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 September 30, 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
requirements for the past 90 days. Yes [ X ] No [ ]
As of November 13, 1998, there were 8,686,844 shares of common stock, $.01 par
value, outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Consolidated Statements of Condition at September 30, 1998 and
June 30, 1998 (Unaudited)
Consolidated Statements of Income for the Three Months Ended
September 30, 1998 and 1997 (Unaudited)
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 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 and Use of Proceeds
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)
September 30, June 30,
Assets 1998 1998
- ------ ------ -------
Cash and due from banks...................................................................... $ 39,504 $ 37,596
Money market investments..................................................................... -- 9,500
Debt and equity securities available-for-sale................................................ 120,075 134,907
Debt and equity securities held-to-maturity (with estimated
market values of $40,543 and $40,509, respectively)...................................... 40,193 40,189
Mortgage-backed securities available-for-sale................................................ 934,341 940,347
Mortgage-backed securities held-to-maturity (with estimated
market values of $289,229 and $252,332, respectively)..................................... 283,094 249,259
Loans receivable:
Mortgage loans.......................................................................... 795,669 790,951
Commercial loans........................................................................ 52,963 49,887
Consumer and other loans................................................................ 134,748 137,900
Less allowance for loan losses........................................................ (9,085) (8,941)
--------- ---------
Loans receivable, net........................................................... 974,295 969,797
Accrued interest receivable, net............................................................. 15,412 14,958
Office properties and equipment, net......................................................... 15,249 15,436
Prepaid expenses and other assets............................................................ 10,155 11,732
Mortgage servicing rights.................................................................... 2,116 2,317
Excess of cost over fair value of net assets acquired........................................ 57,795 58,936
Real estate owned, net....................................................................... 957 755
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Total assets.................................................................... $ 2,493,186 $ 2,485,729
========= =========
Liabilities and Stockholders' Equity
Deposits..................................................................................... $ 1,658,582 $ 1,628,298
Borrowed Funds............................................................................... 606,452 630,206
Advance payments by borrowers for taxes and insurance........................................ 13,037 9,806
Accrued expenses and other liabilities....................................................... 29,560 22,555
-------- ---------
Total liabilities............................................................... 2,307,631 2,290,865
--------- ---------
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; 8,983,938 and 9,564,988 outstanding, respectively............................ 108 108
Additional paid-in capital................................................................... 119,058 117,909
Retained earnings, substantially restricted.................................................. 105,530 102,305
Accumulated other comprehensive income:
Net unrealized appreciation on securities available-for-sale, net of taxes................ 5,416 4,212
Less:
Unallocated common stock held by ESOP........................................................ (4,347) (4,554)
Unearned common stock held by RRP............................................................ (501) (713)
Common stock held by SERP (at cost).......................................................... (373) (373)
Treasury stock, at cost (1,766,882 and 1,185,832 shares, respectively)....................... (39,336) (24,030)
-------- --------
Total stockholders' equity.............................................................. 185,555 194,864
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Total liabilities and stockholders' equity....................................... $ 2,493,186 $ 2,485,729
========= =========
See accompanying notes to unaudited consolidated financial statements.
2
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
September 30,
1998 1997
---- ----
Interest income:
First mortgage loans...................................................................... $ 15,718 $ 15,747
Commercial loans.......................................................................... 1,392 --
Consumer and other loans.................................................................. 2,925 3,026
Mortgage-backed securities................................................................ 19,724 15,983
Money market investments.................................................................. 163 116
Debt and equity securities................................................................ 2,946 1,311
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Total interest income.................................................................. 42,868 36,183
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Interest expense:
Deposits.................................................................................. 16,635 14,964
Borrowed funds............................................................................ 9,030 5,205
------ -------
Total interest expense................................................................. 25,665 20,169
------ -------
Net interest income before provision for loan losses................................... 17,203 16,014
Provision for loan losses................................................................. 150 900
------- --------
Net interest income after provision for loan losses.................................... 17,053 15,114
------ -------
Non-interest income:
Loan fees and service charges............................................................. 160 223
Other operating income.................................................................... 1,013 679
Income from Money Centers................................................................. 632 --
Condemnation award on joint venture....................................................... -- 1,483
Net gain (loss) on securities............................................................. 66 (122)
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Total non-interest income.............................................................. 1,871 2,263
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Non-interest expense:
Compensation and benefits................................................................. 5,286 4,521
Occupancy and equipment................................................................... 1,775 1,459
Federal deposit insurance premiums........................................................ 228 221
Advertising............................................................................... 268 396
Other operating expenses.................................................................. 1,570 1,450
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Total general and administrative expenses.............................................. 9,127 8,047
Real estate operations, net............................................................... 87 225
Amortization of excess of cost over fair value of net assets acquired..................... 1,140 846
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Total non-interest expense................................................................ 10,354 9,118
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Income before income taxes................................................................... 8,570 8,259
Income tax expense .......................................................................... 3,799 3,518
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Net income................................................................................... $ 4,771 $ 4,741
===== =====
Net income per common share:
Basic....................................................................... $ 0.53 $ 0.58
==== ====
Diluted..................................................................... $ 0.50 $ 0.54
==== ====
See accompanying notes to unaudited consolidated financial statements.
3
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended
September 30,
1998 1997
---- ----
Cash flows from operating activities: (Unaudited)
Net income............................................................................. $ 4,771 $ 4,741
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses.............................................................. 150 900
Provision for losses on real estate owned.............................................. 35 130
Amortization of premiums, net.......................................................... 595 238
Amortization relating to allocation and earned portion of stock plans.................. 913 888
Amortization of excess of cost over fair value of net assets acquired.................. 1,140 846
Amortization of mortgage servicing rights.............................................. 201 139
Depreciation and amortization.......................................................... 451 363
Net (gain) loss on securities.......................................................... (66) 122
Net gain on loans sold................................................................. (32) (1)
Proceeds from loans sold............................................................... 6,184 1,151
Net gain on sale of real estate owned.................................................. -- 4
Increase in accrued interest receivable, net........................................... (454) (805)
Decrease in prepaid expenses and other assets.......................................... 1,892 2,206
Increase in accrued expenses and other liabilities..................................... 6,680 4,118
------ ------
Net cash provided by operating activities.......................................... 22,460 15,040
------ ------
Cash flows from investing activities:
Originated and purchased loans, net of principal repayments............................ (11,053) (2,472)
Purchases of mortgage-backed securities available-for-sale............................. (194,362) (169,383)
Proceeds from sales of mortgage-backed securities available-for-sale................... 115,705 83,994
Purchases of mortgage-backed securities held-to-maturity............................... (55,208) (21,027)
Principal repayments from mortgage-backed securities................................... 110,897 43,841
Purchases of debt securities available-for-sale........................................ (2,000) (9,994)
Proceeds from calls and maturities of debt securities.................................. 12,195 10,000
Proceeds from sales of debt securities available-for-sale.............................. 1,292 2,699
Purchases of office properties and equipment........................................... (278) (336)
Proceeds from sales of real estate owned............................................... -- 430
-------- -------
Net cash used in investing activities.............................................. (22,812) (62,248)
-------- --------
Cash flows from financing activities:
Increase in deposits................................................................... 30,399 17,581
Increase in advance payments by borrowers for taxes and insurance...................... 3,231 4,804
Proceeds from FHLB advances............................................................ 99,700 15,200
Repayment of FHLB advances........................................................... (45,136) --
Proceeds from reverse repurchase agreements............................................ 180,132 294,806
Repayment of reverse repurchase agreements............................................. (258,450) (286,067)
Purchases of treasury stock............................................................ (15,621) (2,242)
Net proceeds from issuance of common stock upon exercise of stock options.............. 145 167
Dividends paid......................................................................... (1,640) (1,312)
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Net cash (used in) provided by financing activities................................. (7,240) 42,937
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Net decrease in cash and cash equivalents.............................................. (7,592) (4,271)
Cash and cash equivalents at beginning of period....................................... 47,096 30,665
------- -------
Cash and cash equivalents at end of period............................................. $ 39,504 $ 26,394
====== ======
See accompanying notes to unaudited consolidated financial statements.
4
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Unaudited)
(Dollars in thousands)
Three Months Ended
September 30,
1998 1997
---- ----
(Unaudited)
Supplemental disclosures of cash flow information
Cash paid during the three months ended for:
Interest............................................................................... $ 23,158 $ 19,791
====== ======
Income taxes........................................................................... $ -- $ --
====== ======
Non-cash investing activities:
Transfers from loans to real estate owned.............................................. $ 237 $ 1,991
====== ======
See accompanying notes to unaudited consolidated financial statements.
5
RELIANCE BANCORP, INC. and SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Reliance Bancorp, Inc. (the "Company"), its direct
wholly-owned subsidiary, Reliance Federal Savings Bank (the "Bank") and
the subsidiaries of the Bank.
The unaudited consolidated financial statements included herein reflect
all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the three
months ended September 30, 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 1998 Annual Report on Form 10-K.
2. IMPACT OF NEW ACCOUNTING STANDARDS
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, "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". SFAS No. 132 revises employer's disclosures about pension
and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. Rather, 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 Statements No. 87, No.
88, and No. 106, were issued. The statement suggests combined formats
for presentation and restatement for earlier periods of pension and
other postretirement benefit disclosures. As the requirements of SFAS
No. 132 are disclosure-related, its implementation will have no impact
on the Company's financial condition or results of operations. SFAS No.
132 is effective for fiscal years beginning after December 15, 1997.
6
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective prospectively
for the Company on July 1, 1999. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the Statement, entities
are required to carry all derivative instruments in the statement of
financial position at fair value. The accounting for changes in the
fair value (i.e., gains or losses) of a derivative instrument depends
on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash
flows or foreign currencies. If the hedge exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized
in earnings in the period of change together with the offsetting loss
or gain on the hedge item attributable to the risk being hedged. If the
hedged exposure is a cash flow exposure, the effective portion of the
gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss is
reported in earnings immediately. Accounting for foreign currency
hedges is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the
gain or loss is recognized in earnings in the period of change. The
Company has not determined the impact that SFAS No.
133 will have on its financial statements.
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). 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. The
Company adopted the provisions of SFAS No. 130 during the first quarter
of fiscal 1999 and as such was required to (a) classify items of other
comprehensive income by their nature in a financial statement; (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section in the statement of financial condition and (c)
reclassify prior periods presented. As the requirements of SFAS No. 130
are disclosure-related, its implementation had no impact on the
Company's financial condition or results of operations.
7
Comprehensive income for the three months ended September 30, 1998 and
1997 is as follows:
Three Months Ended
September 30,
1998 1997
---- ----
(Unaudited)
Net Income................................................................. $ 4,771 $4,741
Other comprehensive income, net of taxes:
Net unrealized appreciation on securities available-for-sale
net of reclassification adjustment.................................... 1,204 3,008
----- -----
Comprehensive income................................................. $5,975 $7,749
===== =====
4. SUBSEQUENT EVENT
On November 6, 1998 the Company announced that it has completed its
previously announced seventh stock repurchase program. The Company
repurchased 500,000 shares of its outstanding common stock, par value
$.01 per share, in open market transactions at an aggregate cost of
approximately $13.9 million. Upon settlement of the last transaction on
or about November 12, 1998, there will be 8,686,844 shares of Reliance
Bancorp, Inc. common stock outstanding.
The Company also announced that its Board of Directors approved the
Company's eighth 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. The repurchase will be made in open-market or
privately negotiated transactions, subject to the availability of
stock, acceptable pricing of the stock and such timing limitations as
may be appropriate.
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 and is the holding company for Reliance Federal Savings Bank
(the "Bank"). On March 31, 1994, the Company issued 10,750,820 shares of common
stock at $10.00 per share raising total net proceeds of $103.6 million of which
$51.8 million was retained by the Company with the remaining net proceeds being
used by the Company to purchase all of the outstanding stock of the Bank. As of
September 30, 1998, the Company had 8,983,938 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. In addition, the Company
completed the acquisition Bank of Westbury, a Federal Savings Bank, in August
1995, Sunrise Bancorp, Inc. in January 1996 and Continental bank, a commercial
bank, in October 1997, which were all merged 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. In
addition, during periods in which the demand for loans which meet the Bank's
underwriting and interest rate risk standards and policies is lower than the
amount of funds available for investment, the Bank invests in mortgage-backed
securities, securities issued by the U.S. Government and agencies thereof and
other investments permitted by federal laws and regulations. The 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 interest income
from its securities investments and earnings of the Bank. The Bank's results of
operations are primarily dependent on its net interest income, which is the
difference between the interest earned on its assets, primarily its loan and
securities portfolios, and its cost of funds, which consists of the interest
paid on its deposits and borrowings. The Bank's net income also is affected by
its provision for loan losses as well as non-interest income, general and
administrative expenses, other non-interest expenses, and income tax expense.
General and administrative expenses consists primarily of compensation and
benefits, occupancy expenses, federal deposit insurance premiums, advertising
expense and other general and administrative expenses. Other non-interest
expense consists of real estate operations, net, and amortization of excess of
cost over fair value of net assets acquired. The earnings of the Company and the
Bank 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
Financial Condition
As of September 30, 1998, total assets were $2.5 billion, an increase of $7.5
million from June 30, 1998. Mortgage-backed securities increased $27.8 million,
or 2.3%, during the quarter ended September 30, 1998, primarily due to increased
purchases of private label collateralized mortgage obligations offset by
amortization and prepayments. Debt and equity securities decreased $14.8
million, or 8.5%, from $175.1 million at June 30, 1998 to $160.3 million at
September 30, 1998 as a result of sales and calls of debt securities.
Deposits increased $30.3 million, or 1.9%, during the quarter ended September
30, 1998 as a result of growth in new certificate of deposit products while
borrowings decreased $23.8 million, or 3.8%, from $630.2 million at June 30,
1998 to $606.4 million at September 30, 1998.
Stockholders' equity decreased $9.3 million, or 4.8%, from $194.9 million at
June 30, 1998 to $185.6 million at September 30, 1998 primarily due to the
purchase of treasury stock. Treasury stock increased from $24.0 million at June
30, 1998 to $39.3 million at September 30, 1998 as a result of 595,500 shares
repurchased during the quarter ended September 30, 1998.
Non-performing assets
Non-performing loans totalled $9.1 million, or 0.92 % of total loans, at
September 30, 1998, as compared to $9.3 million, or 0.95% of total loans, at
June 30, 1998. Non-performing loans at September 30, 1998 were comprised of $6.1
million of loans secured by one- to four-family residences, $2.2 million of
commercial real estate loans, $532,000 of commercial loans and $264,000 of
guaranteed student and other loans.
For the quarter ended September 30, 1998, the Company's loan loss provision was
$150,000 as compared to $150,000 in the prior linked quarter ended June 30, 1998
and $900,000 in the prior year quarter. The Company's allowance for loan losses
totalled $9.1 million at September 30, 1998 as compared to $8.9 million at June
30, 1998 which represents a ratio of allowance for loan losses to non-performing
loans and to total loans of 100.25% and 0.92%, respectively, and 96.12% and
0.91%, respectively. For the three months ended September 30, 1998, the Company
experienced net charge-offs of $6,000. Management believes the allowance for
loan losses at September 30, 1998 is adequate and sufficient reserves are
presently maintained to cover losses on non-performing loans.
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.
10
September 30, June 30,
1998 1998
---- ----
(Dollars in thousands)
Non-accrual mortgage loans delinquent more than 90 days.................... $ 7,891 $ 8,218
Non-accrual commercial loans delinquent more than 90 days.................. 532 567
Non-accrual other loans delinquent more than 90 days....................... 377 316
----- -----
Total non-accrual loans delinquent more than 90 days................... 8,800 9,101
Loans 90 days or more delinquent and still accruing........................ 262 201
----- -----
Total non-performing loans................................................. 9,062 9,302
Total foreclosed real estate, net of related allowance for losses.......... 957 755
---- -----
Total non-performing assets................................................ $10,019 $10,057
====== ======
Non-performing loans to total loans........................................ 0.92% 0.95%
Non-performing assets to total assets...................................... 0.40% 0.40%
Allowance for loan losses to non-performing loans.......................... 100.25% 96.12%
Allowance for loan losses to total loans................................... 0.92% 0.91%
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 loans
("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.
The Company has attempted to limit its exposure to interest rate risk through
the origination and purchase of 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 September 30, 1998, 789.3 million, or 34.1%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $795.7 million, of which $422.2 million, or
53.1%, were adjustable-rate loans and $373.4 million, or 46.9%, were fixed-rate
loans. The Bank's commercial loan portfolio totalled $53.0 million, of which
$45.3 million, or 85.5%, were adjustable-rate loans and $7.7 million, or 14.5%,
were fixed-rate loans. In addition, at
11
September 30, 1998, the Bank's consumer loan portfolio totalled $134.7 million,
of which $107.3 million, or 79.7%, were adjustable-rate home-equity lines of
credit and guaranteed student loans and $27.4 million, or 20.3%, were fixed-rate
home-equity and other consumer loans.
At September 30, 1998, the mortgage-backed securities portfolio totalled $1.2
billion, of which $214.5 million, or 17.6%, of the mortgage-backed portfolio
were adjustable-rate securities and $1.0 billion, or 82.4%, were fixed-rate
securities. The mortgage-backed securities portfolio classified as
available-for-sale totalled $934.3 million of which $145.2 million, or 15.5%,
were adjustable rate securities and $789.1 million, or 84.5%, were fixed-rate
securities. The mortgage-backed securities portfolio classified as held-
to-maturity totalled $283.1 million of which $69.3 million, or 24.5%, were
adjustable rate securities and $213.8 million, or 75.5%, were fixed-rate
securities.
During the three months ended September 30, 1998, the Bank purchased
approximately $249.6 million of agency and private label collateralized mortgage
obligations. In addition, during the three months ended September 30, 1998 the
Bank sold approximately $51.9 million of 30 year mortgage-backed securities,
$43.8 million of agency and private label collateralized mortgage obligations
and $20.0 million of adjustable-rate securities. The Bank has continued to
reposition its securities portfolio by purchasing agency and private label
collateralized 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 and FHLB-NY advances.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and 1997.
General. Net income for the three months ended September 30, 1998 was $4.8
million, an increase of $30,000, or 0.63%, from $4.7 million in the prior year
period. Net income for the quarter ended September 30, 1998 represents an
annualized return on average assets and average tangible equity of 0.77% and
14.70%, respectively, as compared to 0.95% and 16.43%, respectively, in the
prior year period.
Interest Income. Interest income increased $6.7 million, or 18.5%, from $36.2
million for the three months ended September 30, 1997, to $42.9 million for the
three months ended September 30, 1998. The increase resulted from an increase of
$466.3 million, or 24.7%, in the average balance of interest-earning assets from
$1.9 billion for the 1997 period to $2.4 billion for the 1998 period, offset by
a decrease in the average yield of interest-earning assets from 7.66% for the
quarter ended September 30, 1997 to 7.28% for the quarter ended September 30,
1998. The growth in interest-earning assets was attributable to assets acquired
from Continental Bank and increased purchases of mortgage-backed securities. For
the three months ended September 30, 1998, interest income from mortgage-backed
securities increased $3.7 million, or 23.4%, from $16.0 million for the 1997
period to $19.7 million for the 1998 period, primarily due to an increase of
$301.9 million, or 33.4%, in the average balance of mortgage-backed securities
offset by a decrease in the average yield on these securities of 53 basis points
from 7.11% for the 1997 period to 6.58% for the 1998 period. The increase in the
average balance of mortgage-backed securities is primarily due to increased
purchases of private label collateralized 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
12
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 September 30,
1998, was $25.7 million, an increase of $5.5 million, or 27.2%, from $20.2
million for the three months ended September 30, 1997. The increase in interest
expense is related to a $423.9 million, or 23.8%, increase in the average
balance of interest-bearing liabilities, from $1.8 billion for the 1997 period
to $2.2 billion for the 1998 period, and a 13 basis point increase in the cost
of interest-bearing liabilities, from 4.53% for the 1997 period to 4.66% 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 September 30, 1998. Interest expense on deposits increased $1.7 million,
or 11.3%, from $14.9 million for the 1997 period to $16.6 million for the 1998
period, primarily as a result of a $194.8 million, or 13.4%, increase in the
average balance of deposits offset by a 1 basis point decrease in the average
cost of such deposits, from 4.20% in the 1997 period to 4.19% in the 1998
period. Interest expense on borrowed funds increased $3.8 million, or 73.5%,
from $5.2 million for the 1997 period to $9.0 million for the 1998 period,
primarily due to a $259.2 million, or 73.2%, increase in the average balance of
borrowings from $353.9 million in the 1997 period to $613.1 million for the 1998
period, and a 1 basis point increase in the average cost of such borrowings,
from 5.88% in the 1997 period to 5.89% 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 $17.2 million for the
quarter ended September 30, 1998, an increase of $1.2 million, or 7.4%, from
$16.0 million for the quarter ended September 30, 1997. The increase in net
interest income was attributable to the growth in average interest-earning
assets to $2.4 billion for the quarter ended September 30, 1998 from $1.9
billion for the quarter ended September 30, 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 flat
interest rate yield curve and the increased cost of interest-bearing
liabilities, the Bank's net interest spread declined from 3.13% for the quarter
ended September 30, 1997 to 2.62% for the quarter ended September 30, 1998 and
its net interest margin declined from 3.39% in the 1997 period to 2.92% in the
1998 period. For the quarter ended September 30, 1998, the yield on
interest-earning assets was 7.28% and the cost of interest-bearing liabilities
was 4.66%, as compared to 7.66% and 4.53%, respectively, for the quarter ended
September 30, 1997.
Provision for Loan Losses. For the quarter ended September 30, 1998, the
Company's loan loss provision was $150,000 as compared to $900,000 in the prior
year quarter. The lower provision for loan losses in this quarter primarily
results from a decrease in non-performing loans and relatively stable loan
growth. The provision for the quarter ended September 30, 1997, reflects
management's decision to increase loan loss coverage ratios on non-performing
loans in relation to total loans and non-performing loans. The Company's
allowance for loan losses totaled $9.1 million at September 30, 1998 as compared
to $8.9 million at June 30, 1998, which represents a ratio of allowance for loan
losses to non-performing loans and to total loans of 100.25% and 0.92%,
respectively, and 96.12% and 0.91%, respectively. For the three months ended
September 30, 1998, the Company experienced net charge-offs of $6,000.
Management believes that based on information currently known to management, the
provision for possible loan losses and the allowance for possible loan losses
are currently reasonable and adequate to cover potential losses
13
reasonably expected in the existing loan portfolio. While management estimates
loan losses using the best available information, no assurance can be given that
future additions to the allowance will not be necessary based on changes in
economic and real estate market conditions, further information obtained
regarding problem loans, identification of additional problem loans and other
factors, both within and outside management's control.
Non-Interest Income. Non-interest income decreased $392,000, or 17.3%, from $2.3
million in the prior year quarter to $1.9 million in the quarter ended September
30, 1998. The decrease is mainly the result of a $1.5 million gain recognized in
the prior year quarter from a condemnation award on a joint venture. Offsetting
this decrease was increased 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 $10.4 million for the
quarter ended September 30, 1998, a $1.2 million, or 13.6%, increase from $9.1
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 September 30, 1998,
compensation and benefits expense increased to $5.3 million, an increase of
$765,000, or 16.9%, from $4.5 million for the quarter ended September 30, 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 September
30, 1998, ESOP and RRP expenses were collectively $913,000 as compared to
$888,000 recorded in the prior year quarter. Occupancy and equipment expense
increased $316,000, or 21.7%, from $1.5 million recorded for the quarter ended
September 30, 1997 to $1.8 million for the quarter ended September 30, 1998, due
to the addition of two banking offices and five check cashing facilities.
Income Tax Expense. Income tax expense was $3.8 million, for the three months
ended September 30, 1998 an increase of $281,000, or 8.0%, from $3.5 million for
the three months ended September 30, 1997, representing effective income tax
rates of 44.3% and 42.6%, 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.
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
September 30, 1998, the Bank made a dividend payment of $8.0 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 September 1, 1998, the Company announced the completion of its sixth stock
repurchase program and the approval by its Board of Directors for a seventh
stock repurchase plan to repurchase up to 500,000 of the Company's outstanding
shares. As of October 2, 1998, the Company has repurchased 401,500 shares under
this repurchase program. During the quarter ended September 30, 1998, the
Company repurchased 595,500 shares at an aggregate cost of $15.6 million.
14
On September 16, 1998, the Board of Directors declared a regular cash dividend
of $0.18 per common share for the quarter ended September 30, 1998. The dividend
was payable on October 16, 1998 to stockholders of record on October 2, 1998.
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. The minimum required liquidity is currently 4.0%.
The Bank's liquidity ratio averaged 4.6% for the quarter ended September 30,
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 September 30, 1998,
assets qualifying for liquidity, including cash, US government obligations and
other eligible securities, totalled $197.4 million.
The Bank's primary sources of funds are principal and interest payments on
loans, mortgage-backed securities and debt and equity securities, deposits,
advances from the FHLB-NY, borrowings under reverse repurchase agreements and
sales of loans. While maturities and scheduled amortization of loans,
mortgage-backed securities and debt and equity 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 three months ended September 30, 1998, principal payments on loans
and mortgage-backed securities totalled $77.1 million and $110.9 million,
respectively, as compared to $31.3 million and $43.8 million, respectively, in
the prior year period. In addition, during the three months ended September 30,
1998, the Bank sold $115.7 million of mortgage-backed securities. At September
30, 1998, advances from the FHLB-NY and borrowings under reverse repurchase
agreements and capital trust securities totalled $606.5 million, a decrease of
$23.8 million, from $630.2 million at June 30, 1998. Deposits increased $30.3
million, or 1.9%, during the quarter ended September 30, 1998 as a result of
growth in new certificate of deposit products.
The primary investment activity of the Bank is the origination of mortgage,
commercial and consumer loans, and the purchase of mortgage loans and
mortgage-backed securities. During the three months ended September 30, 1998,
the Bank originated and purchased mortgage, commercial and consumer loans in the
amount of $36.9 million, $41.7 million and $9.6 million, respectively. During
the three months ended September 30, 1998, the Bank purchased $249.6 million of
mortgage-backed securities of which $194.4 million were classified as
available-for-sale and $55.2 million were classified as held-to-maturity.
At September 30, 1998, the Bank had outstanding loan commitments of $39.2
million, open home equity lines of credit of $52.8 million and $18.8 million of
open 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
September 30, 1998 totalled $842.1 million. Management believes that a
significant portion of such deposits will remain with the Bank.
At September 30, 1998, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 6.05%, 6.05% and 15.18%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
15
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 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 adopted a "Year 2000 Policy" and is in the process of reviewing
its internal systems. The Company has begun testing all computer software
programs and hardware to determine Year 2000 compliance. Further, the Company
has purchased Year 2000 compliant software from EDS for use with the mainframe
computer. The Company believes that with existing modifications to existing
software and conversions to new software and hardware where necessary, the Year
2000 problem will be mitigated without causing a material adverse impact on the
operations of the Company. The Company expects to complete testing and
implementation of changes in the second quarter of calendar 1999.
The Company has initiated formal written communications with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failures to remediate their own Year 2000 Issue.
Significant suppliers have been requested to certify that they are Year 2000
compliant or, if not, to provide their plans to become compliant. Management of
the Company receives monthly updates as to which significant suppliers are Year
2000 compliant and follow-up with all significant suppliers is being conducted
according to plan. 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.
16
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, however the Company expects to incur approximately $200,000 in
Year 2000 related expenses.
Presently, the Company does not have a formal contingency plan in the event that
its computer software and hardware vendors are not Year 2000 compliant. Based
upon discussions with the Company's computer software and hardware vendors,
including its data processing vendors they have indicated that they are
performing testing and will be Year 2000 compliant. However, the Company will
monitor the progress of its vendors to determine if a formal contingency plan is
necessary and take all steps necessary to become Year 2000 compliant with all
computer software programs and hardware.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this Quarterly Report includes certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at June
30, 1998 in Exhibit 13.1 to the Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on September 28, 1998. There have been no
material changes in the Company's market risk at September 30, 1998 as compared
to June 30, 1998. 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 September 30, 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, 1998 to September 30, 1998.
GAP Analysis. The one-year cumulative interest sensitivity gap as a percentage
of total assets falls within 11% of the level at June 30, 1998 utilizing similar
assumptions as at June 30, 1998.
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
17
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered positive when
the amount of interest-earning assets maturing or repricing exceeds the amount
of interest-bearing liabilities maturing or repricing within the same period. A
gap is considered negative when the amount of interest-bearing liabilities
maturing or repricing exceed the amount of interest-bearing assets maturing or
repricing within the same period. Accordingly, a positive gap may enhance net
interest income in a rising rate environment and reduce net interest income in 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 September 30, 1998, the Company'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 $237.4 million , or (9.52%) of total
assets at September 30, 1998 as compared to a negative gap of $213.7 million, or
(8.60)% of total assets at June 30, 1998. 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, 1998. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value at September 30, 1998, compared to June 30, 1998, and the projected
changes continue to fall within the board approved limits at all levels of
potential interest rate volatility.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Holding Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
Item 2. Changes in Securities and Use of Proceeds.
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 of Reliance Bancorp, Inc. (1)
3.2 Reliance Bancorp, Inc. By-Laws. (1)
11.0 Statement Re: Computation of Per Share Earnings.
27.0 Financial Data Schedule. (2)
- -------------------
(1) Incorporated by reference into this document from the Exhibits filed
with the Registration Statement of Form S-1, Registration No. 33-72476.
(2) Submitted only with filing in electronic format.
19
b) Reports on Form 8-K
1) The Company filed Form 8-K on September 3, 1998,
which included a copy of the Company's press release
dated September 1, 1998 announcing the seventh stock
repurchase program and the completion of the sixth
stock repurchase program.
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reliance Bancorp, Inc.
----------------------
(Registrant)
/s/ Raymond A. Nielsen 11/16/98 /s/ Paul D. Hagan 11/16/98
- ---------------------- -------- ----------------- --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
21