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, 1999
Commission File Number: 0-23126
RELIANCE BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3187176
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(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
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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 10, 1999, there were 8,623,940 shares of common stock, $.01 par
value, outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Consolidated Statements of Condition at September 30, 1999 and
June 30, 1999 (Unaudited)
Consolidated Statements of Income for the Three Months Ended
September 30, 1999 and 1998 (Unaudited)
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1999 and 1998 (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,
1999 1999
---- ----
Assets
Cash and due from banks........................................................... $ 29,623 $ 33,255
Debt and equity securities available-for-sale..................................... 123,877 122,168
Debt and equity securities held-to-maturity (with estimated
market values of $48,702 and $28,840, respectively)............................ 48,835 28,835
Mortgage-backed securities available-for-sale..................................... 889,004 935,038
Mortgage-backed securities held-to-maturity (with estimated
market values of $256,806 and $252,233, respectively).......................... 260,844 255,917
Loans receivable:
Mortgage loans............................................................... 824,835 810,894
Commercial loans............................................................. 50,540 44,949
Consumer and other loans..................................................... 132,219 127,350
Less allowance for loan losses............................................. (9,068) (9,120)
-------- --------
Loans receivable, net................................................ 998,526 974,073
Accrued interest receivable, net.................................................. 14,148 13,095
Office properties and equipment, net.............................................. 17,779 16,368
Prepaid expenses and other assets................................................. 41,135 16,960
Mortgage servicing rights......................................................... 1,389 1,514
Excess of cost over fair value of net assets acquired............................. 53,232 54,373
Real estate owned, net............................................................ 507 177
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Total assets......................................................... $ 2,478,899 $ 2,451,773
========= =========
Liabilities and Stockholders' Equity
Deposits.......................................................................... $ 1,555,159 $ 1,549,419
Borrowed Funds.................................................................... 711,989 702,434
Advance payments by borrowers for taxes and insurance............................. 12,693 6,399
Accrued expenses and other liabilities............................................ 27,356 21,854
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Total liabilities.................................................... 2,307,197 2,280,106
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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; 8,589,490 and 8,586,210
outstanding, respectively..................................................... 108 108
Additional paid-in capital........................................................ 121,309 121,037
Retained earnings, substantially restricted....................................... 119,607 115,976
Accumulated other comprehensive income:
Net unrealized depreciation on securities
available-for-sale, net of taxes.............................................. (14,654) (10,546)
Less:
Unallocated common stock held by ESOP............................................. (3,519) (3,726)
Unearned common stock held by RRP................................................. (23) (66)
Common stock held by SERP (at cost)............................................... (551) (550)
Treasury stock, at cost (2,161,330 and 2,164,610 shares, respectively)............ (50,575) (50,566)
-------- --------
Total stockholders' equity................................................... 171,702 171,667
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Total liabilities and stockholders' equity............................ $ 2,478,899 $ 2,451,773
========= =========
2
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended
September 30,
1999 1998
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Interest income:
First mortgage loans........................................................... $ 15,814 $ 15,718
Commercial loans............................................................... 1,123 1,392
Consumer and other loans....................................................... 2,644 2,925
Mortgage-backed securities..................................................... 18,803 19,724
Money market investments....................................................... 35 163
Debt and equity securities..................................................... 2,903 2,946
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Total interest income....................................................... 41,322 42,868
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Interest expense:
Deposits....................................................................... 13,880 16,635
Borrowed funds................................................................. 9,993 9,030
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Total interest expense...................................................... 23,873 25,665
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Net interest income before provision for loan losses........................ 17,449 17,203
Provision for loan losses...................................................... -- 150
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Net interest income after provision for loan losses......................... 17,449 17,053
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Non-interest income:
Loan fees and service charges.................................................. 443 160
Other operating income......................................................... 1,272 1,013
Income from Money Centers...................................................... 723 632
Net gain on securities......................................................... -- 66
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Total non-interest income................................................... 2,438 1,871
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Non-interest expense:
Compensation and benefits...................................................... 5,267 5,286
Occupancy and equipment........................................................ 1,697 1,775
Federal deposit insurance premiums............................................. 230 228
Advertising.................................................................... 217 268
Other operating expenses....................................................... 1,868 1,570
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Total general and administrative expenses................................... 9,279 9,127
Real estate operations, net.................................................... 55 87
Amortization of excess of cost over fair value of net assets acquired.......... 1,141 1,140
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Total non-interest expense..................................................... 10,475 10,354
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Income before income taxes........................................................ 9,412 8,570
Income tax expense ............................................................... 4,030 3,799
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Net income........................................................................ $ 5,382 $ 4,771
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Net income per common share:
Basic............................................................ $ 0.65 $ 0.53
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Diluted.......................................................... $ 0.62 $ 0.50
==== ====
3
RELIANCE BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three months ended
September 30,
Cash flows from operating activities: 1999 1998
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Net income............................................................................. $ 5,382 $ 4,771
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses.............................................................. -- 150
Provision for losses on real estate owned.............................................. 29 35
Amortization of premiums, net.......................................................... 65 595
Amortization relating to allocation and earned portion of stock plans.................. 702 913
Amortization of excess of cost over fair value of net assets acquired.................. 1,141 1,140
Amortization of mortgage servicing rights.............................................. 125 201
Depreciation and amortization.......................................................... 350 451
Net gain on securities................................................................. -- (66)
Net gain on loans sold................................................................. (3) (32)
Proceeds from loans sold............................................................... 1,758 6,184
Net gain on sale of real estate owned.................................................. (1) --
Increase in accrued interest receivable, net........................................... (1,053) (454)
(Increase) decrease in prepaid expenses and other assets............................... (21,083) 1,892
Increase in accrued expenses and other liabilities..................................... 5,594 6,680
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Net cash provided by operating activities.......................................... (6,994) 22,460
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Cash flows from investing activities:
(Originated and purchased loans) net of principal repayments........................... (26,466) (11,053)
Purchases of mortgage-backed securities available-for-sale............................. (12,353) (194,362)
Proceeds from sales of mortgage-backed securities available-for-sale................... -- 115,705
Purchases of mortgage-backed securities held-to-maturity............................... (22,172) (55,208)
Principal repayments from mortgage-backed securities................................... 71,476 110,897
Purchases of debt securities available-for-sale........................................ (4,995) (2,000)
Purchases of debt securities held-to-maturity.......................................... (20,000) --
Proceeds from calls and maturities of debt securities.................................. -- 12,195
Proceeds from sales of debt securities available-for-sale.............................. -- 1,292
Purchases of office properties and equipment........................................... (1,777) (278)
Proceeds from sales of real estate owned............................................... 4 --
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Net cash used in investing activities.............................................. (16,283) (22,812)
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Cash flows from financing activities:
Increase in deposits................................................................... 5,853 30,399
Decrease in advance payments by borrowers for taxes and insurance...................... 6,294 3,231
Proceeds from FHLB advances............................................................ 215,943 99,700
Repayment of FHLB advances........................................................... (222,006) (45,136)
Proceeds from reverse repurchase agreements............................................ 283,722 180,132
Repayment of reverse repurchase agreements............................................. (269,104) (258,450)
Proceeds from other borrowings......................................................... 1,000 --
Purchases of treasury stock............................................................ (530) (15,621)
Net proceeds from issuance of common stock upon exercise of stock options.............. 223 145
Dividends paid......................................................................... (1,750) (1,640)
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Net cash provided by (used in) financing activities................................ 19,645 (7,240)
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Net decrease in cash and cash equivalents.............................................. (3,632) (7,592)
Cash and cash equivalents at beginning of period....................................... 33,255 47,096
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Cash and cash equivalents at end of period............................................. $ 29,623 $ 39,504
====== ======
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,
1999 1998
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Supplemental disclosures of cash flow information
Cash paid during the three months ended for:
Interest............................................................................... $ 22,369 $ 23,158
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Income taxes........................................................................... $ -- $ --
=== ===
Non-cash investing activities:
Transfers from loans to real estate owned.............................................. $ 363 $ 237
=== ===
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, 1999 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 1999 Annual Report on Form 10-K.
2. ACQUISITION OF RELIANCE BANCORP, INC. BY NORTH FORK
BANCORPORATION, INC.
On August 30, 1999, the Company announced that it had signed a
definitive Agreement and Plan of Merger, dated as of August 30, 1999,
with North Fork Bancorporation, Inc. NFB is the bank holding company
parent of North Fork Bank, a New York State chartered stock commercial
bank. The Merger Agreement provides, among other things, that Reliance
will merge with and into NFB, with NFB being the surviving corporation.
Pursuant to the Merger Agreement, each share of Reliance common stock,
par value $0.01 per share, issued and outstanding immediately prior to
the Effective Time will be converted into and become the right to
receive 2.0 shares of NFB common stock, par value $2.50 per share.
The Merger will be structured as a tax-free reorganization and will be
accounted under the purchase method of accounting. Consummation of the
Merger is subject to the satisfaction of certain customary conditions,
including approval of the Merger Agreement by the stockholders of
Reliance and approval of the appropriate regulatory agencies. Following
consummation of the Merger, the Bank will be merged with and into North
Fork Bank and Trust Company. It is anticipated that the Merger will be
completed in 2000.
Reliance has the right to terminate the Merger Agreement if the closing
price of NFB's shares decline beyond a specified price and index,
unless NFB elects to increase the Merger Consideration to be received
by Reliance's stockholders as set forth in the Merger Agreement.
The Merger Agreement also provides that options to purchase shares of
Reliance Common Stock under Reliance's stock option plans that are
outstanding at the Effective Time shall be converted into options to
purchase shares of NFB Common Stock in accordance with the procedure
set forth
6
in the Merger Agreement. In connection with the Merger Agreement,
Reliance granted to NFB a stock option pursuant to a Stock Option
Agreement, dated as of August 30, 1999, which, under certain defined
circumstances, would enable NFB to purchase up to 19.9% of Reliance's
issued and outstanding shares of common stock. The Stock Option
Agreement provides that the total profit receivable thereunder may not
exceed $17.4 million plus reasonable out-of-pocket expenses.
On October 29, 1999, the Company amended its definitive Agreement and
Plan of Merger. The amendments reflect modifications and clarifications
to the price-based termination provisions with regard to the
determination of the index group price. The amendments also reflect the
revision of the financial institutions group index to remove Dime
Bancorp, Inc. The Bank and North Fork Bank also executed the Subsidiary
Agreement and Plan of Merger, pursuant to which the Bank will merge
with and into North Fork Bank.
3. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No.133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition
and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative (that is, unrealized gains and
losses) depends on the intended use of the derivative and the resulting
designation. SFAS No. 133 is effective for fiscal quarters of fiscal
years beginning after June 15, 1999 and does not require restatement of
prior periods. In June 1999, the FASB issued SFAS No. 137, "Deferral of
Effective Date of SFAS No. 133", which defers the adoption of SFAS No.
133 by one year. Management of the Company believes the implementation
of SFAS No. 133 will not have a material impact on the Company's
financial condition or results of operations.
4. COMPREHENSIVE INCOME
The Company follows 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, 1999 and 1998 is
as follows:
Three Months Ended
September 30,
1999 1998
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(Unaudited)
Net income ......................................................................... $ 5,382 $ 4,771
Other comprehensive income, net of taxes:
Change in net unrealized (depreciation) appreciation on securities
available-for-sale net of reclassification adjustment................... (4,108) 1,204
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Comprehensive income................................................................ $ 1,274 $ 5,975
===== =====
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") and the subsidiaries of the Bank. 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 of 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. However, on August 30, 1999,
the Company and North Fork Bancorporation Inc. jointly announced that they had
signed a definitive merger agreement whereby North Fork Bancorporation, Inc.
would acquire Reliance Bancorp, Inc. in a stock-for-stock merger valued at
approximately $352 million. Each share of Reliance will be converted into a
fixed exchange ratio of 2 shares of North Fork common stock. On October 29,
1999, the Company amended its definitive Agreement and Plan of Merger. The
amendments reflect modifications and clarifications to the price-based
termination provisions with regard to the determination of the index group
price. The amendments also reflect the revision of the financial institutions
group index to remove Dime Bancorp, Inc. The Bank and North Fork Bank also
executed the Subsidiary Agreement and Plan of Merger, pursuant to which the Bank
will merge with and into North Fork 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, 1999, total assets were $2.5 billion, deposits were $1.6
billion and total stockholders' equity was $171.7 million. At September 30,
1999, the Company had 8,589,490 common shares outstanding with a tangible book
value per common share of $13.79.
Mortgage-backed securities available-for-sale decreased $46.0 million, or 5.2%,
from $935.0 million at June 30, 1999 to $889.0 at September 30, 1999 as the
company invested principal amortization into loans and debt and equity
securities Loans receivable, net increased $24.4 million, or 2.5%, from $974.1
million at June 30, 1999 to $998.5 at September 30, 1999 primarily as a result
of originations of multi-family loans.. Debt and equity securities
held-to-maturity increased $20.0 million, or 69.3%, from $28.8 million at June
30, 1999 to $48.8 million at September 30, 1999 as the bank invested cash flows
into shorter-term securities.
Deposits increased $5.7 million, or 0.37%, during the three months ended
September 30, 1999 as a result of growth in new certificate of deposit products.
Borrowings increased $9.6 million, or 1.4%, from $6702.4 million at June 30,
1999 to $712.0 million at September 30, 1999 as a result of additional FHLB
advances.
Non-performing assets
Non-performing loans totaled $7.6 million, or 0.75% of total loans at September
30, 1999 as compared to $6.6 million, or 0.67% of total loans, at June 30, 1999.
Non-performing loans at September 30, 1999 were comprised of $3.7 million of
loans secured by one- to four-family residences, $2.8 million of commercial real
estate loans, $815,000 of commercial loans and $254,000 of guaranteed student
loans.
For the quarter ended September 30, 1999, the Company had no provision for loan
losses. The Company's allowance for loan losses totalled $9.1 million at
September 30, 1999 which represents a ratio of allowance for loan losses to
non-performing loans and to total loans of 119.42% and 0.90% at September 30,
1999 compared to 139.08% and 0.93% at June 30, 1999, respectively. Management
believes the allowance for loan losses at June 30, 1999 is adequate and
sufficient reserves are presently maintained to cover losses on non-performing
loans. Net charge-offs were $52,000 for the quarter ended September 30, 1999.
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,
1999 1999
---- ----
(Dollars in thousands)
Non-accrual mortgage loans delinquent more than 90 days.................... $ 6,262 $ 5,561
Non-accrual commercial loans delinquent more than 90 days.................. 815 433
Non-accrual other loans delinquent more than 90 days....................... 262 309
------ -----
Total non-accrual loans delinquent more than 90 days................... 7,339 6,303
Loans 90 days or more delinquent and still accruing........................ 254 255
--------- --------
Total non-performing loans................................................. 7,593 6,558
Total foreclosed real estate, net of related allowance for losses.......... 507 177
----- -----
Total non-performing assets................................................ $ 8,100 $ 6,735
===== =====
Non-performing loans to total loans........................................ 0.75% 0.67%
Non-performing assets to total assets...................................... 0.33% 0.27%
Allowance for loan losses to non-performing loans.......................... 119.42% 139.08%
Allowance for loan losses to total loans................................... 0.90% 0.93%
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, 1999, $952.2 million, or 40.6%, of the Bank's interest-earning
assets were in adjustable-rate loans and mortgage-backed securities. The Bank's
mortgage loan portfolio totalled $824.8 million, of which $420.7 million, or
51.0%, were adjustable-rate loans and $404.1 million, or 49.0%, were fixed-rate
loans. The Bank's commercial loan portfolio totalled $50.5 million, of which
$37.7 million, or
11
74.6%, were adjustable-rate loans and $12.9 million, or 25.4%, were fixed-rate
loans. In addition, at September 30, 1999, the Bank's consumer loan portfolio
totalled $132.2 million, of which $104.9 million, or 79.3%, were adjustable-rate
home-equity lines of credit and guaranteed student loans and $27.4 million, or
20.7%, were fixed-rate home-equity and other consumer loans.
At September 30, 1999, the mortgage-backed securities portfolio totalled $1.1
billion, of which $388.9 million, or 33.8%, of the mortgage-backed portfolio
were adjustable-rate securities and $760.9 million, or 66.2%, were fixed-rate
securities. The mortgage-backed securities portfolio classified as
available-for- sale totalled $889.0 million of which $316.5 million, or 27.5%,
of the total mortgage-backed portfolio were adjustable rate securities and
$572.5 million, or 49.8%, were fixed-rate securities. The mortgage-backed
securities portfolio classified as held-to-maturity totalled $260.8 million of
which $72.4 million, or 6.3%, of the total mortgage-backed portfolio were
adjustable rate securities and $188.4 million, or 16.4%, were fixed-rate
securities.
During the three months ended September 30, 1999, the Bank purchased
approximately $5.1 million of agency and private label collateralized mortgage
obligations, $22.2 million of 1 year adjustable rate mortgage-backed securities
and $7.2 million of 5 year adjustable rate securities. During the three months
ended September 30, 1999 the Bank did not sell any mortgage-backed securities.
The Bank has repositioned 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. The Bank has recently begun to purchase adjustable rate
mortgage-backed securities in order to adjust to interest rate changes.
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, and from sales and
principal repayments of mortgaged-backed securities.
Comparison of Operating Results for the Three Months Ended September 30, 1999
and 1998.
General. Net income was $5.4 million for the quarter ended September 30, 1999,
which represents an annualized return on average assets and average tangible
equity of 0.87% and 16.67%, respectively. Net interest income increased to $17.4
million for the quarter ended September 30, 1999, an increase of $246,000, or
1.4%, from $17.2 million for the quarter ended September 30, 1998. The higher
net interest income is due to an increase in the net interest spread from 2.62%
to 2.70% and the net interest margin from 2.92% to 2.97%, respectively, for the
quarters ended September 30, 1998 and 1999. For the quarter ended September 30,
1999, the yield on interest-earning assets was 7.03% and the cost of
interest-bearing liabilities was 4.33% as compared to 7.28% and 4.66%,
respectively, for the quarter ended September 30, 1998.
Interest Income. Interest income decreased $1.5 million, or 3.6%, from $42.9
million for the three months ended September 30, 1999 to $41.3 million for the
three months ended September 30, 1999. The decrease resulted from a decrease in
the average yield of interest-earning assets of 26 basis points from 7.28%in the
prior year quarter to 7.02% for the quarter ended September 30, 1999. For the
three months ended September 30, 1999, interest income from mortgage-backed
securities decreased $921,000, or 4.7%, from $19.7 million for the 1998 period
to $18.8 million for the 1999 period due to a decrease of $41.2 million, or
3.5%, in the average balance of mortgage-backed securities and a decrease in the
average yield on these securities of 28 basis points from 6.58% for the 1998
period to 6.34% for the 1999 period. The decrease
12
in the average balance of mortgage-backed securities is primarily due to the
Bank investing cash flows into loans and debt and equity securities.
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 invest in 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,
1999, was $23.9 million, an decrease of $1.8 million, or 7.0%, from $25.7
million for the three months ended September 30, 1998. The decrease in interest
expense is related to a 33 basis point decrease in the cost of interest-bearing
liabilities, from 4.66% for the 1998 period to 4.33% for the 1999 period. The
decrease in the average cost of interest-bearing liabilities resulted primarily
from a lower rate environment for new certificates of deposits during the
quarter ended September 30, 1999. Interest expense on deposits decreased $2.8
million, or 16.6%, from $16.6 million for the 1998 period to $13.9 million for
the 1999 period, primarily as a result of a $85.3 million, or 5.2%, increase in
the average balance of deposits and by a 48 basis point decrease in the average
cost of such deposits from 4.19% in the 1998 period to 3.71% in the 1999 period.
Interest expense on borrowed funds increased $963,000, or 10.7%, from $9.0
million for the 1998 period to $10.0 million for the 1999 period primarily due
to a $99.2 million, or 16.2%, increase in the average balance of borrowings from
$613.1 million in the 1998 period to $712.3 million for the 1999 period, offset
by a 28 basis point decrease in the average cost of such borrowings, from 5.89%
in the 1998 period to 5.61% in the 1999 period. The Bank continues to use
borrowings to leverage its capital and fund asset growth. Borrowed funds,
principally reverse repurchase agreements, FHLB-NY advances and trust preferred
capital securities 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 $17.4 million for the
quarter ended September 30, 1999, an increase of $246,000, or 1.4%, from $17.2
million for the quarter ended September 30, 1998. The increase in net interest
income was attributable to an increase of 8 basis points in the net interest
spread increased from 2.62% for the quarter ended September 30, 1998 to 2.70%
for the quarter ended September 30, 1999 and a 5 basis point increase in the net
interest margin from 2.92% in the 1998 period to 2.97% in the 1999 period. For
the quarter ended September 30, 1999, the yield on interest-earning assets was
7.03% and the cost of interest-bearing liabilities was 4.33%, as compared to
7.28% and 4.66%, respectively, for the quarter ended September 30, 1998.
Provision for Loan Losses. For the quarter ended September 30, 1999, the
Company's had no loan loss provision as compared to $150,000 in the prior year
quarter. When determining the provision for loan losses, management assesses the
risk inherent in its loan portfolio based on information available to management
at such time relating to trends in the national and local economies, trends in
the real estate market and trends in the Company's level of non-performing
loans, assets and net charge-offs. The decrease in the provision for loans
losses is due to the lower level of non-performing loans and low level of net
charge-offs. Non-performing loans decreased $1.5 million, or 16.2%, from $9.1
million at September 30, 1998 to $7.6 million at September 30, 1999. Net
charge-offs were $52,000 for the quarter ended September 30, 1999 as compared to
$6,000 in the quarter ended September 30, 1998. The Company's allowance for loan
losses totalled $9.1 million at September 30, 1999 which represents a ratio of
allowance for loan losses to non-performing loans and to total loans of 119.42%
and 0.90% at September 30, 1999 compared to 139.08% and 0.93% at June 30, 1999,
respectively. Management believes that, based on information currently known to
management, the provision for possible loan losses
13
and the allowance for possible loan losses are currently reasonable and adequate
to cover potential losses 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 of
management's control. 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 $567,000, or 30.3%, to $2.4
million in the quarter ended September 30, 1999 from $1.9 million in the prior
year quarter. The increase is mainly the result of additional fee income from
annuity sales, ATM transactions, money center fees, loan servicing fees and loan
prepayment penalties.
Non-Interest Expense. Non-interest expense totalled $10.5 million for the
quarter ended September 30, 1999, a $121,000, or 1.2%, increase from $10.4
million recorded in the prior year quarter. The slight increase is mainly the
result of higher other operating expenses. For the quarter ended September 30,
1999, ESOP and RRP expenses collectively were $702,000 as compared to $913,000
recorded in the prior year quarter.
Income Tax Expense. Income tax expense was $4.0 million, for the three months
ended September 30, 1999 an increase of $231,000, or 6.1%, from $3.8 million for
the three months ended September 30, 1998, representing effective income tax
rates of 42.8% and 44.3%, 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, associated tax benefits
related to a subsidiary of the Bank. and other tax benefits. The lower effective
tax rate during the quarter ended September 30, 1999 is due to higher net income
offsetting goodwill amortization and the tax benefits associated with the recent
purchase of bank owned life insurance.
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, 1999, the Bank did not make any dividend payments 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 November 6, 1998, the Company announced the completion of its seventh stock
repurchase program and the approval by its Board of Directors for an eighth
stock repurchase plan to repurchase up to 500,000 of the Company's outstanding
shares. As of September 30, 1999, the Company repurchased 160,423 shares under
its eighth repurchase program at an aggregate cost of $4.7 million. For the
three months ended September 30, 1999, the Company repurchased 19,000 shares at
an aggregate cost of $530,000.
On September 22, 1999, the Board of Directors declared a regular cash dividend
of $0.21 per common share for the quarter ending September 30, 1999. The
dividend was paid on October 15, 1999 to stockholders of record on October 1,
1999.
14
On August 30, 1999, the Company and North Fork Bancorporation Inc. jointly
announced that they have signed a definitive merger agreement whereby North Fork
Bancorporation, Inc. would acquire Reliance Bancorp, Inc. in a stock-for-stock
merger valued at approximately $352 million. Each share of Reliance will be
converted into a fixed exchange ratio of 2 shares of North Fork common stock.
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 8.53% for the three months ended September
30, 1999.
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, 1999,
assets qualifying for liquidity, including cash, US government obligations and
other eligible securities, totalled $305.9 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, 1999, principal payments on loans
and mortgage-backed securities totalled $67.9 million and $71.5 million,
respectively, as compared to $77.1 million and $110.9 million, respectively, in
the prior year period. At September 30, 1999, advances from the FHLB-NY and
borrowings under reverse repurchase agreements and capital trust securities
totalled $712.0 million, an increase of $9.6 million, from $702.4 million at
June 30, 1999. Deposits increased $5.7 million, or 0.37%, during the three
months ended September 30, 1999 as a result of growth in 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, 1999,
the Bank originated and purchased mortgage, commercial and consumer loans in the
amount of $50.8 million, $25.2 million and $18.3 million, respectively. During
the three months ended September 30, 1999, the Bank purchased $34.5 million of
mortgage-backed securities of which $12.4 million were classified as
available-for-sale and $22.2 million were classified as held-to-maturity.
At September 30, 1999, the Bank had outstanding loan commitments of $17.4
million, open home equity lines of credit of $58.5 million and $16.5 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, 1999 totalled $718.6 million. Management believes that a
significant portion of such deposits will remain with the Bank.
At September 30, 1999, the Bank exceeded each of the OTS capital requirements.
The Bank's tangible, core, and risked-based ratios were 7.0%,7.0% and 17.21%,
respectively. The Bank qualifies as "well capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991.
15
Impact of 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". The Company completed testing of
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 has
completed testing and implementation of changes.
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. The
Company does not believe that such costs will have a material effect on results
of operations. Both
16
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 has 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, such vendors have indicated that they have
completed testing and will be Year 2000 compliant.
Recent Legislation
The Congress has completed work and the President is expected to sign
legislation designed to modernize the regulation of the financial services
industry expands the ability of bank holding companies to affiliate with other
types of financial services companies such as insurance companies and investment
banking companies. However, the legislation provides that companies that acquire
control of a single savings association after May 4, 1999 (or that filed an
application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
Company, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Company.
Private Securities Litigation Reform Act Safe Harbor Statement
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The Company does not undertake -- and specifically disclaims any obligation --
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or
17
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Information regarding management's
discussion and analysis of financial condition and results of operations appears
under Item 7 of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at June
30, 1999 in Exhibit 13.1 to the Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on September 28, 1999. There have been no
material changes in the Company's market risk at September 30, 1999 as compared
to June 30, 1999. 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, 1999, 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, 1999 to September 30, 1999.
GAP Analysis. The Bank's exposure to the risks of changing interest rates may be
analyzed, in part, by examining the extent to which its assets and liabilities
are "interest rate sensitive" and by monitoring the Bank's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or repricing
within that time period. A gap is considered positive when the amount of
interest-earning assets maturing or repricing exceeds the amount of
interest-bearing liabilities maturing or repricing within the same period. A gap
is considered negative when the amount of interest-bearing liabilities maturing
or repricing exceed the amount of interest-bearing assets maturing or repricing
within the same period. Accordingly, a positive gap may enhance net interest
income in a rising rate environment and reduce net interest income in 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, 1999, 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 $147.1million, or (5.93%) of total assets
at September 30, 1999 as compared to a negative gap of $100.1 million, or
(4.08)% of total assets at June 30, 1999. 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, 1999. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value at September 30, 1999, compared to June 30, 1999, 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)
(b) Form 8-K
1) The Company filed Form 8-K on August 31,
1999, which included a copy of the Company's
press release dated August 30, 1999,
announcing a signed definitive agreement
whereby North Fork Bancorporation Inc. would
acquire Reliance Bancorp, Inc. in a
stock-for-stock merger.
2) The Company filed Form 8-K on October 21,
1999, which included a copy of the Company's
press release dated October 21, 1999,
reporting its first quarter fiscal year 2000
results.
- ------------------
(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
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reliance Bancorp, Inc.
----------------------
(Registrant)
/s/ Raymond A. Nielsen 11/12/99 /s/ Paul D. Hagan 11/12/99
- ---------------------- -------- ----------------- --------
Raymond A. Nielsen Paul D. Hagan
Chief Executive Officer Chief Financial Officer
20