities. The Bank also has $577.5 million of
mortgage-backed securities classified as available-for-sale of which $247.2
million, or 42.8%, were adjustable rate securities and $330.3 million, or 57.2%,
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.
As a result of the Bank purchasing 30 year fixed rate mortgage-backed
securities, 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 $102.6 million, or (5.9)%, of total assets at
March 31, 1996 as compared to a positive gap of $65.5 million, or 5.6% at
December 31, 1995, $137.7 million, or 15.2%, at June 30, 1995 and $153.7
million, or 16.9%, at March 31, 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 MARCH 31, 1996 AND
- - --------------------------------------------------------------------------------
1995.
- - -----
General. The Company reported net income of $3.1 million for the three months
- - -------
ended March 31, 1996 as compared to $2.7 million for the three months ended
March 31, 1995, an increase of $400,000 or 14.7%. This represents a return on
average assets of 0.75% and 1.17%, respectively, and a return on average
tangible equity of 11.38% and 6.86%, respectively, for the three months ended
March 31, 1996 and 1995.
Interest Income. Interest income increased $13.0 million, or 80.2%, from $16.2
- - ---------------
million for the three months ended March 31, 1995, to $29.2 million for the
three months ended March 31, 1996. The increase resulted primarily from an
increase of $666.0 million, or 73.6%, in the average balance of interest-earning
assets from $905.3 million for the 1995 period to $1.6 billion for the 1996
period and from an increase in the average yield of interest-earning assets from
7.15% to 7.42%, a 27 basis point increase. Interest income from mortgage loans
increased by $8.3 million, or 185.7%, from $4.5 million for the 1995 period to
$12.8 million for the 1996 period due to a $412.9 million, or 183.2%, increase
in the average balance of mortgage loans, as well as a 7 basis point increase in
the average yield on mortgage loans from 7.96% for the 1995 period to 8.03% for
the 1996 period. The increase in the
13
15
average balance of mortgage loans is due to the acquisitions of mortgage loans
from Bank of Westbury and Sunrise Bancorp, Inc. as well as increased
originations of multi-family loans. For the three months ended March 31, 1996,
interest income from mortgage-backed securities increased $3.8 million, or
47.7%, from $8.1 million for the 1995 period to $11.9 million for the 1996
period, primarily due to an increase of $224.1 million, or 45.8%, in the average
balance of mortgage-backed securities and an increase in the average yield on
these securities of 10 basis points from 6.59% for the 1995 period to 6.69% 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
$446,000, or 18.2%, from $2.5 million for the 1995 period to $2.9 million for
the 1996 period due to a $25.2 million, or 23.8%, increase in the average
balance of consumer loans offset by a 41 basis point decrease in the average
yield on consumer loans from 9.27% for the 1995 period to 8.86% 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 March 31, 1996,
- - ------------------
was $15.6 million, an increase of $7.7 million, or 98.6%, from $7.9 million for
the three months ended March 31, 1995. The increase in interest expense is
related to a 4 basis point increase in the cost of interest-bearing liabilities
from 4.15% for the 1995 period to 4.19% for the 1996 period, and a $733.3
million, or 96.9%, increase in the average balance of interest-bearing
liabilities. The increase in the average cost of interest-bearing liabilities
resulted primarily from a higher interest rate environment during the quarter
ended March 31, 1996 and the Bank's increased emphasis on attracting
certificates of deposits and reverse repurchase agreements which bear higher
rates than the Bank's core deposits (passbook and NOW accounts). During the
quarter ended March 31, 1996, the Bank has experienced account holders
reinvesting funds into higher yielding certificate accounts from core deposits
thereby increasing the average balance of certificate accounts during this
period, albeit at a slower pace than the prior year quarter. At March 31, 1996,
core deposits represented 41.89% of the Bank's deposits as compared to 37.28% at
December 31, 1995 and 38.3% at March 31, 1995. The increase in this ratio is due
to the higher level of core deposits maintained by Sunrise Bancorp, Inc.
Interest expense on total deposits increased $6.9 million, or 120.7%, from $5.8
million for the 1995 period to $12.7 million for the 1996 period, primarily as a
result of a $659.4 million, or 105.1%, increase in the average balance of
deposits and a 29 basis point increase in the average cost of such deposits from
3.67% in the 1995 period to 3.96% in the 1996 period. Interest expense on
borrowed funds increased $784,000, or 37.5%, from $2.1 million for the 1995
period to $2.9 million for the 1996 period. Borrowings averaged $202.8 million
for the three months ended March 31, 1996, an increase of $73.9 million, or
57.3%, from the $128.9 million for the three months ended March 31, 1995.
Borrowed funds, principally from the FHLB-NY and 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 $13.5 million for the three months
- - --------------------
ended March 31, 1996 as compared to $8.3 million for the three months ended
March 31, 1995, an increase of $5.2 million, or 62.8%. The increase in net
interest income was attributable to a $666.0 million, or 73.6%, increase
14
16
in average interest-earning assets to $1.6 billion for the quarter ended March
31, 1996 from $905.3 million for the quarter ended March 31, 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 $733.3 million, or 96.9%, to $1.5 billion for the 1996 period from
$756.4 million for the 1995 period. The Bank's ratio of average interest-earning
assets to average interest-bearing liabilities declined to 1.05X for the quarter
ended March 31, 1996 from 1.20X for the quarter ended March 31, 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
March 31, 1995 to 3.23% for the three months ended March 31, 1996. The increase
in net interest spread is mainly due to higher yielding mortgage assets acquired
from Sunrise Bancorp, Inc. during the quarter. However, the net interest margin
decreased from 3.68% for the three months ended March 31, 1995 to 3.45% for the
three months ended March 31, 1996 as the Bank fully leveraged its excess capital
during the quarter.
Provision for Loan Losses. The provision for loan losses totalled $425,000 for
- - --------------------------
the three months ended March 31, 1996 as compared to $100,000 for the three
months ended March 31, 1995. The Bank increased its provision for loan losses in
order to increase reserves on loans acquired from Sunrise Bancorp, Inc. to bring
such reserves more in line with the Bank's practice of establishing loan loss
reserve allowances. Non-performing loans at March 31, 1996 were comprised of
$11.1 million of loans secured by one- to four-family residences, $549,000 of
guaranteed student loans and two commercial properties with loan balances
totalling $655,000. The Company's allowance for loan losses totalled $4.4
million at March 31, 1996 which represents a ratio of allowance for loan losses
to non-performing loans and to total loans of 35.52% and 0.54%, respectively.
The Company's non-performing assets to total assets ratio was 0.83% at March 31,
1996. Net charge-offs were $151,000 for the quarter ended March 31, 1996 as
compared to $32,000 for the quarter ended March 31, 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 $1.1 million, or 409.1%, from
- - --------------------
$276,000 recorded during the quarter ended March 31, 1995 to $1.4 million for
the quarter ended March 31, 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. and a gain on the sale of securities.
During the quarter, the Bank sold mortgage-backed securities to fund the
purchase of Sunrise Bancorp, Inc. and recognized a net gain of $676,000.
Non-Interest Expense. Non-interest expense totalled $8.5 million for the quarter
- - ---------------------
ended March 31, 1996 as compared to $3.9 million for the quarter ended March 31,
1995, an increase of $4.6 million, or 117.8%. The increase is mainly the result
of banking office personnel, deposit insurance, goodwill amortization and other
occupancy costs associated with the Sunrise Bancorp, Inc. and the Bank of
Westbury acquisitions, however, the operating expense to asset ratio decreased
from 1.92% for the quarter ended March 31, 1995 to 1.75% for the quarter ended
March 31, 1996 due to the increased asset base. For the quarter ended March 31,
1996, compensation and benefits expense increased $1.4 million, or 60.8%, to
$3.8 million from $2.4 million for the quarter ended March 31, 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.
15
17
Expenses for the Bank's RRP and ESOP plans for the quarter ended March 31, 1996
totalled $1.5 million as compared to $1.4 million for the quarter ended March
31, 1995. For the quarter ended March 31, 1996, advertising totalled $287,000,
an increase of $42,000, or 17.1%, from $245,000 recorded for the quarter ended
March 31, 1995 due to a higher level of newspaper advertising relating to the
Bank's "Lifetime Prime Home Equity Line of Credit" product. During the quarter
ended March 31, 1996, the Bank recorded amortization of excess of cost over fair
value of net assets acquired of $856,000 from the Bank of Westbury and Sunrise
Bancorp, Inc. acquisitions as compared to the prior year quarter where no such
expense was recorded. For the quarter ended March 31, 1996, real estate owned
expenses were $366,000 as compared to income of $556,000 in the prior year
quarter. During the quarter ended March 31, 1996, the Bank established a
provision for REO losses of $325,000 as compared to no provision in the prior
year quarter. The Bank established additional reserves on REO in order to
facilitate the sale of such properties in the current market place.
Income Tax Expense. Income tax expense was $2.9 million for the three months
- - --------------------
ended March 31, 1996 and $1.9 million for the three months ended March 31, 1995.
The effective income tax rates were 48.2% for the 1996 period as compared to
40.7% for 1995 period. The increase in the effective tax rate primarily relates
to the amortization of excess of cost over fair value of net assets acquired for
which no tax benefit is provided for.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND
- - --------------------------------------------------------------------------------
1995.
- - -----
General. The Company reported net income of $8.1 million for the nine months
- - -------
ended March 31, 1996 as compared to $7.3 million for the nine months ended March
31, 1995, an increase of $836,000, or 11.5%. This represents a return on average
assets of 0.84% and 1.10%, respectively, and return on average tangible equity
of 8.05% and 6.15%, respectively, for the nine months ended March 31, 1996 and
1995.
Interest Income. Interest income increased $25.0 million, or 56.5%, from $44.2
- - ----------------
million for the nine months ended March 31, 1995, to $69.2 million for the nine
months ended March 31, 1996. The increase in interest income was attributable to
the growth in average interest-earning assets to $1.2 billion for the nine
months ended March 31, 1996 from $858.6 million for the nine months ended March
31, 1995. The growth in interest-earning assets was from assets acquired from
the Sunrise Bancorp, Inc. and Bank of Westbury acquisitions, increased purchases
of mortgage-backed securities and increased originations of multi-family loans.
Interest income from mortgage loans increased by $12.0 million, or 91.8%, from
$13.1 million for the 1995 period to $25.1 million for the 1996 period due to a
$177.4 million, or 77.6%, increase in the average balance of mortgage loans, as
well as a 62 basis point increase in the average yield on mortgage loans from
7.66% for the 1995 period to 8.28% for the 1996 period. The increase in the
average balance of mortgage loans is due to the acquisition of mortgage loans
from Bank of Westbury and Sunrise Bancorp, Inc. and increased originations of
multi-family loans. For the nine months ended March 31, 1996, interest income
from mortgage-backed securities increased $12.2 million, or 58.8%, from $20.7
million for the 1995 period to $32.9 million for the 1996 period, primarily due
to an increase of $209.0 million, or 47.3%, in the average balance of
mortgage-backed securities and an increase in the average yield on these
securities of 50 basis points from 6.25% for the 1995 period to 6.75% for the
1996 period due to the adjustable rate mortgage-backed securities repricing at
higher rates. 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 Sunrise Bancorp, Inc. and Bank of Westbury.
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
16
18
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 $1.1 million, or 16.1%,
from $7.0 million for the 1995 period to $8.1 million for the 1996 period due to
a 16 basis point increase in the average yield on consumer loans from 8.99% for
the 1995 period to 9.15% for the 1996 period and a $14.5 million, or 14.0%,
increase in the average balance of consumer loans. The increase in income is the
result of consumer loans acquired from Bank of Westbury and Sunrise Bancorp,
Inc. as well as increased originations of home equity lines of credit and the
repricing upward of these prime rate based loans.
Interest Expense. Interest expense for the nine months ended March 31, 1996, was
- - -----------------
$36.7 million, an increase of $16.9 million, or 85.3%, from $19.8 million for
the nine months ended March 31, 1995. The increase in interest expense is
related to a 66 basis point increase in the cost of interest-bearing liabilities
from 3.71% for the 1995 period to 4.37% for the 1996 period, and a $408.7
million, or 57.5%, increase in the average balance of interest-bearing
liabilities. The increase in the average cost of interest-bearing liabilities
resulted primarily from a higher interest rate environment during the nine
months ended March 31, 1996 and the Bank's increased emphasis on attracting
certificates of deposits and reverse repurchase agreements which bear higher
rates than the Bank's core deposits (passbook and NOW accounts). During the nine
months ended March 31, 1996, the Bank has experienced account holders
reinvesting funds into higher yielding certificate accounts from core deposits
thereby increasing the average balance of certificate accounts during this
period, albeit at a slower pace. At March 31, 1996, core deposits represented
41.89% of the Bank's deposits as compared to 37.28% at December 31, 1995 and
38.3% at March 31, 1995. The increase in this ratio is due to the higher level
of core deposits maintained by Sunrise Bancorp, Inc. Interest expense on total
deposits increased $14.2 million, or 92.6%, from $15.4 million for the 1995
period to $29.6 million for the 1996 period, primarily as a result of a $357.4
million, or 58.8%, increase in the average balance of deposits and a 72 basis
point increase in the average cost of such deposits from 3.37% for the 1995
period to 4.09% for the 1996 period. Interest expense on borrowed funds
increased $2.7 million, or 60.0%, from $4.4 million for the 1995 period to $7.1
million for the 1996 period. Borrowings averaged $154.1 million for the nine
months ended March 31, 1996, an increase of $51.3 million, or 49.9%, from the
$102.8 million for the nine months ended March 31, 1995. Borrowed funds,
principally from the FHLB-NY and reverse repurchase agreements, have been
reinvested by the Bank in mortgage-backed securities and multi-family loans
leveraging the Bank's capital and improving the return on equity.
Net Interest Income. Net interest income was $32.6 million for the nine months
- - ---------------------
ended March 31, 1996 as compared to $24.5 million for the nine months ended
March 31, 1995, an increase of $8.1 million, or 33.2%. The increase in net
interest income was attributable to the growth in average interest-earning
assets to $1.2 billion for the nine months ended March 31, 1996 from $858.6
million for the nine months ended March 31, 1995. The growth in interest-earning
assets was from assets acquired from the Sunrise Bancorp, Inc. and Bank of
Westbury acquisitions, increased purchases of mortgage-backed securities and
increased originations of multi-family loans. Although net interest income
increased there was a decline in the net interest spread and margin from 3.16%
and 3.80%, respectively, for the nine months ended March 31, 1995 to 3.10% and
3.52%, respectively, for the nine months ended March 31, 1996 due primarily to a
general flattening of the interest rate yield curve and the leveraging of the
Bank's capital. The yield on interest-earning assets was 7.47% for the nine
months ended March 31, 1996 and the cost of interest-bearing liabilities was
4.37%. The Bank's ratio of average interest-earning assets to average
interest-bearing liabilities declined to 1.10X for the nine months ended March
31, 1996 from 1.21X for
17
19
the nine months ended March 31, 1995 as a result of the Bank leveraging its
excess capital with the Sunrise Bancorp, Inc. and Bank of Westbury acquisitions.
Provision for Loan Losses. The provision for loan losses totalled $625,000 for
- - --------------------------
the nine months ended March 31, 1996 as compared to $300,000 for the nine months
ended March 31, 1995. The Bank increased its provision for loan losses in order
to increase reserves on loans acquired from Sunrise Bancorp, Inc. to bring such
reserves more in line with the Bank's practice of establishing loan loss reserve
allowances. Non-performing loans at March 31, 1996 were comprised of $11.1
million of loans secured by one- to four-family residences, $549,000 of
guaranteed student loans and two commercial properties with loan balances
totalling $655,000. The Company's allowance for loan losses totalled $4.4
million at March 31, 1996 which represents a ratio of allowance for loan losses
to non-performing loans and to total loans of 35.52% and 0.54%, respectively.
The Company's non-performing assets to total assets ratio was 0.83% at March 31,
1996. Net charge-offs were $199,000 for the nine months ended March 31, 1996 as
compared to $704,000 for the nine months ended March 31, 1995. 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 Expense. Non-interest expense totalled $19.3 million for the nine
- - ----------------------
months ended March 31, 1996 as compared to $12.7 million for the nine months
ended March 31, 1995, an increase of $6.6 million, or 52.1%. The increase is
mainly the result of banking office personnel, deposit insurance, goodwill
amortization and other occupancy costs associated with the Sunrise Bancorp, Inc.
and Bank of Westbury acquisition, however, the operating expense to average
assets ratio decreased from 1.98% for the nine months ended March 31, 1995 to
1.83% for the nine months ended March 31, 1996 primarily due to the increased
asset base. For the nine months ended March 31, 1996, compensation and benefits
expense increased to $9.4 million, an increase of $2.2 million, or 31.5%, from
7.1 million for the nine months ended March 31, 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 $1.3 million or 71.8%, from $1.8 million for the nine months
ended March 31, 1995 to $3.1 million for the nine months ended March 31, 1996
due to costs associated with the operation of the seventeen new banking offices
as well as miscellaneous data processing costs. For the nine months ended March
31, 1996, advertising totalled $795,000 a decrease of $81,000, or 9.2%, from the
$876,000 recorded for the nine months ended March 31, 1995 due to a lower level
of newspaper advertising of deposit products partially offset by direct
marketing costs related to the introduction of our products and services to
Sunrise Bancorp, Inc. and Bank of Westbury customers. Other operating expenses
increased $611,000, or 27.2%, from $2.2 million during the nine months ended
March 31, 1995 to $2.9 million for the nine months ended March 31, 1996 as a
result of general expenses related to the addition of the seventeen new banking
offices. For the nine months ended March 31, 1996, real estate owned expenses
were $430,000 as compared to income of $414,000 in the prior year period. During
the nine months ended March 31, 1996, the Bank established a provision for REO
losses of $325,000 as compared to a $60,000 provision in the prior year period.
The Bank established additional reserves on REO in order to facilitate the sale
of such properties in the current market place.
Income Tax Expense. Income tax expense was $6.7 million for the nine months
- - --------------------
ended March 31, 1996 and $5.2 million for the nine months ended March 31, 1995.
The effective income tax rates were 45.1% for the 1996 period as compared to
41.5% for the 1995 period. The increase in the effective tax rate primarily
relates to the amortization of excess of cost over fair value of net assets
acquired for which no tax benefit is provided for.
18
20
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, the Company has completed three stock repurchase programs
whereby 1.5 million shares of the Company's outstanding common stock were
repurchased in open market transactions for a total cost of $19.1 million at an
average price of $12.54 per share. In addition, On May 7, 1996, the Company
announced the approval from the Office of Thrift Supervision of its fourth stock
repurchase plan. The Company intends to repurchase 5% or 461,287 shares of its
outstanding common stock.
On March 20, 1996, the Company announced that the Board of Directors had
declared a regular cash dividend of $0.115 per common share for the quarter
ended March 31, 1996. The dividend was paid on April 19, 1996 to stockholders of
record on April 5, 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 March 31, 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. As a result of the sale of such securities, the Company
recognized a net gain on securities of $678,000 during the quarter ended March
31, 1996.
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.
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
9.7%, and 3.0%, respectively, for the nine months ended March 31, 1996. The
Bank's short-term liquidity ratio was 2.2%, at March 31, 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 March 31, 1996,
assets qualifying for short-term liquidity, including cash and short term
investments, totalled $33.9 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 nine months ended March 31, 1996, the Bank originated
mortgage loans and consumer loans in the amount of $69.2 million and
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$25.4 million, respectively. During the nine months ended March 31, 1996, the
Bank purchased $334.6 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. Borrowings from the FHLB-NY and
reverse repurchase agreements, at March 31, 1996, totalled $222.2 million.
At March 31, 1996, the Bank had outstanding loan commitments of $12.8 million
and open lines of credit of $44.0 million. In addition, the Bank had commitments
to purchase $12.0 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 March 31, 1996 totalled $518.6 million. Management
believes that a significant portion of such deposits will remain with the Bank.
At March 31, 1996, the Bank exceeded each of the OTS capital requirements. The
Bank's tangible, core, and risked-based ratios were 5.46%, 5.46% and 14.07%,
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 FEDERAL LEGISLATION
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Pending Federal legislation currently provides for a one-time special assessment
on all SAIF insured deposits of approximately $0.85 to $0.90 per $100 of
deposits. If the assessment is made at the proposed rates, the effect on the
Bank would be a charge in the period enacted of approximately $5.9 million to
$6.3 million on an after tax basis. It is anticipated that if the one-time
assessment is levied, the Bank may see a decrease in the annual deposit premium
in future periods.
There have also been proposals to merge the SAIF with the BIF, eliminate the
Federal Thrift Charter and, under certain conditions, require institutions to
recapture a portion of their Federal, state and local bad debt reserves for
income tax purposes.
No assurance can be given as to whether legislation as discussed above will be
enacted or, if enacted , what the terms of such legislation would be.
IMPACT OF NEW ACCOUNTING STANDARDS
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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, and goodwill related to
assets to be held and used, and for 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 or results of operation.
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
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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 originations or securitization of mortgage servicing rights and to
impairment evaluations of all capitalized mortgage servicing rights, including
those purchased prior to the effective date of SFAS No. 122. The Company has not
determined the effect, if any, the adoption of SFAS No. 122 will have on the
Company's financial condition or results of operation.
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 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Holding Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
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
On May 3, 1996, the Company received regulatory clearance to purchase up
to 5% of its oustanding common stock. The purchase of up to 461,287
shares must be completed by March 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
11.0 Statement re Computation of Per Share Earnings
27.0 Financial Data Schedule
99.0 Press release issued May 7, 1996 announcing
implementation of stock repurchase plan
(b) Reports on Form 8-K
-------------------
1) The Company filed Form 8-K during the quarter ended March
31, 1996 to disclose the acquisition of Sunrise Bancorp, Inc.,
a Federal Savings Bank on January 11, 1996, for approximately
$106.3 million in cash. The Company also filed Form 8-K/A
during the quarter ended March 31, 1996, disclosing pro forma
financial information for the Sunrise Bancorp, Inc.
acquisition.
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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 L. Nielsen 05/09/96 /s/ Paul D. Hagan 05/09/96
- - ----------------------------- -------- ----------------------- --------
Raymond L. Nielsen Paul D. Hagan
Chief Executive Officer Director of Financial Reporting
(Principal Accounting Officer)
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