UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1998
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
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(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 8, 1998, there were 9,653,332 shares of common stock, $.01 par value,
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Consolidated Statements of Condition at March 31, 1998 and
June 30, 1997 (Unaudited)
Consolidated Statements of Operations for the Three and Nine Months
Ended March 31, 1998 and 1997 (Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1998 and 1997 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
1
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
(Dollars in thousands, except share and per share data)
March 31, June 30,
1998 1997
---- ----
Assets
Cash and due from banks............................................................. $ 34,351 $ 29,565
Money market investments............................................................ 14,000 1,100
Debt and equity securities available-for-sale....................................... 30,522 26,909
Debt and equity securities held-to-maturity (estimated market value of
$40,588 and $46,152, respectively............................................. 40,186 46,026
Mortgage-backed securities available-for-sale....................................... 791,491 721,819
Mortgage-backed securities held-to-maturity (estimated market value of
$195,298 and $163,108, respectively........................................... 191,462 159,356
Loans receivable:
Mortgage loans................................................................. 792,432 775,612
Commercial loans............................................................... 48,696 --
Consumer and other loans....................................................... 141,347 138,891
Less allowance for loan losses............................................... (8,888) (5,182)
----------- -----------
Loans receivable, net.................................................. 973,587 909,321
Accrued interest receivable, net.................................................... 13,573 12,040
Office properties and equipment, net................................................ 15,463 14,089
Prepaid expenses and other assets................................................... 11,068 7,580
Mortgage servicing rights........................................................... 2,551 3,046
Excess of cost over fair value of net assets acquired............................... 60,077 45,463
Real estate owned, net.............................................................. 1,423 450
--------- -------------
Total assets........................................................... $ 2,179,754 $ 1,976,764
========= =========
Liabilities and Stockholders' Equity
Deposits............................................................................ $ 1,592,954 $ 1,436,037
FHLB advances....................................................................... 109,200 40,000
Securities sold under agreements to repurchase...................................... 251,110 311,913
Advance payments by borrowers for taxes and insurance............................... 13,946 9,017
Accrued expenses and other liabilities.............................................. 18,745 17,127
---------- ----------
Total liabilities...................................................... 1,985,955 1,814,094
--------- ---------
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; 9,627,726 and 8,776,337
outstanding, respectively....................................................... 108 108
Additional paid-in capital.......................................................... 118,283 105,871
Retained earnings, substantially restricted......................................... 98,569 89,660
Net unrealized appreciation on securities
available-for-sale, net of taxes................................................. 4,040 1,705
Less:
Unallocated common stock held by ESOP............................................... (4,761) (5,382)
Unearned common stock held by RRP................................................... (909) (1,567)
Common stock held by SERP, at cost.................................................. (373) (209)
Treasury stock, at cost (1,123,094 and 1,974,483 shares, respectively).............. (21,158) (27,516)
--------- -----------
Total stockholders' equity..................................................... 193,799 162,670
-------- ----------
Total liabilities and stockholders' equity.............................. $ 2,179,754 $ 1,976,764
========= =========
See accompanying notes to unaudited consolidated financial statements.
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,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
First mortgage loans....................................... $ 15,966 $ 14,306 47,693 $ 42,142
Commercial loans........................................... 1,334 -- 2,524 --
Consumer and other loans................................... 3,017 2,859 9,172 8,575
Mortgage-backed securities................................. 16,714 15,057 50,189 44,036
Money market investments................................... 58 127 338 475
Debt and equity securities................................. 1,357 1,247 3,979 3,516
--------- --------- --------- ---------
Total interest income................................... 38,446 33,596 113,895 98,744
-------- -------- -------- --------
Interest expense:
Deposits................................................... 15,990 13,426 47,153 39,877
Borrowed funds............................................. 5,434 4,478 16,518 12,841
--------- --------- -------- --------
Total interest expense.................................. 21,424 17,904 63,671 52,718
--------- -------- -------- --------
Net interest income before provision for loan losses.... 17,022 15,692 50,224 46,026
Provision for loan losses.................................. 300 300 1,500 650
--------- -------- -------- ---------
Net interest income after provision for loan losses..... 16,722 15,392 48,724 45,376
-------- ------- -------- --------
Non-interest income:
Loan fees and service charges.............................. 345 160 718 568
Other operating income..................................... 948 671 2,474 1,866
Income from Money Centers.................................. 637 -- 1,207 --
Condemnation award on joint venture........................ -- -- 1,483 --
Net (loss) gain on securities.............................. (8) 66 (5) 172
-------- ------- -------- -------
Total non-interest income............................... 1,922 897 5,877 2,606
------- -------- ------- -------
Non-interest expense:
Compensation and benefits.................................. 5,191 4,091 14,764 12,351
Occupancy and equipment.................................... 1,776 1,492 4,785 4,263
Federal deposit insurance premiums......................... 237 220 690 1,592
Advertising................................................ 208 225 912 842
Other operating expense.................................... 1,675 1,511 4,799 4,320
------- ------- ------- -------
Total general and administrative expenses............... 9,087 7,539 25,950 23,368
Real estate operations, net................................ 12 114 170 335
Amortization of excess of cost over fair value
of net assets acquired.................................. 1,141 846 3,077 2,558
SAIF recapitalization charge............................... -- -- -- 8,250
------- ------- ------- -------
Total non-interest expense................................. 10,240 8,499 29,197 34,511
------- ------- ------- -------
Income before income taxes.................................... 8,404 7,790 25,404 13,471
Income tax expense ........................................... 3,746 3,667 11,118 6,873
------- ------- ------- -------
Net income.................................................... $ 4,658 $ 4,123 $ 14,286 $ 6,598
===== ===== ======= =====
Net income per common share:
Basic........................................ $ 0.51 $ 0.50 $ 1.62 $ 0.79
===== ===== ===== =====
Diluted...................................... $ 0.48 $ 0.47 $ 1.53 $ 0.76
===== ===== ===== =====
See accompanying notes to unaudited consolidated financial statements.
3
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended
March 31,
-----------------------
1998 1997
---- ----
Cash flows from operating activities: (Unaudited)
Net income....................................................................... $ 14,286 $ 6,598
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses........................................................ 1,500 650
Provision for losses on real estate owned........................................ 110 200
Amortization of premiums, net.................................................... 1,645 903
Amortization relating to allocation and earned portion of stock plans............ 2,695 1,804
Amortization of excess of cost over fair value of net assets acquired............ 3,077 2,558
Amortization of mortgage servicing rights........................................ 495 603
Acquisition related tax benefits not previously recognized....................... -- 562
Depreciation and amortization.................................................... 1,191 1,045
Net loss (gain) on securities.................................................... 5 (172)
Net gain on loans sold......................................................... (7) (26)
Proceeds from loans sold......................................................... 2,455 6,702
Net gain on sale of real estate owned............................................ (132) (49)
Increase in accrued interest receivable, net..................................... (452) (1,100)
Decrease in prepaid expenses and other assets.................................... 1,074 4,499
(Decrease) Increase in accrued expenses and other liabilities.................... (2,963) 3,758
--------- -------
Net cash provided by operating activities.................................... 24,979 28,535
------- -------
Cash flows from investing activities:
Principal repayments, net of (originated and purchased loans).................... 8,021 (52,939)
Purchases of mortgage-backed securities available-for-sale....................... (335,478) (236,484)
Proceeds from sales of mortgage-backed securities available-for-sale............. 165,208 59,810
Purchases of mortgage-backed securities held-to-maturity......................... (67,242) --
Principal repayments from mortgage-backed securities............................. 216,056 87,594
Purchases of debt securities held-to-maturity.................................... -- (5,007)
Purchases of debt securities available-for-sale.................................. (9,994) (15,000)
Proceeds from call of debt securities............................................ 12,505 2,313
Proceeds from sales of debt securities available-for-sale........................ 4,870 5,028
Proceeds from maturities of debt securities...................................... -- 1,350
Purchases of office properties and equipment..................................... (1,191) (1,391)
Proceeds from sales of real estate owned......................................... 2,448 1,222
Cash and cash equivalents received from Continental Bank acquisition............. 9,106 --
------- ------------
Net cash provided by (used in) investing activities.......................... 4,309 (153,504)
------- ----------
Cash flows from financing activities:
Increase in deposits............................................................. 20,261 59,447
Increase in advance payments by borrowers for taxes and insurance................ 4,929 4,613
Proceeds from FHLB advances...................................................... 55,200 60,000
Repayment of FHLB advances..................................................... (6,825) (23,000)
Proceeds from reverse repurchase agreements...................................... 758,981 908,471
Repayment of reverse repurchase agreements....................................... (830,584) (870,224)
Purchases of treasury stock...................................................... (11,883) (6,282)
Net proceeds from issuance of common stock upon exercise of stock options........ 2,398 562
Dividends paid................................................................... (4,079) (3,257)
---------- ---------
Net cash (used in) provided by financing activities........................... (11,602) 130,330
-------- --------
Net increase in cash and cash equivalents........................................ 17,686 5,361
Cash and cash equivalents at beginning of period................................. 30,665 32,870
------- -------
Cash and cash equivalents at end of period....................................... $ 48,351 $ 38,231
======= =======
4
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
Nine Months Ended
March 31,
--------------------
1998 1997
---- ----
(Unaudited)
Supplemental disclosures of cash flow information
Cash paid during the nine months ended for:
Interest......................................................................... $ 63,751 $ 52,887
======= =======
Income taxes..................................................................... $ 11,077 $ 4,745
======= ========
Non-cash investing activities:
Transfers from loans to real estate owned........................................ $ 3,399 $ 925
======= ========
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 and its
subsidiaries (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, 1998 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 1997 Annual Report on Form 10-K.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ('SFAS") No. 128,
"Earnings per Share". SFAS No.128 specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS")
for entities with publicly held common stock or potential common stock.
This statement simplifies the standard for computing EPS previously
found in Accounting Principles Board Opinion No. 15 ("APB No. 15"). It
replaces the presentation of primary EPS with a presentation of basic
EPS and the presentation of fully diluted EPS with a presentation of
diluted EPS. Basic EPS is computed by dividing net income 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 or resulted in the issuance of common stock
that then shared in the earnings of the entity. Potential common stock
due to the dilutive effect of stock options is computed using the
treasury stock method. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 and
requires the restatement of all prior-period EPS data presented. The
Company adopted SFAS No. 128 during the quarter ended December 31,
1997.
3. ACQUISITION
On October 17, 1997, Reliance Bancorp, Inc. completed its acquisition
of Continental Bank ("Continental") and its merger into the Bank. In
accordance with the terms of the merger agreement, the Company issued
1.10 shares of its common stock for each outstanding common share of
Continental for a total of 1,013,909 common shares which were issued
from its treasury shares. The total transaction value was approximately
$24.0 million. The acquisition of Continental increased the total
number of banking offices to 30 and expanded its lending and deposit
services to include commercial banking services. In addition, the
Company also acquired
6
five money center check cashing operations which result in additional
fee income to the Bank. The Company accounted for the transaction using
the purchase method of accounting which resulted in excess of cost over
the fair value of net assets acquired ("goodwill") of $17.7 million
which is being amortized on a straight line basis over 15 years. 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.
4. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires that all items that are components of
"comprehensive income" be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Comprehensive income is defined as the "change in equity [net assets]
of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes
in equity during a period except those resulting from investments by
owners and distributions to owners". Companies will be required to (a)
classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires reclassification of prior periods
presented. As the requirements of SFAS No. 130 are disclosure-related,
its implementation will have no impact on the Company's financial
condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 requires that
enterprises report certain financial and descriptive information about
operating segments in complete sets of financial statements of the
Company and in condensed financial statements of interim periods issued
to shareholders. It also requires that a Company report certain
information about their products and services, geographic areas in
which they operate and their major customers. As the requirements of
SFAS No. 131 are disclosure-related, its implementation will have no
impact on the Company's financial condition or results of operations.
SFAS No. 131 is effective for fiscal years beginning after December 15,
1997 and requires interim periods to be presented in the second year of
application.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" an amendment of FASB
Statements No. 87, 88, and 106. This statement revises employer's
disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates
certain disclosures that are no longer as useful as they were when FASB
Statement No. 87, "Employer's Accounting for Pensions", No. 88,
"Employer's Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", and No. 106,
"Employer's Accounting for Postretirement Benefits Other Than
Pensions", were issued. The statement suggests combined formats for
presentation of pension and other postretirement benefit disclosures.
The statement suggests combined formats for presentation of pension and
other postretirement benefit disclosures. The statement also permits
reduced disclosures for nonpublic entities.
7
This statement is effective for fiscal years beginning after December
15, 1997. Earlier application is encouraged. Restatement of disclosures
for earlier periods provided for comparative purposes is required
unless the information is not readily available, in which case the
notes to the financial statements should include all available
information and a description of the information not available. SFAS
No. 132 is limited to additional disclosures and, accordingly, the
adoption of this statement will not have an impact on the Company's
financial condition or results of operations.
5. Subsequent Event
On April 29, 1998, the Company announced the completion of a $50
million private placement of 8.17% capital securities due May 1, 2028.
The securities were issued by the Company's recently formed unit,
Reliance Capital Trust I. The securities were sold in an offering under
Rule 144A and Regulation D of the Securities Act of 1933. Proceeds of
the issue are intended to be invested by Reliance Capital Trust I in
junior subordinated debentures issued by the Company. The Capital
Securities are guaranteed by the Company. Net proceeds from the sale of
the debentures will be used for general corporate purposes.
8
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 and its subsidiaries (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, 1998, the Company had
9,627,726 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, corporate
debt and equity securities and repurchase agreements. The Company has also
expanded its operations with the acquisition of three 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 October 17, 1997 the Company acquired Continental
Bank and merged its operations into the Bank.
The Bank's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from
operations, principal repayments and borrowings, primarily in mortgage,
consumer, multi-family, commercial, commercial real estate, construction and
guaranteed student loans. In connection with the acquisition of Continental
Bank, the Bank now offers both secured and unsecured commercial loans. During
periods in which the demand for loans which meet the Bank's underwriting,
investment and interest rate risk standards is lower than the amount of funds
available for investment, the Bank invests excess funding in mortgage-backed
securities, securities issued by the U.S. Government and agencies thereof and
other investments permitted by federal laws and regulations. The Bank also
operates five money center check cashing operations which result in additional
fee income to the Bank.
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 expenses, other non-interest expenses, and
income tax expense. General and administrative expenses consists primarily of
compensation and benefits, occupancy and equipment, 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, in fiscal 1997, 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.
9
Acquisition
On October 17, 1997, the Company completed its acquisition of Continental and
its merger into the Bank. In accordance with the terms of the merger agreement,
the Company issued 1.10 shares of its common stock for each outstanding common
share of Continental for a total of 1,013,909 common shares which were issued
from its treasury shares. The total transaction value was approximately $24.0
million. The acquisition of Continental increased the total number of banking
offices to 30 and expanded its lending and deposit services to include
commercial banking services. In addition, the Company also acquired five money
center check cashing operations which result in additional fee income to the
Bank. The Company accounted for the transaction using the purchase method of
accounting which resulted in excess of cost over the fair value of net assets
acquired ("goodwill") of $17.7 million which is being amortized on a straight
line basis over 15 years. 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 Continental
acquisition is as follows:
After the Close of Business
October 17, 1997
(In thousands)
Assets acquired:
Cash and cash equivalents $ 9,106
Investment securities 4,781
Mortgage-backed securities 78,295
Loans receivable, net 79,867
Other assets 5,297
-------
Total assets acquired 177,346
Liabilities assumed:
Deposits 137,011
Borrowed funds 31,625
Net deferred tax liability 374
Other liabilities 2,073
-------
Total liabilities assumed 171,083
Net assets acquired $ 6,263
Financial Condition
As of March 31, 1998, total assets were $2.2 billion, deposits were $1.6 billion
and total stockholders' equity was $193.8 million. The mortgage-backed
securities portfolio increased $101.8 million, or 11.6%, from $881.2 million at
June 30, 1997 to $983.0 million at March 31, 1998, with the increase primarily
due to securities acquired from Continental and increased purchases of private
label collateralized mortgage obligations offset by amortization and
prepayments.
Funding for the purchases of mortgage-backed securities was through a
combination of new deposit growth, borrowings and cash flows. Deposits increased
$156.9 million, or 10.9% during the nine month
10
period ended March 31, 1998 as a result of growth in new certificate of deposit
products and deposits acquired from Continental. Borrowings increased from
$351.9 million at June 30, 1997 to $360.3 million at March 31, 1998, an increase
of $8.4 million, or 2.4%. The Bank had been using borrowings to leverage its
capital and fund asset growth.
Treasury stock decreased from $27.5 million at June 30, 1997 to $21.2 million at
March 31, 1998 as a result of approximately 1 million shares issued to purchase
Continental.
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 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,
1998 1997
---- ----
(Dollars in thousands)
Non-accrual mortgage loans delinquent more than 90 days.................... $ 10,381 $ 14,262
Non-accrual commercial loans delinquent more than 90 days.................. 1,138 --
Non-accrual other loans delinquent more than 90 days....................... 309 188
-------- --------
Total non-accrual loans................................................ 11,828 14,450
Loans 90 days or more delinquent and still accruing........................ 475 277
-------- --------
Total non-performing loans................................................. 12,303 14,727
Total foreclosed real estate, net of related allowance for losses.......... 1,423 450
------- -------
Total non-performing assets................................................ $ 13,726 $ 15,177
====== ======
Non-performing loans to total loans........................................ 1.25% 1.61%
Non-performing assets to total assets...................................... 0.63% 0.77%
Allowance for loan losses to non-performing loans.......................... 72.24% 35.18%
Allowance for loan losses to total loans................................... 0.90% 0.57%
Non-performing loans totalled $12.3 million, or 1.25% of total loans at March
31, 1998, as compared to $14.7 million, or 1.61% of total loans at June 30,
1997. Non-performing loans at March 31, 1998 were comprised of $8.6 million of
loans secured by one- to four-family residences, $2.1 million of commercial real
estate loans, $1.1 million of commercial loans and $475,000 of guaranteed
student loans. As a result of a decrease in non-performing loans and an
increased asset base, the non-performing assets to total assets ratio improved
to 0.63% at March 31, 1998 from 0.77% at June 30, 1997.
For the nine months ended March 31, 1998, the Company's loan loss provision was
$1.5 million as compared to $650,000 in the prior year period. The Company
increased its provision for loan losses to continue to increase its loan loss
coverage ratios. The Company's allowance for loan losses totalled $8.9 million
at March 31, 1998 as compared to $5.2 million at June 30, 1997 which represents
a ratio of allowance for loan losses to non-performing loans and to total loans
of 72.24% and 0.90% and 35.18%
11
and 0.57%, respectively. The significant increase in the loan loss coverage
ratios is the result of $2.7 million of allowances acquired from Continental
Bank. For the quarter and nine months ended March 31, 1998, the Company
experienced net charge-offs of $104,000 and $538,000, respectively, as compared
to $187,000 and $266,000, respectively, in the prior year periods. Management
believes the allowance for loan losses at March 31, 1998 is adequate and
sufficient reserves are presently maintained to cover losses on non-performing
loans.
Impact of Legislation
Recapitalization of SAIF Fund. Legislation was signed into law during the
quarter ended December 31, 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 pre-tax of $8.25 million. 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 remained 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 are assessed a FICO
payment of 1.3 basis points, while SAIF deposits 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 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.
Asset/Liability Management
One of the Bank's primary long-term financial objectives has been and will
continue to be to monitor the sensitivity of its earnings to interest rate
fluctuations by maintaining an appropriate matching of the maturities and
interest rate repricing characteristics of its assets and liabilities in
relation to the current and anticipated interest rate environment. In an effort
to realize this objective and minimize the Bank's exposure to interest rate
risk, the Bank emphasizes the origination of adjustable-rate mortgage ("ARM"),
consumer and commercial loans, shorter-term fixed rate multi-family, mortgage,
consumer and commercial loans and the purchase of shorter-term fixed rate and
adjustable-rate mortgage-backed securities. However, there can be no assurances
that the Bank will be able to originate adjustable rate loans or acquire
mortgage-backed securities with terms and characteristics which conform with the
Bank's underwriting standards, investment criteria or interest rate risk
policies.
12
The Company has attempted to limit its exposure to interest rate risk through
the origination and purchase of adjustable-rate mortgage loans ("ARMs") and
through purchases of adjustable-rate mortgage-backed and mortgage-related
securities and fixed rate mortgage-backed and mortgage-related securities with
short and medium-term average lives.
The actual duration of mortgage loans and mortgage-backed securities can be
significantly impacted by changes in mortgage prepayment and market interest
rates. Mortgage prepayment rates will vary due to a number of factors, including
the regional economy in the area where the underlying mortgages were originated,
seasonal factors, demographic variables and the assumability of the underlying
mortgages. However, the largest determinants of prepayment rates are prevailing
interest rates and related mortgage refinancing opportunities. Management
monitors interest rate sensitivity so that adjustments in the asset and
liability mix, when deemed appropriate, can be made on a timely basis.
At March 31, 1998, $891.0 million, or 43.7%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $792.4 million, of which $427.8 million, or
54.0%, were adjustable-rate loans and $364.6 million, or 46.0%, were fixed-rate
loans. The Bank's commercial loan portfolio totalled $48.7 million, of which
$43.0 million, or 88.3%, were adjustable-rate loans and $5.7 million, or 11.7%,
were fixed-rate loans. In addition, at March 31, 1998, the Bank's consumer loan
portfolio totalled $141.3 million, of which $112.8 million, or 79.8%, were
adjustable-rate home-equity lines of credit and guaranteed student loans and
$28.5 million, or 20.2%, were fixed-rate home-equity and other consumer loans.
At March 31, 1998, the mortgage-backed securities held-to-maturity portfolio
totalled $191.5 million, of which $83.9 million, or 43.8%, of the
mortgage-backed portfolio were adjustable-rate securities and $107.6 million, or
56.2%, were fixed-rate securities. The mortgage-backed securities portfolio
classified as available-for-sale totalled $791.5 million of which $223.5
million, or 28.2%, were adjustable rate securities and $568.0 million, or 71.8%,
were fixed-rate securities.
During the nine months ended March 31, 1998, the Bank purchased approximately
$291.8 million of agency and private label collateralized mortgage obligations,
$52.3 million of 1 year agency adjustable and $58.6 million of 30 year fixed
rate mortgage-backed securities. In addition, during the nine months ended March
31, 1998 the Bank sold approximately $131.0 million of 15 year and 30 year
mortgage-backed securities, $17.8 million of agency and private label
collateralized mortgage obligations and $16.5 million of adjustable-rate
securities. The Bank has continued to reposition its securities portfolio by
purchasing agency and private label collateral mortgage obligations in order to
increase the incremental yield of the portfolio as well as shorten the duration
of the securities portfolio. 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. The Bank
has funded the purchase of these securities through a combination of internal
deposit growth and borrowings, primarily reverse repurchase agreements.
Comparison of Operating Results for the Three Months Ended March 31, 1998 and
1997.
General. Net income for the three months ended March 31, 1998 was $4.7 million,
an increase of $535,000, or 13.0% from $4.1 million in the prior year period.
Net income for the quarter ended March 31, 1998 represents an annualized return
on average assets and average tangible equity of 0.85% and 14.72%, respectively
as compared to 0.87% and 15.18% in the prior year period.
13
Interest Income. Interest income increased $4.8 million, or 14.4%, from $33.6
million for the three months ended March 31, 1997, to $38.4 million for the
three months ended March 31, 1998. The increase resulted from an increase of
$269.3 million, or 15.1%, in the average balance of interest-earning assets from
$1.8 billion for the 1997 period to $2.1 billion for the 1998 period, offset by
a decrease in the average yield of interest-earning assets from 7.51% in the
prior year period to 7.47%. The growth in interest-earning assets was directly
attributable to assets acquired from Continental Bank and the Bank's increased
purchases of mortgage-backed securities and increased originations of
multi-family loans. Interest income from mortgage loans increased $1.7 million,
or 11.6%, from $14.3 million for the 1997 period to $16.0 million for the 1998
period due to an $87.3 million, or 12.2%, increase in the average balance of
mortgage loans, offset slightly by a decrease in the average yield on mortgage
loans of 5 basis points from 8.07% for the 1997 period to 8.02% for the 1998
period. For the three months ended March 31, 1998, interest income from
mortgage-backed securities increased $1.6 million, or 11.0%, from $15.1 million
for the 1997 period to $16.7 million for the 1998 period, primarily due to an
increase of $143.0 million, or 16.6%, in the average balance of mortgage-backed
securities offset by a decrease in the average yield on these securities of 28
basis points from 6.98% for the 1997 period to 6.70% for the 1998 period. The
increase in the average balance of mortgage-backed securities is primarily due
to increased purchases of private label collateral mortgage obligations and
securities acquired from Continental Bank. 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, 1998,
was $21.4 million, an increase of $3.5 million, or 19.7%, from $17.9 million for
the three months ended March 31, 1997. The increase in interest expense is
related to a $230.0 million, or 13.6%, increase in the average balance of
interest-bearing liabilities from $1.7 billion for the 1997 period to $1.9
billion for the 1998 period and a 23 basis point increase in the cost of
interest-bearing liabilities from 4.24% for the 1997 period to 4.47% for the
1998 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, 1998. Interest expense on deposits increased $2.6 million, or
19.1%, from $13.4 million for the 1997 period to $16.0 million for the 1998
period, primarily as a result of a $202.5 million, or 14.7%, increase in the
average balance of deposits and by a 23 basis point increase in the average cost
of such deposits from 3.95% in the 1997 period to 4.18% in the 1998 period.
Interest expense on borrowed funds increased $956,000, or 21.3%, from $4.5
million for the 1997 period to $5.4 million for the 1998 period primarily due to
a $58.0 million, or 17.7%, increase in the average balance of borrowings from
$328.2 million in the 1997 period to $386.2 million for the 1998 period and a 17
basis point increase in the average cost of such borrowings from 5.46% in the
1997 period to 5.63% in the 1998 period. The Bank continues to use borrowings to
leverage its capital and fund asset growth. 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.
Net Interest Income. Net interest income increased to $17.0 million for the
quarter ended March 31, 1998, an increase of $1.3 million, or 8.5%, from $15.7
million for the quarter ended March 31, 1997. The increase in net interest
income was attributable to the growth in average interest-earning assets to $2.1
billion for the quarter ended March 31, 1998 from $1.8 billion for the quarter
ended March 31, 1997. The growth in average interest-earning assets was from
increased investments in mortgage-backed securities and from assets acquired
from Continental Bank. As a result of a flattening of the yield curve and the
14
increased cost of interest-bearing liabilities, the Bank's net interest spread
declined from 3.27% to 3.00% and its net interest margin declined from 3.51% to
3.31%. For the quarter ended March 31, 1998, the yield on interest-earning
assets was 7.47% and the cost of interest-bearing liabilities was 4.47% as
compared to 7.51% and 4.24%, respectively for the quarter ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses totalled $300,000 for
the three months ended March 31, 1998 and 1997. The Company maintained the same
provision from the prior year after analyzing the loan loss reserve balance,
non-performing loans and net charge-offs. Net charge-offs were $104,000 for the
quarter ended March 31, 1998 as compared to $187,000 in the prior year period.
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 $1.0 million, or 114.3% from
$897,000 in the prior year quarter to $1.9 million in the quarter ended March
31, 1998. The increase is mainly the result of additional fee income from the
acquisition of Continental Bank's check cashing operations and service charges
on newly acquired deposit accounts.
Non-Interest Expense. Non-interest expense totalled $10.2 million for the
quarter ended March 31, 1998, a $1.7 million, or 20.5%, increase from $8.5
million recorded in the prior year quarter. The increase is mainly the result of
higher compensation expense, goodwill amortization and other expenses associated
with the Continental Bank acquisition. For the quarter ended March 31, 1998,
compensation and benefits expense increased to $5.2 million, an increase of $1.1
million, or 26.9%, from $4.1 million for the quarter ended March 31, 1997. The
increase is due to the addition of banking offices, check cashing and commercial
lending personnel from the Continental Bank acquisition, higher benefit expenses
and normal salary adjustments. For the quarter ended March 31, 1998, ESOP and
RRP expenses were $918,000, an increase of $266,000, or 40.8%, from $652,000
recorded in the prior year quarter. Occupancy and equipment expense increased
$284,000, or 19.0%, from $1.5 million recorded for the quarter ended March 31,
1997 to $1.8 million for the quarter ended March 31, 1998 due to the addition of
two banking offices and five check cashing facilities.
Income Tax Expense. Income tax expense was $3.7 million for the quarters ended
March 31, 1998 and 1997 representing effective income tax rates of 44.6% and
47.1%, respectively. The Bank's effective income tax rate is primarily affected
by the amortization of excess of cost over fair value of net assets acquired for
which no tax benefit is provided, as well as associated tax benefits related to
a subsidiary of the Bank.
Comparison of Operating Results for the Nine Months Ended March 31, 1998 and
1997.
General. The Company reported net income of $14.3 million for the nine months
ended March 31, 1998 as compared to $6.6 million for the nine months ended March
31, 1997. The lower net income in the prior year period was primarily the result
of the $8.3 million SAIF charge.
Interest Income. Interest income increased $15.2 million, or 15.3%, from $98.7
million for the nine months ended March 31, 1997 to $113.9 million for the nine
months ended March 31, 1998. The increase in net interest income was
attributable to the growth in average interest-earning assets to $2.0 billion
for
15
the nine months ended March 31, 1998 from $1.8 billion for the nine months ended
March 31, 1997. The growth in interest-earning assets was directly attributable
to assets acquired from Continental Bank, the Bank's increased purchases of
mortgage-backed securities and increased originations of multi-family loans.
Interest income from mortgage loans increased $5.6 million, or 13.2%, from $42.1
million for the 1997 period to $47.7 million for the 1998 period due to an $85.6
million, or 12.2%, increase in the average balance of mortgage loans and a 7
basis point increase in the average yield on mortgage loans from 8.04% for the
1997 period to 8.11% for the 1998 period. The increase in the average balance of
mortgage loans is due to the acquisition of mortgage loans from Continental Bank
as well as increased originations of multi-family loans. For the nine months
ended March 31, 1998, interest income from mortgage-backed securities increased
$6.2 million, or 14.0%, from $44.0 million for the 1997 period to $50.2 million
for the 1998 period, primarily due to an increase of $136.4 million, or 16.3%,
in the average balance of mortgage-backed securities offset slightly by a
decrease in the average yield on these securities of 6 basis points from 6.98%
for the 1997 period to 6.92% for the 1998 period. The increase in the average
balance of mortgage-backed securities is primarily due to increased purchases of
shorter duration private label collateralized mortgage obligations securities
and securities acquired from Continental Bank. 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 nine months ended March 31, 1998, was
$63.7 million, an increase of $11.0 million, or 20.8%, from $52.7 million for
the nine months ended March 31, 1997. The increase in interest expense is
related to a $221.1 million, or 13.5%, increase in the average balance of
interest-bearing liabilities and by a 27 basis point increase in the cost of
interest-bearing liabilities from 4.26% for the 1997 period to 4.53% for the
1998 period. 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, 1998. Interest expense on total deposits increased $7.3
million, or 18.3%, from $39.9 million for the 1997 period to $47.2 million for
the 1998 period, primarily as a result of a $168.2 million, or 12.3%, increase
in the average balance of deposits and by a 25 basis point increase in the
average cost of such deposits from 3.96% for the 1997 period to 4.21% for the
1998 period. Interest expense on borrowed funds increased $3.7 million, or
28.6%, from $12.8 million for the 1997 period to $16.5 million for the 1998
period. Borrowings averaged $380.3 million for the nine months ended March 31,
1998, an increase of $73.3 million, or 23.9%, from $307.0 million for the nine
months ended March 31, 1997. 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.
Net Interest Income. Net interest income increased to $50.2 million for the nine
months ended March 31, 1998, an increase of $4.2 million, or 9.1%, from $46.0
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 $2.0
billion for the nine months ended March 31, 1998 from $1.8 billion for the nine
months ended March 31, 1997. The growth in interest-earning assets was from
assets acquired from the Continental Bank acquisition and increased purchases of
mortgage-backed securities. As a result of a flattening of the yield curve and
the increased cost of interest-bearing liabilities, the Bank's net interest
spread declined from 3.25% for the nine months ended March 31, 1997 to 3.05% for
the nine months ended March 31, 1998. The yield on interest-earning assets was
7.58% for the nine months ended March 31, 1998 and the cost of interest-bearing
liabilities was 4.53% as compared to 7.51% and 4.26%, respectively for the nine
months ended March 31, 1997.
16
Provision for Loan Losses. The provision for loan losses totalled $1.5 million
for the nine months ended March 31, 1998 as compared to $650,000 for the nine
months ended March 31, 1997. The Company established additional loan loss
reserves after analyzing non-performing loans and net charge-offs as well as the
need to increase general valuation allowances on commercial, commercial real
estate and multi-family loans. Non-performing loans at March 31, 1998 were
comprised of $8.6 million of loans secured by one- to four-family residences,
$2.1 million of commercial real estate loans, $1.1 million of commercial loans
and $475,000 of guaranteed student loans. Net charge-offs were $538,000 for the
nine months ended March 31, 1998 as compared to $266,000 in the prior year
period. 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.
Non-Interest Income. Non-interest income increased $3.3 million, or 125.5%, from
$2.6 million for the nine months ended March 31, 1997 to $5.9 million for the
nine months ended March 31, 1998 due to a gain from a condemnation award
received from an inactive joint venture, additional fee income generated from
the check cashing operations acquired from Continental Bank and increased
deposit fee income.
Non-Interest Expense. Non-interest expense totalled $29.2 million for the nine
months ended March 31, 1998 as compared to $34.5 million for the nine months
ended March 31, 1997, a decrease of $5.3 million, or 15.4%. Non-interest expense
for the nine months ended March 31, 1997 reflects a one-time charge of $8.25
million for the Company's share of recapitalizing the SAIF. Excluding the effect
of the SAIF charge, non-interest expense for the nine months ended March 31,
1997 would have been $26.3 million and non-interest expense would have increased
$2.9 million, or 11.2%. This increase is mainly the result of higher
compensation expense, goodwill amortization and other occupancy costs associated
with the Continental Bank acquisition offset by a decrease in deposit insurance
premiums. For the nine months ended March 31, 1998, compensation and benefits
expense increased $2.4 million, or 19.5%, to $14.8 million from $12.4 million
for the nine months ended March 31, 1997. The increase in compensation and
benefits expense is due to the addition of banking offices, check cashing and
commercial lending personnel from the Continental Bank acquisition, higher
benefit expenses and normal salary adjustments. For the nine months ended March
31, 1998, ESOP and RRP expenses were $2.7 million, an increase of $891,000, or
49.3%, from $1.8 million recorded in the prior year nine month period. Occupancy
and equipment expense increased $522,000, or 12.2%, from $4.3 million for the
nine months ended March 31, 1997 to $4.8 million for the nine months ended March
31, 1998 due to costs associated with the operation of two new banking offices
and five check cashing facilities. Other operating expenses increased $479,000,
or 11.1%, from $4.3 million during the nine months ended March 31, 1997 to $4.8
million for the nine months ended March 31, 1998 as a result of general expenses
related to the addition of two new banking offices and five check cashing
facilities.
For the nine months ended March 31, 1998, real estate operations, net was
$170,000 as compared to $335,000 in the prior year nine month period. The
decrease is the result of a lower provision for REO losses during the nine
months ended March 31, 1998. During the nine months ended March 31, 1998, the
Bank established a provision for REO losses of $110,000 as compared to $200,000
in the prior year nine month period.
Income Tax Expense. Income tax expense was $11.1 million for the nine months
ended March 31, 1998 and $6.9 million for the nine months ended March 31, 1997.
The effective income tax rates were 43.8% for the 1998 period as compared to
51.0% for 1997 period. As a result of the SAIF charge, the amortization of
excess of cost over fair value of net assets acquired for which no tax benefit
is provided
17
for represents a higher percentage of pre-tax income thereby increasing the
effective tax rate in the prior year period.
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 nine months ended
March 31, 1998, the Bank made a dividend payment of $7.0 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.
On February 19, 1998, the Company announced the completion of its fifth stock
repurchase program. It repurchased 440,973 shares at an aggregate cost of
approximately $13.4 million. On January 12, 1998, the Board of Directors
approved the Company's sixth stock repurchase plan. The Company has been
authorized by its Board of Directors to repurchase up to 500,000 of the
Company's outstanding shares during the next twelve months. As of March 31,
1998, 10,000 common shares have been repurchased under the sixth stock
repurchase plan. For the nine months ended March 31, 1998, the Company
repurchased 370,973 shares for a total cost of $11.9 million. As of March 31,
1998, the Company's cumulative total of treasury shares (net of reissues for
stock options exercised) was 1,123,094 at an aggregate cost of $21.2 million.
On March 18, 1998, the Board of Directors declared a regular cash dividend of
$0.18 per common share for the quarter ending March 31, 1998, an increase of
$0.02 or 12.5% from the regular cash dividend paid for the second quarter of
fiscal year 1998. The dividend is payable on April 17, 1998 to stockholders of
record on April 3, 1998.
On April 29, 1998, the Company announced the completion of a $50 million private
placement of 8.17% capital securities due May 1, 2028. The securities were
issued by the Company's recently formed unit, Reliance Capital Trust I. The
securities were sold in an offering under Rule 144A and Regulation D of the
Securities Act of 1933. Proceeds of the issue are intended to be invested by
Reliance Capital Trust I in junior subordinated debentures issued by the
Company. The Capital Securities are guaranteed by the Company. Net proceeds from
the sale of the debentures will be used for general corporate purposes
The Bank is required to maintain an average daily balance of liquid assets as a
percentage of net withdrawable deposit accounts plus short-term borrowings as
defined by OTS regulations. This liquidity requirement was 5.0% for fiscal 1997,
but is subject to change from time to time by the OTS to any amount within the
range of 4.0% to 10.0% depending on economic conditions and the savings flows of
member institutions. During the quarter ended December 31, 1997, the minimum
required liquidity ratio was changed to 4.0%. The Bank's liquidity ratio
averaged 6.95% for the nine months ended March 31, 1998.
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, 1998,
assets qualifying for liquidity, including cash, US government obligations and
other eligible securities, totalled $294.8 million.
18
The Bank's primary sources of funds are principal and interest payments on
loans, mortgage-backed securities and investment securities, deposits, advances
from the FHLB-NY, borrowings under reverse repurchase agreements and sales of
mortgage-backed securities and loans. 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. During the nine months ended March 31, 1998, principal payments
on loans and mortgage-backed securities totalled $146.7 million and $216.1
million, respectively, as compared to $101.9 million and $87.6 million,
respectively, in the prior year period. In addition, during the nine months
ended March 31, 1998, the Bank sold $152.4 million of mortgage-backed
securities. At March 31, 1998, borrowings from the FHLB-NY and reverse
repurchase agreements totalled $360.3 million, an increase of $8.4 million, from
$351.9 million at June 30, 1997. Deposits increased $156.9 million to $1.6
billion during the nine months ended March 31, 1998.
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, 1998, the Bank originated and
purchased mortgage loans and consumer loans in the amount of $63.2 million and
$36.2 million, respectively. During the nine months ended March 31, 1998, the
Bank purchased $402.7 million of mortgage-backed securities of which $335.5
million were classified as available-for-sale and $67.2 million were classified
as held-to-maturity.
At March 31, 1998, the Bank had outstanding loan commitments of $24.9 million,
open home equity lines of credit of $55.0 million and $21.6 million of
commercial lines of credit. The Bank anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificates
of deposit which are scheduled to mature in one year or less from March 31, 1998
totalled $710.1 million. Management believes that a significant portion of such
deposits will remain with the Bank.
At March 31, 1998, the Bank exceeded each of the OTS capital requirements. The
Bank's tangible, core, and risked-based ratios were 6.00%, 6.00% and 15.32%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
The Year 2000 Issue
The Year 2000 Issue centers on the inability of computer systems to recognize
the year 2000. Many existing computer programs and systems were originally
programmed with six digit dates that provided only two digits to identify the
calendar year in the date field, without considering the upcoming change in the
century. With the impending millennium, these programs and computers will
recognize "00" as the year 1900 rather than the year 2000. Like most financial
service providers, the Company and its operations may be significantly affected
by the Year 2000 Issue due to the nature of financial information. Software,
hardware, and equipment both within and outside the Company's direct control and
with whom the Company electronically or operationally interfaces (e.g. third
party vendors providing data processing, information system management,
maintenance of computer systems, and credit bureau information) are likely to be
affected. Furthermore, if computer systems are not adequately changed to
identify the Year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on the date field
information, such as interest, payment or due dates and other operating
functions, will generate results which could be significantly misstated, and the
company could experience
19
a temporary inability to process transactions, send invoices or engage in
similar normal business activities. In addition, under certain circumstances,
failure to adequately address the Year 2000 Issue could adversely affect the
viability of the Company's suppliers and creditors and the creditworthiness of
its borrowers. Thus, if not adequately addressed, the Year 2000 Issue could
result in a significant adverse impact on the Company's products, services and
competitive condition.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue will be mitigated without causing a
material adverse impact on the operations of the Company. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have an impact on the operations of the Company. At this
time, management does not believe that the impact and any resulting costs will
be material.
Monitoring and managing the year 2000 project will result in additional direct
and indirect costs to the Company. Direct costs include potential charges by
third party software vendors for product enhancements, costs involved in testing
software products for year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products and implementing any necessary contingency plans. The
company does not believe that such costs will have a material effect on results
of operations. Both direct and indirect costs of addressing the Year 2000 Issue
will be charged to earnings as incurred. Such costs have not been material to
date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at June
30, 1997 in Exhibit 13.1 to the Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on September 29, 1997. There have been no
material changes in the Company's market risk at March 31, 1998 compared to June
30, 1997. The following is an update of the discussion provided therein:
General. The Company's largest component of market risk continues to be interest
rate risk. Virtually all of this risk continues to reside at the Bank level. The
Bank still is not subject to foreign currency exchange or commodity price risk.
At March 31, 1998, neither the Company nor the Bank owned any trading assets,
nor did they utilize hedging transactions such as interest rate swaps and caps.
Assets, Deposit Liabilities and Wholesale Funds. There has been no material
change in the composition of assets, deposit liabilities and wholesale funds
from June 30, 1997 to March 31, 1998.
GAP Analysis. The one-year cumulative interest sensitivity gap as a percentage
of total assets falls within 6% of the level at June 30, 1997 utilizing the same
assumptions as at June 30, 1997.
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
20
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 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.
At March 31, 1998, 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 $189.2 million , or (8.67)% of total assets at March 31,
1998 as compared to a negative gap of $55.6 million, or (2.82)% of total assets
at June 30, 1997 and a negative gap of $7.3 million or (0.38)%, at March 31,
1997. The prepayment rates for mortgage loans, mortgage-backed securities and
consumer loans are based upon the Bank's historical performance.
Interest Rate Risk Compliance. The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at June 30, 1997. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value at March 31, 1998, compared to June 30, 1997, and the projected changes
continue to fall within the board approved limits at all levels of potential
interest rate volatility.
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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
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.
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(b) Reports on Form 8-K
1) The Company filed Form 8-K on April 16, 1998,
announcing the Company's third quarter fiscal year
1998 earnings result.
2) The Company filed Form 8-K on March 18, 1998,
announcing an increase in the third quarter cash
dividend for fiscal year 1998 to $0.18 per common
share.
3) The Company filed Form 8-K on February 19, 1998
announcing the completion of its fifth stock
repurchase program.
4) The Company filed Form 8-K on January 20, 1998,
which included a copy of the Company's press release
dated January 12, 1998 announcing its sixth stock
repurchase program.
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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 A. Nielsen 05/13/98 /s/ Paul D. Hagan 05/13/98
- ----------------------- -------- ------------------------ --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
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