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, 1997
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 May 5, 1997, there were 8,763,369 shares of common stock, $.01 par value,
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - Unaudited
Consolidated Statements of Condition at March 31, 1997 and June
30, 1996 (Unaudited)
Consolidated Statements of Income for the Three Months and Nine
Months Ended March 31, 1997 and 1996 (Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1997 and 1996 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
1
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
(Dollars in thousands, except share and per share data)
March 31, June 30,
1997 1996
---- ----
Assets
Cash and due from banks...................................................................... $ 24,731 $ 22,420
Money market investments..................................................................... 13,500 10,450
Debt and equity securities available-for-sale................................................ 21,941 13,271
Debt and equity securities held-to-maturity (estimated market value of
$50,946 and $48,036, respectively)....................................................... 51,021 48,330
Mortgage-backed securities available-for-sale................................................ 701,260 591,740
Mortgage-backed securities held-to-maturity (estimated market value of
$168,245 and $184,995, respectively)..................................................... 166,187 184,492
Loans receivable:
Mortgage loans.......................................................................... 730,906 690,967
Consumer and other loans................................................................ 135,858 131,274
Less allowance for loan losses........................................................ (4,879) (4,495)
--------- ---------
Loans receivable, net........................................................... 861,885 817,746
Accrued interest receivable, net............................................................. 12,412 11,312
Office properties and equipment, net......................................................... 14,129 13,821
Prepaid expenses and other assets............................................................ 9,007 14,070
Mortgage servicing rights.................................................................... 3,302 3,905
Excess of cost over fair value of net assets acquired........................................ 46,309 49,429
Real estate owned, net....................................................................... 1,116 1,564
-------- --------
Total assets.................................................................... $1,926,800 $1,782,550
========= =========
Liabilities and Stockholders' Equity
Deposits..................................................................................... $1,404,608 $1,345,626
FHLB advances................................................................................ 40,000 3,000
Securities sold under agreements to repurchase............................................... 301,407 263,160
Advance payments by borrowers for taxes and insurance........................................ 13,459 8,846
Accrued expenses and other liabilities....................................................... 12,419 8,299
--------- --------
Total liabilities............................................................... 1,771,893 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; 8,822,769 and 9,128,739
outstanding at March 31, 1997 and June 30, 1996, respectively............................ 108 108
Additional paid-in capital................................................................... 105,463 104,041
Retained earnings, substantially restricted.................................................. 86,763 83,966
Unrealized depreciation on securities available for sale, net of taxes....................... (3,706) (5,281)
Less:
Unallocated common stock held by ESOP........................................................ (5,589) (6,210)
Unearned common stock held by RRP............................................................ (1,773) (2,392)
Common stock held by SERP.................................................................... (209) --
Treasury stock, at cost (1,928,051 and 1,622,081 shares
at March 31, 1997 and June 30, 1996, respectively)......................................... (26,150) (20,613)
--------- ---------
Total stockholders' equity.............................................................. 154,907 153,619
-------- --------
Total liabilities and stockholders' equity....................................... $1,926,800 $1,782,550
========= =========
2
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Interest income:
First mortgage loans....................................... $ 14,306 $ 12,753 $ 42,142 $ 25,079
Consumer and other loans................................... 2,859 2,896 8,575 8,112
Mortgage-backed securities................................. 15,057 11,876 44,036 32,862
Money market investments................................... 127 321 475 772
Debt and equity securities................................. 1,247 1,310 3,516 2,419
------- ------- ------- -------
Total interest income................................... 33,596 29,156 98,744 69,244
------- ------- ------- -------
Interest expense:
Deposits................................................... 13,426 12,725 39,877 29,582
Borrowed funds............................................. 4,478 2,876 12,841 7,078
------- ------- ------- -------
Total interest expense.................................. 17,904 15,601 52,718 36,660
------- ------- ------- -------
Net interest income before provision
for loan losses....................................... 15,692 13,555 46,026 32,584
Provision for loan losses.................................. 300 425 650 625
------- -------- -------- --------
Net interest income after provision for
loan losses........................................... 15,392 13,130 45,376 31,959
------- ------- ------- -------
Non-interest income:
Loan fees and service charges.............................. 160 281 568 490
Other operating income..................................... 671 448 1,866 942
Net gain on securities..................................... 66 676 172 678
-------- ------- -------- -------
Total non-interest income............................... 897 1,405 2,606 2,110
------- ------ ------- -------
Non-interest expense:
Compensation and benefits.................................. 4,091 3,783 12,351 9,362
Occupancy and equipment.................................... 1,492 1,428 4,263 3,129
Federal deposit insurance premiums......................... 220 730 1,592 1,628
Advertising................................................ 225 287 842 795
Other operating expense.................................... 1,511 1,058 4,320 2,859
------- ------- ------- -------
Total general and administrative expenses............... 7,539 7,286 23,368 17,773
Real estate operations, net................................ 114 366 335 430
Amortization of excess of cost over fair value
of net assets acquired.................................. 846 856 2,558 1,072
SAIF recapitalization charge............................... -- -- 8,250 --
---------- ---------- -------- ----------
Total non-interest expense.............................. 8,499 8,508 34,511 19,275
-------- ------- ------- -------
Income before income taxes ................................... 7,790 6,027 13,471 14,794
Income tax expense ........................................... 3,667 2,904 6,873 6,671
------- ------- ------- -------
Net income.................................................... $ 4,123 $ 3,123 $ 6,598 $ 8,123
====== ====== ====== ======
Net income per common share .................................. $ 0.46 $ 0.35 $ 0.73 $ 0.91
===== ====== ===== ======
3
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended
March 31,
---------------------
1997 1996
---- ----
(Unaudited)
Cash flows from operating activities:
Net income........................................................................... $ 6,598 $ 8,123
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses............................................................ 650 625
Provision for losses on real estate owned............................................ 200 325
(Accretion of discounts) amortization of premiums, net............................... 903 (383)
Amortization relating to allocation and earned portion of stock plans................ 1,804 1,512
Amortization of excess of cost over fair value of net assets acquired................ 2,558 1,072
Amortization of mortgage servicing rights............................................ 603 137
Acquisition related tax benefits not previously recognized........................... 562 --
Depreciation and amortization........................................................ 1,045 675
Net gain on securities............................................................... (172) (678)
Net gain on loans sold............................................................. (26) (19)
Net gain on sale of real estate owned................................................ (49) (22)
(Increase) decrease in accrued interest receivable................................... (1,100) 955
Decrease in prepaid expense and other assets......................................... 4,499 332
Increase (decrease) in accrued expenses and other liabilities........................ 3,758 (7,856)
------- --------
Net cash provided by operating activities........................................ 21,833 4,798
------- ------
Cash flows from investing activities:
Originated and purchased loans, net of principal repayments on loans ................ (52,939) (34,696)
Purchases of mortgage-backed securities available-for-sale........................... (236,484) (334,637)
Proceeds from sales of mortgage-backed securities available-for-sale................. 59,810 180,590
Principal repayments from mortgage-backed securities................................. 87,594 110,974
Purchases of debt securities held-to-maturity........................................ (5,007) --
Purchases of debt securities available-for-sale...................................... (15,000) --
Proceeds from call of debt securities................................................ 2,313 15,800
Proceeds from sales of debt securities available-for-sale............................ 5,028 30,345
Proceeds from maturities of debt securities.......................................... 1,350 28,100
Purchases of premises and equipment.................................................. (1,391) (2,320)
Proceeds from loans sold............................................................. 6,702 4,213
Proceeds from sales of real estate owned............................................. 1,222 859
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............................................ (146,802) (95,196)
---------- ---------
Cash flows from financing activities:
Increase in deposits................................................................. 59,447 43,926
Increase (decrease) in advance payments by borrowers for taxes and insurance......... 4,613 (2,550)
Proceeds from FHLB advances.......................................................... 60,000 --
Repayment of FHLB advances......................................................... (23,000) (87,000)
Proceeds from reverse repurchase agreements.......................................... 908,471 564,833
Repayment of reverse repurchase agreements........................................... (870,224) (402,637)
Purchases of treasury stock.......................................................... (6,282) (2,341)
Net proceeds from issuance of common stock and exercise of stock options............. 562 --
Dividends paid....................................................................... (3,257) (2,951)
--------- --------
Net cash provided by financing activities......................................... 130,330 111,280
-------- --------
Net increase in cash and cash equivalents............................................ 5,361 20,882
Cash and cash equivalents at beginning of period..................................... 32,870 16,937
------- -------
Cash and cash equivalents at end of period........................................... $ 38,231 $ 37,819
======= =======
4
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
Nine Months Ended
March 31,
-----------------------
1997 1996
---- ----
(Unaudited)
Supplemental disclosures of cash flow information
Cash paid during the nine months ended for:
Interest............................................................................. $ 52,887 $ 35,676
======= =======
Income taxes......................................................................... $ 4,745 $ 3,544
======== ========
Non-cash investing activities:
Transfers from loans to real estate owned............................................ $ 925 $ 1,060
======== ========
Transfer of mortgage-backed securities
from held-to-maturity to available-for-sale......................................... $ -- $ 283,245
========= =======
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 and nine months ended March 31, 1997 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.
3. SUBSEQUENT EVENT
On May 3, 1997, Reliance Bancorp, Inc., a Delaware corporation
("Reliance"), entered into an Agreement and Plan of Merger (the "Merger
Agreement") by and among Reliance, Reliance Federal Savings Bank, a
federally chartered savings bank and a wholly-owned subsidiary of
Reliance (the "Bank"), and Continental Bank, a New York chartered
commercial bank ("Continental"). The Merger Agreement provides, among
other things, that Continental will be merged with and into the Bank,
with the Bank being the surviving corporation (the "Merger").
Continental is a $173.0 million commercial bank based in Garden City,
New York, with two full service banking offices in Nassau and Suffolk
counties.
Pursuant to the Merger Agreement, each share of common stock of
Continental issued and outstanding at the Effective Time (as defined in
the Merger Agreement) will be converted into the right to receive 1.1
shares of Reliance common stock.
6
Consummation of the merger is expected to occur in the fourth quarter
of calendar year 1997 and is subject to the satisfaction of certain
conditions, including approval of the shareholders of Continental and
approval of the appropriate regulatory agencies.
Continental has the right to terminate the Merger Agreement if the
market value of Reliance (as defined in the Merger Agreement) falls
below $19.20 per share and such decline in value is 15% greater than
the percentage decline of a group of similar financial institutions,
unless Reliance delivers to Continental's shareholders Reliance shares
having a minimum value established pursuant to a formula set forth in
the Merger Agreement.
In connection with the Merger Agreement, Reliance and Continental also
entered into a Stock Option Agreement, dated as of May 3, 1997 pursuant
to which Continental granted Reliance an option to purchase up to
183,425, or 19.9%, of Continental's issued and outstanding shares of
common stock, upon the terms and conditions stated therein. The Merger
Agreement also includes a provision for a $350,000 termination fee that
is payable to Reliance if the transaction is not completed under
certain circumstances.
7
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, 1997, the Company had 8,822,769 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 expanded its operations with the
acquisition of two financial institutions. On January 11, 1996, the Company
completed its acquisition of Sunrise Bancorp, Inc. On August 11, 1995, the
Company completed the acquisition of Bank of Westbury. As discussed in Note 3,
on May 3, 1997 the Company entered into an agreement to acquire Continental
Bank.
The Bank's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from
operations, principal repayments and borrowings, primarily in mortgage 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, amortization of excess of cost
over fair value of net assets acquired and the SAIF recapitalization charge. 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.
8
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
9
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 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 March 31, 1997, total assets were $1.9 billion, deposits were $1.4 billion
and total stockholders' equity was $154.9 million. The mortgage-backed
securities portfolio increased $91.2 million, or 11.8%, from $776.2 million at
June 30, 1996 to $867.4 million at March 31, 1997 with the increase primarily
due to increased purchases of adjustable-rate and longer term fixed-rate
mortgage-backed securities and private label collateralized mortgage obligations
offset by amortization and prepayments. Mortgage loans increased $39.9 million
from $691.0 million at June 30, 1996 to $730.9 million at March 31, 1997. The
10
increase in mortgage loans is primarily due to increased multi-family loan
originations offset by amortization. For the nine months ended March 31, 1997,
the Bank originated $71.6 million of multi-family loans.
Funding for the purchases of mortgage-backed securities and loans was through a
combination of new deposit growth, borrowings and cash flows. Deposits increased
$59.0 million, or 4.4% during the nine months ended March 31, 1997 as a result
of growth in new certificate of deposit products. Borrowings increased from
$266.2 million at June 30, 1996 to $341.4 million at March 31, 1997, an increase
of $75.2 million, or 28.3%. The Bank continues to use borrowings to leverage its
capital and fund asset growth. Excess of cost over fair value of net assets
acquired decreased $3.1 million during the nine months ended March 31, 1997
primarily due to $2.6 million of amortization and approximately $562,000 of
acquisition related tax benefits currently realized and not previously
recognized.
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.
March 31, June 30,
1997 1996
---- ----
(Dollars in thousands)
Non-accrual mortgage loans delinquent more than 90 days.................... $ 12,389 $ 12,277
Non-accrual other loans delinquent more than 90 days....................... 211 352
------- ------
Total non-accrual loans................................................ 12,600 12,629
Loans 90 days or more delinquent and still accruing........................ 393 350
------- ------
Total non-performing loans................................................. 12,993 12,979
Total foreclosed real estate, net of related allowance for losses.......... 1,116 1,564
------- ------
Total non-performing assets................................................ $ 14,109 $ 14,543
======= =======
Non-performing loans to total loans........................................ 1.50% 1.58%
Non-performing assets to total assets...................................... 0.73% 0.82%
Allowance for loan losses to non-performing loans.......................... 37.55% 34.63%
Allowance for loan losses to total loans................................... 0.56% 0.55%
Non-performing loans totalled $13.0 million, or 1.50% of total loans at March
31, 1997, as compared to $13.0 million, or 1.58% of total loans at June 30,
1996. Non-performing loans at March 31, 1997 were comprised of $10.3 million of
loans secured by one- to four-family residences, $393,000 of guaranteed student
loans and $2.3 million of commercial real estate loans. Included in
non-performing loans are two commercial real estate loans to one borrower which
went on non-accrual status during the nine months ended March 31, 1997. At March
31, 1997, the two loans totalled $1.2 million and were 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 March 31, 1997, the
11
borrower remains more than 90 days delinquent on the first and second mortgage
loans. The Bank had commenced foreclosure proceedings and a receiver was
appointed. Subsequently, the borrower declared bankruptcy and a bankruptcy
trustee was appointed by the court and is presently operating the property. The
property is expected to be sold by the bankruptcy trustee during the next
quarter. The Bank continues to monitor such loan and has sufficient reserves
necessary to cover any losses.
Potential Problem Loans
At March 31, 1997, 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 March 31, 1997, the borrower has $465,000
outstanding on the building loan. An appraisal dated March 1995, valued the
property at $1.7 million. As of March 31, 1997, the borrower was 89 days
delinquent on the first mortgage loan and 59 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.
For the nine months ended March 31, 1997, the Company's loan loss provision was
$650,000 as compared to $625,000 in the prior year period. The Company's
allowance for loan losses totalled $4.9 million at March 31, 1997 and $4.5
million at June 30, 1996 which represents a ratio of allowance for loan losses
to non-performing loans and to total loans of 37.55% and 0.56%, respectively,
and 34.63% and 0.55%, respectively. The Company continues to increase its loan
loss reserves after analyzing non-performing loans as well as the need to
increase general valuation allowances on commercial real estate and multi-family
loans. As a result of a decrease in REO and an increased asset base, the
non-performing assets to total assets ratio improved to 0.73% at March 31, 1997
from 0.82% at June 30, 1996. Management believes the allowance for loan losses
at March 31, 1997 is adequate and sufficient reserves are presently maintained
to cover losses on any non-performing loans. For the quarter ended and nine
months ended March 31, 1997, the Company experienced net charge-offs of $187,000
and $266,000, respectively.
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 was paid 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
ended September 30, 1996 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. As of January 1, 1997, BIF deposits will
be assessed a FICO payment of 1.3 basis points, while
12
SAIF deposits will pay an estimated 6.4 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 lowered 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
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 March 31, 1996 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 and New York
City tax laws have been amended to prevent a similar recapture of the Bank's bad
debt reserve, and to permit continued future use of the bad debt reserve
methods, for purposes of determining the Bank's New York State and New York City
tax liability.
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
13
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, 1997, $868.7 million, or 47.7%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $730.9 million, of which $397.8 million, or
54.4%, were adjustable-rate loans and $333.1 million, or 45.6%, were fixed-rate
loans. In addition, at March 31, 1997, the Bank's consumer loan portfolio
totalled $135.9 million, of which $107.4 million, or 79.0%, were adjustable-rate
home-equity lines of credit and guaranteed student loans and $28.5 million, or
21.0%, 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 nine months ended March 31, 1997, the Bank purchased
approximately $53.6 million and $93.5 million of 30 year fixed rate and 1 year
adjustable rate mortgage-backed securities classified as available-for-sale,
respectively. In addition, the Bank has recently purchased private label
collateralized mortgage obligations classified as available-for-sale to increase
the incremental yield on its mortgage-backed securities portfolio as well as
moderate risks associated with conventional mortgage-backed securities resulting
from unexpected prepayment activity. During the nine months ended March 31,
1997, the Bank purchased $117.5 million of private label collateralized mortgage
obligations classified as available-for-sale. Management believes that these
securities may represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment, and interest rate options
available. At March 31, 1997, the mortgage-backed securities held-to-maturity
portfolio totalled $166.2 million, of which $108.8 million, or 65.5%, of the
mortgage-backed portfolio was adjustable-rate securities and $57.4 million, or
34.5%, was fixed-rate securities. The mortgage-backed securities portfolio
classified as available-for-sale totalled $701.3 million of which $260.8
million, or 37.2%, were adjustable rate securities and $440.5 million, or 62.8%,
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 March 31, 1997, 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)
was a negative gap of $7.3 million , or (0.38)% of total assets at March 31,
1997 as compared to a positive gap of $49.3 million, or 2.78% of total assets at
June 30, 1996 and a negative gap of $102.6 million, or (5.9)%, at March 31,
1996. 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
14
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 a 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, 1997 and
1996.
General. The Company reported net income of $4.1 million for the three months
ended March 31, 1997 compared to $3.1 million for the three months ended March
31, 1996, an increase of $1.0 million, or 32.0%. This represents an annualized
return on average assets of 0.87% and 0.75%, respectively, and a return on
average tangible equity of 15.18% and 11.38%, respectively, for the three months
ended March 31, 1997 and 1996.
Interest Income. Interest income increased $4.4 million, or 15.2%, from $29.2
million for the three months ended March 31, 1996, to $33.6 million for the
three months ended March 31, 1997. The increase resulted from an increase of
$217.0 million, or 13.8%, in the average balance of interest-earning assets from
$1.6 billion for the 1996 period to $1.8 billion for the 1997 period and an
increase in the average yield of interest-earning assets from 7.42% in the prior
year period to 7.51%. Interest income from mortgage loans increased by $1.5
million, or 12.2 %, from $12.8 million for the 1996 period to $14.3 million for
the 1997 period due to a $74.9 million, or 11.7%, increase in the average
balance of mortgage loans, and a 4 basis point increase in the average yield on
mortgage loans from 8.03% for the 1996 period to 8.07% for the 1997 period. The
increase in the average balance of mortgage loans is primarily due to increased
originations of multi-family loans. For the three months ended March 31, 1997,
interest income from mortgage-backed securities increased $3.2 million, or
26.8%, from $11.9 million for the 1996 period to $15.1 million for the 1997
period, primarily due to an increase of $150.6 million, or 21.1%, in the average
balance of mortgage-backed securities and an increase in the average yield on
these securities of 29 basis points from 6.69% for the 1996 period to 6.98% for
the 1997 period due to the adjustable-rate mortgage-backed securities repricing
at higher rates, and increased purchases of higher yielding 30 year fixed rate
securities and private label mortgage-backed 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
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 Expense. Interest expense for the three months ended March 31, 1997,
was $17.9 million, an increase of $2.3 million, or 14.8%, from $15.6 million for
the three months ended March 31, 1996. The increase in interest expense is
related to a $198.3 million, or 13.3%, increase in the average balance of
interest-bearing liabilities from $1.5 billion for the 1996 period to $1.7
billion for the 1997 period and a 5 basis point increase in the cost of
interest-bearing liabilities from 4.19% for the 1996 period to 4.24% for the
1997 period. The increase in the average cost of interest-bearing liabilities
resulted primarily from a higher interest rate environment during the quarter
ended March 31, 1997. Interest expense on deposits increased $701,000, or 5.5%,
from $12.7 million for the 1996 period to $13.4 million for the 1997 period,
primarily as a result of a $93.9 million, or 7.2%, increase in the average
balance of deposits offset slightly by a 1 basis point decrease in the average
cost of such deposits from 3.96% in the 1996 period to 3.95% in the 1997 period.
Interest expense on borrowed funds increased $1.6 million, or 55.7%, from $2.9
15
million for the 1996 period to $4.5 million for the 1997 period. Borrowings
averaged $328.2 million for the three months ended March 31, 1997, an increase
of $125.5 million, or 61.9%, from $202.8 million for the three months ended
March 31, 1996. Borrowed funds, principally reverse repurchase agreements and
FHLB-NY advances, have been reinvested by the Bank in mortgage-backed securities
and loans leveraging the Bank's capital and improving the return on tangible
equity.
Net Interest Income. Net interest income was $15.7 million for the three months
ended March 31, 1997 as compared to $13.6 million for the three months ended
March 31, 1996, an increase of $2.1 million, or 15.8%. The increase in net
interest income was attributable to a $217.0 million, or 13.8%, increase in
average interest-earning assets to $1.8 billion for the quarter ended March 31,
1997 from $1.6 billion for the quarter ended March 31, 1996. 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
Sunrise Bancorp, Inc. Interest-bearing liabilities increased $198.3 million, or
13.3%, to $1.7 billion for the 1997 period from $1.5 billion for the 1996
period. Also, net interest income increased as a result of an increase in the
net interest spread from 3.23% for the three months ended March 31, 1996 to
3.27% for the three months ended March 31, 1997. The increase in net interest
spread is mainly due to higher yielding mortgage assets acquired from Sunrise
Bancorp, Inc. and higher yields on multi-family originations. In addition, the
net interest margin increased slightly from 3.45% for the three months ended
March 31, 1996 to 3.51% for the three months ended March 31, 1997 as the Bank
increased its origination of higher yielding multi-family loans and purchases of
higher yielding private label mortgage-backed securities.
Provision for Loan Losses. The provision for loan losses totalled $300,000 for
the three months ended March 31, 1997 compared to $425,000 for the three months
ended March 31, 1996. The Company continues to increase its loan loss reserves
after analyzing non-performing loans as well as the need to increase general
valuation allowances on commercial real estate and multi-family loans. The
higher provision for loan losses in the prior year period was due to the Bank
adjusting loan loss reserve on loans acquired from Sunrise Bancorp, Inc. to meet
compliance with Bank's policies. 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 decreased $508,000, or 36.2%, from $1.4
million for the quarter ended March 31, 1996 to $897,000 for the quarter ended
March 31, 1997 primarily as a result of a net gain on the sale of securities
recognized in the prior year period. During the prior year period, the Bank sold
mortgage-backed securities to fund the acquisition of Sunrise Bancorp, Inc.
Non-Interest Expense. Non-interest expense totalled $8.5 million for the quarter
ended March 31, 1997, the same amount in the prior year quarter. Due to an
increased asset base and acquisition related efficiencies, the operating expense
to average assets ratio improved to 1.59% for the quarter ended March 31, 1997
from 1.75% in the prior year quarter. For the quarter ended March 31, 1997,
compensation and benefits expense increased to $4.1 million, an increase of
$308,000, or 8.1%, from $3.8 million for the quarter ended March 31, 1996. The
increase in compensation and benefits expense is due mainly to increased costs
of the ESOP and RRP benefit plans and normal salary adjustments. For the quarter
ended March 31, 1997, the ESOP and RRP expenses were $652,000 as compared to
$512,000 in the prior year quarter, an increase of $140,000, or 27.3%. Federal
deposit insurance premiums decreased $510,000, or 69.9%, from $730,000 recorded
for the quarter ended March 31, 1996 to $220,000 for the quarter
16
ended March 31, 1997 due to the reduction in SAIF premiums. Other operating
expenses increased $453,000, or 42.8%, from $1.1 million during the quarter
ended March 31, 1996 to $1.5 million for the quarter ended March 31, 1997 as a
result of general expenses related to the operation of the new banking offices.
Income Tax Expense. Income tax expense was $3.7 million for the three months
ended March 31, 1997 and $2.9 million for the three months ended March 31, 1996.
The effective income tax rates were 47.1% for the 1997 period as compared to
48.2% for 1996 period. The slight decrease in the effective tax rate primarily
relates to higher income offsetting the effect of 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, 1997 and
1996.
General. The Company reported net income of $6.6 million for the nine months
ended March 31, 1997 as compared to $8.1 million for the nine months ended March
31, 1997. Excluding the effect of the SAIF charge, the annualized return on
average assets and average tangible equity would have been 0.82% and 9.82%,
respectively.
Interest Income. Interest income increased $29.5 million, or 42.6%, from $69.2
million for the nine months ended March 31, 1996, to $98.7 million for the nine
months ended March 31, 1997. The increase in net interest income was
attributable to the growth in average interest-earning assets to $1.8 billion
for the nine months ended March 31, 1997 from $1.2 billion for the nine months
ended March 31, 1996. The growth in interest-earning assets was directly
attributable to assets acquired from Bank of Westbury and Sunrise Bancorp, Inc.
and the Bank's increased purchases of mortgage-backed securities and increased
originations of multi-family loans. Interest income from mortgage loans
increased by $17.1 million, or 68.0%, from $25.1 million for the 1996 period to
$42.1 million for the 1997 period due to a $296.6 million, or 73.0%, increase in
the average balance of mortgage loans, offset by a 24 basis point decrease in
the average yield on mortgage loans from 8.28% for the 1996 period to 8.04% for
the 1997 period. The increase in the average balance of mortgage loans is due to
the acquisition of mortgage loans from the Bank of Westbury and Sunrise Bancorp,
Inc. acquisitions as well as increased originations of multi-family loans. For
the nine months ended March 31, 1997, interest income from mortgage-backed
securities increased $11.2 million, or 34.0%, from $32.9 million for the 1996
period to $44.0 million for the 1997 period, primarily due to an increase of
$187.3 million, or 28.8%, in the average balance of mortgage-backed securities
and an increase in the average yield on these securities of 23 basis points from
6.75% for the 1996 period to 6.98% for the 1997 period due to purchases of
higher yielding longer term and private label mortgage-backed securities. The
increase in the average balance of mortgage-backed securities is primarily due
to increased purchases of adjustable rate, longer term and private label
securities and also from securities acquired from 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 $463,000, or 5.7%, from $8.1 million for the 1996 period to $8.6
million for the 1997 period due to a $15.2 million, or 12.8%, increase in the
average balance of consumer loans offset by a 56 basis point decrease in the
average yield on consumer loans from 9.15% for the 1996 period to 8.59% for the
1997 period. The decrease in the yield on consumer loans is the result of the
downward repricing of prime rate based home
17
equity lines of credit as well as lower yielding consumer loans acquired in
the Sunrise Bancorp, Inc. acquisition.
Interest Expense. Interest expense for the nine months ended March 31, 1997, was
$52.7 million, an increase of $16.0 million, or 43.8%, from $36.7 million for
the nine months ended March 31, 1996. The increase in interest expense is
related to a $531.6 million, or 47.5%, increase in the average balance of
interest-bearing liabilities offset by a 11 basis point decrease in the cost of
interest-bearing liabilities from 4.37% for the 1996 period to 4.26% for the
1997 period. The decrease in the average cost of interest-bearing liabilities
resulted primarily from a lower interest rate environment during the nine months
ended March 31, 1997. Interest expense on total deposits increased $10.3
million, or 34.8%, from $29.6 million for the 1996 period to $39.9 million for
the 1997 period, primarily as a result of a $400.2 million, or 41.4%, increase
in the average balance of deposits offset by a 13 basis point decrease in the
average cost of such deposits from 4.09% for the 1996 period to 3.96% for the
1997 period. Interest expense on borrowed funds increased $5.7 million, or
81.4%, from $7.1 million for the 1996 period to $12.8 million for the 1997
period. Borrowings averaged $307.0 million for the nine months ended March 31,
1997, an increase of $152.9 million, or 99.2%, from $154.1 million for the nine
months ended March 31, 1996. Borrowed funds, principally reverse repurchase
agreements and FHLB-NY advances have been reinvested by the Bank in
mortgage-backed securities and multi-family loans leveraging the Bank's capital
and improving the return on tangible equity.
Net Interest Income. Net interest income was $46.0 million for the nine months
ended March 31, 1997 as compared to $32.6 million for the nine months ended
March 31, 1996, an increase of $13.4 million, or 41.3%. The increase in net
interest income was attributable to the growth in average interest-earning
assets to $1.8 billion for the nine months ended March 31, 1997 from $1.2
billion for the nine months ended March 31, 1996. The growth in interest-earning
assets was primarily from assets acquired in the Sunrise Bancorp, Inc.
acquisition, increased purchases of mortgage-backed securities and increased
originations of multi-family loans. Interest-bearing liabilities increased
$531.6 million, or 47.5%, to $1.7 billion for the 1997 period from $1.1 billion
for the 1996 period. The Bank's ratio of average interest-earning assets to
average interest-bearing liabilities declined to 1.06X for the nine months ended
March 31, 1997 from 1.10X for the nine months ended March 31, 1996 as a result
of the Bank leveraging its excess capital with the Bank of Westbury and Sunrise
Bancorp, Inc. acquisitions. During the nine months ended March 31, 1997, the
Bank improved its net interest spread to 3.25% from 3.10% for the nine months
ended March 31, 1996, primarily due to a lower cost of funds for its
interest-bearing liabilities. However, the net interest margin decreased
slightly from 3.52% for the nine months ended March 31, 1996 to 3.50% for the
nine months ended March 31, 1997 as the Bank fully leverage its excess capital
from the prior year period.
Provision for Loan Losses. The provision for loan losses totalled $650,000 for
the nine months ended March 31, 1997 as compared to $625,000 for the nine months
ended March 31, 1996. The Company established additional loan loss reserves
after analyzing non-performing loans and charge-offs as well as the need to
increase general valuation allowances on commercial real estate and multi-family
loans. The Company's allowance for loan losses totalled $4.9 million at March
31, 1997 which represents a ratio of allowance for loan losses to non-performing
loans and to total loans of 37.55% and 0.56%, respectively. The Company's
non-performing assets to total assets ratio was 0.73% at March 31, 1997. Net
charge-offs were $266,000 for the nine months ended March 31, 1997. Management
believes that based upon information currently available, its allowance for loan
losses is adequate and sufficient reserves are presently maintained to cover
losses on any non-performing loans.
18
Non-Interest Expense. Non-interest expense totalled $34.5 million for the nine
months ended March 31, 1997 as compared to $19.3 million for the nine months
ended March 31, 1996, an increase of $15.2 million, or 79.0%. Included in
non-interest expense for the nine months ended March 31, 1997 is the special
SAIF charge of $8.3 million. Excluding the SAIF charge, non-interest expense
increased $7.0 million, or 36.2%. This increase is mainly the result of banking
office personnel, goodwill amortization and other occupancy costs associated
with the Sunrise Bancorp, Inc. acquisition. Due to the increased asset base and
the operational efficiencies realized from the acquisition, the operating
expense to average assets ratio improved from 1.83% for the nine months ended
March 31, 1996 to 1.68% for the nine months ended March 31, 1997. For the nine
months ended March 31, 1997, compensation and benefits expense increased $3.0
million, or 31.9%, to $12.4 million from $9.4 million for the nine months ended
March 31, 1996. The increase in compensation and benefits expense is due to the
addition of banking office personnel from the Sunrise Bancorp, Inc. acquisition,
higher benefit expenses and normal salary adjustments. For the nine months ended
March 31, 1997, ESOP and RRP expense were $1.8 million as compared to $1.5
million in the prior year period, an increase of $292,000, or 19.3%. Occupancy
and equipment expense increased $1.1 million, or 36.2%, from $3.1 million for
the nine months ended March 31, 1996 to $4.3 million for the nine months ended
March 31, 1997 due to costs associated with the operation of the new banking
offices as well as miscellaneous data processing costs. Other operating expenses
increased $1.4 million, or 51.1%, from $2.9 million during the nine months ended
March 31, 1996 to $4.2 million for the nine months ended March 31, 1997 as a
result of general expenses related to the addition of the new banking offices.
Income Tax Expense. Income tax expense was $6.9 million for the nine months
ended March 31, 1997 and $6.7 million for the nine months ended March 31, 1996.
The effective income tax rates were 51.0% for the 1997 period as compared to
45.1% for 1996 period. The increase in the effective tax rate primarily relates
to $2.6 million of amortization of excess of cost over fair value of net assets
acquired for which no tax benefit is provided for. In addition, as a result of
the SAIF charge such amortization represents a higher percentage of pre-tax
income thereby increasing the effective tax rate.
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. During the quarter ended
March 31, 1997, the Bank made a dividend payment of $6.7 million to the Company.
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 March 31, 1997, the Company has repurchased a total of 1.9
million shares of the Company's outstanding common stock in open market
transactions for a total cost of $26.2 million and at an average price of
approximately $13.56 per share. On April 4, 1997 the Company announced its fifth
5% stock repurchase of the Company's 8,822,769 outstanding shares.
On March 19, 1996, the Board of Directors declared a regular cash dividend of
$0.16 per common share, an increase of $0.02 or 14.13% from the regular cash
dividend paid for the second quarter of fiscal year 1997. The dividend was paid
on April 18, 1997 to stockholders of record on April 4, 1997.
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
19
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, 1997, 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.
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
5.33%, and 1.55%, respectively, for the nine months ended March 31, 1997. The
Bank's short-term liquidity ratio was 2.37%, at March 31, 1997.
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, 1997,
assets qualifying for short-term liquidity, including cash and short term
investments, totalled $39.5 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, 1997, the Bank originated and
purchased mortgage loans and consumer loans in the amount of $108.2 million and
$35.3 million, respectively. During the nine months ended March 31, 1997, the
Bank purchased $236.5 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 March 31, 1997, borrowings
from the FHLB-NY and reverse repurchase agreements totalled $341.4 million.
At March 31, 1997, the Bank had outstanding loan commitments of $22.5 million
and open lines of credit of $50.9 million. In addition, the Bank had commitments
to purchase $5.0 million of U.S. government agency 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, 1997 totalled $503.7
million. Management believes that a significant portion of such deposits will
remain with the Bank.
At March 31, 1997, the Bank exceeded each of the OTS capital requirements. The
Bank's tangible, core, and risked-based ratios were 5.43%, 5.43% and 14.95%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
20
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 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 will implement the
pro forma disclosures required by SFAS No. 123 with the preparation of the
annual financial statement for fiscal 1997.
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. SFAS No.125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after January 1, 1997, and should
be applied prospectively.
In January 1997, FASB issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125." ("SFAS No.127"). SFAS No. 127 postpones the
effective date by one year for certain provisions of SFAS No. 125. Specifically,
paragraph 15 of SFAS No. 125 (secured borrowings and collateral) is deferred for
all transfers of financial assets until after December 31, 1997. Likewise,
paragraphs 9-12 of SFAS No. 125 (accounting for transfers) are deferred until
after December 31, 1997, but only for repurchase agreements, dollar-rolls,
securities lending and similar transactions. SFAS No.125, as amended by SFAS No.
127, did not have a material effect on the Company's consolidated financial
statements. 21
In February 1997, the FASB issued SFAS No.128, "Earnings per share". The
statement is effective for periods ending after December 15, 1997, and will
require restatement of all prior period earnings per share ("EPS") data
presented. The statement establishes standards for computing and presenting EPS.
It replaces the presentation of primary EPS with basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement. Basic
EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Adoption of this statement is not expected to have a material effect on the
Company's consolidated financial statements.
22
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
3.1 Certificate of Incorporation*
3.2 Bylaws*
11.0 Statement re Computation of Per Share Earnings
27.0 Financial Data Schedule 1
*Incorporated by reference into the Registrant's Statement of Form S-1, as
amended, originally filed on December 3, 1993.
1 Submitted only with filing in electronic format.
23
(b) Reports on Form 8-K
1) On March 19, 1997, the Company declared a regular
cash dividend of $0.16 per common share for the
quarter ended March 31, 1997, an increase of $0.02 or
14.3% from the second quarter of fiscal year 1997.
The dividend will be payable on April 18, 1997 to
stockholders of record on April 4, 1997.
2) On April 4, 1997, the Company announced its fifth
stock repurchase plan. The Company has been
authorized by its Board of Directors to repurchase up
to 5% of the Company's 8,822,769 outstanding shares
during the next twelve months.
3) On May 5, 1997, the Company announced that it
had entered into an agreement to acquire Continental
Bank.
24
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 05/15/97 /s/ Paul D. Hagan 05/15/97
---------------------- --------- -------------------- --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
25