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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
Commission file under 0-27624
RELIANCE BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
WISCONSIN 39-1834823
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3140 S 27TH STREET
MILWAUKEE, WISCONSIN 53215
(Address of principal executive offices) (Zip Code)
(414) 671-2222
(Registrant's telephone number, including area code)
Securities Registered Under Section 12(b) of the Exchange Act:
None
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Securities Registered Under Section 12(g) of the Exchange Act:
COMMON STOCK, $1.00 PAR VALUE PER SHARE
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(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 60 days.
(1) Yes X No .
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(2) Yes X No .
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
State issuer's revenues for most recent fiscal year: $3,508,000 (Total
interest and dividend income and total non-interest income.)
As of September 5, 1997, there were issued 2,562,344 shares of Common Stock of
the Registrant and 2,472,075 shares outstanding. The aggregate market value of
the voting stock held by non-affiliates of the Registrant, computed by
reference to the average of the bid and asking price of such shares of Common
Stock as of September 5, 1997 was $18.40 million. Solely for purposes of this
calculation, all executive officers and directors of the Registrant are
considered to be affiliates; also included as "affiliate shares" certain shares
held by various employee benefit plans in which the trustees are directors of
the Registrant or are required to vote a portion of unallocated shares at the
direction of executive officers or directors of the Registrant. The exclusion
from such amount of the market value of the shares owned by any person shall
not be deemed an admission by the Registrant that such person is an affiliate
of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB: Portions of the Annual Report to Shareholders
for the fiscal year ended June 30, 1997 are incorporated by reference into
Parts II and IV hereof.
Part III of Form 10-KSB: Portions of the Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
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PART 1
ITEM I. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS
The discussion in this Form 10-KSB includes certain forward-looking statements
based upon management expectations. Such forward-looking statements include
words and phrases such as "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions and
various other statements contained herein. Factors which could cause future
results to differ from these expectations include the following: general
economic conditions; legislative and regulatory initiatives; monetary and
fiscal policies of the federal government; deposit flows; the costs of funds;
general market rates of interest; interest rates on competing investments;
demand for loan products; demand for financial services; changes in accounting
policies or guidelines; and changes in the quality or composition of the
Company's loan and investment portfolios.
GENERAL
Reliance Bancshares, Inc., a Wisconsin corporation (the "Company" or the
"Registrant"), was formed for the purpose of owning all of the outstanding
stock of Reliance Savings Bank, a Wisconsin chartered stock savings bank (the
"Bank"), issued in the mutual to stock conversion of the Bank (the
"Conversion"). The Conversion was consummated on April 18, 1996; the Company
issued 2,562,344 shares of Common Stock in exchange for proceeds of $20.5
million, and the Company purchased all of the issued and outstanding shares of
Common Stock of the Bank for $9.5 million. The Bank is regulated by the
Wisconsin Department of Financial Institutions, Division of Savings and Loan
(the "DSL") and the Federal Deposit Insurance Corporation (the "FDIC"). The
Bank's deposits are insured up to the applicable limits by the Savings
Association Insurance Fund ("SAIF") of the FDIC. The Bank also is a member of
the Federal Home Loan Bank ("FHLB") system. The Bank was organized in 1922,
and has one full service office located in Milwaukee County, Wisconsin.
Because the Company's only significant business operations are that of the
Bank, the business of the Bank is essentially the only business of the Company.
The Bank is a community oriented financial institution which emphasizes retail
financial services to individuals and consumers within its market areas. The
Bank's principal business is attracting retail deposits from the general public
and investing those deposits, together with funds generated from other
operations, primarily to originate residential mortgage loans within its
primary market areas and invest in mortgage-backed securities and investment
securities. The principal lending is on one-to four-family owner-occupied
homes, including ARM loans, and to lesser extent, the Bank also originates,
multi-family, other consumer, commercial / non-residential and residential
construction loans. The Bank invests a significant portion of its assets in
investment securities and mortgage-backed securities, including U.S. Government
and federal agency securities, short-term liquid assets and other marketable
securities. The Bank's revenues are derived principally from interest on its
mortgage loan portfolio, interest on mortgage-backed securities and interest
and dividends on its investment securities. The Bank's principal sources of
funds are received from deposits, repayments on loans and mortgage-backed and
related securities.
MARKET AREA AND COMPETITION
The Bank offers a variety of loan and deposit products and banking
services primarily within the metropolitan Milwaukee area. The Bank's office
is located at 3140 South 27th Street, Milwaukee, Wisconsin. The City of
Milwaukee is located along the western shore of Lake Michigan, and is the
largest metropolitan statistical area ("MSA") within the State of Wisconsin.
The Milwaukee MSA includes Milwaukee, Waukesha, Ozaukee and Washington
counties. The Bank's primary market area consists of the Milwaukee MSA, which
in 1994 was the nation's 35th largest MSA. The Milwaukee MSA includes a
diverse economic base, including business, industry and agriculture, and of the
nation's 35 largest MSAs, Milwaukee ranked third in the percentage of its work
force in manufacturing. Major employers include Johnson Controls, Inc.,
Harnischfeger Industries, Inc., Briggs & Stratton Corp., Harley-Davidson, Inc.,
A.O. Smith Corp., Allen-Bradley Co., GE Medical Systems, Miller Brewing Co.,
Master Lock Co., W.H. Brady Co., Quad/Graphics, Inc., Northwestern Mutual Life
Insurance Co., and the home offices of numerous other insurance companies and
financial institutions. The Milwaukee MSA has 11 colleges and universities
each with enrollments exceeding 1,000 students, including the Milwaukee campus
of the University of Wisconsin and Marquette University.
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Many of the Bank's present customers and businesses are centralized within the
Bank's local market area. The Bank's local market area, generally defined as
an area within a three-mile radius of the Bank's office, has experienced
limited population growth, reduced employment and recessionary economic
conditions in recent years. The Bank's local market area has experienced
modest population declines in the last five years and decreasing median
household income levels in the last five years, and both of these trends are
expected to continue. The median household and per capita income levels of the
Bank's local market area are below the Milwaukee MSA average, and may be a
reflection of the area's primarily blue collar labor force and the migration of
a large portion of the white collar residents to outlying suburban areas.
Additionally, this local market area has experienced a general weakening of
real estate values and a slow-down of home sales and construction. These
factors, along with intensified competition from other financial institutions
and mortgage brokers, have resulted in a diminishing demand for permanent
one-to four-family mortgage loans and for deposit products in the Bank's local
market area.
The Bank's local market area has a high density of financial institutions, most
of which are significantly larger and have greater financial resources than the
Bank. The Bank has significant competition in both its mortgage and consumer
lending business, as well as in attracting deposits. The Bank's competition
for loans is principally from other thrift institutions, savings banks,
mortgage banking companies, insurance companies and commercial banks. Its most
direct competition for deposits historically has come from other thrifts,
savings banks, commercial banks and credit unions. Because of the lower
interest rate environment over the past several years, the Bank has faced
additional competition for funds from a number of institutions, including the
availability of short-term money market funds and other corporate and
government securities funds offered by other financial service companies, such
as brokerage firms and insurance companies.
LENDING ACTIVITIES
General
The Bank's largest component of its gross loan portfolio, which totaled $29.8
million at June 30, 1997 was first mortgage loans secured by owner-occupied
one-to four-family residences. At June 30, 1997, one-to four-family mortgage
loans totaled $11.0 million or 37.04% of gross loans. Of the total one-to
four-family mortgage loans, $3.4 million or 30.75% were ARM loans. Of there
remaining loans held at June 30, 1997, 18.05% or $5.4 million were in
commercial real estate loans, 16.44% or $4.9 million were in residential
construction loans, 15.45% or $4.6 million were in multi-family mortgage
loans, 11.82% or $3.5 million were in commercial construction and land
development loans, and the balance were in consumer loans.
The aggregate amount of loans that the Bank is permitted to make under
applicable state regulations to any one borrower, including related entities,
is generally an amount up to 15% of the Bank's capital plus an additional 10%
for loans fully secured by readily marketable collateral. At June 30, 1997,
the maximum amount which the Bank could lend under these limits to any one
borrower and borrower's related entities was $3.0 million. At June 30, 1997,
the Bank had no loans or groups of loans to related borrowers with outstanding
balances in excess of this amount. At that date, the Bank had 14 borrowers or
groups of borrowers with outstanding lending relationships in excess of
$400,000, for a total of $13.9 million, all of which loans are performing in
accordance with their terms. The Bank's single largest borrowing relationship
at June 30, 1997 had multiple loans aggregating $2.3 million. All of such
loans are performing in accordance with their terms.
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Composition of Loan Portfolio
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and in percentages of the respective portfolios at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------ ------------------------------ ------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------------- -------------- -------------- -------------- -------------- --------------
Mortgage loans: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to four-family $ 10,425 47.51% $ 10,745 40.46% $ 11,035 37.04%
Multi-family 4,711 21.46% 4,585 17.26% 4,604 15.45%
Commercial real estate 3,880 17.68% 4,163 15.68% 5,376 18.05%
Residential construction 2,226 10.14% 4,311 16.23% 4,899 16.44%
Commercial construction/
land development 694 3.16% 2,390 9.00% 3,521 11.82%
-------------- -------------- -------------- -------------- -------------- --------------
Total mortgage loans 21,936 99.95% 26,194 98.63% 29,435 98.80%
Consumer loans:
Home equity 7 0.03% 356 1.34% 355 1.19%
Other consumer 5 0.02% 7 0.03% 2 0.01%
-------------- -------------- -------------- -------------- -------------- --------------
Total consumer loans 12 0.05% 363 1.37% 357 1.20%
-------------- -------------- -------------- -------------- -------------- --------------
Gross loans receivable 21,948 100.00% 26,557 100.00% 29,792 100.00%
============== ============== ==============
Less:
Undisbursed loan proceeds 701 3,366 1,890
Allowance for loan losses 104 126 147
Deferred loan fees and
discounts 109 134 154
Total additions /
deductions -------------- -------------- --------------
914 3,626 2,191
-------------- -------------- --------------
Loans receivable, (net) $ 21,034 $ 22,931 $ 27,601
============== ============== ==============
</TABLE>
Contractual Principal Repayments
The following table sets forth the maturity or period to repricing of the
Bank's loan portfolio at June 30, 1997. Loans that have adjustable rates are
shown as being due in the period during which the interest rates are next
subject to change. The table does not include prepayments or scheduled
principal amortization. Prepayment's and scheduled principal amortization on
mortgage loans totaled $2.0 million.
<TABLE>
<CAPTION>
At June 30, 1997
--------------------------------------------------------------------
One-to Multi-Family / Consumer Total
Four-Family(1) Non-residential(1) Loans Loans
-------------- ------------------ -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Amounts due(2): $ 3,200 $ 5,595 $ 2 $ 8,797
Within one year:
After one year:
One to three years 5,329 3,304 15 8,648
Three to five years 428 2,106 243 2,777
Five to ten years 473 705 97 1,275
Ten to twenty years 1,725 566 -- 2,291
Over twenty years 4,778 1,226 -- 6,004
-------------- ------------------ -------------- --------------
Total due or repricing
after one year 12,733 7,907 356 20,995
-------------- ------------------ -------------- --------------
Total amounts due or
repricing 15,933 13,502 357 29,792
Less:
Deferred fees and discounts (72) (81) -- (153)
Allowance for loan losses (85) (60) (2) (147)
-------------- ------------------ -------------- --------------
Gross loans receivable $ 15,776 $ 13,361 $ 355 $ 29,492
============== ================== ============== ==============
</TABLE>
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The following table sets forth at June 30, 1997, the dollar amount of all loans
and mortgage-backed securities due or scheduled to reprice after one year, and
whether such loans have fixed or adjustable interest rates. Loans that have
adjustable rates are shown as being due in the period during which the interest
rates are subject to change.
<TABLE>
<CAPTION>
Due or Repricing
After June 30, 1998
-----------------------------------------
Fixed Adjustable Total
----------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to four-family $ 10,640 $ 2,093 $ 12,733
Multi-family / non-residential 7,235 672 7,907
Consumer loans 355 -- 355
----------- ------------- -------------
Gross loans receivable 18,230 2,765 20,995
Mortgage-backed securities 686 -- 686
----------- ------------- -------------
Gross loans receivable and
mortgage-backed securities $ 18,916 $ 2,765 $ 21,681
=========== ============= =============
</TABLE>
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(1) Includes some residential construction lending.
(2) These amounts are net of loans in process.
(3) Includes some construction lending.
One-to Four-Family and Residential Construction Lending
The Bank originates first mortgage loans secured by one-to four-family
owner-occupied residences and residential construction loans within the Bank's
primary lending area. All of the Bank's first mortgage loans are originated
for the Bank's own loan portfolio. At June 30, 1997, $15.9 million, or 53.48%,
of the Bank's gross loan portfolio consisted of loans secured by one-to
four-family residential properties. Of the one-to four-family residential
mortgage loans in the Bank's gross loan portfolio, $4.9 million were in the
Bank's residential construction loan category. At June 30, 1997, $12.2
million, or 76.89% of the Bank's one-to four-family residential mortgage loans
consisted of fixed rate loans and $3.7 million, or 23.11%, consisted of balloon
loans and ARM loans. At June 30, 1997, the average outstanding one-to
four-family loan balance was $82,000 and the largest outstanding one-to
four-family loan balance was $512,000.
Because of the highly competitive mortgage loan market in which the Bank
originates loans, a variety of mortgage products are available from the Bank,
with a variety of interest rates, fees and other origination terms. The bank
offers conventional fixed rate mortgage loans and ARM loans with maturity dates
which typically range from 15 to 30 years. Residential mortgage loans
generally are underwritten to Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA"), and other agency guidelines.
The Bank rarely originates loans in excess of these agency limits; however, if
the Bank does originate jumbo loans, the loans are underwritten in accordance
with the Bank's underwriting guidelines and are retained in the Bank's loan
portfolio. The Bank charges origination fees ranging from zero to two points
on mortgage loans. The interest rates charged on mortgage loans at any given
date will vary, depending upon the amount of origination points to be paid.
The interest rate at which the Bank offers to grant a mortgage loan also are
determined by the secondary market pricing for comparable mortgage-backed
securities, local mortgage loan competition and the Bank's yield requirements.
Mortgage loan originations are solicited from real estate brokers, builders,
developers, existing or past customers and residents of the local communities
located in the Bank's primary market area. The Bank advertises its product
offerings in newspapers and other media circulating throughout its primary
market area in addition to its officers soliciting prospects. Upon receipt of
a completed mortgage application from a prospective borrower, a credit report
is ordered, income and other information is verified, and, as necessary,
additional financial information is requested. An appraisal of the real estate
that is to secure the loans is required. It is the Bank's policy to obtain
title insurance on all real estate first mortgage loans. Borrowers must
present evidence of appropriate hazard insurance and flood insurance (if
applicable) prior to the closing. The lending policy of the Bank restricts
mortgage loans to 80% of the lesser of the appraised value or purchase price of
the real estate to be mortgaged by the Bank. The Bank makes mortgage loans to
95% if the lesser of the appraised value or purchase price subject to the
availability of private mortgage insurance insuring the amount in excess of 75%
of the loan. The Bank reviews all the pertinent information and makes a credit
decision for approval of denial within established Bank policy guidelines.
Most
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recommendations to deny applications based on underwriting considerations are
reviewed by the Bank's President prior to a final loan denial. All one-to
four-family mortgage loan applications are reviewed on a monthly basis by the
Board of Directors. Mortgage loans in the Bank's loan portfolio include
due-on-sale clauses, which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers the
ownership of the property without the Bank's consent. The Bank enforces the
due-on-sale clauses of its mortgage loans.
The Bank originates one and three year ARM loans. The Bank's one-year ARM
loans typically adjust to a maximum of 200 basis points per year, with a
lifetime cap of approximately 600 basis points above the interest rate
established at the origination date of the ARM loan. Monthly payments of
principal and interest are adjusted when the interest rate adjusts, in order to
maintain full amortization of the mortgage loan within a maximum 30-year term.
The Bank does not offer ARM loans which provide for negative amortization. The
Bank's three-year ARM loans adjust annually after the initial three year term.
The initial rate offered on ARM loans fluctuates with general interest rate
changes, and are predetermined by secondary market pricing, competitive
conditions and the Bank's yield requirements. Currently, the Bank primarily
utilizes the Seventh District Cost of Funds Index, plus a margin, in order to
determine the interest rate payable upon the adjustment date of its ARM loans
outstanding. In order to minimize the risk associated with ARM loans,
borrowers under ARM programs are qualified at the higher of the initial
offering rate or the fully-indexed rate and with a specified minimum interest
rate. None of the ARM loans are granted with conversion options. As compared
to fixed rate loans, ARM loans generally pose different risks. In a rising
interest rate environment, the underlying loan payment rises, which increases
the potential for default by the borrower. At the same time, the marketability
of the underlying property may be adversely affected by higher interest rates.
In a decreasing interest rate environment, mortgagors tend to refinance into
fixed rate loans.
The Bank also offers one-to four-family mortgage loans with balloon features.
Under these loans, the interest rate and monthly payment are fixed for the
initial term, which is usually one to five years, and thereafter, provided
certain conditions are met at maturity, the loan would be paid off in full or
renewed at the then-current rate.
The Bank also offers owner-occupied one-to four-family residential construction
loans. Residential construction loans are underwritten in conjunction with the
regular first mortgage loans and terminate upon completion of the project. At
June 30, 1997, the Bank had 27 one-to four-family construction loans in its
portfolio, aggregating $4.9 million, and the average outstanding residential
construction loan balance was $181,000 and the largest outstanding residential
construction loan balance was $512,000. Because most residential construction
loans are ARM loans, residential construction afford the Bank the opportunity
to decrease the interest rate sensitivity of its loan portfolio and to receive
yields on fixed rate loans higher than those obtainable on fixed rate loans
secured by existing one-to four-family residential properties. These higher
yields, however, correspond to the higher risks associated with residential
construction loans. Loan proceeds are disbursed in increments as construction
of the residence progresses. Title company disbursement agents are utilized to
clear all lien waivers and ensure the Bank's first lien position. These loans
are structured to allow borrowers to pay interest only on the funds advanced
during the construction period, which is generally six months. In most cases,
the Bank structures residential construction loans to automatically convert to
regular first mortgage loans upon completion of the project and when
certification of occupancy has been obtained.
Upon completion of construction, residential construction loans
generally become either 30-year fixed rate loans or ARM loans with one- and
three-year interest rate adjustments. Residential construction loans made in
conjunction with the first mortgage have a loan-to-value ratio limit not to
exceed 95%. As with other one-to four-family residential mortgage loans, when
the loan to value exceeds 80%, private mortgage insurance is required.
Coverage is required to reduce the Bank's exposure to 75% of the value or less.
The Bank offers one-to four-family residential construction loans to home
builders for speculation and model homes. These residential construction loans
convert to one-year ARM loans and typically are made at loan-to-value ratios of
80% or less. Payment terms are generally interest only for 12 months.
Thereafter, the borrower is required to begin principal and interest payments
to fully amortize the loan. Loan proceeds are disbursed in increments as
construction of the residence progresses.
At June 30, 1997, the largest aggregate amount of loans outstanding to any one
borrower totaled $2.3 million, and consisted of one commercial property and
four single family properties located in Waukesha County, Wisconsin. At
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June 30, 1997, all of these loans were current and performing in
accordance with their terms. These loans did not exceed the regulatory "loans
to one borrower" limitation at June 30, 1997. See "Regulation".
Multi-Family Lending
The Bank originates or participates in fixed rate and ARM loans secured by
multi-family properties. The Bank holds in its loan portfolio 18 multi-family
loans which at June 30, 1997 totaled $4.6 million, or 15.45% of the Bank's
gross loans. The average outstanding loan balance on each multi-family loan at
June 30, 1997 was $255,800. All payments under multi-family loans originated
by the Bank were current and performing in accordance with their terms at June
30, 1997. All of the Bank's multi-family loans are secured by properties
located in the Bank's primary market area. The rates charged on the Bank's ARM
multi-family loans are typically 25 to 50 basis points higher than on one-to
four-family residential properties. Multi-family ARM loans typically adjust in
a manner similar to that of the Bank's other ARM loans. An origination fee of
1% to 2% is usually charged on such loans.
Multi-family loans generally are underwritten in amounts of up to 80% of the
lesser of the appraised value or purchase price of the underlying property.
The underlying properties typically are apartment buildings generally with 24
or less units. Appraisals on properties which secure multi-family loans are
performed by an independent appraiser designated by the Bank at the time the
application is submitted. All appraisals on multi-family loans are reviewed by
Bank management. In underwriting such loans, the Bank primarily considers the
net operating income generated by the real estate to support the debt service,
the financial resources and income level of the borrower and the Bank's
experience with the borrower. To assess the ability of a property to
adequately service debt, the Bank uses debt service coverage ratios. Debt
service coverage ratios are a means of estimating risk based upon the
relationship of debt service to an estimate of a property's stabilized net
operating income. Desired debt service coverage ratios will vary depending
upon the size of the loan, and the verification of the borrower's credit
history, and analysis of the borrower's income, personal financial statements
and banking relationships, a review of the property, including cash flow
projections and historical operating results, and an analysis of the borrower's
experience in owning or managing similar properties. The Bank evaluates all
aspects of multi-family lending in order to mitigate risk to the extent
possible. The Bank seeks to ensure that the property securing the loans will
generate sufficient cash flow to adequately cover operating expenses and debt
service payments. Typically, individuals guarantee all of their multi-family
loans.
Loans secured by multi-family real estate generally involve a greater degree of
credit risk than one-to four-family mortgage loans and carry larger loan
balances. This increased credit risk is a result of several factors, including
the concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability
to repay the loans may be impaired. Despite the risk inherent in multi-family
real estate lending, the Bank's delinquent multi-family loans as a percentage
of gross loans has been minimal.
The largest multi-family loan at June 30, 1997 had an outstanding balance of
$807,400 and was secured by a 16-unit apartment building located in Pewaukee,
Wisconsin. At June 30, 1997, this loan was current and performing in
accordance with its terms.
Commercial Real Estate Lending
The Bank originates or participates in commercial real estate loans secured
generally by small office buildings, apartment buildings, hotels, and small
industrial/manufacturing buildings. At June 30, 1997, the Bank's commercial
real estate loan portfolio consisted of 17 loans totaling $5.4 million, or
18.05%, of the Bank's gross loan portfolio. The Bank's underwriting standards
provide that commercial real estate loans generally may be made in amounts up
to 80% of the appraised value of the property, subject to the Bank's current
loans-to-one-borrower limit. These loans may be made with terms ranging from
three years to 25 years, fully amortized, and generally are offered at interest
rates which are fixed at prevailing market rates or which adjust in accordance
with the Seventh District Cost of Funds index. Some of the Bank's commercial
real estate loans are balloon loans. Balloon loan payments generally are
amortized on a 15-year to 25-year basis with a typical maturity of three to
five years. The Bank generally has required that the properties securing
commercial real estate loans have debt service coverage ratios of at least 1.0%
to 1.5%.
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The average outstanding loan balance on each commercial/non-residential loan at
June 30, 1997 was $316,300. The largest commercial real estate loan at June
30, 1997 had an outstanding balance of $1,346,000 and was secured by an office
building located in Brookfield, Wisconsin. The concentration of commercial
real estate loans to one borrower totaled $1,545,800 at June 30, 1997 and
consisted of 2 loans secured by an office building in Brookfield, Wisconsin.
All payments under the Bank's commercial real estate loans were current at June
30, 1997.
The risks associated with commercial real estate lending are similar to
the risks associated with multi-family lending. To minimize these risks, the
Bank generally imposes similar underwriting standards in connection with
commercial real estate lending as it does with multi-family lending.
Commercial real estate loans generally are underwritten in amounts of up to 80%
of the lesser of the appraised value or purchase price of the underlying
property. Appraisals on properties which secure commercial real estate loans
are performed by an independent appraiser designated by the Bank at the time
the application is submitted. All appraisals on commercial real estate loans
are reviewed by Bank management. In addition, the Bank's underwriting
procedures require verification of the borrower's credit history, and analysis
of the borrower's income, financial statements and banking relationships, a
review of the borrower's property management experience and references and a
review of the property, including cash flow projections and historical
operating results. The Bank evaluates all aspects of commercial real estate
lending in order to mitigate risk to the extent possible. The Bank seeks to
ensure that the property securing the loans will generate sufficient cash flow
to adequately cover operating expenses and debt service payments. In addition,
the Bank obtains financial statements on an annual basis to monitor cash flow
and financial condition.
Commercial Construction and Land Development Lending
The Bank also provides construction loans secured by multi-family projects and
commercial real estate land development loans. At June 30, 1997, the Bank's
commercial construction and land development loan portfolio totaled $3.5
million of the Bank's gross loans. The construction loans secured by
multi-family projects usually will involve the construction of 8-unit to
24-unit apartment complexes. The construction loans secured by commercial real
estate properties typically will involve hotels or motels and office and
warehouse buildings. The Bank will originate land development loans to local
developers for the purpose of developing the land (i.e., roads, sewer and
water). Construction loans secured by multi-family projects and commercial
real estate and land development loans generally are made to existing customers
of the Bank and developers and contractors with which the Bank has had previous
lending experience, or will involve the purchase of a participation interest
from another financial institution. Multi- family and commercial real estate
construction loans typically are originated as a one-year ARM loan, while land
development loans typically are originated as a three-year ARM loan or a
three-year fixed rate balloon loan. Multi- family and commercial real estate
construction loans and land development loans typically are originated with
interest only payments made during construction with amortization beginning
upon completion. Balloon loan payments, however, are amortized on a 15-year to
25-year basis with a typical loan maturity of three years. These loans are
priced at 250 to 350 basis points above the rate on U.S. Treasury securities
for comparable maturities. Typically, these loans are made in amounts not to
exceed 80% of an independent appraisal for multi-family or commercial real
estate lending and 75% of appraisal on land development loans. These
appraisals are made to reflect absorption rates in the marketplace for both
loan types and discounted for carrying costs and cost of sale regarding land
development lending. The Bank monitors individual draws with funds disbursed
based on actual work in progress, a contractor's affidavit and an acceptable
on-site inspection report. All multi-family and commercial real estate
construction loans and all land development loans require a Phase I
environmental audit prior to commitment.
At June 30, 1997, the Bank had no multi-family construction loans in its loan
portfolio; several commercial real estate construction loans in its loan
portfolio, the largest consisting of a loan of $1,965,000 secured by an office
building construction project located in Brookfield, Wisconsin; and one land
development loan with an outstanding balance of $397,000 in its loan portfolio,
secured by residential subdivision property located in Oak Creek, Wisconsin.
At June 30, 1997, all of these loans were current and performing in accordance
with their terms.
Commercial construction and land development lending generally is considered to
involve a higher degree of risk than one-to four-family mortgage lending.
However, the Bank believes this lending activity affords the Bank the
opportunity to invest in relatively higher-yielding assets with shorter terms
to maturity and repricing than in the case with one-to four-family mortgage
lending. Therefore, the Bank is pursuing these lending opportunities to
increase its loan portfolio.
8
<PAGE> 9
Other Consumer Lending
The Bank originates a variety of other consumer loans, generally
consisting of home improvement loans and loans secured by savings accounts. At
June 30, 1996 and 1997, the total loan portfolio of these types of loans
totaled $363,000 and $357,000, respectively, or 1.37% and 1.20%, respectively,
of gross loans at those dates. Home equity loans comprised 98.3% and 99.4% of
other consumer loans at June 30, 1996 and 1997, respectively. Consumer loans
generally have shorter terms and higher interest rates than mortgage loans but
generally involve more risk than mortgage loans because of the type and nature
of the collateral and, in certain cases, the absence of collateral.
The underwriting standards generally employed by the Bank for other consumer
loans include a determination of the applicant's payment history on other debts
and assessment of the borrower's ability to meet payments on the proposed loans
along with existing obligations. In addition to the credit-worthiness of the
applicant, the underwriting process also includes a comparison of the value of
the security in relation to the proposed loan amount. Upon receipt of
completed consumer loan application from a prospective borrower, a credit
report is ordered, income and other information is verified and, if necessary,
additional financial information is required.
For all consumer loans, the Bank's underwriters review all pertinent
information prior to making a credit decision. Consumer loans may entail
greater risk than residential mortgage loans, particularly in the case of
consumer loans which are unsecured or secured by rapidly depreciating assets
such as automobiles. Although the level of delinquencies in the Bank's
consumer loan portfolio has been low, there can be no assurance the
delinquencies will not increase in the future.
LOAN ORIGINATIONS, SALES AND PURCHASES
The following table sets forth the Bank's loan originations, sales, and
purchases, and principal repayments for the periods indicated. The Bank has no
mortgage loans held for sale.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1995 1996 1997
----------- ---------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period $ 20,315 $ 21,936 $ 26,194
Mortgage loans originated:
One-to four-family 1,694 3,236 233
Multi-family -- -- 332
Commercial real estate 179 1,965 200
Residential construction 2,781 3,160 4,815
Commercial construction / land development 620 940 2,893
----------- ---------------- ------------
Total mortgage loans originated 5,274 9,301 8,473
Principal repayments (3,653) (5,043) (5,232)
Sale of loans -- -- --
Mortgage loans purchased (1) -- -- --
----------- ---------------- ------------
At end of period $ 21,936 $ 26,194 $ 29,435
=========== ================ ============
Consumer loans (gross):
At beginning of period 17 12 363
Loans originated 48 371 --
Principal repayments (53) (20) (6)
----------- ---------------- ------------
At end of period $ 12 $ 363 $ 357
=========== ================ ============
</TABLE>
- -------------------------------------------------------------------
(1) Mortgage loan purchases consist of whole loans purchased by the Bank from
various other lending institutions. Mortgage loan participations are
included in the appropriate loan category.
Sale of Mortgage Loans
The Bank has originated substantially all of the loans in its portfolio and
holds them to maturity. The Bank generally does not engage in the sale of
loans. However, form time to time, the Bank may sell participation interests
in loans which it has originated in order to spread risk associated with the
loan because of the size of the loan relative to the
9
<PAGE> 10
size of the Bank's loan portfolio. Loan participations are sold on a
non-recourse basis, and the Bank retains the servicing on all loans it
originates and of which it sells participation interests. In the last five
fiscal years, the Bank sold one participation interest in a commercial real
estate loan. At June 30, 1997 the Bank's retained interest in this commercial
real estate loan was $384,600 while the sold participation interest in this
loan totaled $127,000.
Purchase of Mortgage Loans
The Bank has purchased loans or participation interests in a variety of loans
originated by other lenders from time to time. The Bank purchases
participation interests with servicing released. As a participant, the Bank
acquires an individual, non-recourse ownership interest in the loan, and thus
does not have recourse against the selling institution, but rather, has direct
recourse against the borrower. Prior to purchase, the Bank reviews each
purchase or participation to ensure that the underlying loan complies with the
Bank's lending policy and the loans-to-one borrower limit.
At June 30, 1997, the Bank held five participation loans in its loan portfolio
totaling $2.2 million, or 3.36%, of the Bank's gross loan portfolio, as
follows: a multi-family loan of $727,000 (out of an original entire loan
amount of $2.6 million) secured by a 60-unit apartment building and originated
in 1992; a commercial real estate construction loan of $487,300 (out of an
original entire loan amount of $2.9 million) secured by a hotel and originated
in 1994; a land development loan of $397,000 (out of an original entire loan
amount of $895,000) and originated in 1997; a multi-family loan of $414,800
(out of an original entire loan amount of $900,000) secured by a 24-unit
apartment building and originated in 1988; and a commercial real estate loan of
$141,700 (out of an entire loan amount of $485,000) secured by a warehouse and
office building and originated in 1990.
The purchase of participation loans involves the same risks as the origination
of the same types of loans as well as additional risks related to the
purchaser's lower level of control over the origination and subsequent
administration of the loan. While the Bank intends to purchase additional
participation loans in the future, management does not anticipate such activity
will be significant.
Mortgage Loan Brokering Fees
Because of its loans-to-one borrower regulatory limit, the Bank has from time
to time received a brokering fee form other financial institutions in exchange
for the opportunity to originate various mortgage loans from borrowers with
whom the Bank already has a lending relationship. For the year ended June 30,
1996, the Bank received real estate loan brokering fees of $11,000 for loan
opportunities in the aggregate amount of $2.2 million. For the year ended June
30, 1997, the Bank did not have any loan brokering opportunities and therefore
did not receive any loan brokering fees.
LOAN APPROVAL AND MONITORING
The President of the Bank and at least one director have the authority to
approve any consumer loan, one-to four- family mortgage loan, residential
construction loan, multi-family loan, commercial real estate loan, commercial
construction loan or land development loan, up to $150,000, provided the
loan-to-value ratio does not exceed 80%. All loans exceeding this amount and
all loans upon which the loan-to-value ratio exceeds 80% are presented to the
Board of Directors for approval. The Bank's Board of Directors reviews on a
monthly basis all loans made, and ratifies all actions taken relative to loan
approvals.
LOAN ORIGINATION, SERVICING AND OTHER FEES
In addition to interest earned on loans, the Bank receives income through fees
in connection with loan originations, loan modifications, late payments and for
miscellaneous services related to its loans. Income from these activities
varies form period to period with the volume and type of loans originated.
In connection with the origination of mortgage loans, the Bank charges points
for origination and commitment, and fees for processing and closing, in
addition to requiring borrower reimbursement for out-of-pocket costs associated
with obtaining independent appraisals, credit reports, title insurance, private
mortgage insurance and other items. Because of the highly competitive mortgage
market in which the Bank originates loans, the point structure varies
considerably, depending upon the type of mortgage loan being made, its interest
rate and other competitive factors.
10
<PAGE> 11
The Bank charges origination fees ranging from zero to two points on
mortgage loan originations, and such points usually vary inversely with the
interest rate on the loan. That is, the amount of the origination fee is
typically higher with lower interest rate and lower if a higher interest rate
is established for the loan. Fees are paid by the applicant at the time of
loan commitment, whereas the origination fees are paid at the time of closing.
Accounting standards adopted under FASB 91 prescribe the accounting treatment
for origination and commitment fees. Loan origination and commitment fees and
certain direct loan origination costs are being deferred and the net amounts
amortized as an adjustment of the related loan's yield. These amounts are
amortized to interest income using the level yield method over the contractual
life of the related loans. Deferred loan fees totaled $109,000, $134,000 and
$153,000 at June 30, 1995, 1996 and 1997, respectively. Deferred loan
origination fees and costs associated with loans sold are recognized at the
time of sale as a component of gain or loss on the sale of loans.
DELINQUENCIES, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
At June 30, 1997, the Bank had no nonperforming assets, classified assets or
loans delinquent more than 89 days.
Delinquent Loans
Management and the Bank's Board of Directors perform a monthly review of all
delinquent loans. The procedures taken by the Bank with respect to
delinquencies vary depending on the type of loan, delinquent amount and age of
delinquency. The Bank generally requires that delinquent loans be reviewed and
a written late charge notice be mailed not later than the 15th day of
delinquency. The Bank's policies provide that telephone contact will be
attempted to ascertain the reasons for delinquency and the prospects of prompt
payment. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. It is the Bank's
general policy to continue to accrue interest on all loans which are past due
up to 90 days. When a loan secured by a mortgage is delinquent for 90 or more
days, the Bank generally will initiate foreclosure proceedings. Property
acquired by the Bank as a result of foreclosure on a loan is classified as
"real estate owned" and is recorded at the lower of the unpaid principal
balance or fair value less costs to sell at the date of acquisition and
thereafter. Upon foreclosure, it is the Bank's policy generally to require an
appraisal of the property and, thereafter, appraisal of the property on an
annual basis and external inspections on at least a quarterly basis.
At June 30, 1995, 1996, and 1997, delinquencies in the Bank's loan portfolio
were as follows:
<TABLE>
<CAPTION>
At June 30, 1995 At June 30, 1996
--------------------------------------------------------------------------------
80-89 Days 90 Days or More (1) 60-89 Days 90 Days or More (1)
--------------------------------------------------------------------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of loans of loans of loans of loans of loans of loans of loans of loans
-------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family 0 $ -- 0 $ -- 0 $ -- 0 $ --
Multi-family 0 -- 0 -- 0 -- 0 --
Commercial real estate 0 -- 0 -- 0 -- 0 --
Residential construction 0 -- 0 -- 0 -- 0 --
Commercial construction /
land development 0 -- 0 -- 0 -- 0 --
-------- -------- -------- -------- -------- -------- -------- ---------
Total mortgage loans 0 -- 0 -- 0 -- 0 --
-------- -------- -------- -------- -------- -------- -------- ---------
Consumer loans:
Home equity 0 -- 0 -- 0 -- 0 --
Other consumer 0 -- 0 -- 0 -- 0 --
-------- -------- -------- -------- -------- -------- -------- ---------
Total consumer loans 0 -- 0 -- 0 -- 0 --
======== ======== ======== ======== ======== ======== ======== =========
Total gross loans 0 $ -- 0 $ -- 0 $ -- 0 $ --
======== ======== ======== ======== ======== ======== ======== =========
Delinquent loans to gross loans 0.00% 0.00% 0.00% 0.00%
(including loans held for sale)
<CAPTION>
At June 30, 1997
---------------------------------------
60-89 Days 90 Days or More (1)
---------------------------------------
Principal Principal
Number Balance Number Balance
of loans of loans of loans of loans
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Mortgage loans:
One-to four-family 2 $ 195 0 $ --
Multi-family 0 -- 0 --
Commercial real estate 0 -- 0 --
Residential construction 0 -- 0 --
Commercial construction /
land development 0 -- 0 --
-------- -------- -------- --------
Total mortgage loans 2 195 0 --
-------- -------- -------- --------
Consumer loans:
Home equity 0 -- 0 --
Other consumer 0 -- 0 --
-------- -------- -------- --------
Total consumer loans 0 -- 0 --
======== ======== ======== ========
Total gross loans 2 $ 195 0 $ --
======== ======== ======== ========
Delinquent loans to gross loans 0.65% 0.00%
(including loans held for sale)
</TABLE>
1) The Bank discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest
payment by 90 days or more.
Non-Performing Assets
Loans are placed on non-accrual status when, in the judgment of Bank
management, the probability of collection of principal or interest is deemed
insufficient to warrant further accrual of interest. The Bank discontinues the
accrual of interest on loans when the borrower is delinquent as to a
contractually due principal or interest payment by 90 days or more. When a
loan is placed on non-accrual status, all of the accrued interest on that loan
is reversed by way of a
11
<PAGE> 12
charge to interest income. Accrual of interest on a non-accrual loan
is resumed when all contractually past due payments are current and when
management believes the outstanding loan principal and contractually due
interest is no longer doubtful or collection.
Property acquired by the Bank as a result of a foreclosure, property upon which
a judgment of foreclosure has been entered but prior to foreclosure sale and
property which has been in substance foreclosed are classified as foreclosure
properties. Foreclosed properties are recorded at the lower of the unpaid
principal balance of the related loan or fair market value. The amount by
which the recorded loan balance exceeds the fair market value at the time a
property is classified as foreclosed property is charged against the allowance
for loan losses. Any subsequent reduction in the carrying value of a
foreclosed property, is charged against current earnings. At June 30, 1997,
the Bank had no properties in foreclosure or in substance foreclosed.
Non-performing loans include loans placed on non-accrual status and troubled
debt restructurings. Non-performing assets consist only of non-performing
loans, since there are no foreclosed properties for the periods indicated
below. The following table sets forth non-performing loans and assets:
<TABLE>
<CAPTION>
At June 30,
----------------------------
1995 1996 1997
-------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans -- -- --
Nonaccrual consumer loans -- -- --
Real estate in judgement -- -- --
-------- --------- -------
Total non-performing assets -- -- --
======== ========= =======
Total non-performing assets to gross loans receivable 0.00% 0.00% 0.00%
======== ========= =======
Total non-performing assets to total assets 0.00% 0.00% 0.00%
======== ========= =======
Interest on non-performing loans on the accrual basis -- -- --
Accrued interest received on non-performing loans -- -- --
-------- --------- -------
Net reduction of interest income -- -- --
======== ========= =======
</TABLE>
There are concentrations of loans exceeding 10% of loans which are not
otherwise disclosed as a category of loans.
As of June 30, 1997, there were no other loans not included in the foregoing
tables or discussed above where known information about the possible credit
problems of borrowers caused management to have serious doubts as to the
ability of the borrower to comply with present loan repayment terms and which
may result in disclosure of such loans in the future.
As of June 30, 1977, the Bank had no real estate owned ("REO"). If the Bank
were to acquire any REO, it would initially record the REO at the lower of the
recorded investment in the loan or the fair market value of the assets securing
the loan at the date of foreclosure, less costs to sell. Thereafter, if there
were a further deterioration in value, the Bank would either rewrite down the
REO directly or provide a valuation allowance and charge operations for the
reduction in value. The policy for loans secured by real estate, which
comprise the bulk of the Bank's portfolio, is to establish loss reserves in
accordance with the Bank's loan classification process, based on GAAP. It is
the policy of the Bank to obtain an appraisal on all real estate acquired
through foreclosure at the time of foreclosure.
Classification of Assets
Federal regulations require that each insured financial institution classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions by regulatory authorities, regulatory examiners have
authority to identify problem assets as Substandard, Doubtful or Loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable, and there is a high possibility of loss.
An asset classified as Loss is considered uncollectible and of such little
value that continuance as an asset of the Bank is not warranted. The Bank has
adopted an asset classification methodology which parallels that required by
federal regulations. Assets classified as Substandard or
12
<PAGE> 13
Doubtful require the Bank to establish prudent general allowances for
loan losses. Assets classified as Loss must either be charged off or must have
a specific allowance established for 100% of the asset classified as a Loss.
At June 30, 1997, based upon the Bank's asset classification methodology, the
Bank had no assets classified as Substandard, Doubtful or Loss.
Allowance for Loan Losses
Under federal regulations, when an insured institution classifies problem
assets as with Substandard or Doubtful, it is required to establish general
allowances for loan losses in an amount deemed prudent by management. In
addition to general valuation allowances, the Bank may establish specific loss
reserves against specific assets in which a loss may be realized. General
allowances represent loss allowances which have been established to recognize
the inherent risks associated with lending activities, but which, unlike
specific allowances, have not been allocated to recognize probable losses on
particular problem assets. The Bank's determination as to its classification
of assets and the amount of its specific and general valuation allowances are
subject to review by the DSL and the FDIC, either of which can order the
establishment of additional general or specific loss allowances.
The FDIC, in conjunction with the other federal banking agencies, has adopted
and interagency policy statement on the allowance for loan and lease losses.
The policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy
statement. While the Bank believes that it has established an adequate
allowance for loan losses, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to materially
increase its allowance for loan losses, thereby negatively affecting the Bank's
financial condition and earnings at that time. Although management believes
that adequate specific and general loan loss allowances have been established,
actual losses are dependent upon future events and, as such, further additions
to the level of specific and general loan loss allowances may become necessary.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its portfolio
and the general economy. Such evaluation, which includes a review of all loans
on which full collectibility may not be reasonably assured, considers, among
other matters, the estimated value of the underlying collateral, the nature and
type of collateral, economic conditions, recent loan loss experience, industry
standards, regulatory considerations and other factors that warrant recognition
in providing for an adequate loss allowance. There can be no assurance that
the allowance for loan losses will be adequate to cover losses which may in
fact be realized in the future and that additional provisions for loan losses
will not be required. The amount of the provision for loan losses for the
years ended June 30, 1995, 1996 and 1997 reflected management's intention to
continue to make annual additions to the Bank's allowance for loan losses until
it is equal to approximately 1.0% of the Bank's gross loan portfolio. However,
the Bank will continue to monitor its loan loss experience, the condition and
composition of its loan portfolio and general economic conditions, and may make
further additions to its allowance for loan losses to a greater or lesser
extent than it has done historically, depending upon changes in the
aforementioned conditions.
13
<PAGE> 14
The following table sets forth the Bank's allowance for loan losses at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 84 $ 104 $ 126
Provision for loan losses 22 22 21
Charge-offs net of recoveries
Mortgage loans 2 -- --
Consumer loans -- -- --
------------ ------------ ------------
Total charge-offs (net) 2 -- --
------------ ------------ ------------
Balance at end of period $ 104 $ 126 $ 147
============ ============ ============
Ratio of allowance for loan losses to gross receivable
at the end of period 0.47% 0.47% 0.49%
Ratio of allowance for loan losses to non-performing loans
at the end of period 0.00% 0.00% 0.00%
Ratio of allowance for loan losses to total non-performing
assets at the end of period 0.00% 0.00% 0.00%
Ratio of net charge-offs to average gross loans during
period 0.01% 0.00% 0.00%
</TABLE>
The following table shows the Bank's total allowance for loan losses and the
allocation to the various categories of loans held for investment at the dates
indicated. It is not anticipated that charge-offs during the year ending June
30, 1998 will exceed the amount allocated to any individual category of loans.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------------------------------------------------------------------------
% of Total % of Total % of Total
Loans in Loans in Loans in
Category Category Category
% of To Total % of To Total % of To Total
Total Loans Outstanding Total Loans Outstanding Total Loans Outstanding
Amount by Category Loans Amount by Category Loans Amount by Category Loans
------ ----------- ----------- ------ ----------- ----------- ------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of Allowance:
Mortgage Loans
One-to four-family 50 0.47% 47.51% 51 0.47% 40.46% 53 0.49% 36.26%
Commercial real estate 18 0.47% 17.68% 20 0.47% 15.68% 27 0.49% 18.32%
Multi-family 22 0.47% 21.46% 22 0.47% 17.26% 23 0.49% 15.95%
Commercial construction 3 0.47% 3.16% 11 0.47% 9.00% 10 0.49% 6.60%
Residential construction 11 0.47% 10.14% 20 0.47% 16.23% 32 0.49% 21.67%
------ ----------- ----------- ------ ----------- ----------- ------ ------------- -----------
Total mortgage loans 104 0.00% 99.95% 124 0.00% 98.63% 145 0.00% 98.80%
Consumer loans 0 0.05% 2 1.37% 2 1.20%
------ ----------- ------ ----------- ------ -----------
Total allowance for loan
losses 104 100.00% 126 100.00% 147 100.00%
====== =========== ====== ========== ====== ===========
</TABLE>
INVESTMENT ACTIVITIES
General
The investment policy of the Bank, which is established by the Board of
Directors and implemented by the Bank's management, is designed primarily to
provide and maintain required liquidity, generate a favorable return on
investments without incurring undue interest rate and credit risk and
complement the Bank's lending activities. The Bank primarily invests in
mortgage-backed and related securities. United States treasury obligations and
mutual funds (the assets of which are comprised primarily of government
guaranteed mortgage-backed and related securities).
The Bank's investment policy permits investment in various types of liquid
assets authorized under FDIC and state regulations, which include U.S. Treasury
obligations, securities of various agencies, certain certificates of deposit of
insured banks and savings institutions, certain banker's acceptances and
deposits at the FHLB-Chicago. The Bank also is permitted to invest in
commercial paper, mutual funds, investment grade corporate debt securities and
mortgage-backed and related securities. Investment and aggregate investment
limitations and credit quality
14
<PAGE> 15
parameters of each class of investment are prescribed in the Bank's
investment policy. The Bank performs analyses on mortgage related securities
prior to purchase and on an ongoing basis to determine the impact on earnings
and market value under various interest rate and prepayment conditions. The
Bank's investment policy prohibits the Bank from engaging in hedging activities
which involve the use of options, futures, interest rate swaps or forward
commitments, and from purchasing non-investment grade corporate debt
securities. During the years ended June 30, 1995, 1996 and 1997, the Bank did
not hold any derivative financial instruments in its investment portfolio to
which the provisions of SFAS No. 119 would apply.
The Bank categorizes the securities it purchases into a "Held to Maturity" or
"Available for Sale" portfolio as follows:
1. Securities Held to Maturity. The Bank has the ability and
intent to hold these assets to maturity. Upon acquisition,
securities are classified as to the Bank's intent and a sale would
only be effected due to deteriorating investment quality. The
investment portfolio is not used for speculative purposes and is
carried at amortized cost. In the event the Bank sells securities
from this portfolio for other than credit quality reasons, all
activities within the investment portfolio with matching
characteristics may be reclassified as assets held for sale.
2. Securities Available for Sale. The Bank does not intend to
hold these assets to maturity and thus are carried at an amount which
is the lower of aggregate cost or market value with unrealized losses
recognized as a component of stockholders' equity. This portion of
the securities portfolio is designated to meet anticipated loan
demand and deposit runoff or to take advantage of market
opportunities.
Mortgage-Backed Securities
At June 30, 1997, the Bank's mortgage-backed securities portfolio totaled
$586,000, and consisted of $568,000 of GNMA participation certificates and
$18,000 of FHLMC participation certificates.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgage loans, the principal and interest
payments on which are passed from the mortgage loan originators through
intermediaries (generally federal government-sponsored enterprises) that pool
and repackage the participation interest in the form of securities to investors
such as the Bank. Such federal government-sponsored enterprises, which
guarantee the payment of principal and interest to investors include FHLMC,
FNMA and GNMA. Mortgage-backed securities generally increase the quality of
the Bank's assets by virtue of the guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Bank.
The actual maturity of a mortgage-backed security varies, however, depending on
when the mortgagors prepay or repay the underlying mortgage loans. Prepayments
of the underlying mortgage loans may shorten the life of the investment,
thereby adversely affecting its yield to maturity and the related market value
of the mortgage-backed security. The yield is based upon the interest income
and the amortization of the premium or accretion of the discount, related to
the mortgage-backed security. Premiums and discounts on mortgage-backed
securities are amortized or accreted over the estimated term of the securities
using a level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgage loans depend on many factors, including type of mortgage
loans and general levels of market interest rates. The difference between the
interest rates on the underlying mortgage loans and the prevailing mortgage
interest rates is an important determinent in the rate of prepayments. During
periods of falling mortgage interest rates, prepayments generally increase. If
the coupon rate of the underlying mortgage loans significantly exceeds the
prevailing market interest rate offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgage
loans. Prepayment experience is more difficult to estimate for adjustable rate
mortgage-backed securities. While mortgage-backed securities carry a reduced
credit risk as compared to whole loans (and generally yield less than the loans
that underlie such securities because of the cost payment guarantees or credit
enhancements that result in nominal credit risk), such securities remain
subject to the risk that a fluctuating interest rate environment, along with
other factors such as the geographic distribution of the underlying mortgage
loans, may alter the prepayment rate of such mortgage loans and so affect both
the prepayment speed and value of such securities.
15
<PAGE> 16
Mortgage-Related Securities
At June 30, 1997, the Bank's mortgage-related securities portfolio totaled
$100,000, consisting entirely of CMOs which were issued by the FHLMC. CMOs are
typically issued by a special purpose entity, which may be organized in a
variety of legal forms, such as a trust, a corporation or a partnership. The
entity aggregates pools of pass-through securities, which are used to
collateralize the mortgage-related securities. Once combined, the cash flows
can be divided into "tranches" or "classes" of individual securities, thereby
creating more predictable average lives for each security than the
underlying pass-through pools. Accordingly, under this security structure all
principal paydowns from the various mortgage pools are allocated to a
mortgage-related securities class or classes, structured to have priority until
it has been paid off. Thus, these securities are intended to address the
reinvestment concerns associated with mortgage-backed security pass-throughs,
namely that they tend to pay off when interest rates fall. Bank management
believes these securities represent attractive alternatives relative to other
investments due to the wide variety of maturity and repayment options available
through such investments and due to the limited prepayment risk associated with
such investments. The Bank has not purchased and does not intend to purchase
higher risk CMO residuals or stripped mortgage securities for its investment
securities portfolio. The Bank's investment in CMOs are primarily in short-
and intermediate-term (1 - 5 years) fixed rate tranche securities.
COMPOSITION OF THE BANK'S MORTGAGE-BACKED AND RELATED SECURITIES PORTFOLIO
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Bank's mortgage-backed and
related securities held for investment at June 30, 1997. At June 30, 1997, the
Bank did not have any mortgage-backed and related securities held for sale.
<TABLE>
<CAPTION>
At June 30, 1997
----------------------------------------------------------------------------------------
One Year or Less Over One to Five Years Over Five to Ten Years Over Ten Years
----------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ -- -- $ -- -- $ 205 8.57% $ 363 10.62%
FHLMC -- -- 18 9.00% -- -- -- --
Mortgage-related securities:
CMOs -- -- -- -- -- -- 100 6.00%
-------- -------- -------- -------- -------- ------- -------- -------
Total mortgage-backed and related
securities $ -- -- $ 18 9.00% $ 205 8.57% $ 463 9.78%
-------- -------- -------- -------- -------- ------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------
Mortgage-Backed and Related Securities
Total
-----------------------------------------------------
Average
Remaining Approximate Weighted
Years to Carrying Market Average
Maturity Value Value Yield
-----------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA 14.20 $ 568 $ 616 10.01%
FHLMC 3.92 17 19 9.00%
Mortgage-related securities:
CMOs 22.00 100 97 6.00%
--------- -------- ----------- --------
Total mortgage-backed and related
securities 14.09 $ 685 $ 732 9.40%
--------- -------- ----------- --------
</TABLE>
The following table sets forth certain information regarding carrying and
market values and percentage of total carrying values of the Bank's
mortgage-backed and related securities portfolio held for investment.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------------------------------------------------------------------------
Carrying Market Carrying Market Carrying Market
Value % of Total Value Value % of Total Value Value % of Total Value
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ 896 87.84% $ 966 $ 679 84.88% $ 735 $ 568 82.92% $ 616
FHLMC 24 2.35% 26 21 2.62% 22 17 2.48% 19
Mortgage-related securities:
CMOs 100 9.81% 95 100 12.50% 95 100 14.60% 97
-------- ---------- ---------- ------------ ---------- ------- ------------ ---------- -------
Total mortgage-backed and
related securities $ 1,020 100.00% $ 1,087 $ 800 100.00% $ 852 $ 685 100.00% 732
======== ========== ========== ============ ========== ======= ============ ========== =======
</TABLE>
16
<PAGE> 17
The following table sets forth the activity in the Bank's mortgage-backed and
related securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
1995 1996 1997
---------------------------------
(Dollars in thouseands)
<S> <C> <C> <C>
MORTGAGE-BACKED AND RELATED
SECURITIES HELD FOR INVESTMENT
At beginning of period $1,291 $1,020 $800
Purchases -- -- --
Sales -- -- --
Repayments (273) (221) (115)
Premium / discount amortization 2 1 --
------ ------ ----
At end of period $1,020 $ 800 $685
====== ====== ====
</TABLE>
The Bank may, in future periods, leverage its capital base by using the
proceeds of borrowings from the FHLB-Chicago to purchase mortgage-backed and
related securities or investment securities. Therefore, it the leveraging
strategy is implemented, the size of the Bank's mortgage-backed and related
securities portfolio may increase in future periods.
Investment Securities
The Bank invests in various types of liquid assets that are permissible
investments for state chartered savings banks, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposits of federally insured banks and savings institutions and federal funds.
Subject to various restrictions, the Bank also may invest its assets in
commercial paper, mutual funds, and investment grade corporate debt securities.
The Bank's current investment policy permits purchase only of investments
rated investment grade (i.e., rated in one of the top four rating categories)
by a nationally recognized statistical rating corporation ("NRSRO") and does
not permit purchases of securities of non-investment grade quality. Investment
securities generally are carried at cost, as adjusted for amortization of
premiums and accretion of discounts, because it is management's intention to
hold such securities to maturity.
A significant portion of the Bank's investment securities portfolio consists of
U.S. government and other agency obligations and mutual fund investments. At
June 30, 1997, U.S. government and agency obligation investments totaled $5.8
million, or 38.09% of the Bank's total investment portfolio. The amount of
these securities decreased significantly during the year ended June 30, 1997
due to the payment of the capital distribution. At June 30, 1997, mutual fund
investments totaled $5.4 million, or 35.61%, of the Bank's total investment
securities portfolio. All of the Bank's mutual fund investments are
permissible investments under the Bank's investment policy and all other
applicable regulations. Mutual fund investments are carried at market value.
Management anticipates that the Bank's investment portfolio may decrease in
fiscal 1998 if the Bank is successful in diversifying and expanding its
mortgage loan originations, and expanding its deposit funding through the
building or acquisition of branch facilities or the acquisition of other
financial institutions.
The following table sets forth investment securities issued by a single entity
with a total carrying value in excess of 10% of the Bank's retained earnings at
June 30, 1997 and all mutual fund investments contained in the Bank's
investment securities portfolio at June 30, 1997.
<TABLE>
<CAPTION>
Carrying Market
Value at Value at
June 30, 1997 June 30, 1997
------------- -------------
(In thousands)
<S> <C> <C>
Federated ARMS Fund, Institutional Shares, 251,004.016 shares $ 2,500 $ 2,448
Asset Management Fund, Inc., Adjustable Rate Mortgage (ARM) Portfolio,
122,517.732 shares 1,225 1,223
Federated Short-Term Income Fund (A Portfolio of Private Income Securities
Trust), Institutional Shares, 109,409,190 shares 1,000 953
Strong Government Securities Fund, 74,976.57 shares 800 784
FHLMC Bond, due 11/20/98 2,000 2,001
</TABLE>
17
<PAGE> 18
COMPOSITION OF THE BANK'S INVESTMENT SECURITIES PORTFOLIO
The following table sets forth certain information regarding the fair market
values and the amortized cost or market value of the Bank's investment
securities.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------
1995 1996 1997
------------------------------------------------------------------------------------
Amortized Amortized Amortized
Cost or Cost or Cost or
Carrying % Market Carrying % Market Carrying % Market
Value of Total Value Value of Total Value Value of Total Value
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and other agency
obligations $ -- -- $ -- $ -- -- $ -- $ 2,592 22.58% $ 2,582
Equity securities - mutual funds 5,884 95.01% 6,028 5,350 67.88% 5,525 5,403 47.06% 5,525
Corporate debt securities -- -- -- 1,955 24.80% 1,955 2,540 22.12% 2,540
Equity securities - FHLMC stock 309 4.99% 27 577 7.32% 28 946 8.24% 28
------ ------ ------ ------- ------ ------ ------- ------ -------
Total investment securities available
for sale $6,193 100.00% $6,055 $ 7,882 100.00% 7,508 $11,481 100.00% $10,675
------ ------ ------ ------- ------ ------ ------- ------ -------
Securities held to maturity:
U.S. Government and other agency
obligations $2,196 77.68% $2,203 $11,178 96.12% 11,162 $ 3,189 86.58% $ 3,202
Certificates of deposit 479 16.94% 479 294 2.53% 294 294 7.96% 294
FHLB stock 152 5.38% 152 157 1.35% 157 200 5.43% 200
------ ------ ------ ------- ------ ------ ------- ------ -------
Total securities held to maturity $2,827 100.00% $2,834 $11,629 100.00% 11,613 $ 3,683 100.00% $ 3,696
====== ====== ====== ======= ====== ====== ======= ====== =======
</TABLE>
The table below sets forth certain information regarding the carrying value or
amortized cost, weighted cost, weighted average yields and maturities of the
Bank's investment securities at June 30, 1997.
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------------------------------------------------
One Year or Less Over One to Five Years Over Five to Ten Years Over Ten Years
-----------------------------------------------------------------------------------------------
Carrying Carrying Carrying Carrying
Value or Weighted Value or Weighted Value or Weighted Value or Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and other agency
obligations $ 1,008 7.28% $ -- -- $ 1,005 7.74% $ 581 8.00%
Equity securities - mutual funds -- -- -- -- -- -- -- --
Corporate debt securities -- -- -- -- -- -- 2,540 5.51%
Equity securities - FHLMC stock -- -- -- -- -- -- -- --
------- ------ ------- -------
Total investment securities
available for sale $ 1,008 7.28% $ -- -- $ 1,005 7.74% $ 3,121 5.97%
------- ------ ------- -------
Securities held to maturity:
U.S. Government and other agency
obligations $ -- -- $ 2,989 8.05% -- -- $ 200 7.00%
Certificates of deposit 100 5.95% 194 5.40% -- -- -- --
FHLB stock -- -- -- -- -- -- -- --
------- ------- ------ ------
Total securities held to maturity $ 100 5.90% $ 3,183 8.01% $ -- -- $ 200 7.00%
======= ======= ====== ======
<CAPTION>
At June 30, 1997
--------------------------------------------------------------------
No Contractual
Maturity Investment Securities Totals
--------------------------------------------------------------------
Carrying Average Carrying
Value or Remaining Value or Approximate Weighted
Amortized Years to Amortized Market Average
Cost Maturity Cost Value Yield
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and other agency
obligations $ -- 6.25 $ 2,582 $ 2,592 7.82%
Equity securities - mutual funds 5,403 -- 5,525 5,403 6.20%
Corporate debt securities -- 22.33 2,540 2,540 5.51%
Equity securities - FHLMC stock 948 -- 28 946 38.30%
-------- ------- -------
Total investment securities available
for sale 8,348 10,675 11,481 8.46%
-------- ------- -------
Securities held to maturity:
U.S. Government and other agency
obligations $ -- 7.94 $ 3,189 $ 3,202 8.11%
Certificates of deposit -- 1.64 294 294 5.59%
FHLB stock 200 -- 200 200 4.92%
-------- ------- -------
Total securities held to maturity $ 200 $ 3,683 $ 3,696 8.00%
======== ======= =======
</TABLE>
SOURCES OF FUNDS
General
The Bank's primary sources of funds for use in lending, investing and for other
general purposes are deposits, proceeds from principal and interest payments on
loans, mortgage-backed and related securities and investment securities.
Contractual loan payments are a relatively stable source of funds, while
deposit inflows and outflows and loan prepayments are significantly influenced
by general market interest rates and economic conditions. Borrowings may be
used on a short-term basis to compensate for seasonal or other reductions in
normal sources of funds or for deposit inflows at less than projected levels.
The Bank also has other lines of credit available for borrowing purposes with
other local financial institutions.
18
<PAGE> 19
Deposits
The Bank offers a variety of deposit accounts having a range of interest rates
and terms. The Bank's deposits principally consist of demand accounts
(non-interest bearing checking, NOW, MMDA, and passbook) and certificates of
deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates and competition. The Bank's
deposits are obtained primarily from the area in which its office is located,
and the Bank relies principally on customer service, marketing programs and
long-standing relationships with customers to attract and retain these
deposits. Various types and limited amounts of advertising and promotion to
attract and retain deposit accounts also are used. The Bank does not currently
solicit or currently accept brokered deposits. Management monitors the Bank's
certificate accounts and based on historical experience, management believes it
will retain a large portion of such accounts upon maturity. Management
considers Bank profitability, the matching of term lengths with assets, the
attractiveness to customers and rates offered by competitors in deposit
offerings and promotions. The Bank has been competitive in the types of
accounts and interest rates it has offered on its deposit products. The Bank
intends to continue its efforts to attract deposits as a primary source of
funds for supporting its lending and investing activities.
The Bank sets interest rates on its deposits on a weekly basis, based upon a
number of factors, including: (i) the previous week's deposit flow; (ii) a
current survey of a selected group of competitors' rates for similar products;
(iii) external data which may influence interest rates; (iv) investment
opportunities and loan demands; and (v) scheduled maturities.
The following table presents the deposit activity of the Bank for the
periods indicated. During the low interest rate environment over the past
three years, the Bank's deposits have declined, with depositors shifting funds
from lower interest certificates of deposit to mutual funds and other
investment alternatives offering higher yields. In addition, although the Bank
has been competitively pricing its deposit products over the past two years,
its core deposits have continued to decline. The Bank believes its office
location and the characteristics of its local market area are primary
contributors to this continued decline. See "--Market Area and Competition".
One of the goals of the Conversion was to enhance the Bank's ability to build
or acquire at least one additional branch facility to be located within the
Bank's primary market area of the Milwaukee MSA; management believes that the
Bank needs to grow and expand if it is to remain competitive and to counteract
limited loan demand and deposit funds in its local market area. Management
believes that an additional branch facility will enable the Bank to attract
deposits from the local areas surrounding such facilities. In addition, the
Bank's deposit account balance has declined by the amount authorized to be
withdrawn by depositors for payment for shares of Common Stock in connection
with the Conversion.
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------
1995 1996 1997
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Deposits $ 4,977 $ 2,289 $ 4,518
Withdrawals 6,808 7,334 5,926
------- ------- -------
Net deposits (withdrawals) (1,831) (5,045) (1,408)
Interest credited on deposits 876 933 804
------- ------- -------
Total increase (decrease) in deposits $ (955) $(4,112) $ (604)
======= ======= =======
</TABLE>
At June 30, 1996 and 1997, the bank had outstanding $1.38 million and $1.40
million, respectively, in certificates of deposit in amounts of $100,000 or
more maturing as follows:
<TABLE>
<CAPTION>
At At
June 30, 1996 June 30, 1997
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 100 $ 100
Over three through six months 318 112
Over six through twelve months 521 843
Over twelve months 439 347
------ ------
Total $1,378 $1,402
====== ======
</TABLE>
19
<PAGE> 20
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal rates on each
category of deposits presented.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
1995 1996
-------------------------------------------------------------------------
Weighted Weighted
Percent of Average Percent of Average
Amount Total Deposits Nominal Rate Amount Total Deposits Nominal Rate
------ -------------- ----------- ------ ------------- -------------
(Dollars in thousands)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deposit accounts
Non-interest bearing $ 16 0.07% -- $ 89 0.49% --
Interest-bearing NOW 66 0.30% 2.50% 126 0.69% 2.50%
Money market 1,499 6.72% 3.45% 952 5.23% 3.45%
Passbook 3,096 13.88% 3.01% 2.775 15.25% 2.78%
------- ------- ------- ------
Total demand accounts 4,677 20.96% 3.13% 3,942 21.66% 2.87%
Certificates of deposit
Six months and less 6,711 30.08% 5.28% 7,230 39.73% 5.59%
6 to 12 months 5,701 25.55% 6.04% 3,533 19.41% 5.49%
13 to 36 months 4,493 20.14% 5.97% 2,813 15.46% 5.84%
37 to 60 months 682 3.06% 6.21% 632 3.47% 6.01%
61 to 90 months 48 0.22% 0.00% 50 0.27% 6.00%
Jumbo (over 90 months) -- 0.00% 8.00% -- 0.00% 0.00%
------- ------- ------- ------
Total certificates of deposit 17,635 79.04% 5.72% 14,258 78.34% 5.64%
------- ------- ------- ------
Total deposit accounts $22,312 100.00% 5.18% $18,200 100.00% 5.04%
======= ======= ======= ======
<CAPTION>
------------------------------------
1997
------------------------------------
Weighted
Percent of Average
Amount Total Deposits Nominal Rate
------ -------------- -----------
<S> <C> <C> <C>
Deposit Accounts
Non-interest bearing $ 35 0.20% --
Interest-bearing NOW 92 0.52% 2.50%
Money market 926 5.26% 3.45%
Passbook 2,660 15.12% 2.78%
------- ------
Total demand accounts 3,713 21.10% 2.91%
Certificates of deposit
Six months and less 6,410 36.43% 5.59%
6 to 12 months 4,326 24.58% 5.49%
13 to 36 months 2,807 15.95% 5.84%
37 to 60 months 289 1.65% 6.01%
61 to 90 months 51 0.29% 8.00%
Jumbo (over 90 months) -- 0.00% 0.00%
------- ------
Total certificates of deposit 13,883 78.90% 5.63%
------- ------
Total deposit accounts $17,596 100.00% 5.05%
======= ======
</TABLE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at June 30, 1995, 1996 and 1997 and the
periods to maturity of the certificate accounts outstanding at June 30, 1997.
<TABLE>
<CAPTION>
At June 30, Period to Maturity from June 30, 1997
-------------------------------------------------------------------------------------------
Within One to
1995 1996 1997 One Three Thereafter Totals
Year Years
-------------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit
amounts:
3.99% or less $ 21 $ 10 $ 11 $ 11 $ -- $ -- $ 11
4.00% to 4.99% 2,504 95 -- -- -- -- --
5.00% to 5.99% 7,721 11,180 11,138 9,089 1,995 54 11,138
6.00% to 6.99% 6,626 2,402 2,467 1,534 697 236 2,467
7.00% to 7.99% 710 521 216 101 115 -- 216
8.00% to 8.99% 53 50 51 -- -- 51 51
9.00% to 9.99% -- -- -- -- -- -- --
-------- ------- ------- ------- ------ ------- -------
Total $ 17,635 $14,258 $13,883 $10,735 $2,807 $ 341 $13,883
======== ======= ======= ======= ====== ======= =======
</TABLE>
Borrowings and Other Financial Transactions
The Bank's other available sources of funds include notes payable to the
FHLB-Chicago and collateralized borrowings. As a member of the FHLB-Chicago,
the Bank is required to own capital stock in and is authorized to apply for
borrowings form the FHLB-Chicago. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and a range of maturities. The
FHLB-Chicago may prescribe the acceptable uses for these borrowings, as well as
limitations on the amount and repayment provisions. The Bank has borrowed
funds in the past, and will continue to monitor use of this source in the
future. At June 30, 1996, the Bank had no outstanding borrowings from the
FHLB-Chicago. At June 30, 1997, the Bank had $4.0 million outstanding form the
FHLB-Chicago. Other sources of funding are from correspondent banks on a
short-term basis.
The Bank's borrowings from time to time include reverse repurchase agreements
and repurchase agreements. The form of reverse repurchase agreements used by
the Bank involves the sale of securities owned by the Bank with a commitment to
repurchase the same or substantially the same securities at a predetermined
price at a future date, typically within 30 days to 12 months. The form of
repurchase agreements used by the Bank generally are entered into with local
businesses and institutions seeking to deposit funds in excess of insurable
limits. Both of these transactions are treated as borrowings on the Bank's
financial statements. These transactions are authorized by the
20
<PAGE> 21
Bank's Investment Policy and are governed by agreements with primary
government dealers under PSA Master Repurchase Agreements. At June 30, 1996,
the Company had no outstanding reverse repurchase agreements. At June 30,
1997, the Company had $2.0 million outstanding reverse repurchase agreements or
repurchase agreements.
The following table sets forth certain information regarding the Bank's
FHLB-Chicago advances, reverse repurchase agreements and repurchase agreements
at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
As of for Years Ended June 30,
---------------------------------------------
1995 1996 1997
------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB-Chicago advances:
Average balance outstanding $ -- $ 134 $ 1,775
Maximum amount outstanding at any
month-end during the period -- 650 4,000
Balance outstanding at end of period -- -- 4,000
Weighted average interest rate during
the period (1) 5.82% 5.91%
Weighted average interest rate at end of
period -- 5.97%
Reverse repurchase agreements:
No activity $ 280 $ -- $ --
Repurchase agreements:
Average balance outstanding $ 880 $ -- $ 1,347
Maximum amount outstanding at any
month-end during the period -- -- 3,000
Balance outstanding at end of period -- -- 2,000
Weighted average interest rate during
the period(1) 6.43% -- 5.72%
Weighted average interest rate at
end of period -- -- 5.70%
</TABLE>
- --------------
(1) Computed on the basis of average monthly balances
FEDERAL TAXATION
General
The following discussion of tax matters is intended to be a summary of the
material tax rules applicable to the Bank and does not purport to be a
comprehensive description of all applicable rules.
The Bank and the Holding Company report their income on a fiscal year
basis using the cash method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. For
its taxable year ended June 30, 1997, the Bank was subject to a blended federal
income tax rate of approximately 34%.
Bad Debt Reserves
Savings institutions, such as the Bank, which meet certain definitional tests
primarily relating to their assets and the nature of their business
("qualifying thrifts"), are permitted to establish a reserve for bad debts and
to make annual additions, thereto, which additions may, within specified
formula limits, be deducted in arriving at their taxable income. For its
taxable year ended June 30, 1993, the Bank adopted the Book/Tax Conformity
method for bad debt deductions under IRC 166. This method allows the Bank to
take bad debt deductions for specific loss reserves that it establishes. Each
year the Bank will review the most favorable way to calculate the deduction.
Earnings that have been appropriated for bad debt reserves and deducted for
federal income tax purposes cannot be used by the Bank to pay cash dividends to
the Holding Company without the payment of income taxes by the Bank at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. Thus,
any dividends to the Holding Company that would reduce amounts appropriated to
the Bank's bad debt reserves and deducted for federal income tax purposes could
create a tax liability for the Bank. The Bank does not intend to pay dividends
that would result in a recapture of its bad debt reserves. See "Regulation."
21
<PAGE> 22
Distributions
To the extent that (i) the Bank's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under an
experience method, and (ii) the Bank makes "non-dividend distributions" to
stockholders that are considered to result in distributions from the excess bad
debt reserve or the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Non-dividend distributions in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings or
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution form the Bank's bad debt reserve.
The amount of additional taxable income created from an Excess Distribution is
an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if after the Conversion, certain
portions of the Bank's accumulated tax bad debt reserve are used for purposes
other than to absorb qualified bad debt losses, such as for payment of
dividends or other distributions with respect to the Bank's capital stock
(including distributions upon redemption or liquidation), approximately one and
one-half times the amount so used would be includable in gross income for
federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state taxes). See "Dividend Policy" and "Regulations" for limits
on the payment of dividends by the Bank.
Corporate Alternative Minimum Tax
For taxable years beginning after December 31, 1986, the Internal
Revenue Code imposes an alternative minimum tax ("AMT") on a corporation's
alternative minimum taxable income ("AMTI") which is imposed at a rate of 20%.
The excess of the bad debt reserve deduction using the percentage of taxable
income method, over the deduction that would have been allowable under an
experience method, is treated as preference item for purposes of computing the
AMTI. Only 90% of AMTI can be offset by net operating losses. For taxable
years beginning after December 31, 1989, the adjustment to AMTI based on book
income will be an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction of net operating losses). In addition, for
taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an AMT is due. The Bank is not subject to the environmental tax and does
not expect to be subject to the AMT.
STATE TAXATION
The Bank is subject to franchise taxes at a rate of 7.9% imposed by the State
of Wisconsin. Wisconsin taxable income is generally similar to federal taxable
income except that interest from state and municipal obligations is taxable, no
deduction is allowed for state income taxes, and net operating losses may be
carried forward but not back. Wisconsin law does not provide for filing of
consolidated income tax returns.
REGULATION
The Bank consummated its conversion from a mutual to a stock savings bank on
April 18, 1996. The following discussion involves regulations as they apply to
stock savings banks and is intended to be a summary of key regulatory issues
and not a comprehensive description of all applicable regulations.
The Bank is a Wisconsin-chartered stock savings bank and its deposit accounts
are insured up to applicable limits by the FDIC under the Savings Association
Insurance Fund ("SAIF"). The Bank is subject to extensive regulation by the
Administrator, as its chartering agency, and by the FDIC, as its deposit
insurer and principal federal regulator. The lending and investment authority
of the Bank is prescribed by Wisconsin law and regulations, as well as
applicable federal law and regulations, and the Bank is prohibited from
engaging in any activities not permitted by such law and regulations. The
Company is a one-bank holding company subject to regulatory oversight by the
Federal Reserve Board ("FRB"), the Director and the Securities and Exchange
Commission ("SEC").
22
<PAGE> 23
WISCONSIN SAVINGS BANK REGULATION
Regulations administered by the Director govern various aspects of the
activities and operations of Wisconsin- chartered savings banks.
Examinations and Assessments
The Bank is required to file periodic reports with and is subject to
examination at least once every 18-month period by the Director. Savings banks
are required to pay examination fees and annual assessments to fund the
supervisory operations of the Director. Based on the assessment rates
published by the Director and the Bank's total assets of $40.4 million at
December 31, 1996, the Bank paid $1,125 in assessments for the period ended
June 30, 1997.
Loans and Investments
Under Wisconsin law, the Bank is authorized to make, invest in, sell, purchase,
participate or otherwise deal in mortgage loans or interests in mortgage loans
without geographic restriction, including loans made on the security of
residential and commercial property. Savings banks may lend funds, on a
secured or unsecured basis, for commercial or consumer purposes, provided that
aggregate commercial loans do not exceed 10% of the savings bank's total assets
and aggregate consumer loans do not exceed 10% of the savings bank's total
assets. Subject to certain limited exceptions, savings banks may not make a
loan secured by a first lien mortgage in an amount in excess of 90% of the fair
value of the real estate security.
Subject to statutory and regulatory limitations, savings banks may also invest
funds in certain types of debt and equity securities, including obligations of
federal, state and local governments and agencies. Subject to prior approval
of the Director, compliance with capital requirements, and certain other
restrictions, savings banks may invest in residential housing development
projects. Savings banks may invest in service corporations or subsidiaries
with the prior approval of the Director, subject to certain restrictions. The
Bank does not have any subsidiary operations.
The lending and investment powers of Wisconsin savings banks also are limited
by FDIC regulation and other federal law and regulations. See "Federal Deposit
Insurance Corporation Improvement Act of 1991".
Loans to One Borrower
Wisconsin-chartered savings banks may make loans and extensions of credit, both
direct and indirect, to one borrower in amounts up to 15% of capital plus an
additional 10% for loans fully secured by readily marketable collateral. In
addition, savings banks may make loans to one borrower for any purpose in an
amount not to exceed $500,000, or to develop domestic residential housing units
in an amount not to exceed the lesser of $30 million or 30% of capital,
provided certain conditions are satisfied. At June 30, 1997, the Bank did not
have any loans which exceeded the loans-to-one borrower limitations.
Qualified Thrift Lender
As a Wisconsin-chartered savings bank, the Bank must qualify for and maintain a
level of qualified thrift investments equal to 60% of its assets as prescribed
in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended
("Internal Revenue Code"). At June 30, 1997, the Bank maintained over 75% of
its assets in qualified thrift investments and therefore met the qualified
thrift-requirement.
Dividend Limitations
A savings bank which meets its regulatory capital requirement may declare
dividends on capital stock based upon net profits, provided that its
paid-in-surplus equals its capital stock. If the paid-in surplus of the
savings bank does not equal its capital stock, the board of directors may not
declare a dividend unless at least 10% of the net profits of the preceding half
year in the case of quarterly or semi-annual dividends, or 10% of the net
profits of the preceding year in the case of annual dividends, has been
transferred to paid-in surplus. In addition, prior approval of the
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Director is required before dividends exceeding 50% of profits for any
calendar year may be declared and before a dividend may be declared out of
retained earnings. Under the Director's regulations, a savings bank which has
converted from mutual to stock form also is prohibited from paying a dividend
on its capital stock if the effect thereof would cause the regulatory capital
of the savings bank to be reduced below the amount required for its liquidation
account.
Liquidity
Savings banks are required to maintain an average daily balance of liquid
assets (including cash, certain time deposits, certain banker's acceptances,
certain corporate debt securities and highly rated commercial paper, securities
of certain mutual funds and specified United States government, state or
federal agency obligations) of not less than 8% of its average daily balance
during the preceding calendar month of its net withdrawable accounts plus its
short-term borrowings. Also required is a "primary liquid assets" ratio of at
least 4% of average daily withdrawable accounts and short-term borrowings.
"Primary liquid assets" is defined as primary short-term liquid assets and U.S.
government and federal agency securities. On June 30, 1997, the Bank's
liquidity ratio was 75.05%.
CERTAIN FEDERAL REGULATIONS
Provisions of federal law address risk reduction and the promotion of standards
of safety and soundness for insured depository institutions.
Examinations and Audits
Federal regulations require: (i) annual on-site examinations for all
depository institutions except those well- capitalized institutions with assets
of than $100 million; (ii) annual audits by independent public accountants for
all insured institutions with assets in excess of $500 million; (iii) the
formation of independent audit committees of the boards of directors of insured
depository institutions for institutions with assets equal to or in excess of
$500 million; and, (iv) management of depository institutions to prepare
certain financial reports annually and to establish internal compliance
procedures.
Prompt Corrective Regulatory Action
Federal bank regulators are required to take certain supervisory actions with
respect to undercapitalized institutions, the severity of which depends upon
the institution's degree of capitalization. Under the regulations, an
institution shall be deemed to be: (i) "well-capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has Tier 1 risk- based capital of
6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of
4.0% or more and a Tier 1 leverage capital ratio 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well-capitalized";
(iii) "undercapitalized" if it has a total risk-based capital ratio less than
8.0%, a Tier 1 risk-based capital ratio less than 4.0% or a Tier 1 leverage
capital ratio less than 4.0% (or less than 3.0% under certain circumstances);
(iv) "significantly undercapitalized" if it has a total risk-based capital
ratio less than 6.0%, a Tier 1 risk-based capital ratio less than 3.0% or a
Tier 1 leverage ratio less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets equal to or less than 2.0%.
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends, making any
other capital distribution or paying a management fee to a controlling person.
Undercapitalized and significantly undercapitalized institutions are subject to
certain mandatory supervisory actions and face more severe restrictions. The
Bank currently exceeds all applicable regulatory capital requirements and
therefore is not subject to prompt corrective action.
At June 30, 1997, the Bank was a "well-capitalized" institution under the
prompt corrective actions regulations.
Brokered Deposits; Interest Rate Limitations
FDIC regulations govern the acceptance of brokered deposits by insured
depository institutions. The capital position of an institution determines
whether and with what limitations an institution may accept brokered deposits.
A "well-
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capitalized" institution (one that significantly exceeds specified
capital ratios) may accept brokered deposits without restriction.
"Undercapitalized" institutions (those that fail to meet minimum regulatory
requirements) may not accept brokered deposits and "adequately capitalized"
institutions (those that are not "well-capitalized" or "undercapitalized") may
only accept such deposits with the consent of the FDIC. "Adequately
capitalized" institutions may apply for a waiver by letter to the FDIC. An
institution that is not "well-capitalized", even if meeting minimum capital
requirements, may not solicit brokered or other deposits by offering interest
rates that are significantly higher than the relevant local or national rate as
determined under the regulations. As a "well-capitalized" institution, the
Bank may accept brokered deposits without restrictions. At June 30, 1997, the
Bank had no brokered deposits.
Uniform Lending Standards
Savings banks must adopt and maintain written policies that establish
appropriate limits and standards for extensions of credit secured by liens or
interests in real estate or made for the purpose of financing permanent
improvements to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards (including
loan-to-value limits) that are clear and measurable, loan administration
procedures and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by federal bank regulators.
The Bank has adopted and maintains such policies.
Standards for Safety and Soundness
On July 10, 1995, federal bank regulators adopted the Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") and also
adopted a final rule establishing deadlines for submission and review of safety
and soundness compliance plans. Federal bank regulators are authorized, but
not required, to request a compliance plan for failure to satisfy the safety
and soundness standards set out in the Guidelines. An institution must file a
compliance plan within 30 days of a request to do so from the institution's
primary federal regulators.. Regulators expect to request a compliance plan
from an institution whose failure to meet one or more of the standards is of
such severity that it could threaten the safe and sound operation of the
institution.
The Guidelines prescribe operational and managerial standards for all insured
depository institutions relating to internal controls, information systems and
audit systems; loan documentation; credit underwriting; interest rate risk
exposure; asset growth; and compensation fees and benefits.
The Bank believes that its operational and managerial standards substantially
comply with the standards set forth in the Guidelines and that compliance with
the Guidelines will therefore not impose a significant burden on Bank
operations.
Restrictions Upon State-Chartered Banks
FDIC regulations governing equity investments of the Bank prohibit certain
equity investments and generally limit the activities and equity investments of
FDIC-insured state-chartered banks and their subsidiaries to those permissible
for federally chartered national banks and their subsidiaries. The Bank does
not hold any impermissible equity investments.
The Bank must obtain the FDIC's prior approval before directly, or indirectly
through a majority-owned subsidiary, engaging "as principal" in any activity
that is not permissible for a national bank unless certain exceptions apply.
In order for a state bank to conduct an activity as principal without the
FDIC's consent, the activity must be conducted in the same manner in which a
national bank is authorized to conduct the activity. The activity regulations
provide that state banks which meet all regulatory capital requirements may
engage in certain activities that are not permissible for national banks which
are deemed not to present a significant risk to the insurance fund, including
guaranteeing certain obligations of others, activities which the FRB has found
to be closely related to banking and certain securities activities conducted
through subsidiaries. The FDIC will not approve an activity it determines
would present a significant risk to the FDIC insurance fund. Bank activities
are of a type permissible under applicable federal regulations.
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CAPITAL MAINTENANCE
FDIC Regulation
FDIC-insured institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based capital requirements. The Bank is
required to meet the following capital standards: (i) "Tier 1 capital" in an
amount not less than 3% of total assets; (ii) "Tier 1 capital" in an amount not
less than 4% of risk-weighted assets; and (iii) "total capital" in an amount
not less than 8% of risk- weighted assets.
FDIC-insured institutions in the strongest financial and managerial condition
(with a composite rating of "1" under the Uniform Financial Institutions Rating
System established by the Federal Financial Institutions Examination Council)
are required to maintain "Tier 1 capital" equal to at least 3% of total assets
(the "leverage capital" requirement). Tier 1 capital is defined to include the
sum of stockholders' equity, noncumulative perpetual preferred stock (including
any related surplus), and minority interests in consolidated subsidiaries,
minus all intangible assets (with certain exceptions), identified losses and
qualifying investments in securities subsidiaries. An institution that fails
to meet the minimum leverage capital requirement must file a capital
restoration plan with the appropriate FDIC regional director. At June 30,
1997, the Bank's ratio of Tier 1 capital to total assets was 46.18% or 43.18%
in excess of the minimum leverage capital requirement.
FDIC-insured institutions also are required to adhere to certain
risk-based capital guidelines which are designed to provide a measure of
capital more sensitive to the risk profiles of individual banks. Under the
risk-based capital guidelines, capital is divided into two tiers: core (Tier 1)
capital, as defined above, and the supplementary capital (Tier 2). Tier 2
capital is limited to 100% of core capital and includes cumulative preferred
stock, perpetual preferred stock, mandatory convertible securities,
subordinated debt, intermediate preferred stock and allowance for possible loan
and lease losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Total capital is the sum of Tier 1 and Tier 2 capital. The risk-based capital
framework assigns balance sheet assets to one of four broad risk categories
which are assigned risk- weights ranging from 0% to 100% based primarily on the
degree of credit risk associated with the obligor. Off- balance sheet items
are converted to an on-balance sheet "credit equivalent" amount utilizing
certain conversion factors. The weighted sum of the four risk-weighted
categories equals risk-weighted assets. At June 30, 1997, the Bank's Tier 1
capital to risk-weighted assets was 74.18% or 70.18% in excess of the FDIC
requirement and the Bank's total capital to risk-weighted assets was 46.52% or
38.52% in excess of the FDIC requirement.
Wisconsin Regulations
Wisconsin-chartered savings banks are required to maintain a minimum capital to
assets ratio of 6% and must maintain total capital necessary to ensure the
continuation of insurance of deposit accounts by the FDIC. It the Director
determines that the financial condition, history, management or earning
prospects of a savings bank are not adequate, the Commissioner may require a
higher minimum capital level for the savings bank. If a savings banks' capital
ratio falls below the required level, the Director may direct the savings bank
to adhere to a specific written plan established by the Director to correct the
savings bank's capital deficiency, as well as a number of other restrictions on
the savings bank's operations, including a prohibition on the declaration of
dividends by the savings bank's board of directors. At June 30, 1997, the
Bank's total capital, as calculated under Wisconsin law, was $20.3 million or
47.66% of total assets, which was 41.66% in excess of the required amount.
INSURANCE OF DEPOSITS
The Bank's deposits are insured to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the FDIC. The FDIC regulations assign
institutions to a particular capital group based on the level of an
institution's capital -- "well capitalized", "adequately capitalized", and
"under capitalized". These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with reduced insurance rates paid by well capitalized,
financially sound institutions and higher rates paid by undercapitalized
institutions that pose a substantial risk of loss to the insurance fund unless
effective corrective action is taken.
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Deposit insurance premiums for the Bank, which is classified as a well
capitalized savings bank, are currently assessed at the rate of 23 cents per
$100 of deposits. The Bank's expense related to FDIC premiums was $162,400 for
the fiscal year ended June 30, 1997. Deposit premium levels are set in order
to permit the SAIF to achieve a ratio of reserves to insured deposits of 1.25%,
and the FDIC may adjust assessment rates in order to maintain the target ratio.
In addition, the FDIC may impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. While an increase in premiums for the Bank could have
an adverse effect on earnings, a decrease in premiums could have a positive
impact on earnings. The Bank does not expect that any reasonably foreseeable
increased insurance assessments would significantly impair the Bank's overall
financial condition or results of operations.
The FDIC insures commercial bank deposits through a separate fund, the Bank
Insurance Fund ("BIF"). During 1995, BIF assessment rates were reduced and as
a result, BIF-member institutions were paying lower deposit insurance premiums
then SAIF-member institutions. Legislation passed during 1996 addressed the
BIF/SAIF premium disparity and other matters related to deposit insurance
obligations.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. If
insurance of accounts is terminated, the accounts at the institution at the
time of termination, less subsequent withdrawals, shall continue to be insured
for a period of six months to two years, as determined by the FDIC. Management
is aware of no existing circumstances which could result in termination of the
deposit insurance of the Bank.
REGULATORY LEGISLATION AFFECTING DEPOSIT INSURANCE
Deposits of the Bank currently are insured to applicable limits by the FDIC
under the Savings Associations Insurance Fund ("SAIF"). The FDIC also insures
commercial bank deposits under the Bank Insurance Fund ("BIF"). Premium levels
are set in order to permit the funds to be capitalized at a level equal to
1.25% of total fund deposits. Assessment rate changes made in 1995 created a
deposit insurance premium disparity between the two funds; while most BIF
members were paying only a nominal $2,000 annual premium, SAIF members were
paying average rates of 23.4 basis points of deposits.
On September 30, 1996, Congress passed legislation to address the deposit
insurance premium disparity. The "Deposit Insurance Funds Act of 1996" (the
"DIF Act"), included as part of an Omnibus Appropriations Bill, directed the
FDIC to impose a special assessment on SAIF-assessable deposits at a rate that
would cause the SAIF to achieve its designated reserve ratio of 1.25% of
SAIF-insured deposits as of October 1, 1996. The DIF Act required that the
special assessment be applied against the SAIF-assessable deposits held be
institutions as of March 31, 1995. Pursuant to a final rule issued by the FDIC
on October 16, 1996, the special assessment rate was determined to be 65.7
basis points. This one-time special assessment fully capitalized the SAIF and
was collected on November 27, 1996.
The amount of the assessment to the Bank was $144,000. The special assessment
was recorded on September 30, 1996 and had the effect of reducing the Bank's
earnings and capital by the after-tax amount of the assessment as of the date
of enactment, which was $87,000 or $0.04 per share. As described below, with
the recapitalization of the SAIF, BIF and SAIF regular premiums will be
comparable and, therefore, FDIC premium expense is expected to be reduced in
future periods.
The FDIC published a final rule on December 24, 1996, establishing a permanent
base assessment schedule for the SAIF and setting assessment rates at a range
of 4 to 31 basis points. The rule provides for an adjusted assessment schedule
reducing rates by 4 basis points to reflect current conditions, producing an
effective SAIF assessment range of 0 to 27 basis points beginning October 1,
1996. This assessment range, which applies to all SAIF institutions other than
SAIF member savings associations, is comparable to the current schedule for
BIF-institutions. A special interim rate schedule ranging from 18 to 27 basis
points applied to SAIF-member savings associations for the last quarter of
1996, reflecting the fact that assessments related to certain bond obligations
of the Financial Corporation ("FICO"), which were issued to resolve the savings
and loan crisis in the 1980's, will be included in the SAIF rates for these
institutions during that period. Because the Bank is a "Sasser bank" (a bank
that converted its charter from a savings association to a state savings bank
charter, yet remains a SAIF member in accordance with the so-called
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"Sasser Amendment"), it was not assessed this interim rate and received
a credit in January 1997 for its entire FDIC premium for the quarter ended
December 31, 1996.
The DIF Act addressed other matters which will affect the Bank. The
FICO obligations are being shared by all insured depository institutions (after
December 31, 1996). This obligation had previously been the sole responsibility
of SAIF-insured institutions and had been funded through SAIF assessments. The
DIF Act eliminated the statutory link between FICO's assessments and amounts
authorized to be assessed by the SAIF. Effective January 1, 1997, all insured
institutions will pay an annual assessment to fund interest payments on the
FICO bonds. BIF-member institutions will pay one-fifth the rate to be paid by
SAIF members, for the first three years. The annual FICO assessment is 1.3 and
6.5 basis points of deposits for BIF and SAIF members, respectively. After
January 1, 2000, BIF and SAIF members will share the FICO payments on a
pro-rate basis, which is assessed at 2.4 basis points, until the bonds mature
in 2017.
In addition, the DIF Act provided for the merger of BIF and SAIF into a single
Deposit Insurance Fund. This provision will be effective January 1, 1999,
assuming that no insured depository institution is a savings association on
that date. This legislation contemplates that the savings association charter
will be phased out over that period of time. The DIF Act also calls for the
Secretary of the Treasury to undertake a study concerning the development of a
common charter for all insured depository institutions and the abolition of
separate and distinct charters for banks and savings associations.
Management does not anticipate that any of the foregoing legislation will have
a material impact on the Company's financial condition in future periods.
RESTRICTIONS ON LOANS TO AND TRANSACTIONS WITH INSIDERS AND AFFILIATES
FRB regulations limit the total amount a savings bank may lend to its executive
officers, directors, principal shareholders and their related interests
(collectively referred to herein as "affiliated persons"). Generally, an
affiliated person may borrow an aggregate amount not exceeding 15% of a savings
bank's unimpaired capital and unimpaired surplus on an unsecured basis and an
additional 10% on a secured basis. The regulations limit, with certain
exceptions, the aggregate amount a depository institution may lend to
affiliated persons as a class to an amount not exceeding the institution's
unimpaired capital and unimpaired surplus.
In addition, the Director's regulations establish restrictions on loans and
other transactions with the Bank's affiliated persons. All loans to affiliated
persons must be made in the "ordinary course of business" involving not more
than the "normal risks of collectibility" and not exceeding the loan amount
which would be available to members of the general public of similar credit
status, must be secured by the principal residence of the affiliated person or
deposit accounts maintained at the Bank and must be approved by a majority of
the Bank's disinterested directors. Interest rates on loans to affiliated
persons must be equal to or greater than the Bank's current cost of funds,
except that the interest rate secured by a deposit account must be at least 1%
above the rate of return on the deposit account. Extensions of credit to
affiliated persons for commercial purposes, in the aggregate, may not exceed
$100,000.
The Bank also must comply with Sections 23A and 23B of the Federal
Reserve Act relating to transactions with affiliates in the same manner and to
the same extent as if the savings bank were a Federal Reserve member bank.
Generally, Sections 23A and 23B limit the extent to which an insured
institution or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and
surplus, plus an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and require that all
transactions be on terms substantially the same, or at least as favorable to
the institution or subsidiary, as those provided to non-affiliates. The term
"covered transaction" includes the making of loans, the purchase of assets,
issuance of a guaranty and similar other types of transactions. The Director,
for safety and soundness reasons, may impose more stringent restrictions on
savings banks but may not exempt transactions from or otherwise abridge
Sections 23A and 23B. Exemptions form 23A and 23B may be granted only by the
FRB.
Unless prior approval of the Director is obtained, a savings bank may not
purchase, lease or acquire a site for an office building or an interest in real
estate from an affiliated person, including a stockholder owning more than 10%
of its capital stock, or from any firm, corporation, entity or family in which
an affiliated person or 10% stockholder has a direct or indirect interest. The
Bank has not been significantly affected by such restrictions on loans to and
transactions with affiliates.
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COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977, as amended (the "CRA"), as
implemented by FDIC regulations, the Bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services it believes are best suited to its
particular community. The CRA requires the FDIC, in connection with its
examination of a bank, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such institution. The law requires public
disclosure of an institution's CRA rating and also requires the primary
regulator to provide a written evaluation of an institution's performance. The
Bank's latest CRA rating, received on December 7, 1993 was satisfactory.
On May 4, 1995, the federal banking regulators adopted a final rule ("Final CRA
Rule") governing compliance with the CRA. The Final CRA Rule eliminates the
previous CRA regulation's 12 assessment factors and substitutes a performance
based evaluation system. The Final CRA Rule will be phased in over a period of
time and become fully effective by July 1, 1997. Under the Final CRA Rule, an
institution's performance in meeting the credit needs of its entire community,
including low- and moderate-income areas, as required by the CRA, will
generally be evaluated under three assessment tests relating to lending,
investment and service.
Management of the holding Company does not anticipate that the new CRA
regulations will adversely affect the Bank.
FEDERAL RESERVE SYSTEM
Regulation D, promulgated by the FRB, imposes reserve requirements on all
depository institutions, including savings banks and savings institutions,
which maintain transaction accounts or non-personal time deposits. Checking
accounts, NOW accounts and certain other types of accounts that permit payments
or transfers to third parties all within the definition of transaction accounts
and are subject to Regulation D reserve requirements, as are any non- personal
time deposits (including certain money market deposit accounts) at a savings
institution. For 1997, a depository institution must maintain average daily
reserves equal to 3% of the first $49.3 million of net transaction accounts and
an initial reserve of $1.5 million, plus 10% of that portion of total
transaction accounts in excess of $49.3 million. The first $4.4 million of
otherwise reservable balances (subject to adjustment by the FRB) are exempt
from the reserve requirements. These percentages and threshold limits are
subject to adjustment by the FRB. As of June 30, 1997, the Bank met its
Regulation D reserve requirements.
Thrift institutions also have authority to borrow from the Federal
Reserve Bank "discount window", but FRB policy generally requires thrift
institutions to exhaust all sources before borrowing from the Federal Reserve
System. The Bank had no discount window borrowings as of June 30, 1997.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System, consisting of 12 FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Chicago, is required to acquire and hold
shares of capital stock in the FHLB- Chicago in an amount equal to the greater
of: (i) 1% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, or (ii) 1% of 30% of total assets. The Bank is in
compliance with this requirement with an investment in FHLB-Chicago stock of
$200,100 at June 30, 1997.
Among other benefits, the FHLBs provide a central credit facility primarily for
member institutions. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the
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FHLB-Chicago. At June 30, 1997, the Bank had $4.0 million in advances
outstanding from FHLB-Chicago. See "Business of the Bank".
HOLDING COMPANY REGULATION
Federal Regulation
The Company is a registered bank holding company pursuant to the Bank Holding
Company Act of 1956, as amended (the "BHCA"). As such, the Company is subject
to examination, regulation and periodic reporting under the BHCA, as
administered by the FRB. The FRB has adopted capital adequacy guidelines for
bank holding companies (on a consolidated basis) substantially similar to those
of the FDIC for the Bank. The Company's total Tier 1 capital significantly
exceeded such capital adequacy requirements.
The Company is required to obtain the prior approval of the FRB to acquire all,
or substantially all, of the assets of any bank or bank holding company. Prior
FRB approval will be required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank holding company if,
after giving effect to such acquisition, it would directly or indirectly, own
or control more than 5% of any class of voting shares of such bank or bank
holding company. The BHCA also prohibits the acquisition by the Company of
more than 5% of the voting shares of substantially all the assets of a bank
located outside the State of Wisconsin unless such an acquisition is
specifically authorized by the laws of the state in which such bank is located.
FRB regulations govern a variety of bank holding company matters, including
redemption of outstanding equity securities, and non-banking activities. A
bank holding company generally is prohibited from engaging in, acquiring direct
or indirect control of any company engaged in non-bank activities. One of the
principal exemptions to this prohibition is for activities found by the FRB to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Some of the principal activities the FRB has
determined by regulation to be so closely related to banking are: (i) making or
servicing loans; (ii) performing certain data processing services; (iii)
providing discount brokerage services; (iv) acting as fiduciary, investment or
financial advisor; (v) leasing personal or real property; (vi) making
investments in corporations or projects designed primarily to promote community
welfare; and (vii) acquiring and/or operating a savings and loan association.
Pursuant to FRB policy, dividends should be paid only out of current earnings
and only if the prospective rate of earnings retention by the bank holding
company appears consistent with its capital needs, asset quality and overall
financial condition. The FRB policy also requires that a bank holding company
serve as a source of financial strength to its subsidiary banks by standing
ready to use available resources to provide adequate capital funds to those
banks during periods of financial stress or adversity. These policies could
affect the ability of the Company to pay cash dividends.
Subsidiary banks of a bank holding company are subject to certain quantitative
and qualitative restrictions imposed by the Federal Reserve Act on any
extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
See "Restrictions on Loans and Transactions with Insiders and Affiliates".
Moreover, subsidiaries of bank holding companies are prohibited from engaging
in certain tie- in arrangements (with the Company or any of its subsidiaries)
in connection with any extension of credit, lease, sale of property or
furnishing of services.
The Company and its subsidiary, the Bank, will be affected by the monetary and
fiscal policies of various agencies of the United States government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for management of the
Company to accurately predict future changes in monetary policy or the effect
of such changes on the business or financial condition of the Company.
30
<PAGE> 31
State Savings Bank Holding Company Regulation
In addition to the FRB bank holding company regulations, a bank holding company
that owns or controls, directly or indirectly, more than 25% of the voting
securities of a state savings bank also is subject to regulation as a savings
bank holding company by the Director. The Director has not yet issued
regulations governing savings bank holding companies.
ACQUISITION OF THE HOLDING COMPANY
Under the federal Change in Bank Control Act of 1978, as amended
("CBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's shares of Common Stock outstanding, unless the FRB has found that the
acquisition will not result in a change in control of the Company. Under the
CBCA, the FRB has 60 days within which to act on such notices, taking into
consideration convenience and needs of the communities served by the Company
and the Bank, and the anti-trust effects of the acquisition. Under the BHCA,
any company would be required to obtain prior approval from the FRB before it
may obtain "control" of the Company within the meaning of the BHCA. Control
generally is defined to mean the ownership or power to vote 25% or more of any
class of voting securities of the Company or the ability to control in any
manner the election of a majority of the Company's directors. In addition, the
BHCA prohibits the acquisition of the Company by a bank holding company located
outside the State of Wisconsin, unless such acquisition is specifically
authorized by Wisconsin law.
FEDERAL SECURITIES LAWS
The Company filed with the SEC a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), for the registration of the
Common Stock issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock was registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
is subject to the information, proxy solicitation, insider trading restrictions
and other requirements under the Exchange Act.
The registration under the Securities Act of the shares of the Common Stock
does not cover the resale of such shares. Shares of Common Stock purchased by
persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company will be subject
to the resale restrictions of Rule 144 under the Securities Act. If the
Company meets current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of Common
Stock of the Company, or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks.
31
<PAGE> 32
ITEM 2. DESCRIPTION OF PROPERTY
The Bank conducts its operations through its full-service office listed below.
<TABLE>
<CAPTION>
Net Book Value
Year of Property at
Location Opened Owned or Leased June 30, 1997
- -------- ------ --------------- --------------
<S> <C> <C> <C>
3140 South 27th Street 1953 Owned $45,000
Milwaukee, WI 53215
</TABLE>
In order to expand and diversify its operations, the Bank intends to build or
purchase a branch facility in its primary market area of Milwaukee MSA, or
purchase a financial institution that has one or more of such branch
facilities.
ITEM 3. LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business, which in the
aggregate involve amounts that are believed by management to be immaterial to
the financial condition of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Shareholders held May 15, 1997, the Reliance Savings
Bank Recognition and Retention Plan (the "Retention Plan") and the Reliance
Bancshares, Inc. 1997 Stock Option Plan (the "Stock Option Plan") were approved
by the shareholders.
At the Special Meeting of Shareholders, there were:
a) 2,528,499 votes eligible to be cast,
b) 1,049,302 votes cast for, 428,685 votes cast against, and 84,216
abstentions related to the approval of the Reliance Savings Bank
Recognition and Retention Plan,
c) 1,061,741 votes cast for, 392,746 votes cast against, and 82,716
abstentions related to the approval of the Reliance Bancshares, Inc.
1997 Stock Option Plan.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently being traded on the National
Association of Securities Dealers Automated Quotation (NASDAQ) Small Cap
Market under the symbol of RELI. Information required by this item is included
in the table "Market Information" as part of the "Quarterly Consolidated
Financial Information (Unaudited)" shown in Note 17 to the "Notes to Financial
Statements of Reliance Bancshares, Inc." and "Shareholder Information" in the
Registrant's Annual Report to Shareholders for the fiscal year ended June 30,
1997, which has been filed separately pursuant to Rule 14a-3 under the
Securities Exchange Act of 1934 and in accordance with General Instruction E(2)
to Form 10- KSB and which section is hereby incorporated herein by reference.
As of September 5, 1997, there were 315 registered shareholders of
record and an estimated 1,200 beneficial shareholders. Shares outstanding at
September 5, 1997 were 2,472,075. The Board of Directors of the Registrant
intends to consider a policy of paying regular or special dividends on the
shares of Common Stock in the future. However, no decision has been made as to
the amount or timing of such dividends, if any. Declarations of dividends by
the Board of Directors will depend upon a number of factors, including
investment opportunities available to the Company and the Bank, capital
requirements, regulatory limitations and the Bank's and the Company's financial
condition and results of operations, tax considerations and general economic
conditions. The payment of cash dividends by the Bank to the Company will be
subject to significant regulatory restrictions. There can be no assurance that
dividends will in fact be paid on the shares of Common Stock or that, if paid,
such dividends will not be reduced or eliminated in future periods.
32
<PAGE> 33
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Item 6 Information for the Registrant has been provided, and is included
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Reliance Bancshares, Inc." in the Registrant's
Annual Report to Shareholders for the fiscal year ended June 30, 1997, which
has been filed with the Securities and Exchange Commission separately pursuant
to Rule 14a-3 under the Securities Exchange Act of 1934 and in accordance with
General Instruction E(2) to Form 10-KSB, and which section is hereby
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
Form 10-KSB equivalent financial information for the Registrant for the fiscal
year ended June 30, 1997, has been provided and is included under the heading
"Financial Statements of Reliance Bancshares, Inc." and "Notes to Financial
Statements of Reliance Bancshares, Inc." in the Registrant's Annual Report to
Shareholders for the fiscal year ended June 30, 1997, which has been filed with
the Securities and Exchange Commission separately pursuant to Rule14a-3 under
the Securities Exchange Act of 1934 and in accordance with General Instruction
E(2) to Form 10- KSB, and which sections are hereby incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
Information required by this item with respect to directors is included under
the heading "Election of Directors" in the Registrants' definitive Proxy
Statement dated September 17, 1997, relating to the 1997 Annual Meeting of the
Shareholders scheduled for October 21, 1997, which has been filed separately
with the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934 and in accordance with General Instruction E(3)
to Form 10-KSB, not later than 120 days after the end of the Registrant's
fiscal year, and which section is hereby incorporated herein by reference.
There are no arrangements or understandings between persons named and any other
person pursuant to which such officers were selected, nor are there any family
relationships among them.
Information required by this item with respect to Item 405, Compliance
with Section 16(a) of the Exchange Act, is included under the heading "Section
16(a) Beneficial Ownership Reporting Compliance" in the Registrant's definitive
Proxy Statement dated September 17, 1997, which has been filed separately with
the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934 and in accordance with General Instruction E(3)
to Form 10-KSB, not later than 120 days after the end of the Registrant's fiscal
year, and which section is hereby incorporated herein be reference.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item in included under the heading "Compensation
of Executive Officers and Directors" in the Registrant's definitive Proxy
Statement dated September 17, 1997, relating to the 1997 Annual Meeting of
Shareholders scheduled for October 21, 1997, which has been filed separately
with the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934 and in accordance with General Instruction E(3)
to Form 10-KSB, not later than 120 days after the end of the Registrant's
fiscal year, and which section is hereby incorporated herein by reference.
33
<PAGE> 34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item in included under the heading "Stock
Ownership of Certain Beneficial Owners" in the Registrant's definitive Proxy
Statement dated September 17, 1997, relating to the 1997 Annual Meeting of
Shareholders scheduled for October 21, 1997, which has been filed separately
with the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934 and in accordance with General Instruction E(3)
to Form 10-KSB, not later than 120 days after the end of the Registrant's
fiscal year, and which section is hereby incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item in included under the heading "Indebtedness
of Management and Certain Transactions" in the Registrant's definitive Proxy
Statement dated September 17, 1997, relating to the 1997 Annual Meeting of
Shareholders scheduled for October 21, 1997, which has been filed separately
with the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934 and in accordance with General Instruction E(3)
to Form 10-KSB, not later than 120 days after the end of the Registrant's
fiscal year, and which section is hereby incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits Required by Item 601:
------------------------------
2.1 Plan of Conversion of Reliance Savings Bank (1)
3.1 Articles of Incorporation of Registrant (1)
3.2 Bylaws of Registrant (1)
3.3 Stock Articles of Incorporation of Reliance Savings Bank (1)
3.4 Bylaws of Reliance Savings Bank (1)
4.1 Specimen Stock Certificate of Registrant (1)
4.2 Specimen Stock Certificate of Reliance Savings Bank (1)
10.1 Reliance Savings Bank Employee Stock Ownership Plan (1)
10.2 Credit Agreement by and between Reliance Savings Bank Employee Stock
Ownership Trust and Registrant (1)
10.3 Employment Agreement - Mr. Allan T. Bach (1)
10.4 Employment Agreement - Ms. Carol A. Barnharst (1)
10.5 Reliance Savings Bank Recognition and Retention Plan (2)
10.6 Reliance Bancshares, Inc. 1997 Stock Option Plan (2)
13 1997 Annual Report to Shareholders (3)
21 Subsidiaries of Registrant
23 Consent of Meier, Clancy, George & Co. LLP (3)
27 Financial Data Schedule (3)
99 Proxy Statement for 1997 Annual Meeting of Shareholders (3)
</TABLE>
- -------------------------
(1) Incorporated by reference to exhibits filed with Registrant's Form
SB-2 Registration Statement declared effective on February 29, 1996
(Registration No. 33-99706).
(2) Incorporated by reference to exhibits filed with Registrant's Form S-8
Registration Statement filed with the SEC on June 3, 1997
(Registration No. 333-28375).
(3) Filed herewith.
(b) Reports of Form 8-K
No reports on Form 8-K were filed by the Registrant during the three
months ended June 30, 1997.
34
<PAGE> 35
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, herewith duly authorized.
RELIANCE BANCSHARES, INC.
Dated: September 17, 1997 By: /s/
--------------------------------------------
Allan T. Bach, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/
--------------------------------------------
Carol A. Barnharst, Vice-President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Chairman of the Board, September 17, 1997
------------------- President, Chief Executive Officer,
Allan T. Bach and Director
/s/ Vice President, Chief Financial September 17, 1997
------------------- Officer, Secretary, Treasurer,
Carol A. Barnharst and Director
/s/ Director September 17, 1997
-------------------
O. William Held
/s/ Director September 17, 1997
-------------------
John T. Lynch
/s/ Director September 17, 1997
-------------------
Majorie A. Spicuzza
</TABLE>
35
<PAGE> 1
1997 ANNUAL REPORT
TO SHAREHOLDERS
<PAGE> 2
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
Company Profile 1
Letter to Shareholders 2
Financial Highlights of Reliance Bancshares, Inc. 4
Selected Financial and Other Data of Reliance Bancshares, Inc. 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations of Reliance Bancshares, Inc. 6
Independent Auditor's Report 24
Financial Statements of Reliance Bancshares, Inc.
Consolidated Statements of Financial Condition of the Company
at June 30, 1997 and 1996 25
Consolidated Statements of Income of the Company
for the Years Ended June 30, 1997, 1996 and 1995 26
Consolidated Statements of Stockholders' Equity of the Company
for the Years Ended June 30, 1997, 1996 and 1995 27
Consolidated Statements of Cash Flows of the Company
for the Years Ended June 30, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements for Reliance
Bancshares, Inc. 30
Shareholder Information 52
</TABLE>
COMPANY PROFILE
Reliance Bancshares, Inc. is the holding company for Reliance Savings Bank.
The Bank converted from a Wisconsin-chartered mutual savings bank to a
Wisconsin-chartered stock savings bank on April 18, 1996. In connection with
the Conversion, Reliance Bancshares, Inc. sold 2,562,344 shares of common stock
at $8.00 per share and used a portion of the net proceeds to purchase all of
the issued and outstanding capital stock of the Bank.
Reliance Savings Bank was established in 1922, and is regulated by the
Wisconsin Department of Financial Institutions, Division of Savings and Loan
and the Federal Deposit Insurance Corporation. The Bank is a
community-oriented full-service financial institution offering a variety of
retail financial services to meet the needs of the communities it serves. The
Bank's principal business consists of attracting funds in the form of deposits
and investing such funds in loans secured by real estate, varying from
residential to one- to four-family to commercial, various types of consumer
loans, mortgage-backed securities and investment securities. The Bank has a
full-service office located in Milwaukee County, Wisconsin. At June 30, 1997,
the Company had total assets of $47.0 million, total deposits of $17.6 million
and stockholders' equity of $23.0 million.
The shares on Common Stock of Reliance Bancshares, Inc. are publicly traded on
the National Association of Securities Dealers Automatic Quotation (NASDAQ)
"Small-Cap" Market under the symbol "RELI".
1
<PAGE> 3
LETTER TO SHAREHOLDERS
We are pleased to present Reliance Bancshares, Inc. second annual report. It
was in April of 1996 that Reliance Savings Bank completed its mutual to stock
conversion and was acquired by Reliance Bancshares, Inc. This years annual
report reflects the first full year of operations of Reliance Bancshares, Inc.
as a state-chartered stock savings bank holding company.
The Conversion was completed in April of 1996 with the sale of 2,562,344 shares
of common stock at $8.00 per share. In October of 1996, the board of directors
authorized payment of a special distribution of $3.00 per share payable on
November 15, 1996. The majority of the distribution represented a return of
capital. This distribution was an excellent opportunity to deploy some of our
excess capital to further our commitment to maximize the return to our
shareholders.
At June 30, 1997, our total assets were $47.0 million as compared to $47.8
million for the previous year end. The Bank's loan portfolio increased to
$27.6 million from $22.9 million for the previous year end. Deposits decreased
slightly to $17.6 million from $18.2 million for the year ended June 30, 1996.
Our net interest income increased to $2,400,000 for the year ended June 30,
1997 from $1,571,000 for the year ended June 30, 1996. Operating expenses also
increased to $1,431,000 from $721,000. And finally, our net income increased
to $616,000 for the year ended June 30, 1997 from $514,000 for the year ended
June 30, 1996. This translates to an increase in earnings per share to $0.25
for the year ended June 30, 1997 as compared to $0.21 for the year ended June
30, 1996.
The Company's management has continued its strategy of strengthening the Bank's
capital position through controlled growth and emphasizing quality customer
service. We hope to continue to improve our presence in the community by
remaining competitive in our primary business of attracting deposits and
originating real estate mortgage loans. We invite you to review the
information contained in this, our second Annual Report, which discusses the
results of our business during our fiscal year ended June 30, 1997.
ASSET QUALITY. The Bank continues its focus on high asset quality in both its
lending activities and its investment portfolio. There were no nonperforming
assets at June 30, 1997. During the past three years, the Bank has experienced
only $2,000 in loan charge-offs. None of the Bank's investment securities or
mortgage-backed securities have been categorized as nonperforming during the
past three years.
LENDING. The Bank has continued to increase its lending activities in the non
one- to four-family market. These loans afford the Bank the opportunity to
invest in relatively high-yielding assets with shorter terms to maturity and
repricing than is the case with one- to four-family mortgage lending. The lack
of quality one- to four-family mortgage lending opportunities in the Bank's
local market area has not improved during the current year. Along with
increased competition for mortgage loan originations and relatively no change
in the interest rates on mortgage loans, the Bank does not anticipate a
significant increase in one- to four-family mortgage lending in its portfolio
in the near future. Therefore, the Bank will continue to pursue other lending
opportunities, including construction and land development loans to increase
its loan portfolio.
INVESTMENTS. The amount invested in U.S. government and other agency
obligations decreased during the year ended June 30, 1997 due to the special
distribution of capital in November of 1996 and the Bank's increased lending
activities. In future periods, the Bank may leverage its capital position by
using the proceeds of borrowings from the FHLB-Chicago to purchase
mortgage-backed and related securities or investment securities.
CAPITAL POSITION. The Bank continues to meet all of its regulatory capital
requirements and has been profitable in all recent years. At June 30, 1997,
the Bank had $19.7 million of capital, or 46.18% of total assets, with GAAP
Capital of 42.88% of adjusted total assets and Tier 1 capital of
2
<PAGE> 4
74.18% of total risk weighted assets. We have continued to monitor our capital
position for the purpose of maximizing the return to our shareholders.
INTEREST RATE RISK MANAGEMENT. The Bank continues to closely monitor its
interest rate risk as it relates to its lending and investment strategies. At
June 30, 1997, the Bank's interest-earning assets with maturities of one year
or less exceeded its interest-bearing liabilities with comparable maturities by
$6.7 million, or 14.2% of total assets. With a positive gap such as this, in
periods of rising interest rates, it is projected that the cost of the Bank's
interest-bearing liabilities would rise slower than the yield on its
interest-earning assets thereby having a positive effect upon net interest
income. The Bank anticipates that the magnitude of its positive gap position
at June 30, 1997 will increase during fiscal 1998.
DEPOSITS. The Bank's deposits decreased slightly to $17.6 million at June 30,
1997 from $18.2 million at June 30, 1996. The decline was primarily seen in
the Bank's core deposits. We intend to continue to focus on attempting to
increase our core deposits as a more stable deposit base, and will continue to
aggressively price our deposit products in an effort to maintain our current
deposit position.
We appreciate the continued confidence you have shown as shareholders in our
Company. We intend to increase the value of the Company by improving our
position in the marketplace, controlling our growth and constantly monitoring
credit quality and financial soundness. We do not intend to grow just for the
sake of growth. The Bank's growth will be planned and done so in an effort to
improve earnings and maximize shareholder value.
Sincerely,
Mr. Allan T. Bach
President, CEO and Chairman of the Board
[NET INCOME LINE GRAPH]
1995 1996 1997
- ---- ---- ----
405 514 616
[NET INTEREST MARGIN LINE GRAPH]
1995 1996 1997
- ---- ---- ----
4.24% 4.42% 5.29%
[RETURN ON ASSETS LINE GRAPH]
1995 1996 1997
- ---- ---- ----
1.29% 1.40% 1.32%
3
<PAGE> 5
FINANCIAL HIGHLIGHTS OF RELIANCE BANCSHARES, INC.
<TABLE>
<CAPTION>
At or For the Years Ended June 30
---------------------------------
1997 1996 1995(3)
---- ---- ----
(Dollars in thousands
except per share data)
<S> <C> <C> <C>
Earnings Per Share(1) $ .25 $ .21 N/A
Cash Dividends Per Share(2) 3.00 N/A N/A
Return on Average Equity 2.44% 3.45% 4.32%
Return on Average Assets 1.32% 1.40% 1.23%
BALANCE SHEET DATA
Total Assets $ 47,009 $ 47,752 $ 32,260
Loans Receivable, net 27,601 22,931 21,034
Investment Securities Available for Sale 11,481 7,882 6,193
Investment Securities Held to Maturity 3,189 11,178 2,196
Mortgage-Backed Securities 685 800 1,020
Other Interest-earning Assets 494 451 631
Cash and Cash Equivalents 3,048 4,055 777
Deposits 17,596 18,200 22,312
FHLB Advances and Other Borrowings 6,008 -- --
Stockholders' Equity, Substantially Restricted 22,966 29,348 9,616
INCOME STATEMENT DATA
Total Interest and Dividend Income $ 3,472 $ 2,724 $ 2,453
Total Interest Expense 1,072 1,153 1,083
Provision for Loan Losses 22 22 22
Net Interest Income after Provision for Loan Losses 2,378 1,549 1,348
Total Non-Intrest Income 36 17 8
Total Non-Interest Expenses 1,431 721 680
Income before Income Tax Expense 983 845 676
Income Tax Expense 367 331 271
Net Income 616 514 405
</TABLE>
(1) Reliance Savings Bank converted from mutual to stock form on April 18,
1996; therefore, earnings per share data for prior is not applicable.
(2) Payment of a special distribution on November 15, 1996 of which $2.925
represented a return of capital.
(3) Fiscal years ended June 30, 1997 and 1996 are based on the audited
consolidated financial statements of the Holding Company and its wholly
owned Bank. Fiscal year ended June 30, 1995 is based on the Bank only
audited financial statements.
4
<PAGE> 6
SELECTED FINANCIAL RATIOS AND OTHER DATA OF
RELIANCE BANCSHARES, INC.
<TABLE>
<CAPTION>
At June 30,
-----------
1997 1996 1995(3)
---- ---- ----
<S> <C> <C> <C>
PERFORMANCE RATIOS
Interest Rate Spread during Period(1) 2.55% 2.25% 2.96%
Net Interest Margin(1) 5.29% 4.42% 4.24%
Non-interest Expense to Average Assets 3.07% 1.97% 2.06%
Non-interest Income to Average Assets 0.08% 0.05% 0.02%
Average Interest-earnings Assets to Average
Interest-bearing Liabilities 215.89% 166.94% 138.02%
ASSET QUALITY RATIOS
Nonperforming Loans to Gross Loans(2) 0.00% 0.00% 0.00%
Nonperforming Loans to Total Assets(2) 0.00% 0.00% 0.00%
Allowance for Loan Losses to Nonperforming Loans(2) 0.00% 0.00% 0.00%
Net Charge-offs to Average Gross Loans 0.00% 0.00% 0.01%
REGULATORY CAPITAL AND CAPITAL RATIOS(3)
Tier 1 Risk-based Capital Ratio 74.18% 91.80% 52.63%
Total Risk-based Capital Ratio 46.52% 49.64% 53.20%
Leverage Ratio 46.18% 49.31% 29.55%
Wisconsin Capital to Assets Ratio 47.66% 50.24% 30.13%
Average Stockholders' Equity to Average Assets 54.08% 40.71% 28.49%
Stockholders' Equity to Total Average Assets 49.28% 61.46% 29.81%
OTHER DATA
Number of Deposit Accounts 1,565 1,757 1,872
Number or Real Estate Loans Outstanding 229 238 231
Number of Consumer Loans Outstanding 8 9 4
Real Estate Loans Originated (in thousands) $ 8,473 $ 9,301 $ 5,274
Full-service Facilities 1 1 1
</TABLE>
(1) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities. Net interest margin
represents net interest income as a percentage of average interest-
earning assets.
(2) Nonperforming loans consist on non-accrual loans. Nonperforming assets
consist of nonperforming loans because the Bank has no foreclosed
properties.
(3) For a discussion of the Bank's regulatory capital ratios, see "Notes
to Consolidated Financial Statements".
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
FORWARD-LOOKING STATEMENTS
The discussion in this Annual Report includes certain forward-looking
statements based upon management expectations. Such forward-looking statements
include words and phrases such as "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project", or similar
expressions and various other statements contained herein. Factors which could
cause future results to differ from these expectations include the following:
general economic conditions; legislative and regulatory initiatives; monetary
and fiscal policies of the federal government; deposit flows; the costs of
funds; general market rates of interest; services; changes in accounting
policies or guidelines; and changes in the quality or composition of the
Company's loan and investment portfolios.
GENERAL
Reliance Bancshares, Inc. (the "Company") is the holding company for Reliance
Savings Bank (the "Bank"). On April 18, 1996, the Bank completed its
conversion from a Wisconsin-chartered mutual savings bank to a
Wisconsin-chartered stock savings bank (the "Conversion"). On that date, the
Company issued 2,562,344 shares of common stock at $8.00 per share to complete
the Conversion. The gross proceeds from the sale of the shares of common stock
were $20.5 million. Net proceeds to the Company were $19.1 million, after
deduction of Conversion expenses of approximately $720,000 and after lending
$713,000 to the Bank's Employee Stock Ownership Plan. The Company utilized
approximately $9.5 million of the net proceeds to purchase all of the issued
and outstanding common stock of the Bank.
The Company's business currently consists of the business of the Bank. The
Bank is headquartered in Milwaukee, Wisconsin and is a community-oriented,
full-service financial institution offering a variety of retail financial
services to meet the needs of the communities it serves. The Bank's principal
business consists of attracting funds in the form of deposits and investing
such funds in loans secured by real estate, investment securities (including
United States government and other agency obligations and mutual funds) and
mortgage-backed and related securities.
The earnings of the Bank depend primarily on its level of net interest income,
which is the difference between interest earned on interest-earning assets,
consisting primarily of mortgage loans, mortgage-backed and related securities
and other investment securities, and the interest paid on interest-bearing
liabilities, consisting primarily of deposits. Net interest income is a
function of the Bank's interest rate spread, which is the difference between
the average yield earned on interest-earning assets and the average rate paid
on interest-bearing liabilities as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. Many of
the Bank's assets, including mortgage loans and mortgage-backed and related
securities, are subject to reinvestment risk. During periods of falling
interest rates, higher yielding loans and mortgage-backed and related
securities are more likely to prepay and the Bank may not be able to reinvest
the proceeds from such repayment in loans or securities with yields similar to
those prepaying. The Bank's earnings also are affected by the level of its
other income, including loan servicing, commitment and origination fees and
gains on sale of loans and investments as well as its level of noninterest
expenses, including employee compensation and benefits, directors' fees,
occupancy and equipment costs and federal deposit insurance premiums. The
Bank's operating results are significantly affected by general economic
conditions, and the monetary, fiscal and regulatory policies of governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates and the
availability of funds. Deposit flow and cost of funds likewise are heavily
influenced by prevailing market rates of interest on competing investment
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
alternatives, account maturities and the levels of personal income and savings
in the Bank's primary market area.
MANAGEMENT STRATEGY
For many years, the Bank's financial condition has been characterized by high
capital and liquidity levels. While the Bank has in recent years had funds to
lend, the Bank believes there has been a diminishing demand for one- to
four-family mortgage loans in its local market area (generally defined as an
area within a three-mile radius of the Bank's office). The Bank intends to
continue to emphasize one- to four-family mortgage lending in its local market
area, but also has been originating, and intends to continue to originate one-
to four-family, residential construction, commercial real estate, commercial
construction and land development and multi- family loans both within and
outside its local market area in suburbs surrounding the City of Milwaukee,
which encompass the Wisconsin counties of Milwaukee, Waukesha, Ozaukee and
Washington, in order to generate earnings, adequately leverage its capital and
make effective use of its liquid assets.
The Bank's strategic business plan is to utilize its well-capitalized position
to take advantage of future expansion and growth opportunities, while
controlling expenses, controlling exposure to credit and interest rate risk and
continuing to operate a profitable and independent community- oriented savings
institution dedicated to providing quality customer service. The Bank seeks to
accomplish these goals by: (i) expanding its lending activities beyond its
local market area and originating loans throughout its primary market area of
the Milwaukee MSA; (ii) continuing to diversify its lending activities beyond
one- to four-family mortgage lending; and, (iii) meeting the financial needs
of customers. Financial highlights and operating strategies of the Bank
include the following:
1 - PROFITABILITY AND CAPITAL STRENGTH; POSSIBLE USE OF STRONG CAPITAL
POSITION. The Bank has been profitable and has met all of its regulatory
capital requirements over at least the past 20 years. For the years ended June
30, 1996 and 1997, the Company's net income was $514,000 and $616,000,
respectively. The Company's return on average assets for the years ended June
30, 1996 and 1997 was 1.40% and 1.32%, respectively. The Company's return on
average equity for the years ended June 30, 1996 and 1997 was 3.45% and 2.44%,
respectively.
At June 30, 1997, the Company had $23.0 million of stockholders' equity, or
48.85% of total assets, and met all of its regulatory capital requirements, in
each case on a fully phased-in basis, with GAAP capital of 48.85% of total
assets and Tier 1 capital of 46.18% of total risk-weighted assets.
The Bank has and will continue to leverage its capital base by using the
proceeds of borrowings from the FHLB-Chicago to purchase mortgage-backed and
related securities and investment securities and fund loan originations. The
Bank will continue such a strategy, until other earning asset growth fully
utilizes its capital. In addition, the Bank intends to utilize its
well-capitalized position to expand and diversify its lending activities as
discussed herein.
2 - EXPANSION AND DIVERSIFICATION OF LENDING ACTIVITIES. The largest portion
of the Bank's loan portfolio is one- to four-family residential mortgage loans,
which amounted to $11.0 million, or 37.04% of total gross loans, at June 30,
1997. The remaining $18.8 million, or 62.96% of total gross loans, at June 30,
1997 consisted of $4.6 million of multi-family loans, $5.4 million of
commercial real estate loans, $4.9 million of residential construction loans,
$3.5 million of commercial construction and land development loans, and
$357,000 of consumer loans. The Bank intends to continue to emphasize one- to
four-family mortgage lending, but intends to
7
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
continue to expand its focus for such lending beyond its local market
area (generally defined as an area within a three-mile radius of the Bank's
office) throughout its primary market area of the Milwaukee MSA. The Bank
anticipates that its efforts to continue to build its one- to four-family
mortgage lending portfolio will be enhanced through its efforts to build or
acquire at least one branch facility to be located within the Bank's primary
market area of the Milwaukee MSA. Bank management believes that growth trends
and demographic characteristics of the local area surrounding its main office
have not been favorable for originating residential mortgage loans. The Bank
believes that the addition of a branch facility within its primary market area
of the Milwaukee MSA may enhance the Bank's ability to attract deposit funds
and originate residential mortgage loans.
The Bank also believes that the acquisition of another financial institution
within the community defined by its CRA statement as the four county area of
Milwaukee, Racine, Washington and Waukesha would enhance its ability to expand
its lending activity. The Bank will continue to review possible acquisitions
of a financial institution in this area with a lending practice and loan
portfolio that complements that of the Bank's.
Due to the Bank's belief that there has been diminishing demand for permanent
one- to four- family mortgage loans in the Banks' local market area since the
early 1990's and the increased competition relating to one- to four-family
mortgage lending opportunities, the Bank has developed a niche lending strategy
involving the origination of comparatively large balance construction and land
development loans and commercial and multi-family loans. The Bank intends to
continue to expand these portfolios, as these types of loans afford the Bank
the opportunity to invest in relatively higher-yielding assets with shorter
terms to maturity or repricing than is the case with one- to four-family
mortgage lending. In addition, one of the purposes of the Conversion was to
increase the Bank's capital so that the Bank's loans-to-one- borrower limit
would increase. This increased limit will allow the Bank to originate and
retain in its portfolio additional non-one- to four-family mortgage loans for
borrowers with whom it has a preexisting relationship. The Bank has sought to
address the risks associated with these types of loans, and loan concentrations
by developing and adhering to underwriting policies, disbursement procedures
and monitoring practices.
3 - ASSET QUALITY. The Bank focuses on high asset quality in its lending
activities. At June 30, 1997, the Bank had no non-performing assets, and the
Bank had no non-performing assets during the last three fiscal years.
Moreover, the Bank has had only $2,000 in charge-offs during the last three
fiscal years. During the years ended June 30, 1996 and 1997, respectively, the
Bank added $22,000 to its allowance for loan losses and there were no
charge-offs. Absent any significant change in the collectibility of the Bank's
loan portfolio, future additions to the allowance for loan losses will be made
at a rate per year so that the Bank's allowance for loan losses is equal to
approximately 1.0% of the Bank's gross loan portfolio.
4 - CUSTOMER SERVICE. The Bank is committed to meeting the financial needs of
its customers. Management believes that the Bank is large enough to provide a
range of personal and business financial services, and yet is small enough to
be able to provide such services on a personalized and efficient basis.
Management believes that the Bank can be more effective in servicing its
customers than many of its nonlocal competitors because of the Bank's ability
to quickly and effectively provide senior management responses to customer
needs and inquiries. The Bank also intends to build or acquire at least one
branch facility to offer, in addition to the products and services currently
available at the Bank's main office, drive-up facilities, an automated teller
machine and safe deposit boxes to meet the needs of its customers. In addition
to enhancing the delivery of retail services to customers, a new branch
facility should improve the Bank's office facilities and better position the
Bank for future growth.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
GENERAL
Net income for the year ended June 30, 1997 increased 20.2% to $616,000
compared to $514,000 for the year ended June 30, 1996. The increase in the net
income was primarily attributable to an increase in net interest income. Net
interest income increased 52.8% to $2.40 million for the year ended June 30,
1997 compared to $1.57 million for the year ended June 30, 1996, due primarily
to a decrease in average interest-bearing liabilities and an increase in
interest-earning assets, and an increase in the interest rate spread.
Non-interest income increased 111.8% to $36,000 for the year ended June 30,
1997 compared to $17,000 for the year ended June 30, 1996. Non-interest
expense increased 98.5% to $1,431,000 for the year ended June 30, 1997 compared
to $721,000 for the year ended June 30, 1996, primarily due to a $112,000
increase in the FDIC assessment, a $155,000 increase in professional services
and a $406,000 increase in compensation and benefits. Income taxes increased
10.9% to $367,000 for the year ended June 30, 1997 compared to $331,000 for the
year ended June 30, 1996. The return on average assets decreased to 1.32% for
the year ended June 30, 1997 compared to 1.40% for the year ended June 30,
1996. The return on average equity decreased to 2.44% for the year ended June
30, 1997 compared to 3.45% for the year ended June 30, 1996.
NET INTEREST INCOME
Net interest income is determined by an institution's interest rate spread, the
relative dollar amount or mix of interest-earning assets and interest-bearing
liabilities and the degree of match in the maturity and repricing of its
interest-earning assets and interest-bearing liabilities.
Net interest income increased $829,000 to $2.40 million for the year ended June
30, 1997 compared to $1.57 million for the year ended June 30, 1996. The
increase was due to a $748,000 increase in total interest income and a decrease
in total interest expense of $81,000. The increase in net interest income was
the result of a 1.5% decline in average interest-bearing liabilities, and a
27.4% increase in average interest-earning assets, coupled with a 30 basis
point increase in the interest rate spread. The increase in interest rate
spread between June 30, 1997 and 1996 was due primarily to the decrease in the
average cost of deposit accounts by 30 basis points, while the average yield on
interest-earning assets remained level for the same period.
The increase in average interest-earning assets over interest-bearing
liabilities between June 30, 1997 and 1996 was due to the decrease in the
average balances of deposit accounts between periods of $3.20 million while the
average balances of loans and investments increased by $9.76 million for the
same period. Management believes deposits declined due to general demographic
changes in the Bank's local market area and due to competition from alternative
investments that were more attractive to depositors during the period.
INTEREST INCOME
Total interest income increased $748,000, or 27.5% to $3.47 million for the
year ended June 30, 1997 compared to $2.72 million for the year ended June 30,
1996, as a result of an increase in the average balance of interest-earning
assets. The average yield on interest-earning assets remained level at 7.66%
for the years ended June 30, 1997 and 1996. For the year ended June 30, 1997,
the Bank's average yield on loans was 8.82% compared to 8.55% for the year
ended June 30, 1996. Total interest-earning assets increased 27.5% to $45.3
million for the year ended June 30, 1997 from $35.6 million for the year ended
June 30, 1996.
Interest income on loans increased to $2.23 million for the year ended June 30,
1997 compared to $1.89 million for the year ended June 30, 1996. The increase
was primarily due to an
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
increase in average loan balances of $3.2 million, and an increase in the
average yield of 27 basis points. Interest income on investments increased to
$1,162,000 for the year ended June 30, 1997 from $743,000 for the year ended
June 30, 1996.
Interest income on mortgage-backed and related securities declined to $68,000
for the year ended June 30, 1997 compared to $84,000 for the year ended June
30, 1996. The decline was due to a reduction in the balance of mortgage-backed
and related securities due to increased prepayments on mortgage-backed pool
yielding over 10%.
INTEREST EXPENSE
Total interest expense, which consisted of interest expense on deposits,
decreased $235,000, or 20.5% to $911,000 for the year ended June 30, 1997 from
$1.15 million for the year ended June 30, 1996 and interest expense on
borrowings increased $154,000 to $161,000 for the year ended June 30, 1997 from
$7,000 for the year ended June 30, 1996. The general decrease in market rates
of interest during the year ended June 30, 1997 resulted in decreases in
average rates paid on all of the Bank's major categories of deposits to 5.07%
for the year ended June 30, 1997 from 5.41% for the year ended June 30, 1996.
This decrease was coupled with a $3.2 million decrease in average deposits to
$18.0 million for the year ended June 30, 1997 from $21.2 million for the year
ended June 30, 1996. The level of deposit inflows during any given period is
heavily influenced by factors such as the general level of interest rates in
the economy as well as alternative yields that investors may obtain on
competing investment instruments. Management believes the higher returns on
equity investments over the past few years has made alternative financial
products, such as mutual funds, more competitive with the Bank's traditional
deposit base. In addition, the Bank's deposit base has been decreasing as
competition for funds has increased and as the Bank's local market area has
experienced demographic changes and recessionary conditions.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $22,000 for both years ended June 30, 1997
and 1996. The Bank determines the desired level of allowance for loan losses
based on the Bank's historical loan loss experience, the condition and
composition of the Bank's loan portfolio and general economic conditions. The
amount of the provision for loan losses for both the years ended June 30, 1997
and 1996 reflect management's intention to continue to make annual additions to
the Bank's allowance for loan losses until it is equal to approximately 1.0% of
the Bank's gross loan portfolio. However, the Bank will continue to monitor
its loan loss experience, the condition and composition of its loan portfolio
and general economic conditions, and make further additions to its allowance
for loan losses to a greater or lesser extent than it has done historically,
depending upon changes in the aforementioned factors. The allowance for loan
losses totaled $147,000 and $126,000 at June 30, 1997 and 1996, respectively.
The allowance for loan losses was 0.47% of gross loans at June 30, 1997 and
0.47% of gross loans at June 30, 1996. There were no nonperforming loans at
June 30, 1997 and June 30, 1996. There were no charge-offs recorded by the
Bank for the years ended June 30, 1997 and 1996.
NON-INTEREST INCOME
Non-interest income increased to $36,000 for the year ended June 30, 1997
compared to $17,000 for the year ended June 30, 1996. The change was due in
part to an $2,000 investment gain during the year ended June 30, 1997 compared
to an $3,000 investment loss during the year ended June 30, 1996. The
remainder of the change was due to an increase in the cash surrender value of
life insurance of $23,000 and a decrease in real estate loan brokerage fee
income of $8,000 for the year ended June 30, 1997.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
NON-INTEREST EXPENSE
Non-interest expense increased $710,000, or 98.5%, to $1,431,000 for the year
ended June 30, 1997 from $721,000 for the year ended June 30, 1996. The
increase was due primarily to a special one-time FDIC assessment of $112,000,
an increase in compensation and benefits of $406,000, and an increase in fees
for professional services of $155,000. The Bank anticipates a continued
increase non-interest expense of compensation and benefits and other expenses
related to being a public company. Non-interest expense as a percentage of
average assets (on an annualized basis) was 3.07% and 2.06%, respectively, for
the years ended June 30, 1997 and 1996.
INCOME TAX EXPENSE
Income tax expense increased $36,000, or 10.9%, to $367,000 for the year ended
June 30, 1997 from $331,000 for the year ended June 30, 1996, primarily due to
increased income before income taxes. The increase reflects the increase in
income before taxes from $845,000 for the year ended June 30, 1996 to $983,000
for the year ended June 30, 1997. The Company's effective tax rates were 37.3%
and 39.2%, respectively, for the years ended June 30, 1997 and 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
GENERAL
Net income for the year ended June 30, 1996 increased 26.9% to $514,000
compared to $405,000 for the year ended June 30, 1995. The increase in the net
interest was primarily attributable to an increase in net interest income. Net
interest income increased 14.7% to $1.57 million for the year ended June 30,
1996 compared to $1.37 million for the year ended June 30, 1995, due primarily
to a decrease in average interest-bearing liabilities and an increase in
interest-earning assets, partially offset by a reduction in the interest rate
spread. Non-interest income increased 112.5% to $17,000 for the year ended
June 30, 1996 compared to $8,000 for the year ended June 30, 1995.
Non-interest expense increased 6.0% to $721,000 for the year ended June 30,
1996 compared to $680,000 for the year ended June 30, 1995, primarily due to a
$45,000 increase in compensation and benefits. Income taxes increased 22.1% to
$331,000 for the year ended June 30, 1996 compared to $271,000 for the year
ended June 30, 1995. The return on average assets increased to 1.40% for the
year ended June 30, 1996 compared to 1.23% for the year ended June 30, 1995,
while the return on average equity declined to 3.45% for the year ended June
30, 1996 compared to 4.21% for the year ended June 30, 1995.
NET INTEREST INCOME
Net interest income increased $201,000 to $1.57 million for the year ended June
30, 1996 compared to $1.37 million for the year ended June 30, 1995. The
increase was due to a $271,000 increase in total interest income which was
partially offset by an increase in total interest expense of $70,000. The
increase in net interest income was the result of a 9.0% decline in average
interest-bearing liabilities, and a 10.0% increase in average interest-earning
assets, partially offset by a 71 basis point decrease in the interest rate
spread. The decline in interest rate spread between June 30, 1996 and 1995 was
due primarily to the increase in the average cost of deposit accounts by 74
basis points, while the average yield on interest-earning assets increased by
only 7 basis points for the same period.
The increase in average interest-earning assets over interest-bearing
liabilities between June 30, 1996 and 1995 was due to the decrease in the
average balances of deposit accounts between periods of $1.53 million and the
decrease in the average balances of escrow accounts between periods of
$441,000, while the average balances of loans and investments increased by
$3.24
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
million for the same period. Management believes deposit declined due to
general demographic changes in the Bank's local market area and due to
competition from alternative investments that were more attractive to
depositors during the period. A portion of the decline in deposit accounts was
due to the conversion of deposit account monies to stock proceeds at the
Conversion. Escrows declined as a result of the Bank's decision to return all
escrow balances to customers in July and August of 1995, and have the
borrowers be responsible for their own insurance and real estate taxes.
INTEREST INCOME
Total interest income increased $271,000, or 11.0% to $2.72 million for the
year ended June 30, 1996 compared to $2.45 million for the year ended June 30,
1995, as a result of an increase in the average yield on interest-earning
assets and the average balance of interest-earning assets. The average yield
on interest-earning assets increased 7 basis points to 7.66% for the year ended
June 30, 1996 compared to 7.59% for the year ended June 30, 1995. For the year
ended June 30, 1996, the Bank's average yield on loans was 8.55% compared to
8.52% for the year ended June 30, 1995. In fiscal 1996, lower-yielding
interest-earning deposit funds and lower- yielding maturing certificates of
deposit were reinvested by the Bank primarily in permanent and construction
mortgage loans secured by one- to four-family residences and in higher-yielding
investment securities. Total interest-earning assets increased 10.0% to $35.6
million for the year ended June 30, 1996 from $32.3 million for the year ended
June 30, 1995, primarily due to the reinvestment of Conversion proceeds into
investment securities and loans.
Interest income on loans increased to $1.89 million for the year ended June 30,
1996 compared to $1.72 million for the year ended June 30, 1995. The increase
was primarily due to an increase in average loan balances of $1.9 million, and
an increase in the average yield of 3 basis points. Interest income on
investments increased to $743,000 for the year ended June 30, 1996 from
$618,000 for the year ended June 30, 1995, due primarily to the reinvestment of
proceeds from the Conversion into investment securities.
Interest income on mortgage-backed and related securities declined to $84,000
for the year ended June 30, 1996 compared to $106,000 for the year ended June
30, 1995. The decline was due to a reduction in the balance of mortgage-backed
and related securities due to increased prepayments on mortgage-backed pool
yielding over 10%.
INTEREST EXPENSE
Total interest expense, which consisted almost entirely of interest expense on
deposits, increased $70,000, or 6.5% to $1.15 million for the year ended June
30, 1996 from $1.08 million for the year ended June 30, 1995. The general
increase in market rates of interest during the year ended June 30, 1996
resulted in increases in average rates paid on all of the Bank's major
categories of deposits to 5.41% for the year ended June 30, 1996 from 4.67% for
the year ended June 30, 1995. This increase was partially offset by a $1.5
million decrease in deposits to $21.2 million for the year ended June 30, 1996
from $22.7 million for the year ended June 30, 1995. A portion of the decline
in deposit accounts was due to the conversion of deposit account monies to
stock proceeds at Conversion.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $22,000 for both years ended June 30, 1996
and 1995. The Bank determines the desired level of allowance for loan losses
based on the Bank's historical loan loss experience, the condition and
composition of the Bank's loan portfolio and general economic conditions. The
amount of the provision for loan losses for both the years ended June 30, 1996
and 1995 reflect management's intention to continue to make annual additions to
the Bank's allowance for loan losses until it is equal to approximately 1.0% of
the Bank's gross loan portfolio. However, the Bank will continue to monitor
its loan loss experience, the condition and
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
composition of its loan portfolio and general economic conditions, and
make further additions to its allowance for loan losses to a greater or lesser
extent than it has done historically, depending upon changes in the
aforementioned factors. The allowance for loan losses totaled $126,000 and
$104,000 at June 30, 1996 and 1995, respectively. The allowance for loan losses
was 0.47% of gross loans at June 30, 1996 and 1995, and there were no
nonperforming loans at June 30, 1996. While the Bank recorded no charge-offs
for the year ended June 30, 1996, charge-offs in the amount of $2,000 were
recorded for the year ended June 30, 1995.
NON-INTEREST INCOME
Non-interest income increased to $17,000 for the year ended June 30, 1996
compared to $8,000 for the year ended June 30, 1995. The change was due in
part to an $11,000 investment loss during the year ended June 30, 1995 compared
to an $3,000 investment loss during the year ended June 30, 1996. The
remainder of the change was due to real estate loan brokerage fee income of
$11,000 for the year ended June 30, 1996 compared to $9,000 for the year ended
June 30, 1995.
NON-INTEREST EXPENSE
Non-interest expense increased $41,000, or 6.03%, to $721,000 for the year
ended June 30, 1996 from $680,000 for the year ended June 30, 1995. The
increase was due primarily to an increase of $45,000 in compensation and
benefits, and an increase of $3,000 in fees and expenses for directors,
officers, and employees, which expenses were partially offset by cost
reductions in other areas. The Bank anticipates a continued increase in
non-interest expense as a result of the Conversion due to anticipated increased
legal and accounting fees. Non-interest expense as a percentage of average
assets (on an annualized basis) was 2.06% and 1.97%, respectively, for the
years ended June 30, 1996 and 1995.
INCOME TAX EXPENSE
Income tax expense increased $60,000, 22.1%, to $331,000 for the year ended
June 30, 1996 from $271,000 for the year ended June 30, 1995. The increase
reflects the increase in income before taxes from $676,000 for the year ended
June 30, 1995 to $845,000 for the year ended June 30, 1996. The Company's
effective tax rates were 39.2% and 40.1%, respectively, for the years ended
June 30, 1996 and 1995.
FINANCIAL CONDITION
The following table summarizes certain information relating to the Company's
statement of financial condition at the dates indicated.
<TABLE>
<CAPTION>
At June 30
--------------------------------
1997 1996 1995
------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents 3,048 4,055 777
Investment securities 14,964 19,354 8,868
Mortgage-backed securities 685 800 1,020
Loans receivable, net 27,601 22,931 21,034
LIABILITIES:
Deposits 17,596 18,200 22,312
Borrowings 6,008 -- --
Stockholders' equity,
substantially restricted 22,966 29,348 9,616
</TABLE>
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
The statements of financial condition at June 30, 1997 and 1996 are
consolidated (see "Principles of Consolidation" in the Notes to Consolidated
Financial Statements), whereas June 30, 1995 represent the Bank only.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased to $3.0 million at June 30, 1997 from $4.1
million at June 30, 1996. The decrease was attributable to the increase in
mortgage loans originated during the period and funds used for the special
capital distribution.
INVESTMENT SECURITIES
Investment securities decreased to $15.0 million at June 30, 1997 from $19.4
million at June 30, 1996. The change was primarily due to the sale of
investment securities to partially fund a special capital distribution to
shareholders in the aggregate amount of $7.6 million paid in November 1996.
The Bank may, in future periods, continue to leverage its capital base by using
the proceeds of borrowings from the FHLB-Chicago to purchase mortgage-backed
and related securities and investment securities. Therefore, if the leveraging
strategy in continued, the size of the Bank's investment securities portfolio
may increase in future periods.
MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities declined to $685,000 at June 30, 1997
from $800,000 at June 30, 1996. The decrease was the result of normal
principal payments and escalated prepayments on mortgage-backed pools yielding
over 10% since market rates were significantly lower during this period.
Management decided to reinvest the repayment and prepayment proceeds into
higher yielding mortgage loans and other investment securities. The Bank may,
in future periods, leverage its capital base by using the proceeds of
borrowings from the FHLB- Chicago to purchase mortgage-backed and related
securities and investment securities. Therefore, if the leveraging strategy is
implemented, the size of the Bank's mortgage-backed and related securities
portfolio may increase in future periods.
LOANS RECEIVABLE
Net loans receivable increased to $27.6 million at June 30, 1997 from $22.9
million at June 30, 1996. The net change in loans arising from originations
and principal repayments for the years ended June 30, 1997 and 1996 was
$290,000 and $320,000 for one- to four-family loans, respectively; $19,000 and
($126,000) for multi-family loans, respectively; $1.7 million and $3.8 million
for construction and land development loans, respectively; and, $1.2 million
and $283,000 for commercial real estate loans, respectively. There were no
loans sold during these periods. As a result of the originations and
repayments during these periods, mortgage loans increased or decreased as
follows: one- to four-family mortgage loans were $11.0 million at June 30,
1997, compared to $10.7 million at June 30, 1996; commercial construction and
land development loans were $8.4 million at June 30, 1997, compared to $6.7
million at June 30, 1996; multi-family loans were $4.6 million at June 30,
1997, compared to $4.6 million at June 30, 1996; and commercial real estate
loans were $5.4 million at June 30, 1997, compared to $4.2 million at June 30,
1996. The large increase in commercial and land development loans is due to a
strategic decision to pursue these higher-yielding, shorter maturity loans.
DEPOSITS AND BORROWINGS
Deposits were $17.6 million and $18.2 million at June 30, 1997 and 1996,
respectively. Deposits are the Bank's primary source of externally generated
funds. The level of deposits is heavily influenced by factors such as the
general level of short and long-term interest rates, as well as alternative
yields that investors may obtain on competing investment instruments such as
mutual
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
funds. In recent years, the lower yields on bank deposit products have
made alternative financial products more competitive with the Bank's
traditional deposit products. During the year ended June 30, 1997, this
competition caused the Bank's certificate of deposit accounts to decline
$375,000 and non-certificate accounts to decline by $229,000. At June 30, 1997
and 1996, demand accounts, which consist of interest-bearing and
noninterest-bearing NOW accounts, money market accounts and passbook accounts,
were $3.7 million and $3.9 million, respectively. The general decrease in
these accounts was primarily due to the increased competition from non-deposit
accounts offering higher yields than traditional deposit products. The Bank
intends to focus on increasing its core deposits in order to maintain a more
stable deposit base. However, although the Bank has been competitively pricing
its deposit products over the past two years, its core deposits have continued
to decline.
The Bank had $6.0 million in outstanding advances or other borrowings at June
30, 1997 and had no outstanding advances or other borrowings at June 30, 1996.
This increase is primarily attributable to management's decision to leverage
its capital base. The Bank may continue such a strategy, until other earning
asset growth fully utilizes its capital.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity declined to $23.0 million at June 30, 1997
from $29.3 million at June 30, 1996. The decrease was primarily attributable
to the return of capital distribution of $7.3 million during the period.
Stockholders' equity also increased as a result of the Company's net income of
$616,000 for the year ended June 30, 1997. In addition, stockholders' equity
also increased by unrealized gains, net of taxes, for the Bank's securities
which were held as available for sale. For the year ended June 30, 1997, the
unrealized gain was $263,000, which was net of assumed taxes of $168,000, and
for the year ended June 30, 1996, the unrealized gain was $144,000, which was
net of assumed taxes of $92,000.
LIQUIDITY, CAPITAL RESOURCES AND REGULATORY CAPITAL
The Bank's primary source of funds are deposits, proceeds of principal and
interest payments on loans, and principal and interest payments on
mortgage-backed and related securities and investment securities. Although
maturity and scheduled amortization of loans and investments are predictable
sources of funds, deposit flows, mortgage loan prepayments and prepayments on
mortgage-backed and related securities are influenced significantly by general
interest rates, economic conditions and competition. During the years ended
June 30, 1997 and 1996, rates in general declined only moderately and mortgage
loan prepayments thus were fairly stable. For the years ended June 30, 1997
and 1996, the Bank reinvested loan and mortgage-backed and related securities
repayments into new mortgage loan originations, primarily commercial and land
development loans, and investment securities. In a period of rising interest
rates, it is anticipated that mortgage loan prepayments will decrease, and any
proceeds from such prepayments would be invested in higher yielding loans or
investments which would have the effect of increasing interest income.
The Bank is required to maintain minimum levels of liquid assets under the
Wisconsin Director of Savings and Loan's (the "Director") regulations for
state-chartered savings banks. Savings banks are required to maintain an
average daily balance of liquid assets (including cash, certain time deposits,
certain banker's acceptances, certain corporate debt securities and highly
rated commercial paper, securities of certain mutual funds and specified United
States government, state or federal agency obligations) of not less than 8% of
its average daily balance of net withdrawable accounts plus short-term
borrowings. The Bank's liquidity ratios were 75.05% and 39.69%, at June 30,
1997 and 1996, respectively.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The levels of these
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. At June 30, 1997 and 1996, cash and cash
equivalents were $3.0 million and $4.1 million, respectively. The decrease in
cash and cash equivalents was attributable to the increase in mortgage loans
originated during the year and for funds used for the special capital
distribution.
Liquidity management for the Bank is both a daily and long-term component of
the Bank's management strategy. The Bank maintains liquidity levels
sufficient to accommodate normal deposit fluctuations and various funding
needs, and to meet its asset and liability management objectives. Excess funds
generally are invested in short-term investments.
The primary investing activity of the Bank is the origination of loans. For
the years ended June 30, 1997 and 1996, respectively, the Bank originated $8.5
million and $9.3 million in mortgage loans. There were no sales or purchases
of mortgage loans during these periods. The Bank also did not originate or
purchase any mortgage-backed and related securities during these periods.
During the years ended June 30, 1997 and 1996, respectively, the Bank received
principal repayments on loans totaling $5.2 million and $5.0 million, and
principal repayments on mortgage-backed and related securities of $115,000 and
$221,000.
At June 30, 1997, the Bank had $1.9 million in outstanding loan commitments.
The Bank had no commitments to purchase mortgage-backed and related securities
at that date. The Bank anticipates it will have sufficient funds available to
meet its current loan commitments, including loan applications received and in
process prior to the issuance of firm commitments. Certificates of deposit
which are scheduled to mature in one year or less at June 30, 1996 were $10.7
million. Based on its historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
Effective June 7, 1993, the Bank converted from a state-chartered mutual
savings and loan regulated by the OTS to a state-chartered mutual savings bank
subject to regulation by the FDIC and the Wisconsin Department of Financial
Institutions, Division of Savings and Loan. Applicable FDIC regulations
require institutions to meet three capital standards: (i) "Tier 1 capital" in
an amount not less than 3% of total assets; (ii) "Tier 1 capital" in an amount
not less than 4% of risk-weighted assets; and (iii) "Total Capital" in an
amount not less than 8% of risk-weighted assets. Wisconsin-chartered savings
banks also are required to maintain a minimum capital to assets ratio of 6%.
The percent of assets for Wisconsin regulatory capital purposes is based on
total unconsolidated assets. See "Regulation" for a discussion of the Bank's
regulatory capital requirements.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
A summary of the Bank's regulatory capital follows:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1996 1997
------------------------ ------------------------
Percent of Percent of
Amount Assets Amount Assets
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Total capital under generally accepted accounting principals $19,030 49.91% $20,157 47.28%
======= ===== ======= =====
Tier 1 capital leverage $18,803 49.31% $19,670 46.18%
Tier 1 capital leverage requirement 1,144 3.00% 1,278 3.00%
------- ----- ------- -----
Excess $17,659 46.31% $18,392 43.18%
======= ===== ======= =====
Tier 1 risk-based capital $18,803 91.80% $19,670 74.18%
Tier 1 risk-based capital requirement 819 4.00% 1,061 4.00%
------- ----- ------- -----
Excess $17,984 87.80% $18,609 70.18%
======= ===== ======= =====
Total risk-based capital $18,929 49.64% $19,817 46.52%
Total risk-based capital requirement 1,639 8.00% 2,122 8.00%
------- ----- ------- -----
Excess $17,290 41.64% $17,695 38.52%
======= ===== ======= =====
Wisconsin regulatory capital $19,156 50.24% $20,304 47.66%
Wisconsin regulatory capital requirement 2,288 6.00% 2,556 6.00%
------- ----- ------- -----
Excess $16,868 44.24% $17,748 41.66%
======= ===== ======= =====
</TABLE>
Cash flows are categorized as to whether they relate to the operating,
investing or financing activities of the Bank. Cash flow from operating
activities include net income plus or minus non- cash income statement items
and cash flow related to the origination and sale of mortgage loans held for
sale. Cash flow from investing activities includes proceeds from the sale or
maturity of investment securities, principal payments collected on loans and
mortgage-backed and related securities, loan originations and purchases on
investments and mortgage-backed and related securities. Cash flow from
financing activities includes the increase or decrease in deposits, borrowings
and escrows and common stock transactions. The amount of principal repayments
on loans and mortgage-backed and related securities are heavily influenced by
the general level on interest rates in the economy. During periods in which
the Bank is unable to originate a sufficient amount of loans that it intends to
retain, such as ARM loans and other loans with shorter terms, and during
periods of high principal repayments, the Bank will increase liquid assets,
with remaining amounts invested in mortgage-backed and related securities.
Deposits were $17.6 million and $18.2 million at June 30, 1997 and 1996,
respectively. The Bank's certificates of deposit accounts at June 30, 1997 and
1996 were $13.9 million and $14.3 million, respectively, and demand accounts,
which consist of NOW accounts, money market accounts and passbook accounts,
were $3.7 million and $3.9 million, respectively, at June 30, 1997 and 1996.
The decreases were due to the increased competition for nondeposit products
offering higher yields than traditional deposit accounts.
DIVIDENDS
The Board of Directors of the Company authorized a special distribution of
$3.00 per share to shareholders of record on November 8, 1996. A significant
portion of the special distribution represented a non-taxable return of capital
that resulted in a reduction in the cost basis of each share. Approximately
$0.075 of the special distribution represented the payment of a cash dividend.
Declaration of future dividends by the Board of Directors will depend upon a
number of factors, including investment opportunities available to the Company
and the Bank, capital requirements, regulatory limitations and the Bank's and
the Company's financial condition and results of operations, tax considerations
and general economic conditions. The payment of cash dividends
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
by the Bank to the Company will be subject to significant regulatory
restrictions. No assurances can be given that any dividends will be paid or
will continue to be paid.
COMMON STOCK REPURCHASE AND PURCHASE PROGRAMS
The Company adopted two share repurchase programs for its common stock on
August 29, 1996 and June 20, 1997. The repurchase programs were adopted to
improve earnings per share and return on equity, and represents an attractive
investment alternative compared to other available investments. The
repurchased shares will become treasury shares and will be used for general
corporate purposes. The Company has notified the Wisconsin Department of
Financial Institutions, Division of Savings and Loan and the FDIC of the
repurchase program and has obtained regulatory approval for the program
consistent with applicable regulations.
Under the August 29, 1996 program, the Company planned to purchase up to 5% of
the outstanding shares of common stock, or approximately 128,117 shares, at
prevailing market prices. Approximately 34,000 shares were repurchased at an
approximate cost of $283,000. Under the June 20, 1997 program, up to 126,424
shares or 5% of the outstanding shares of common stock would be repurchased at
prevailing market prices commencing in late July 1997.
Also on June 20, 1997, the Company announced that the administrators of the
Reliance Savings Bank Recognition and Retention Plan (the "Retention Plan")
will begin the open market purchase of up to 75,855 shares, or 3% of the
outstanding shares of the Company's common stock, which will be used for awards
under the Retention Plan. The purchase program calls for shares to be
purchased at prevailing market prices over a six-month period of time
commencing in late July 1997.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's Consolidated Financial Statements and Notes thereto have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which requires the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels on inflation.
Interest rates do not necessarily move in the same direction or to the extent
as the price of goods and services.
ACCOUNTING DEVELOPMENTS
In October, 1995, the FASB issued FAS 123, "Accounting for Stock Compensation".
The statement encourages companies to account for stock compensation awards
based on their fair value at the date the awards are granted. The resulting
compensation cost would be shown as an expense on the income statement. FAS
123 is effective for calendar year 1996. However, companies will be required
to include in that year's financial statements information about options
granted in 1995. Companies can choose not to apply the new accounting method
and continue to apply current accounting requirements, which generally result
in no compensation cost for most fixed stock option plans. Those that do so,
however, will be required to disclose in the notes to the financial statements
what net income earnings per share would have been if they had followed the new
accounting method. The Bank has elected to retain the accounting under APB
Opinion No. 25.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinquishments of Liabilities." The
Statement focuses on the issues of accounting for transfers and servicing of
financial assets, extinquishments of liabilities and financial assets subject
to prepayment. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinquishments of liabilities occurring after December
31, 1996. The provisions of this statement for financial assets subject to
prepayment is effective for financial assets held on or acquired after January
1, 1997. SFAS No. 125 is not expected to have a material impact on the
financial position or results of operations of the Company.
FASB issued SFAS No. 128, "Earnings per Share." FASB No. 128 applies to (a)
companies with common stock or potential common stock (such as options,
warrants, or convertible securities) traded in a public market and (b)
companies that have filed or are in the process of filing with a regulatory
agency to sell securities in a public market. SFAS No. 128 requires companies
to report earnings per share data using the weighted-average number of common
shares outstanding during the period. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 may not be applied
earlier.
ASSET/LIABILITY MANAGEMENT
The Bank's profitability, like that of most financial institutions, depends to
a large extent upon its net interest income, which is the difference between
the interest it earns on interest-earning assets, such as loans and
investments, and the interest expense it pays on interest-bearing liabilities,
such as deposits and borrowings. The matching of assets and liabilities may be
analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institutions' interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it matures or re-prices within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or re-price within a specific time period and the amount
of interest-bearing liabilities anticipated, based upon certain assumptions, to
mature or re-price within that time period. A gap is considered positive when
the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities that mature or re-price within a specified time
period. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets that
mature or re-price within a specified time period. During a period of rising
interest rates, therefore, a negative gap theoretically would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. Conversely, during a period of falling
interest rates, a negative gap position would theoretically tend to result in
an increase in net interest income while a positive gap would tend to affect
net interest income adversely.
In an attempt to manage vulnerability to interest rate changes, management
monitors the Bank's interest rate risk. The principal objective of the Bank's
interest rate risk management function is to evaluate the interest rate risk
included in certain balance sheet accounts, determine the level of risk for the
Bank given its operating environment, capital and liquidity requirements an
performance objectives, and manage the risk consistent with board approved
guidelines. Through such management, the Bank seeks to reduce the
vulnerability of its operations to changes in interest rates. The Bank
monitors its interest rate risk as such risk relates to its operating
strategies. The Bank's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets monthly and reports trends to the Board of
Directors on a monthly basis and the Bank's interest rate risk position on a
quarterly basis.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
Generally, the Bank utilizes the following strategies to manage interest rate
risk: (i) emphasizing the origination of adjustable rate one- to four-family
mortgage loans and non-one- to four-family mortgage loans (which typically are
either adjustable rate or short-term) for its loan portfolio; (ii) holding
primarily short-term mortgage-backed and related securities and investment
securities, and (iii) attempting to reduce the overall interest rate
sensitivity of liabilities by emphasizing core and longer-term deposits.
By originating ARM loans and other mortgage loans with short to medium terms
and investing in relatively short to medium term mortgage-backed and related
securities and investment securities, the Bank has been able to reduce interest
rate risk by more closely matching the terms and repricing characteristics of
its assets and liabilities. Although the Bank has significantly increased its
emphasis upon originating ARM loans and has been developing other types of
mortgage loans with shorter average lives or terms and invests in
mortgage-backed and related securities with shorter average lives, the level of
the Bank's portfolio of fixed rate mortgage loans and investments with longer
average lives continues to affect its gap position. The Bank's ARM loans also
typically have annual and lifetime caps on interest rate increases, which
reduces the extent to which they protect the Bank against interest rate risk.
Further, mortgage-backed securities are subject to reinvestment risk. For
example, during periods of falling interest rates, mortgage-backed securities
are more likely to prepay, and the Bank may not be able to reinvest the
proceeds from prepayments in securities or other assets with yields similar to
those of the prepaying mortgage-backed securities. Mortgage-backed and related
securities also are subject to extension risk, which is the risk that the
effective maturity of the security may increase in a rising interest rate
environment. The market value of a security with a longer maturity typically
is more sensitive to changes in market rates of interest, and rising interest
rates may have a more pronounced adverse effect on the market value of
mortgage-backed and related securities than on other types of investment
securities.
The Bank continues to closely monitor its interest rate risk as that risk
relates to its strategies. At June 30, 1997, total interest-earning assets
maturing or re-pricing within one year exceeded total interest-bearing
liabilities maturing or re-pricing in the same period by $6.7 million,
representing a positive cumulative one year gap ratio of 14.22%. With a
positive gap position, during periods of rising interest rates, it is projected
that the cost of the Bank's interest-bearing liabilities would rise slower than
the yield on its interest-earning assets, which would have a positive effect
upon net interest income. The opposite effect on net interest income would
occur in periods of falling interest rates. The Bank also could experience
substantial prepayments of its fixed rate mortgage loans in periods of falling
interest rates, which would likely result in the reinvestment of such proceeds
at market rates which are lower than current rates.
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities at June 30, 1997, which are anticipated by the
Company to mature or reprice in each of the time periods shown. Except as
stated below, the amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual maturity of the asset or
liability. It is intended to provide an approximation of the projected
repricing of assets and liabilities at June 30, 1997 on the basis of
contractual maturities, anticipated prepayments, and scheduled rate adjustments
within a three month period and subsequent selected time intervals. The loan
amounts in the table reflect principal balances expected to be redeployed
and/or repriced as a result of contractual amortization and anticipated
prepayments of adjustable rate loans and fixed rate loans, and as a result of
contractual rate adjustments on adjustable rate loans. For loans on
residential properties, adjustable rate loans and fixed rate loans are
projected to prepay at rates between 15% and 30% annually. Prepayment
assumptions are based on OTS prepayment assumptions
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
of 10% - 30% based on loan type. Mortgage-backed and related securities are
projected to prepay at rates between 23% and 29% annually. Money market
savings accounts, passbook accounts and negotiable order of withdrawal ("NOW")
accounts are assumed to have decay rates between 40% and 70% annually.
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------------------------------------
More More Than
Within Four to Than One Three Over
Three Twelve Year to Years to Five
Months Months Three Years Five Years Years Total
------ ------- ----------- ---------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1)
Mortgage loans(2)
Fixed $ 1,504 $ 4,021 $ 3,753 $ 1,442 $ 7,872 $18,592
Variable 978 5,392 2,284 -- -- 8,654
Consumer loans(2) 17 53 151 95 39 355
Mortgage-backed securities 8 24 74 83 497 686
Investment securities
and other assets 10,264 1,007 3,083 99 2,937 17,390
------- ------- ------- ------- ------- -------
Total interest-earning assets $12,771 $10,497 $ 9,345 $ 1,719 $11,345 $45,677
======= ======= ======= ======= ======= =======
Interest-bearing liabilities
Deposits(3)
NOW Accounts $ 13 $ 38 $ 49 $ 17 $ 10 $ 127
Money market accounts 183 548 124 45 25 925
Passbook accounts 266 798 1,022 368 207 2,661
Certificates of deposit 3,980 6,756 2,807 289 51 13,883
Borrowings 2,008 2,000 2,000 -- -- 6,008
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 6,450 $10,140 $ 6,002 $ 719 $ 293 $23,604
======= ======= ======= ======= ======= =======
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 6,321 $ 357 $ 3,343 $ 1,000 $11,052 $22,073
======= ======= ======= ======= ======= =======
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 6,321 $ 6,678 $10,021 $11,021 $22,073 $22,073
======= ======= ======= ======= ======= =======
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as
a percent of total assets 13.45% 14.21% 21.32% 23.44% 46.95% 46.95%
======= ======= ======= ======= ======= =======
</TABLE>
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing
OTS prepayment assumptions of 10% - 30% based on loan type.
(2) Balances have been reduced for undisbursed loan proceeds, unearned
interest, deferred loan fees and allowances for loan losses, which
aggregated $2,188,000 at June 30, 1997. Consumer loans include home
equity loans.
(3) Although the Bank's negotiable order of withdrawal ("NOW") accounts,
money market accounts and passbook accounts generally are subject to
immediate withdrawal, management considers a certain amount of such
accounts to be core deposits have significantly longer effective
maturities and times to repricing based on the Bank's historical retention
of such deposits in changing interest rate environments. NOW accounts,
passbook savings accounts and money market accounts have been assumed to
be withdrawn at annual rates of 40%, 40% and 79%, respectively, of the
declining balance of such accounts during the period shown. The
withdrawal rates are higher than the Bank's historical rates but are
considered by management to be more indicative of expected withdrawal
rates currently. If all of the Bank's NOW accounts, passbook savings and
money market deposit accounts
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
had been assumed to be subject to repricing within one year, the
one-year cumulative excess of interest-earning assets over
interest-bearing liabilities would have been $15.4 million of 32.67% of
total assets.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans and mortgage-backed
securities, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In addition, the proportion
of ARM loans and mortgage-backed securities in the Bank's portfolios could
decrease in future periods if market interest rates remain at or decrease below
current levels due to the exercise of conversion options and refinancing
activity. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed
in the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
average statements of financial condition and the statements of income for the
years ended June 30, 1997, 1996 and 1995, and reflects the average yield on
assets and average cost of liabilities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------
1995 1996
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans $20,199 $ 1,720 8.52% $22,079 $ 1,887 8.55%
Mortgage-backed and related securities 996 106 10.64% 895 84 9.39%
Investment and other securities 10,996 618 5.62% 12,444 743 5.97%
Federal Home Loan Bank stock 138 9 6.52% 153 10 6.54%
------- ------- ----- ------- ------- -----
Total interest-earning assets(1) 32,329 2,453 7.59% 35,571 2,724 7.66%
===== =====
Noninterest earning assets 604 -- 1,021 --
------- ------- ------- -------
Total assets $32,933 $ 2,453 $36,592 $ 2,724
======= ======= ======= =======
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Total deposits $22,696 $ 1,059 4.67% $21,167 $ 1,146 5.41%
Advances from borrowers for
taxes and insurance 448 6 1.34% 7 -- --
Borrowings 280 18 6.43% 134 7 5.22%
------- ------- ----- ------- ------- -----
Total interest-bearing liabilities 23,424 1,083 4.62% 21,308 1,153 5.41%
===== =====
Noninterest bearing liabilities 126 -- 387 --
Retained Earnings 9,383 -- 14,897 --
------- ------- ------- -------
Total liabilities and retained earnings $32,933 $ 1,083 $36,592 $ 1,153
======= ======= ======= =======
Net interest income/ $ 1,370 $ 1,571
======= =======
interest rate spread(2) 2.97% 2.25%
===== =====
Net interest-earning assets/ $ 8,905 $14,263
======= =======
net interest margin(3) 4.24% 4.42%
===== =====
Average interest-earning assets to
average interest-bearing liabilities 138.0% 166.9%
======= =======
<CAPTION>
Year Ended June 30,
--------------------------------
1997
--------------------------------
Average Average
Balance Interest Yield
------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans $25,290 $ 2,230 8.82%
Mortgage-backed and related securities 716 68 9.50%
Investment and other securities 19,156 1,162 6.07%
Federal Home Loan Bank stock 168 12 7.14%
------- ------- -----
Total interest-earning assets(1) 45,330 3,472 7.66%
=====
Noninterest earning assets 1,273 --
------- -------
Total assets $46,603 $ 3,472
======= =======
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Total deposits $17,971 $ 911 5.07%
Advances from borrowers for
taxes and insurance -- -- --
Borrowings 3,025 161 5.32%
------- ------- -----
Total interest-bearing liabilities 20,996 1,072 5.11%
=====
Noninterest bearing liabilities 403 --
Retained Earnings 25,204 --
------- -------
Total liabilities and retained earnings $46,603 $ 1,072
======= =======
Net interest income/ $ 2,400
=======
interest rate spread(2) 2.55%
=====
Net interest-earning assets/ $24,334
=======
net interest margin(3) 5.29%
=====
Average interest-earning assets to
average interest-bearing liabilities 215.9%
=======
</TABLE>
Such yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Average
balances are derived principally from average daily balances and include
non-accruing loans. The yields and costs
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
RELIANCE BANCSHARES, INC.
include fees which are considered adjustments to yields. The amount of
interest income resulting from the recognition of loan fees was $68,000,
$22,000 and $34,000 for the years ended June 30, 1997, 1996 and 1995,
respectively. Interest income on nonaccruing loans is reflected in the period
it is collected and not in the periods it is earned. Such amounts are not
material to net interest income or net change in net interest income in any
period. Nonaccrual loans are included in the average balances and do not have
a material effect on the average yield.
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(change in rate multiplied by prior volume), and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Year Ended June 30, 1996 Year Ended June 30, 1995
Compared to Compared to
Year Ended June 30, 1997 Year Ended June 30, 1996
-------------------------------------- --------------------------------------
Increase(Decrease) Increase (Decrease)
Due to Due to
-------------------------------------- --------------------------------------
Rate Volume Net Rate Volume Net
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 62 $ 281 $ 343 $ 6 $ 161 $ 167
Mortgage-backed and
related securities 1 (17) (16) (11) (11) (22)
Investments and other
securities 12 407 419 40 85 125
Federal Home Loan
Bank stock 1 1 2 -- 1 1
------ ------ ------ ------ ------ ------
Total interest-earning assets $ 76 $ 672 $ 748 $ 35 $ 236 $ 271
====== ====== ====== ====== ====== ======
Interest-bearing liabilities:
Total deposits $ (70) $ (165) $ (235) $ 164 $ (77) $ 87
Advances from borrowers
for taxes and insurance -- -- -- (3) (3) (6)
Borrowings -- 154 154 (3) (8) (11)
------ ------ ------ ------ ------ ------
Total interest-bearing liabilities $ (70) $ (11) $ (81) $ 158 $ (88) $ 70
====== ====== ====== ====== ====== ======
Net change in net interest income $ 146 $ 683 $ 829 $ (123) $ 324 $ 201
====== ====== ====== ====== ====== ======
</TABLE>
23
<PAGE> 25
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Reliance Bancshares, Inc.
Milwaukee, Wisconsin
We have audited the accompanying consolidated statements of financial condition
of RELIANCE BANCSHARES, INC. as of June 30, 1997 and 1996, and the related
consolidated statements of income, retained earnings, and cash flows for the
three years in the period ended June 30, 1997. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RELIANCE
BANCSHARES, INC. as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
Meier, Clancy, George & Co. LLP
Certified Public Accountants
Brookfield, Wisconsin
July 18, 1997
24
<PAGE> 26
RELIANCE BANCSHARES, INC.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
----- -----
(Dollars in thousands)
<S> <C> <C>
Assets
Cash $ 829 $ 98
Cash equivalent interest-bearing deposits 2,219 3,957
------------- ----------
Total cash and cash equivalents 3,048 4,055
Investments
Certificates of deposit - at cost 294 294
Investment securities available for sale, at fair value 11,481 7,882
Investment securities held to maturity (estimated market
value of $3,202 in 1997 and $11,161 in 1996) 3,189 11,178
Mortgage-backed and related securities (estimated market
value of $732 in 1997 and $852 in 1996) 685 800
Federal Home Loan Bank stock - at cost 200 157
Loans receivable - net 27,601 22,931
Accrued interest receivable 182 173
Office properties and equipment 86 84
Prepaid expenses and other assets 243 198
------------- ----------
Total assets $ 47,009 $ 47,752
============= ==========
Liabilities and Equity
Deposit accounts $ 17,596 $ 18,200
Borrowed funds 6,008 --
Income taxes:
Current -- 5
Deferred 197 94
Accrued and other liabilities
Interest 32 33
Other 210 72
------------- ----------
Total liabilities 24,043 18,404
Commitments and contingencies -- --
Stockholders' equity
Common stock of $1 par value; 6,000,000 shares authorized;
2,562,344 shares issued and outstanding 2,562 2,562
Additional paid-in-capital 9,947 17,225
Unearned ESOP compensation (449) (713)
Unrealized gain on securities available for sale,
net of applicable deferred income taxes 490 227
Retained earnings - substantially restricted 10,471 10,047
Treasury stock, at cost, 6,519 and -0- shares (55) --
------------- ----------
Total stockholders' equity 22,966 29,348
------------- ----------
Total liabilities and stockholders' equity $ 47,009 $ 47,752
============= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
RELIANCE BANCSHARES, INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------
1997 1996 1995
------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Mortgage loans $ 2,230 $ 1,886 $ 1,719
Investment securities 1,162 743 618
Mortgage-backed and related securities 68 84 106
Other loans -- 1 1
Dividends on stock in Federal Home Loan Bank 12 10 9
--------- ----------- ----------
Total interest and dividends 3,472 2,724 2,453
--------- ----------- ----------
Interest expense:
Deposits and escrows 911 1,146 1,065
Notes payable and other borrowings 161 7 18
--------- ----------- ----------
Total interest expense 1,072 1,153 1,083
--------- ----------- ----------
Net interest income 2,400 1,571 1,370
Provision for loan losses 22 22 22
--------- ----------- ----------
Net interest income after provision for loan losses 2,378 1,549 1,348
--------- ----------- ----------
Noninterest income:
Gain (loss) on sale of investments 2 (3) (11)
Other income 23 9 10
Loan fees and service charges 11 11 9
--------- ----------- ----------
Total noninterest income 36 17 8
--------- ----------- ----------
Operating income 2,414 1,566 1,356
--------- ----------- ----------
Noninterest expense:
Compensation and benefits 764 358 313
Occupancy 30 30 31
Advertising 7 7 18
Furniture and equipment 14 22 20
Federal insurance premiums 162 50 54
Professional services 186 31 28
Data processing 72 70 67
Stationery, communications, and other operating expenses 96 60 59
Directors' fees and expenses of directors, officers
and employees 100 93 90
--------- ----------- ----------
Total noninterest expense 1,431 721 680
--------- ----------- ----------
Income before income taxes 983 845 676
--------- ----------- ----------
Income taxes:
Current 433 336 298
Deferred (66) (5) (27)
--------- ----------- ----------
Total income taxes 367 331 271
--------- ----------- ----------
Net income $ 616 $ 514 $ 405
========= =========== ==========
Earnings per share $ 0.25 $ 0.21 $ N/A
========= =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
RELIANCE BANCSHARES, INC.
Consolidated Statement of Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on
Securities
Available
for Sale, Net
Additional Unearned of Applicable
Common Paid-in ESOP Deferred
Stock Capital Compensation Income Taxes
------ -------- ------------ -------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 $ -- $ -- $ -- $ 12
Net income -- -- -- --
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $46 -- -- -- 71
------- ------- ------ --------
Balances at June 30, 1995 -- -- -- 83
Sale of 2,562,344 shares of common stock
at $8 per share, net of related expenses 2,562 17,225 (713) --
Net income -- -- -- --
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $92 -- -- -- 144
-------- ------- ------ --------
Balances at June 30, 1996 2,562 17,225 (713) 227
Net income -- -- -- --
Cash dividend ($3.00 per share) -- (7,374) 249 --
Purchase of treasury stock -- -- -- --
Issuance of treasury stock for retention plan -- (15) -- --
Amortization of unearned ESOP compensation -- 111 15 --
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $169 -- -- -- 263
------- -------- ------ --------
Balances at June 30, 1997 $ 2,562 $ 9,947 $ (449) $ 490
======= ======== ====== ========
<CAPTION>
Retained Treasury
Earnings Stock Total
-------- -------- -----
<S> <C> <C> <C>
Balances at June 30, 1994 $ 9,128 $ -- $ 9,140
Net income 405 -- 405
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $46 -- -- 71
------------ --------- -------
Balances at June 30, 1995 9,533 -- 9,616
Sale of 2,562,344 shares of common stock
at $8 per share, net of related expenses -- -- 19,074
Net income 514 -- 514
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $92 -- -- 144
------------ --------- -------
Balances at June 30, 1996 10,047 -- 29,348
Net income 616 -- 616
Cash dividend ($3.00 per share) 192 -- (7,317)
Purchase of treasury stock -- (283) (283)
Issuance of treasury stock for retention plan -- 228 213
Amortization of unearned ESOP compensation -- -- 126
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $169 -- -- 263
------------ --------- -------
Balances at June 30, 1997 $ 10,471 $ (55) $ 22,966
============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
RELIANCE BANCSHARES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1997 1996 1995
-------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 616 $ 514 $ 405
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for depreciation 18 23 25
Provision for loan losses 22 22 20
Amortization of premiums, discounts and fees - net (79) (33) (52)
ESOP expenses 126 -- --
Increase (decrease) in income taxes payable (5) (59) 131
Provision for (reduction of) deferred income taxes (66) (4) (27)
(Increase) decrease in interest receivable (9) (78) (7)
Net increase (decrease) in accrued/other liabilities 126 15 14
Net (increase) decrease in prepaid expense and other assets (31) 9 (188)
Loss (gain) on investments (2) 3 11
-------- -------- --------
Net cash provided (used) by operating activities 716 412 332
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (43) (5) (14)
Proceeds from sale/maturities of investment securities 12,652 6,939 3,135
Purchase of investment securities (7,818) (17,182) (1,000)
Net (increase) decrease in loans (4,624) (1,896) (1,967)
Principal payments collected on mortgage-backed securities 115 220 273
Purchase of fixed assets (20) -- (20)
Proceeds from real estate in judgement -- -- 78
-------- -------- --------
Net cash provided (used) by investing activities 262 (11,924) 485
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 19,074 --
Purchase of treasury stock (283) -- --
Treasury stock issued 213 -- --
Repayments of short-term borrowing -- (650) (8,190)
Proceeds from short-term borrowing 4,000 650 8,190
Proceeds from securities sold under repurchase agreements 4,053 -- --
Payments on securities sold under repurchase agreements (2,046) -- --
Cash dividend (7,317) -- --
Increase (decrease) in advance payments by borrowers -- (172) (306)
Increase (decrease) in deposit accounts (605) (4,112) (955)
-------- -------- --------
Net cash provided (used) by financing activities (1,985) 14,790 (1,261)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,007) 3,278 (444)
Cash and cash equivalents at beginning of year 4,055 777 1,221
-------- -------- --------
Cash and cash equivalents at end of year $ 3,048 $ 4,055 $ 777
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
RELIANCE BANCSHARES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1997 1996 1995
-------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Supplemental cash flow information
Cash paid during the period for:
Interest on deposit accounts $ 148 $ 183 $ 184
Income taxes 438 395 233
Interest on borrowings 161 7 18
Noncash investing activities:
Loans transferred to foreclosed properties and real
estate in judgment -- -- --
Total increase in unrealized gain on securities available-
for-sale 432 236 118
</TABLE>
Accounting Policies Note: Cash equivalents include demand deposits at
other financial institutions and the Federal
Home Loan Bank.
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Reliance Bancshares, Inc. and Subsidiary (the
Company) conform to generally accepted accounting principles and prevailing
practices within the thrift industry. A summary of the more significant
accounting policies follows:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Reliance Bancshares, Inc. and its wholly-owned subsidiary, Reliance Savings
Bank (the Bank). All significant intercompany accounts and transactions have
been eliminated in consolidation.
BUSINESS
Reliance Bancshares, Inc. provides a full range of financial services to
individual customers in southeastern Wisconsin through its wholly-owned insured
banking subsidiary, Reliance Savings Bank. The Bank is a state chartered stock
savings bank which conducts its business through one facility. The Bank
emphasizes permanent and construction loans secured by real estate. The Bank's
primary deposit products are savings accounts and certificates of deposit.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS IN SECURITIES
The Company's investments in securities are classified in two categories and
accounted for as follows:
SECURITIES HELD TO MATURITY - Debt and mortgage-backed securities for
which the Company has the positive intent and ability to hold to maturity
are reported at cost, adjusted for amortization of premiums and accretion
of discounts, which are recognized in interest income using the interest
method over the period to maturity.
SECURITIES AVAILABLE FOR SALE - Securities available for sale consist
of equity securities and certain debt and mortgage-backed securities not
classified as securities held to maturity. Unrealized holding gains and
losses, net of tax, on securities available for sale are reported as a net
amount in a separate component of stockholders' equity until realized, if
judged to be temporary.
The Company does not hold any trading securities at June 30, 1997.
Gains and losses on the sale of securities available for sale are determined
using the specific identification method.
30
<PAGE> 32
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MORTGAGED-BACKED SECURITIES
The Company has a portfolio of mortgage-backed certificates which bear interest
at stated rates ranging from 8.5% to 15% and which mature between 2005 and
2020. Most of the pools were acquired at a discount; a few were acquired at a
nominal premium. Mortgage-backed certificates acquired at a discount after
July 1, 1982 are being amortized and included in the Company's gross income
using the interest method. Prior year discounts are being amortized on a
straight-line basis over eleven to twelve years. The difference in prior year
discount amortization on a straight-line basis versus the interest method is
not material. The Company will continue to amortize discounts on
mortgage-backed certificates purchased prior to July 1, 1982 on a straight-line
basis. Premium amortizations are not material in amount. The Company has
adequate liquidity and capital, and it is generally management's intention to
hold such assets to maturity. Should any be sold, gains and losses will be
recognized based on the specific identification method.
At June 30, 1997 and 1996, the Company had no outstanding commitments to sell
loans or securities.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses, and net deferred loan-origination fees and discounts.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may effect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
INTEREST ON LOANS
Interest on loans is recorded as income as the borrowers' payments become due.
Interest collected in advance of the payment due date is deferred until the
payment is due. Uncollected interest on loans in excess of 90 days delinquent
is fully reserved (June 30, 1997 - $0, June 30, 1996 - $0).
LOAN-ORIGINATION FEES AND RELATED COSTS
Prior to July 1, 1988, the Bank recognized loan origination fees as income over
a period of ten years at ten percent a year, the related costs associated with
these loans were expensed as incurred.
Loan fees received on or after July 1, 1988, are accounted for in accordance
with FASB Statement No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases."
Accordingly, loan origination fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loan's yield. The Bank is generally amortizing these amounts over the
contractual life of the related loans.
31
<PAGE> 33
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated
depreciation and include expenditures for new facilities and items which
substantially increase the useful lives of existing buildings and equipment.
Building and equipment are depreciated on the straight-line method over the
estimated lives of the assets. Expenditures for normal repairs and maintenance
are charged to operations as incurred. When properties are retired or
otherwise disposed of, the related costs and accumulated depreciation are
removed from the respective accounts and the resulting gain or loss is recorded
in income. The estimated useful lives used to compute depreciation for
financial reporting purposes are as follows:
Office, buildings and improvements 10 - 42 years
Furniture, fixtures and equipment 5 - 10 years
Automobile 6 years
INCOME TAXES
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities result primarily from the Company and the Bank
reporting taxable income using the cash basis method of accounting which
differs from the accrual method used in reporting income on the financial
statements, as measured by the enacted tax rates which will be in effect when
these differences are expected to reverse.
REAL ESTATE OWNED/REAL ESTATE IN JUDGMENT
Property acquired in settlement of loans is recorded at the lower of the
related principal balance upon foreclosure or its fair value. Costs of
developing and improving such properties are to be capitalized. Expenses
related to holding such real estate, net of rental and other income, are
charged against income as incurred. A provision for estimated losses is
recorded when it is known that the net realizable value is less than the
carrying value.
Profit on the sale of real estate is recognized as income in the year sold only
to the extent that cash is received. Excess profit, if any, is deferred and
recognized as income as principal payments are made on the loan or contract.
EARNINGS PER SHARE
On April 18, 1996, Reliance Savings Bank converted from a state-chartered
mutual savings bank to a state-chartered stock savings bank with the concurrent
formation of a holding company. As part of this conversion, Reliance
Bancshares, Inc. sold 2,562,344 shares of stock.
Earnings per share are based on the weighted average number of common shares
outstanding during each period and common stock equivalent shares, using the
treasury share method. ESOP shares that are committed to be released are
considered to be outstanding. Primary and fully diluted earnings per share are
the same. The common stock equivalents consist entirely of stock options. The
resulting weighted average number of shares used in computing earnings per
share for the year ended June 30, 1997 is 2,456,131 shares of common stock.
32
<PAGE> 34
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share of common stock for the year ended June 30, 1996, were
computed based on consolidated net income and weighted average outstanding
shares of common stock computed as if Reliance Bancshares, Inc. initial public
offering had taken place on July 1, 1995. In this computation, net income was
not adjusted for the additional income which could have been earned had the net
proceeds from the offering been available for investment as of July 1, 1995.
Uncommitted ESOP shares (89,125) were not included in the weighted average
outstanding shares per SOP 93-6. The resulting weighted average number of
shares of common stock is 2,473,219.
Earnings per share are not presented for the year ended June 30, 1995, as
Reliance Bancshares, Inc. first issued stock on April 18, 1996.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing
to retain the accounting under APB Opinion No. 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value based
method of accounting under SFAS No. 123 had been applied. Reliance Bancshares,
Inc. has elected to retain the intrinsic value based method of accounting.
See Note 13 for additional information concerning SFAS No. 123.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform to current year
presentation.
33
<PAGE> 35
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES AVAILABLE FOR SALE
The carrying value (amortized cost) and estimated market values of investment
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Equity securities - common stock $ 28 $ 918 $ -- $ 946
U. S. Government and other marketable securities 5,122 12 2 5,132
Equity securities - mutual funds 5,525 -- 122 5,403
--------- --------- -------- ----------
Total $ 10,675 $ 930 $ 124 $ 11,481
========= ========= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Equity securities - common stock $ 28 $ 549 $ -- $ 577
Corporate debt securities 1,955 -- -- 1,955
Equity securities - mutual funds 5,525 -- 175 5,350
--------- --------- -------- ----------
$ 7,508 $ 549 $ 175 $ 7,882
========= ========= ======== ==========
</TABLE>
Detail of sales of investment securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Proceeds
from Gross Gross
Sales Gains Losses
--------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Year Ended:
June 30, 1997 $ 3,652 $ 2 $ --
June 30, 1996 500 -- 3
June 30, 1995 750 -- 11
</TABLE>
34
<PAGE> 36
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost and estimated market values of investment securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
June 30, 1997
-----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ------------------ ------------------ -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury obligations and
obligations of U.S. agencies $ 3,189 $ 13 $ -- $ 3,202
================= ================= ================= ================
<CAPTION>
June 30, 1996
-----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ----------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury obligations and
obligations of U.S. agencies $ 11,178 $ 5 $ 22 $ 11,161
================= ================= ================= ================
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market value of investment securities by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities on those securities where the borrowers may have the
right to call or prepay obligation with or without call or prepayment
penalties.
Contractual maturities are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
June 30,
---------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------------ ------------------ ----------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within one year or no maturity $ -- $ -- $ 498 $ 499
Greater than one year but less
than five years 2,989 3,001 8,480 8,459
Greater than five years but less
than ten years -- -- 1,000 1,000
Greater than ten years 200 201 1,200 1,204
----------------- ---------------- --------------- -------------
$ 3,189 $ 3,202 $ 11,178 $ 11,162
Total ================= ================ =============== =============
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of investment securities held-to-maturity during the years
ended June 30, 1997and 1996.
35
<PAGE> 37
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - MORTGAGE-BACKED SECURITIES AND RELATED SECURITIES
The amortized cost and estimated market value of mortgage-backed and related
securities are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
June 30, 1997
--------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ------------------ ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Participation Certificates:
Government National
Mortgage Association $ 588 $ 48 $ -- $ 616
Collateralized Mortgage Obligation 100 -- 3 97
Federal Home Loan Mortgage
Corporation 17 2 -- 19
----------------- ----------------- ----------------- ----------------
Total mortgage-backed securities $ 685 $ 50 $ 3 $ 732
================= ================= ================= ================
<CAPTION>
June 30, 1996
-------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ------------------ ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Participation Certificates:
Government National
Mortgage Association $ 679 56 -- $ 735
Collateralized Mortgage Obligation 100 -- 5 95
Federal Home Loan Mortgage
Corporation 21 1 -- 22
----------------- ----------------- ----------------- ----------------
Total mortgage-backed securities $ 800 57 5 $ 852
================= ================= ================= ================
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of mortgage-backed securities during the years ended June
30, 1997 and 1996.
36
<PAGE> 38
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
June 30,
--------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
First mortgage loans:
One-to-four family residential $ 11,035 $ 10,745
Multi-family residential 4,604 4,585
Commercial 5,376 4,163
Construction 8,420 6,701
Consumer and other loans:
Savings account 2 7
Second mortgages 355 356
Total loans ---------------- -------------
29,792 26,557
---------------- -------------
Less:
Undisbursed loan proceeds 1,890 3,366
Deferred loan fees 154 134
Allowance for loan losses 147 126
---------------- -------------
2,191 3,626
---------------- -------------
$ 27,601 $ 22,931
Loans receivable - net ================ =============
--------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
--------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 126 $ 104 $ 84
Provisions charged against income 21 22 22
Charge-offs and recoveries - net -- -- (2)
---------------- ---------------- ------------
Balance at end of year $ 147 $ 126 $ 104
================ ================ ============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The existing allowance for loan losses is considered neither inadequate nor
excessive relative to credit risk.
Loans receivable from officers and directors aggregated $154,801, and $158,620
at June 30, 1997 and 1996.
The Bank did not have any specific allowance for loan losses at June 30, 1997
and 1996. The Bank's policy is to set up a specific loss allowance when it
becomes evident that a specific loan would be disposed of at a loss.
The majority of the Bank's lending activity is with borrowers located in
metropolitan Milwaukee, Wisconsin. Although the Bank has a diversified
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the general economic conditions of the area.
37
<PAGE> 39
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
June 30,
--------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Investment securities $ 107 $ 146
Mortgage-backed securities 5 6
Loans receivable 70 21
---------------- --------------
$ 182 $ 173
================ ==============
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30,
-------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Land $ 7 $ 7
Office building 147 147
Furniture, fixtures and equipment 111 106
Automobile 32 27
---------------- --------------
297 287
Less: accumulated depreciation 211 203
---------------- --------------
$ 86 $ 84
================ ==============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation charged to operations totaled $18,000, $23,000, and $25,000 for
the years ended June 30, 1997, 1996, and 1995.
38
<PAGE> 40
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEPOSIT ACCOUNTS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
At June 30,
----------------------------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Non-interest bearing $ 35 0.20% -- $ 88 0.48% --%
NOW 92 0.52% 2.50% 126 0.69% 2.50%
Passbook 2,660 15.12% 2.78% 2,776 15.26% 2.78%
Money market 926 5.26% 3.45% 952 5.23% 3.45%
------- ------ -------- -------
Total demand accounts $ 3,713 21.10% 2.89% $ 3,942 21.66% 2.8%
------- ------ -------- -------
Certificate accounts:
3.00% to 399% $ 11 0.06% 3.40% $ 10 0.05% 3.40%
4.00% to 4.99% -- -- -- 95 0.53% 4.80%
5.00% to 5.99% 11,138 63.30% 5.52% 11,180 61.43% 5.41%
6.00% to 6.99% 2,467 14.02% 6.10% 2,402 13.20% 6.38%
7.00% to 7.99% 216 1.23% 7.30% 521 2.86% 7.17%
8.00% to 8.99% 51 0.29% 8.00% 50 0.27% 8.00%
------- ------ -------- -------
Total certificates $13,883 78.90% 5.65% $ 14,258 78.34% 5.64%
------- ------ -------- -------
Total deposit accounts $17,596 100.00% 5.07% $ 18,200 100.00% 5.04%
======= ====== ======== =======
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Deposit accounts with individual balances of $100,000 or more totaled
$1,402,000, and $1,378,000 at June 30, 1997 and 1996, respectively.
On June 30, 1997, certificate accounts have scheduled maturity dates as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ending June 30,
-----------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Totals
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
3.00% to 39.9% $ 11 $ -- $ -- $ -- $ -- $ -- $ 11
4.00% to 4.99% -- -- -- -- -- -- --
5.00% to 5.99% 9,090 1,405 589 53 1 -- 11,138
6.00% to 6.99% 1,534 354 343 236 -- -- 2,467
7.00% to 7.99% 101 58 57 -- -- -- 216
8.00% to 8.99% -- -- -- -- -- 51 51
------- -------- ------ ----- ----- ---- -------
$10,736 $ 1,817 $ 989 $ 289 $ 1 $ 51 $13,883
======= ======== ====== ===== ===== ==== =======
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on deposit accounts consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended June 30,
------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Passbook, money market and
certificate accounts $ 908 $ 1,144 $ 1,058
Escrows --- -- 6
NOW accounts 3 2 1
------------------ ---------------- ------------
$ 911 $ 1,146 $ 1,065
================== ================ ============
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 41
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - BORROWINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
At June 30,
----------------------------------------------------------------------------------------------
1997 1996
----------------------------------------------------- --------------------------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities sold under
agreements to repurchase 1998 $ 2,007 5.70% $ -- --
Advances from the
Federal Home Loan Bank 1988 4,000 5.97% -- --
--------- --------- --
$ 6,007 5.84% $ --
========= ========= --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The securities underlying the repurchase agreement are book entry securities.
The dealer may sell, loan or otherwise dispose of such securities to other
parties in the normal course of their operations, but have agreed to resell to
Reliance Bancshares, Inc. identical or substantially the same securities upon
the maturities of the agreements. Securities sold under repurchase agreements
averaged $1,346,864 for the year ended June 30, 1997, and the maximum
outstanding at any month-end during 1997 was $3.0 million.
FHLB advances are collateralized by residential real estate loans with a
carrying value of $19.2 million at June 30, 1997, and all Federal Home Loan
Bank stock.
In addition, the Company has a $2.0 million line of credit with Bank One,
Milwaukee. Any advances bear interest based on either the LIBOR or prime rate.
Reliance Bancshares, Inc. has the option to select the interest rate.
NOTE 10 - STOCKHOLDERS' EQUITY
At the time of its stock conversion, the Bank established a liquidation account
in an amount equal to its total net worth as of the date of the latest
statement of financial condition. The amount of the liquidation account was
determined to be $10,049,000. The liquidation account will be maintained for
the benefit of eligible account holders who continue to maintain their accounts
at the Bank after the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each account holder will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. Except for the purchase of stock
and payment of dividends by the Bank, the existence of the liquidation account
will not restrict use or application of stockholders' equity.
40
<PAGE> 42
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation, the Bank is required to maintain a minimum level of
capital. Also, Wisconsin chartered savings banks are required to meet minimum
capital levels of 6%. The following table summarizes the Bank's capital
requirements and ratios:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
At June 30, 1997
----------------------------------------------------------------------------------------------
Amount Ratios
Actual Required Excess Actual Required Excess
--------- --------- --------- --------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 19,670 $1,061 $18,609 74.18% 4.00% 70.18%
Total risk-based capital 19,817 2,122 17,695 46.52% 8.00% 38.52%
Leverage ratio 19,670 1,278 18,392 46.18% 3.00% 43.18%
State of Wisconsin 20,304 2,556 17,748 47.66% 6.00% 41.66%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank's capital exceeds all of the fully phased-in capital requirements
imposed by federal and Wisconsin law and regulation.
The following table summarizes the differences between the Company's
stockholders' equity and the Bank's regulatory capital at June 30, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Tier 1 Total
Risk-Based Risk-Based Leverage State of
Capital Capital Ratio Wisconsin
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Total consolidated stockholder's equity $ 22,966 $ 22,966 $ 22,966 $ 22,966
Holding Company stockholders' equity
not available for regulatory purposes (2,809) (2,809) (2,809) (2,809)
General loss allowances -- 147 -- 147
Unrealized gain on securities available for sale (487) (487) (487) --
--------- --------- --------- ---------
$ 19,670 $ 19,817 $ 19,670 $ 20,304
========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<Caption
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended June 30,
------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Current tax provision:
Federal $ 341 $ 284 $ 236
State 92 72 62
------------ ------------ -----------
Total current $ 433 $ 336 $ 298
============ ============ ===========
Deferred tax provision (credit):
Federal (52) (4) (23)
State (14) $ (1) (4)
Total deferred ------------ ------------ -----------
$ (66) $ (5) $ (27)
============ ============ ===========
Total provision for income taxes $ 367 $ 331 $ 271
============ ============ ===========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1997, the Bank has a net capital loss carryforward for tax return
purposes of $18,530 which, if unused, $4,340 expires in 1999, $11,172 expires
in 2000, and $3,018 expires in 2001.
41
<PAGE> 43
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actual income tax expense differs from the "expected" income tax expense,
computed by applying the federal income tax rate of 34% to income before income
taxes as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Federal taxes at statutory rates $334 $287 $230
Increase (decrease) resulting from:
State income taxes - net of
federal income tax benefit 51 44 35
Increase in cash value of life insurance (9) -- --
Other - net (9) -- 6
---- ---- ----
Provision for income taxes $367 $331 $271
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
June 30,
--------------------
1997 1996
----- ----
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 60 $ 53
Allowance for loan losses 49 41
Accrued expenses 37 7
Defered compensation 47 22
Other 10 12
----- ----
Gross defferred tax assets $ 203 $135
===== ====
Deferred tax liabilities:
Accrued income $ 75 $ 71
FHLB stock dividends 6 6
Depreciation 3 5
Unrealized gain on securities 316 147
----- ----
Gross deferred tax liabilities $ 400 $229
===== ====
Net deferred tax asset (liability) $(197) $(94)
===== ====
</TABLE>
Previously, the Bank qualified under provisions of the Internal Revenue Code
which permitted as a deduction from taxable income allowable bad debt deductions
which significantly exceeded actual experience and the financial statement loan
loss provisions. A deferred tax liability was not required on these excess tax
bad debt reserves. At June 30, 1997, the Bank's tax bad debt reserves were
approximately $1,401,000. The Bank is now required to establish a deferred tax
liability for the excess of its tax bad debt reserves over the balance at the
close of the base year. The amount of the base year reserves is considered to
meet the indefinite reversal criteria of Accounting Principles Board Opinion No.
12, "Accounting for Income Taxes - Special Areas," and accordingly, is not
subject to deferred taxes. The Bank's base year tax bad debt reserves were
approximately $1,401,000. Income taxes would be imposed at the then-applicable
rates if the Bank were to use these reserves for any other purpose other than to
absorb bad debt losses. In August 1996, federal legislation was enacted which
repealed the favorable bad debt method for savings and loan associations.
Subsequent to this repeal, the Bank continues to be subject to this potential
tax liability to the extent payments or distributions of these appropriated
earnings occur.
42
<PAGE> 44
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - FORECLOSED PROPERTIES AND REAL ESTATE IN JUDGMENT
Foreclosed properties and real estate in judgment is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
-------------------------
(Dollars in thousands)
<S> <C> <C>
Real estate in judgment subject to redemption $ -- $ --
Foreclosed properties -- --
Allowance for losses -- --
---------- --------
$ -- $ --
========== ========
</TABLE>
NOTE 13 - OFFICER, DIRECTOR AND EMPLOYEE BENEFIT PLAN
The Bank is a participant in the multi-employer Financial Institutions
Retirement Fund ("FIRF"). The FIRF covers substantially all of the Bank's
employees and provides benefits based on compensation and years of service for
employees age 21 and over after one year of eligibility service. The Bank's
contributions are determined by FIRF and generally represent the normal cost of
the plan. The plan provides benefits of approximately 1.5% of the average of
the five highest years of compensation times the number of years of service.
Pension costs and funding include normal costs and amortization of prior
service costs over 15 years. The FIRF does not make separate actuarial
valuations or segregate plan assets by participating employer. As a result,
disclosures required by SFAS No. 87, "Employer's Accounting for Pensions,"
cannot be made. Significant actuarial assumptions for the FIRF include a 7.5%
return on plan investments. Pension expense is based on the Bank's
contributions as determined by the FIRF. The market value of the net assets of
the fund exceeds the liabilities for the present value of accrued benefits in
the aggregate. Contributions of $31,000, $29,000 and $27,000 were made for the
years ended June 30, 1997, 1996 and 1995, respectively.
Concurrent with the conversion from a mutual savings bank to a stock savings
bank, the Bank borrowed funds from the holding company to purchase 89,125
shares of Reliance Bancshares, Inc. common stock to establish an Employee Stock
Ownership Plan (ESOP) for substantially all of its employees. The loan is to
be repaid over fifteen years and bears interest at 7.0%. Unallocated ESOP
shares are reflected as a reduction from stockholders' equity in the Company's
consolidated statements of financial condition. 16,196 shares were allocated
to participants for the year ended June 30, 1997. Expense to the ESOP was
$127,000, and $0 for 1997 and 1996. ESOP shares as of June 30 were as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Allocated shares 16,196 --
Shares ratably released for allocation -- --
Unreleased shares 72,929 89,125
-------- --------
Total ESOP shares 89,125 89,125
======== ========
Fair value of unreleased shares at June 30 $610,780 $713,000
======== ========
</TABLE>
43
<PAGE> 45
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank has a nonqualified deferred retirement plan for directors. The Plan
was approved by the Commissioner of Savings and Loan of the State of Wisconsin
on June 20, 1994. The Plan provides for each director to receive additional
benefits at retirement. In the event of death during service, the same amounts
are payable to a director designated beneficiary. The Bank has acquired
permanent life insurance policies on the individuals to fund the Plans. The
cash value of the policies totaled $216,000 at June 30, 1997. The directors
have no rights, title or interest in the insurance policies. The deferred
compensation liabilities are being accrued ratably from July 1994 to the
respective normal retirement dates. As of June 30, 1997 and 1996, $88,450 and
$57,000 had been accrued for the Plan.
RECOGNITION AND RETENTION PLAN
The Recognition and Retention Plan of the Bank was adopted on May 15, 1997 to
enable the Bank to reward and retain key officers. A total of 81,980 shares of
common stock were awarded. One-third of the shares become vested on date of
adoption, one-third will vest on May 15, 1998, and the remaining one-third will
vest on May 15, 1999. Compensation expense for stock rewarded under this plan
is recorded over the vesting periods, and totaled $242,000 for the year ended
June 30, 1997. Since the plan was adopted during the current year, there are
no expenses for the years ended June 30, 1996 and 1995.
STOCK OPTION PLAN
The Stock Option Plan of the Company was adopted on May 15, 1997. A total of
256,234 shares of common stock were authorized to be reserved for the grant of
both incentive and nonincentive stock options to officers and directors. The
option exercise price is equal to the fair market value of the common stock on
the date of the grant ($7.81 on May 15, 1997). The option term cannot exceed
ten years. A total of 221,066 shares of common stock were granted under the
plan on May 15, 1997. The options vested one-third on May 15, 1997, and will
vest one-third on May 15, 1998, and one-third on May 15, 1999.
As disclosed in Note 1, the Company has elected to follow APB Opinion No. 25
"Accounting for Stock Issued to Employees," and related interpretations for
accounting for its stock option grants. Accordingly, no compensation expense
has been recognized for the Company's stock option grants. Had compensation
cost for the Company's 1997 grant for stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been reduced by $171,000 and $.07.
The following is a summary of stock option transactions for the year ended June
30, 1997:
<TABLE>
<CAPTION>
Number of Per
Shares Share
--------- -------
<S> <C> <C>
Initial grant date - May 15, 1997 221,066 $7.81
Exercised -- --
------- -----
Outstanding at June 30, 1997 221,066 $7.81
======= =====
Exercisable at June 30, 1997 73,689 $7.81
======= =====
Available to future grant at year-end 35,168
=======
</TABLE>
44
<PAGE> 46
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER
COMMITMENTS
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instrument consists of commitments to extend credit. This instrument
involves, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the statement of financial condition. The
contract amounts reflect the extent of involvement the Bank has in the
particular class of financial instrument. The Bank's maximum exposure to
credit loss for commitments to extend credit is represented by the contract
amount of those instruments.
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1997 1996
----------- ----------
(Dollars in thousands)
<S> <C> <C>
Commitments to extend credit
Fixed Rate $ 1,890 $ 1,350
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. As some commitments expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates the creditworthiness of each
customer on a case by case basis. The Bank generally extends credit only on a
secured basis. Collateral obtained varies, but consists primarily of
one-to-four family residences.
Commitments to extend credit on a fixed-rate basis expose the Bank to a certain
amount of interest rate risk if market rates of interest substantially increase
during the commitment period.
The Bank is a party to various legal actions normally associated with financial
institutions, the aggregate effect of which, in management's and legal
counsel's opinion, would not be material to the financial condition of Reliance
Bancshares, Inc.
NOTE 15 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement No. 107, ("Disclosures about Fair Value of Financial Instruments"),
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not necessarily
represent the underlying value of Reliance Bancshares, Inc. Reliance
Bancshares, Inc. does not routinely measure the market value of financial
instruments because such measurements represent point-in- time estimates of
value. It is generally not the intent of Reliance Bancshares, Inc. to
liquidate and therefore realize the difference between market value and
carrying value and even if it were, there is no assurance that the estimated
market values could be realized. Thus, the information
45
<PAGE> 47
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
presented is not particularly relevant to predicting Reliance Bancshares,
Inc.'s future earnings or cash flows.
The following methods and assumptions were used by Reliance Bancshares, Inc. in
estimating its fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS
The carrying values approximate the fair values for these assets.
SECURITIES AVAILABLE FOR SALE, INVESTMENTS, AND MORTGAGE-BACKED SECURITIES
Fair values are based on quoted market prices, where available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
LOANS
Fair values are based on quoted market prices for loans with similar financial
characteristics.
DEPOSITS
The fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW accounts, money market, and checking accounts, is
the amount payable on demand at the reporting date. The fair value of fixed
rate time deposits is calculated using discounted cash flows applying interest
rates currently being offered on similar certificates.
BORROWINGS
The carrying amounts of short-term borrowings approximate their fair values.
46
<PAGE> 48
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OFF-BALANCE SHEET INSTRUMENTS
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. The fair
value of these off-balance-sheet items approximates the recorded amounts of the
related fees and is not material.
The carrying amounts and estimated fair value of financial instruments were as
follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------
1997 1996
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 3,048 $ 3,048 $ 4,055 $ 4,055
Certificates of deposit 294 294 294 294
Securities available for sale 11,481 11,481 7,882 7,882
Securities held to maturity 3,189 3,202 11,178 11,162
Mortgage-backed securities 685 732 800 852
Loans receivable 27,601 28,859 22,931 23,702
Financial Liabilities:
Deposits:
Demand deposits 3,713 3,713 3,942 3,942
Certificates 13,883 14,609 14,258 14,383
Borrowed funds 6,008 6,008 -- --
</TABLE>
47
<PAGE> 49
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of June 30, 1997
and 1996 and condensed statements of income and cash flows for the period then
ended for Reliance Bancshares, Inc. should be read in conjunction with the
consolidated financial statements and the notes thereto.
CONDENSED STATEMENT OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash $ 416 $ 5
Cash equivalent interest-bearing deposits 936 2,121
Investment securities available for sale 1,005 460
Investment securities held to maturity 1,992 6,986
Investment in savings bank subsidiary 20,157 19,043
Loan to ESOP 449 697
Other assets 28 50
------- -------
Total assets $24,983 $29,362
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowed funds $ 2,008 $ --
Liabilities 9 14
------- -------
Total liabilities 2,017 14
Stockholders' equity 22,966 29,348
------- -------
Total liabilities and stockholders' equity $24,983 $29,362
======= =======
</TABLE>
CONDENSED STATEMENT OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Period of
April 18, 1996
Year Ended through
June 30, June 30,
1997 1996
---------- --------------
<S> <C> <C>
Interest income $404 $120
Interest expense 75 --
---- ----
Net interest income 329 120
Non-interest income 2 --
---- ----
Operating income 331 120
Non-interest expense
Compensation and employee benefits 6 --
Professional services 88 --
Other 34 5
---- ----
Total non-interest expense 128 5
---- ----
Income before income taxes and equity
in undistributed earnings of subsidiary 203 115
Income tax 80 46
---- ----
Income before equity in undistributed
earnings of subsidiary 123 69
Equity in undistributed earnings of subsidiary 753 157
---- ----
Net income $876 $226
==== ====
</TABLE>
48
<PAGE> 50
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period of
April 18, 1996
Year Ended through
June 30, June 30,
1997 1996
--------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 876 $ 226
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (1,114) (157)
Amortization (7) (7)
ESOP expenses 126 --
Net (increase) decrease in other assets 22 (63)
Net increase (decrease) in other liabilities (5) 14
Loss (gain) on investments (2) --
------- -------
Net cash provided by operating activities (104) 13
------- -------
Cash flows from investing activities:
Purchase of stock of subsidiary -- (9,537)
Purchase of investment securities (4,000) (11,989)
Proceeds from sales/maturities of investment securities 8,462 4,549
Loan to ESOP -- (713)
Payment received on loan to ESOP 248 16
------- -------
Net cash provided (used) by investing activities 4,710 (17,674)
------- -------
Cash flows from financial activities:
Net proceeds from issuance of common stock upon conversion -- 19,787
Cash dividends (7,317) --
Purchase of treasury stock (283) --
Treasury stock issued 213 --
Proceeds from securities sold under repurchase agreements 4,053 --
Payments on securities sold under repurchase agreements (2,046) --
------- -------
Net cash provided (used) by financing activities (5,380) 19,787
------- -------
Increase (decrease) in cash and cash equivalents (774) 2,126
Cash and cash equivalents at beginning of year 2,126 0
------- -------
Cash and cash equivalents at end of year $ 1,352 $ 2,126
======= =======
</TABLE>
49
<PAGE> 51
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1996 1996 1997 1997
------------- ----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest and dividend income $836 $891 $839 $906
Interest expense 231 252 281 308
---- ---- ---- ----
Net interest income 605 639 558 598
Provision for loan losses 5 6 6 5
---- ---- ---- ----
Net interest income after
provision for loan losses 600 633 552 593
Non-interest income 3 5 2 26
Non-interest expense 346 229 262 594
---- ---- ---- ----
Income before income taxes 257 409 292 25
Income taxes 98 156 116 (3)
---- ---- ---- ----
Net income $159 $253 $176 $ 28
==== ==== ==== ====
<CAPTION>
Three Months Ended
--------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1995 1995 1996 1996
------------- ----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest and dividend income $622 $620 $623 $859
Interest expense 294 291 289 279
---- ---- ---- ----
Net interest income 328 329 334 580
Provision for loan losses 5 6 5 6
---- ---- ---- ----
Net interest income after
provision for loan losses 323 323 329 574
Non-interest income 8 2 2 5
Non-interest expense 165 185 183 188
---- ---- --- ----
Income before income taxes 166 140 148 391
Income taxes 65 55 59 152
---- ---- ---- ----
Net income $101 $ 85 $ 89 $239
==== ==== ==== ====
</TABLE>
The following schedule is a summary of earnings per share and market
information during the years ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1996 1996 1997 1997
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Earnings per share $ 0.06 $ 0.10 $ 0.07 $ 0.02
Dividends paid -- 3.00 -- --
Market information:
Trading range
High 8.750 10.250 7.750 8.500
Low 7.625 6.125 6.375 7.000
Close 8.625 6.750 7.250 8.375
<CAPTION>
Three Months Ended
--------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1995 1995 1996 1996
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Earnings per share $ -- $ -- $ -- $ 0.10
Dividends paid -- -- -- --
Market information:
Trading range
High -- -- -- 8.750
Low -- -- -- 7.500
Close -- -- -- 8.000
</TABLE>
50
<PAGE> 52
RELIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - FEDERAL DEPOSIT INSURANCE CORPORATION SPECIAL ASSESSMENT
Federal legislation enacted on September 30, 1996 addressed inadequate funding
of the Savings Association Insurance Fund ("SAIF"), which had resulted in a
large deposit insurance premium disparity between banks insured by the Bank
Insurance Fund ("BIF") and SAIF insured thrifts. As a result of this new
legislation, a one-time special assessment was imposed on thrift institutions,
and the Company recognized a $144,000 pretax charge for assessment on its
savings bank subsidiary. The after tax impact on earnings amounted to $87,000.
The legislation also provides for a reduction in deposit insurance premiums in
subsequent periods and other regulatory reforms.
51
<PAGE> 53
SHAREHOLDER INFORMATION
BOARD OF DIRECTORS OF RELIANCE BANCSHARES, INC. AND RELIANCE SAVINGS BANK
ALLAN T. BACH
Chairman of the Board, Director, President and Chief Executive Officer of the
Company; Director, President and Chief Executive Officer of the Bank since 1991
CAROL A. BARNHARST
Director, Vice President, Secretary, Treasurer and Chief Financial Officer of
the Company; Director, Chief Financial Officer and Vice President of the
Bank since 1981
O. WILLIAM HELD
Director of the Company; Chairman of the Board and Director of the Bank since
1985; President and Chief Executive Officer of the Bank prior to his retirement
in 1991
JOHN T. LYNCH
Director of the Company; Director of the Bank since 1988, practices law as a
sole practitioner, owns and manages residential rental properties
MARJORIE A. SPICUZZA
Director of the Company; Director of the Bank since 1980; prior to her
retirement in 1985, President and Chief Executive Officer of the Bank
EXECUTIVE OFFICERS OF RELIANCE BANCSHARES, INC. AND RELIANCE SAVINGS BANK ALLAN
T. BACH
Chairman of the Board, President and Chief Executive Officer of the Company;
President and Chief Executive Officer of the Bank
CAROL A. BARNHARST
Vice President, Chief Financial Officer and Secretary/Treasurer of the Company
and Vice President and Chief Financial Officer of Bank
HEADQUARTERS
RELIANCE BANCSHARES, INC.
3140 South 27th St.
Milwaukee, WI 53215
(414) 671-2222
RELIANCE BANCSHARES BANK
3140 South 27th St.
Milwaukee, WI 53215
(414) 671-2222
RELIANCE BANCSHARES BANK-BANK OFFICE LOCATIONS
MAIN OFFICE
3140 South 27th St.
Milwaukee, WI 53215
SHAREHOLDER/MEDIA RELATIONS
Shareholders, investors, analysts, the news media and other interested in
additional information may contact Allan T. Bach, Chairman of the Board,
President and Chief Executive Officer of the Company, at the Company's
Headquarters.
ANNUAL REPORT ON FORM 10-KSB
A copy of Reliance Bancshares, Inc.'s Form 10-KSB filed with the Securities and
Exchange Commission is available without charge by writing:
Carol A. Barnharst, Secretary Reliance Bancshares, Inc.
3140 South 27th St.
Milwaukee, WI 53215
ANNUAL MEETING
The annual meeting of shareholders of Reliance Bancshares, Inc. will be held at
2:00 p.m., Milwaukee time, October 21, 1997 at the Clarion Hotel & Conference
Center, 5311 South Howell Avenue, Milwaukee, Wisconsin
AUDITORS
Meijer, Clancy, George & Co. LLP
3245 North 124th Street
Brookfield, WI 53005
LEGAL COUNSEL
Michael Best & Friedrich
100 East Wisconsin Avenue
Milwaukee, WI 53202
TRANSFER AGENT
Firstar Trust Company
615 E. Michigan Street
Fourth Floor
Milwaukee, WI 53202
Telephone: (414) 276-3737
STOCK LISTING INFORMATION
Reliance Savings Bank converted from a mutual to a stock company, effective
April 16, 1996, at which time Reliance Bancshares, Inc. consummated the sale of
2,562,344 shares of its Common Stock to the public. The shares of Common Stock
of Reliance Bancshares, Inc. are publicly traded on the NASDAQ "Small Cap"
Market under the symbol "RELI".
STOCK PRICE INFORMATION
Shares of Common Stock of Reliance Bancshares, Inc. were made available to
qualified subscribers at $8.00 per share during the initial public offering,
which was consummated on April 18, 1996. A special distribution of
approximately $2.92 per share was made on November 15, 1996. At September 3,
1997, the closing bid price of the Common Stock was $8.375 per share.
SHAREHOLDERS AND SHARES OUTSTANDING
As of September 5, 1997 there were 315 registered shareholders of record and
1,200 estimated additional beneficial shareholders for an approximate total of
1,515. Shares outstanding at September 5, 1997 were 2,472,075.
52
<PAGE> 1
SUBSIDIARIES OF RELIANCE BANCSHARES, INC.
RELIANCE SAVINGS BANK - 100% owned
- - A Wisconsin chartered stock savings bank
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 18, 1997, with respect to the consolidated
financial statements of Reliance Bancshares, Inc. in the Form 10-KSB for the
fiscal year ended June 30, 1997 of Reliance Bancshares, Inc.
Meier, Clancy, George & Co. LLP
Certified Public Accountants
Brookfield, Wisconsin
September 16, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 829
<INT-BEARING-DEPOSITS> 2,219
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,481
<INVESTMENTS-CARRYING> 3,874
<INVESTMENTS-MARKET> 3,934
<LOANS> 27,601
<ALLOWANCE> 147
<TOTAL-ASSETS> 47,009
<DEPOSITS> 17,596
<SHORT-TERM> 6,008
<LIABILITIES-OTHER> 439
<LONG-TERM> 0
0
0
<COMMON> 2,562
<OTHER-SE> 20,404
<TOTAL-LIABILITIES-AND-EQUITY> 47,009
<INTEREST-LOAN> 2,230
<INTEREST-INVEST> 1,242
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,472
<INTEREST-DEPOSIT> 911
<INTEREST-EXPENSE> 1,072
<INTEREST-INCOME-NET> 2,400
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 1,431
<INCOME-PRETAX> 983
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 616
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 2.55
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 126
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 147
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 147
</TABLE>
<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
<TABLE>
<CAPTION>
CHECK THE APPROPRIATE BOX:
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission only
[X] Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
RELIANCE BANCSHARES, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
ALLAN T. BACH, PRESIDENT OF REGISTRANT
------------------------------------------------------------------------
(Name of Person(s) filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
2. Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
4. Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
5. Total fee paid:
-----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
-----------------------------------------------------------------------
2. Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
3. Filing Party:
-----------------------------------------------------------------------
4. Date Filed:
-----------------------------------------------------------------------
<PAGE> 2
RELIANCE BANCSHARES, INC.
3140 SOUTH 27TH STREET
MILWAUKEE, WISCONSIN 53215
(414) 671-2222
September 17, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of Reliance Bancshares, Inc. (the "Company"), the
holding company for Reliance Savings Bank (the "Bank"), which will be held on
October 21, 1997, at 2:00 p.m., Milwaukee time, at the Clarion Hotel &
Conference Center (formerly the Quality Inn Airport), 5311 South Howell Avenue,
Milwaukee, Wisconsin 53207.
The attached Notice of Annual Meeting of Shareholders and Proxy Statement
describe the formal business to be conducted at the Annual Meeting. We also
have enclosed a copy of the Company's Annual Report for the fiscal year ended
June 30, 1997. Directors and officers of the Company, as well as
representatives of Schenck & Associates, S.C. (the successor to Meier, Clancy,
George & Co. LLP following the merger of Meier, Clancy, George & Co. LLP with
and into Schenck & Associates, S.C.), the Company's independent auditors, will
be present at the Annual Meeting to respond to any questions that our
shareholders may have.
The vote of every shareholder is important to us. Please sign and return
the enclosed appointment of proxy form promptly in the postage-paid envelope
provided, regardless of whether you are able to attend the Annual Meeting in
person. If you attend the Annual Meeting, you may vote in person even if you
have already mailed your Proxy.
On behalf of the Board of Directors and all of the employees of the
Company and the Bank, I wish to thank you for your continued support.
Sincerely yours,
/s/ Allan T. Bach
Allan T. Bach
President and Chief Executive Officer
<PAGE> 3
RELIANCE BANCSHARES, INC.
3140 SOUTH 27TH STREET
MILWAUKEE, WISCONSIN 53215
(414) 671-2222
------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 21, 1997
------------------------------------------------
TO THE HOLDERS OF COMMON STOCK OF RELIANCE BANCSHARES, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Annual Meeting") of Reliance Bancshares, Inc. (the "Company") will be held on
Tuesday, October 21, 1997, at 2:00 p.m., Milwaukee time, at the Clarion Hotel &
Conference Center (formerly the Quality Inn Airport), 5311 South Howell Avenue,
Milwaukee, Wisconsin 53207.
The Annual Meeting is for the purpose of considering and voting upon the
following matters, all of which are set forth more completely in the
accompanying Proxy Statement:
1. The election of one director for a three-year term and until
his successor is elected;
2. The ratification of the appointment of Schenck & Associates,
S.C. (the successor to Meier, Clancy, George & Co. LLP following the
merger of Meier, Clancy, George & Co. LLP with and into Schenck &
Associates, S.C.) as independent auditors of the Company for the
fiscal year ending June 30, 1998; and
3. Such other matters as may properly come before the Annual Meeting
or any adjournments or postponements thereof. The Board of Directors
is not aware of any other such business.
The Board of Directors has established September 5, 1997 as the record
date for the determination of shareholders entitled to notice of and to vote at
the Annual Meeting and any adjournments or postponements thereof. Only
shareholders of record as of the close of business on that date will be
entitled to vote at the Annual Meeting or any adjournments or postponements
thereof. In the event there are not sufficient votes for a quorum or to
approve or ratify any of the foregoing proposals at the time of the Annual
Meeting, the Annual Meeting may be adjourned or postponed in order to permit
further solicitation of proxies by the Company.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Carol A. Barnharst
Milwaukee, Wisconsin Carol A. Barnharst
September 17, 1997 Vice President, Chief Financial Officer,
Secretary and Treasurer
================================================================================
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. YOUR VOTE IS IMPORTANT.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ENCLOSED PROXY FORM PROMPTLY IN THE ENVELOPE PROVIDED.
================================================================================
<PAGE> 4
RELIANCE BANCSHARES, INC.
3140 SOUTH 27TH STREET
MILWAUKEE, WISCONSIN 53215
(414) 671-2222
------------------------------
PROXY STATEMENT
------------------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 21, 1997
------------------------------
This Proxy Statement is being furnished to holders of common stock, $1.00
par value per share (the "Common Stock") of Reliance Bancshares, Inc. (the
"Company") in connection with the solicitation on behalf of the Board of
Directors of the Company of proxies to be used at the Annual Meeting of
Shareholders (the "Annual Meeting") to be held on Tuesday, October 21, 1997, at
2:00 p.m., Milwaukee time, at the Clarion Hotel & Conference Center (formerly
the Quality Inn Airport), 5311 South Howell Avenue, Milwaukee, Wisconsin 53207,
and at any adjournments or postponements thereof.
The 1997 Annual Report to Shareholders, including the consolidated
financial statements for the fiscal year ended June 30, 1997, accompanies this
Proxy Statement and appointment form of proxy (the "Proxy") which are first
being mailed to shareholders on or about September 17, 1997.
Only shareholders of record as of the close of business on September 5,
1997 (the "Voting Record Date") will be entitled to vote at the Annual Meeting.
On the Voting Record Date, there were 2,472,075 shares of Common Stock
outstanding, and the Company had no other class of securities outstanding.
The presence, in person or by Proxy, of the holders of at least a majority
of the total number of shares of Common Stock entitled to vote is necessary to
constitute a quorum at the Annual Meeting. As to the election of a director
for a term expiring in the year 2000, the Proxy being provided by the Board of
Directors enables a shareholder to vote for the election of the nominee
proposed by the Board, or to withhold authority to vote for the nominee
proposed by the Board. Article VI of the Company's Articles of Incorporation
provides that there will be no cumulative voting by shareholders for the
election of the Company's directors. Under the Wisconsin Business Corporation
Law, directors are elected by a plurality of the votes cast with a quorum
present. The affirmative vote of a majority of the total votes cast in person
or by proxy is necessary to ratify the appointment of Schenck & Associates,
S.C. (the successor to Meier, Clancy, George & Co. LLP following the merger of
Meier, Clancy, George & Co. LLP with and into Schenck & Associates, S.C.) as
independent auditors for the fiscal year ending June 30, 1998. Abstentions are
included in the determination of shares present and voting for purposes of
whether a quorum exists, while broker non-votes are not. Neither abstentions
nor broker non-votes are counted in determining whether a matter has been
approved. In the event there are not sufficient votes for a quorum or to
approve or ratify any proposal at the time of the Annual Meeting, the Annual
Meeting may be adjourned or postponed in order to permit the further
solicitation of proxies.
<PAGE> 5
As provided in the Company's Articles of Incorporation, record holders of
Common Stock who beneficially own in excess of 10% of the outstanding shares of
Common Stock (the "10% Limit") are not entitled to any vote in respect of the
shares held in excess of the 10% Limit. A person or entity is deemed to
beneficially own shares owned by an affiliate of, as well as such persons
acting in concert with, such person or entity. The Company's Articles of
Incorporation authorize the Board to make all determinations necessary to
implement and apply the 10% Limit, including determining whatever persons or
entities are acting in concert. The provisions of the Company's Articles of
Incorporation relating to the 10% Limit do not apply to an acquisition of more
than 10% of the shares of Common Stock if such acquisition has been approved by
a majority of disinterested directors; provided such approval shall be
effective only if obtained at a meeting where a quorum of disinterested
directors is present.
Shareholders are requested to vote by completing the enclosed Proxy and
returning it signed and dated in the enclosed postage-paid envelope.
Shareholders are urged to indicate their votes in the spaces provided on the
Proxy. Proxies solicited by the Board of Directors of the Company will be
voted in accordance with the directions given therein. Where no instructions
are given, signed proxies will be voted FOR the election of the nominee for
director named in this Proxy Statement and FOR the ratification of the
appointment of Schenck & Associates, S.C. as independent auditors of the
Company for the fiscal year ending June 30, 1998. Returning your completed
Proxy will not prevent you from voting in person at the Annual Meeting should
you be present and wish to do so.
Any shareholder giving a Proxy has the power to revoke it any time before
it is exercised by: (i) filing with the Secretary of the Company written
notice thereof (Carol A. Barnharst, Secretary, Reliance Bancshares, Inc., 3140
South 27th Street, Milwaukee, Wisconsin 53215); (ii) submitting a duly
executed Proxy bearing a later date; or (iii) appearing at the Annual Meeting
and giving the Secretary notice of his or her intention to vote in person. If
you are a shareholder whose shares are not registered in your own name, you
will need additional documentation from your record holder to vote personally
at the Annual Meeting. Proxies solicited hereby may be exercised only at the
Annual Meeting and any adjournments or postponements thereof and will not be
used for any other meeting.
The cost of solicitation of proxies by mail on behalf of the Board of
Directors will be borne by the Company. Proxies also may be solicited by
personal interview or by telephone, in addition to the use of the mails by
directors, officers and regular employees of the Company and Reliance Savings
Bank (the "Bank"), without additional compensation therefor. The Company also
has made arrangements with brokerage firms, banks, nominees and other
fiduciaries to forward proxy solicitation materials for shares of Common Stock
held of record by the beneficial owners of such shares. The Company will
reimburse such holders for their reasonable out-of-pocket expenses.
Proxies solicited hereby will be returned to the Board of Directors and
will be tabulated by inspectors of election designated by the Board of
Directors who will not be employed by, or a director of, the Company or any of
its affiliates.
-2-
<PAGE> 6
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of the Voting Record Date by: (i) each shareholder known to
the Company to beneficially own more than 5% of the shares of Common Stock
outstanding, as disclosed in certain reports regarding such ownership filed
with the Company and with the Securities and Exchange Commission (the "SEC") in
accordance with Sections 13(d) or 13(g) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"); (ii) each director of the Company; (iii) the
executive officer of the Company appearing in the Summary Compensation Table
below; and (iv) all directors and executive officers as a group. Members of
the Board of Directors of the Company also serve as directors of the Bank.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME OWNED (1) PERCENT OF CLASS
------ ----------- ----------------
<S> <C> <C>
Reliance Savings Bank Employee Stock
Ownership Trust (5) ..................... 89,125 3.5%
Jerome H. Davis (6) ....................... 142,700 5.6
Allan T. Bach (2)(3)(4) ................... 61,720 2.5
Carol A. Barnharst (2)(3)(4) .............. 59,239 2.4
O. William Held (2) ....................... 40,404 1.6
John T. Lynch (2) ......................... 44,535 1.8
Marjorie A. Spicuzza (2)(7) ............... 44,535 1.8
All directors and executive officers
as a group (5 persons) .................. 250,433 9.9%
</TABLE>
- ---------------------
(1) Unless otherwise indicated, includes shares of Common Stock held directly
by the individuals as well as by members of such individuals' immediate
family who share the same household, shares held in trust and other
indirect forms of ownership over which shares the individuals exercise
sole or shared voting power and/or investment power. Fractional shares of
Common Stock held by certain executive officers under the Reliance Savings
Bank Employee Stock Ownership Plan (the "ESOP") have been rounded to the
nearest whole share.
(2) Includes shares of Common Stock which the named individuals and certain
executive officers have the right to acquire within 60 days of the Voting
Record Date pursuant to the exercise of stock options: Mr. Bach - 13,285
shares; Ms. Barnharst - 13,285 shares; Mr. Held - 13,285 shares; Mr. Lynch
- 13,285 shares; and Ms. Spicuzza - 13,285 shares. Does not include
options to purchase shares of Common Stock which do not vest within 60
days of the Voting Record Date which have been awarded to executive
officers and directors under the Reliance Bancshares, Inc. 1997 Stock
Option Plan (the "Stock Option Plan").
(3) Includes 16,393 and 10,933 shares of Common Stock awarded to Mr. Bach and
Ms. Barnharst, respectively, during the fiscal year ended June 30, 1997
under the Reliance Savings Bank Recognition and Retention Plan (the
"Retention Plan"). Does not include 32,787 and 21,867 shares of Common
Stock awarded to Mr. Bach and Ms. Barnharst, respectively, under the
Retention Plan which have not yet been acquired by the Retention Plan;
therefore, although, Mr. Bach and Ms. Barnharst have a contractual right
to such shares, they do not yet have voting or dispositive power with
respect to such shares.
(4) Includes shares of Common Stock allocated to certain executive officers
under the ESOP, for which such individuals possess shared voting power, of
which approximately 7,042 shares and 3,771 shares have been allocated to
the accounts of Mr. Bach and Ms. Barnharst, respectively.
(5) Emjay Corporation (the "Trustee") is the trustee for the Reliance Savings
Bank Employee Stock Ownership Trust. The Trustee's address is 725 West
Glendale Avenue, Glendale, Wisconsin 53209.
(6) Based upon a Schedule 13D, dated May 22, 1997, filed with the Company
pursuant to the Exchange Act by Mr. and Mrs. Jerome H. Davis. Mr. and
Mrs. Davis' residence is located at 11 Baldwin Farms North, Greenwich, CT
06831.
(7) Of the 31,250 shares indicated as beneficially owned by Ms. Spicuzza,
10,000 are owned by her sister who has sole voting and investment power
over such shares, and as to which Ms. Spicuzza disclaims beneficial
ownership.
-3-
<PAGE> 7
MATTERS TO BE VOTED ON AT THE ANNUAL MEETING
MATTER 1.
ELECTION OF DIRECTORS
Pursuant to the Articles of Incorporation of the Company, at the first
annual meeting of shareholders of the Company held on October 28, 1996,
directors of the Company were divided into three classes as equal in number as
possible. The director of the first class was elected to hold office for a
term expiring at the first succeeding annual meeting, directors of the second
class were elected to hold office for a term expiring at the second succeeding
annual meeting and directors of the third class were elected to hold office for
a term expiring at the third succeeding annual meeting, and in each case until
their successors are elected and qualified. At each subsequent annual meeting
of shareholders, one class of directors, or approximately one-third of the
total number of directors, will be elected for a term of three years. There
are no family relationships among the directors and/or executive officers of
the Company. The person being nominated as a director is not being proposed
for election pursuant to any agreement or understanding between any person and
the Company.
Unless otherwise directed, each Proxy executed and returned by a
shareholder will be voted FOR the election of the nominee for director listed
below. If the person named as nominee should be unable or unwilling to stand
for election at the time of the Annual Meeting, the proxies will nominate and
vote for any replacement nominee recommended by the Board of Directors. At
this time, the Board of Directors knows of no reason why the nominee listed
below may not be able to serve as a director if elected.
The following tables present information concerning the nominee for
director and continuing directors, including tenure as a director of the Bank.
All of the directors have served as a director of the Company since the
Company's formation in November 1995.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR
AND PRINCIPAL OCCUPATION OF THE BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE
---- --- -------------------------- --------
NOMINEE FOR DIRECTOR FOR THREE-YEAR TERM EXPIRING IN 2000
<S> <C> <C> <C>
John T. Lynch 63 Director of the Company and the 1988
Bank; From 1984 to 1995, partner
in the law firm of Duggan Lynch &
Fons in Milwaukee, Wisconsin;
currently a solo practitioner.
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Allan T. Bach 63 Chairman of the Board of Directors 1991
of the Company and President, Chief
Executive Officer and Director of the
Company and the Bank.
</TABLE>
-4-
<PAGE> 8
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR
AND PRINCIPAL OCCUPATION OF THE BANK
NAME AGE DURING THE PAST FIVE YEARS SINCE
---- --- -------------------------- --------
<S> <C> <C> <C>
O. William Held 67 Chairman of the Board of Directors 1985
of the Bank and Director of the
Company and the Bank; Prior to his
retirement in 1991, Mr. Held served
as the President and Chief Executive
Officer of the Bank from 1985 to 1991.
DIRECTORS WHOSE TERMS EXPIRE IN 1999
Carol A. Barnharst 53 Vice President, Chief Financial Officer, 1993
Secretary, Treasurer and Director of
the Company; Vice President, Chief
Financial Officer and Director of the
Bank; Ms. Barnharst has served as
Vice President of the Bank since 1981
and as Chief Financial Officer of the
Bank since 1994.
Marjorie A. Spicuzza 72 Director of the Company and the Bank; 1980
Prior to her retirement in 1985, Ms.
Spicuzza served as the President and Chief
Executive Officer of the Bank from 1980
to 1985.
</TABLE>
THE AFFIRMATIVE VOTE OF A PLURALITY OF THE VOTES CAST IS REQUIRED FOR THE
ELECTION OF DIRECTORS. UNLESS OTHERWISE SPECIFIED, THE SHARES OF COMMON STOCK
REPRESENTED BY THE PROXIES SOLICITED HEREBY WILL BE VOTED IN FAVOR OF THE
ELECTION OF THE ABOVE-DESCRIBED NOMINEE. THE BOARD OF DIRECTORS RECOMMENDS
THAT YOU VOTE FOR ELECTION OF THE NOMINEE FOR DIRECTOR.
MATTER 2.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for the fiscal year ended June 30, 1997
were Meier, Clancy, George & Co. LLP. The Board of Directors of the Company
has reappointed Schenck & Associates, S.C. (the successor to Meier, Clancy,
George & Co. LLP following the merger of Meier, Clancy, George & Co. LLP with
and into Schenck & Associates, S.C.) to perform the audit of the Company's
financial statements for the fiscal year ending June 30, 1998. Representatives
of Schenck & Associates, S.C. will be present at the Annual Meeting and will be
given the opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions from the Company's shareholders.
UNLESS MARKED TO THE CONTRARY, THE SHARES OF COMMON STOCK REPRESENTED BY
THE ENCLOSED PROXY WILL BE VOTED FOR RATIFICATION OF THE APPOINTMENT OF SCHENCK
& ASSOCIATES, S.C. AS THE INDEPENDENT AUDITORS OF THE COMPANY. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF SCHENCK &
ASSOCIATES, S.C. AS THE INDEPENDENT AUDITORS OF THE COMPANY.
-5-
<PAGE> 9
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Company was organized on November 10, 1995. Regular meetings of the
Board of Directors of the Company generally are held on a monthly basis.
During the fiscal year ended June 30, 1997, the Board of Directors of the
Company held twelve regular meetings. No incumbent director attended fewer
than 75% of the aggregate total number of meetings of the Board of Directors
held and the total number of committee meetings on which such director served
during the fiscal year ended June 30, 1997.
The Board of Directors of the Company has a standing Audit Committee and
Compensation Committee. The Audit Committee consists of Messrs. O. William
Held, John T. Lynch and Ms. Marjorie A. Spicuzza. The Audit Committee reviews
the scope and timing of the audit of the Company's financial statements by the
Company's independent public accountants and will review with the independent
public accountants the Company's management policies and procedures with
respect to auditing and accounting controls. The Audit Committee also will
review and evaluate the independence of the Company's accountants, and
recommend to the Board the engagement, continuation or discharge the Company's
accountants. In addition, the Audit Committee will direct the activities of
the Bank's internal audit. The Company's Audit Committee met once during the
fiscal year ended June 30, 1997.
The Board of Directors of the Bank has established a Compensation
Committee consisting of Messrs. O. William Held, John T. Lynch and Ms. Marjorie
A. Spicuzza who are neither officers nor employees of the Company or the Bank
("Outside Directors"). The Compensation Committee of the Bank met once during
the fiscal year ended June 30, 1997. During the fiscal year ended June 30,
1997, all executive officer compensation was paid by the Bank and the
compensation policies were determined by the Compensation Committee of the
Bank, and the Company did not pay separate compensation to its executive
officers. As the Company currently does not anticipate paying separate
compensation to its officers during the upcoming fiscal year, compensation
policies will continue to be determined by the Compensation Committee of the
Bank.
The entire Board of Directors of the Company acted as a Nominating
Committee for the selection of the nominee for director to stand for election
at the Annual Meeting. The Board, acting as the Nominating Committee, met in
August, 1997 to consider and recommend the nominee for director to stand for
election at the Annual Meeting. The Company's By-laws allow for shareholder
nominations of the directors and require such nominations be made pursuant to
timely notice in writing to the Secretary of the Company. See "Shareholder
Proposals for the 1998 Annual Meeting."
-6-
<PAGE> 10
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
During the fiscal year ended June 30, 1997, the Company did not pay
separate compensation to its officers. Separate compensation will not be paid
to officers of the Company until such time as the officers of the Company
devote significant time to separate management of Company affairs, which is not
expected to occur until the Company becomes actively involved in additional
significant business beyond the Bank.
The following table summarizes the total compensation paid by the Bank to
its Chief Executive Officer during the Bank's fiscal years ended June 30, 1995,
1996 and 1997. The Bank's next highest paid executive officers' compensation
(salary and bonus) did not exceed $100,000 for either of the Bank's fiscal
years ended June 30, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
--------------- ----------------------
VALUE OF NUMBER OF
RESTRICTED SHARES
NAME AND STOCK SUBJECT TO ALL OTHER
PRINCIPAL POSITION YEAR SALARY AWARDS(2) OPTIONS(3) COMPENSATION(4)
- ------------------------ -------- --------------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Allan T. Bach........... 1997 $104,018 $384,096 39,857 $48,071
President and Chief 1996 102,156 -- -- 6,539
Executive Officer of the 1995 76,193 -- -- --
Company and the Bank
</TABLE>
- -----------------------
(1) Perquisites provided to Mr. Bach by the Bank did not exceed the lesser of
$50,000 or 10% of Mr. Bach's total annual salary and bonus during the
fiscal years ended June 30, 1995, 1996 and 1997, and accordingly, are not
included.
(2) The amount shown in this column represents the value of vested and
unvested shares of Common Stock awarded under the Retention Plan during
the fiscal year ended June 30, 1997, calculated by multiplying the value
of the Common Stock on the date of grant ($7.81) by the number of shares
of Common Stock awarded (49,180 shares). The number and vesting schedule
for the shares awarded to Mr. Bach are as follows: (i) 16,393 -
(5/15/97); (ii) 16,393 - (5/15/98); and (iii) 16,394 - (5/15/99).
Recipients of awards under the Retention Plan are entitled to payment of
any dividends on unvested shares. The value of the vested and unvested
Retention Plan Shares held by Mr. Bach at June 30, 1997 was $412,128 based
on 49,180 shares and the value of the Common Stock on that date ($8.38 per
share).
(3) The amount shown in this column represents the total number of shares of
Common Stock subject to options granted (both vested and unvested) under
the Stock Option Plan during the fiscal year ended June 30, 1997.
(4) The amount shown in this column for the fiscal year ended June 30, 1996
represents the Bank's contribution on behalf of the named executive
officer under the ESOP. The amount for the fiscal year ended June 30,
1997 represents the allocation to the named executive officer's ESOP
account as a result of a special distribution of $3.00 per share paid by
the Company to its shareholders in November 1996 (see "Benefits - Employee
Stock Ownership Plan and Trust").
-7-
<PAGE> 11
EMPLOYMENT AGREEMENTS
In connection with the conversion of the Bank from a state-chartered
mutual savings bank to a state-chartered stock savings bank which was
consummated on April 18, 1996 (the "Conversion"), the Bank entered into a
three-year employment agreement with Mr. Allan T. Bach. The employment
agreement is intended to ensure that the Bank maintains stable and competent
management.
Under the employment agreement, which became effective upon consummation
of the Conversion, the base salary for Mr. Bach is $108,656. The base salary
may be increased by the Bank's Board of Directors, but may not be reduced
except as part of a general pro rata reduction in compensation for all
executive officers. In addition to the base salary, the agreement provides for
payments from other Bank incentive compensation plans, and provides for other
benefits, including participation in any group health, life, disability or
similar insurance program and in any pension, profit-sharing, employee stock
ownership plan, deferred compensation, 401(k) or other retirement plans
maintained by the Bank. The agreement also provides for participation in any
stock-based incentive programs made available to executive officers of the
Bank. The agreement may be terminated by the Bank upon death, disability or
retirement; for cause at any time; or in certain events specified by the
regulations issued by the Wisconsin Department of Financial Institutions,
Division of Savings and Loan ("DFI-DSL"). If the Bank terminates the agreement
other than for death, disability, retirement or cause, Mr. Bach is entitled to
severance pay in the amount of two years' base salary (based on the highest
compensation in effect within the three years preceding the date of
termination) together with other compensation and benefits in which he was
vested at the termination date.
The agreement provides for severance payments if Mr. Bach's employment
terminates following a change in control. Under the agreement, a "Change in
Control" generally is defined to include any change in control required to be
reported under the federal securities laws as well as: (i) the acquisition by
any person of 25% or more of the Company's outstanding voting securities; or
(ii) a change in a majority of the directors of the Company during any
consecutive two-year period without the approval of at least two-thirds of the
persons who were directors at the beginning of such period. In the event of a
Change in Control, Mr. Bach may terminate employment for "good reason," which
includes: (i) a material change in his duties, responsibilities or titles; (ii)
a reduction in base salary; (iii) a geographic change in principal office
location; or (iv) a reduction in incentives or other benefits available to him.
In the event of such termination, Mr. Bach may receive severance pay for the
longer of the unexpired term of the agreement or 36 months, based upon his
highest base salary within the three years preceding termination plus bonus and
incentive compensation based on the last calendar year. In addition, Mr. Bach
is entitled to all qualified retirement and other benefits in which he was
vested, and additional retirement benefits under all qualified plans to which
he would have been entitled had he continued employment through the
then-remaining employment term. If the severance payments following a Change
in Control would constitute "parachute payments" within the meaning of Section
280G(b)(2) of the Internal Revenue Code of 1986, as amended ("Internal Revenue
Code"), and the present value of such "parachute payments" equals or exceeds
three times Mr. Bach's average annualized includable income for the five
calendar years preceding the year in which a Change in Control occurred, the
severance payments shall be reduced to an amount equal to the present value of
2.99 times the average annual compensation paid to Mr. Bach during the five
calendar years immediately preceding such Change in Control.
-8-
<PAGE> 12
BENEFITS
INSURANCE PLANS
All full-time employees of the Bank are eligible for comprehensive health
insurance commencing upon the completion of three full months of employment
with the Bank. After three full months of employment, full-time employees also
are covered as a group for life insurance. The Bank pays 100% of the cost of
health insurance for single and family coverage for employees and executive
officers of the Bank. The Bank pays the entire cost of life insurance for all
employees.
DEFINED BENEFIT PLAN
The Bank participates in the Financial Institutions Retirement Fund
("FIRF"), a multiple employer, defined benefit plan qualified within the
meaning of Section 401(a) of the Internal Revenue Code. FIRF participation
generally is limited to employers who are engaged in the financial services
industry. FIRF is administered by a board of directors comprised of the
President of FIRF, the Presidents of the twelve Federal Home Loan Banks and
twelve other persons who are representatives of employers participating in
FIRF. Executive officers and directors of the Bank are not employed by FIRF.
In order to be eligible to participate in the FIRF, an employee must not be
compensated on an hourly basis, have attained the age of 21 and completed 1,000
hours of service in a twelve consecutive month period. Eligible employees
become vested after completion of five years of service. No participant
contributions are permitted.
Under the Bank's adoption agreement pursuant to which it participates in
FIRF, benefits for eligible employees are determined under the following
formula: 1.5% multiplied by the average annual compensation for the highest
five consecutive years of service multiplied by years of service. Benefits are
payable by FIRF: (i) upon separation from service with the Bank provided
applicable vesting and certain other conditions are met; and (ii) with respect
to a vested participant upon retirement, death, disability or other separation
from service. In the event separation from service is for reasons other than
retirement, death or disability, benefit commencement will be deferred.
Pursuant to FIRF regulations, normal retirement age is 65. However, a vested
participant may retire as early as age 45 but his or her benefit will be
reduced by 3% for each year his or her retirement age precedes age 65. If a
participant continues working after age 65, the benefit otherwise payable at
actual retirement is increased by 2% for each year of service after age 65.
The plan provides for pre-retirement survivor benefits as required by the
Internal Revenue Code. Further, in the event of death, the plan provides for
death benefits in an amount equal to the last annual salary plus 10% of such
salary for each year of service up to a maximum amount of three times such
salary, and in the event of death after retirement, the difference, if any,
between twelve times annual pension payments less the amount of pension
payments made prior to such death. In the event of disability, a vested
participant shall receive the greater of the then accrued benefit payable in
annuity form or 30% of the average annual compensation for the highest five
consecutive years of service. Benefits are payable in annuity form and there
is no lump sum settlement option. The forms of annuities available are the
joint and survivor annuity form required by the Internal Revenue Code and,
assuming appropriate spousal waivers, a single life annuity, a ten-year certain
annuity, with or without survivor option, and a survivor annuity with a
contingent annuitant other than a spouse.
-9-
<PAGE> 13
The following table sets forth the estimated annual benefits payable under
FIRF on retirement at normal retirement age for the compensation levels and
number of years of service noted:
<TABLE>
<CAPTION>
FINAL AVERAGE PAY 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ----------------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 3,750 $ 7,500 $ 11,250 $ 15,000 $ 18,750 $ 22,500 $ 26,250
75,000 5,625 11,250 16,875 22,500 28,125 33,750 39,375
100,000 7,500 15,000 22,500 30,000 37,500 45,000 52,500
125,000 9,375 18,750 28,125 37,500 46,875 56,250 65,625
</TABLE>
Maximum annual pension benefits are limited under Section 415 of the Internal
Revenue Code to the lesser of: (i) $125,000 currently (subject to future
adjustment by the United States Secretary of the Treasury based on cost of
living factors); or (ii) 100% of the participant's average annual compensation
for the three most recent consecutive Plan Years (as defined in the FIRF), each
reduced by 10% per year for each year of service less than ten. These benefits
are not integrated with social security or other benefits.
FIRF assets are held in a single trust funded through the aggregate
contributions of all participating employers. All assets of FIRF are available
to pay the benefits of any retiree. Under funding rules established by FIRF,
the Bank has been credited with future employer contribution offsets ("FECO").
The Bank's obligation to make periodic contributions to fund benefits accrued
under FIRF for such period for its employees has been met for the last several
years by applying such FECO against the amounts otherwise due as a
contribution. It is anticipated that the Bank will continue to cause its
contribution obligations to be met, in whole or in part, through the use of
such FECO for as long as FECO credits are available to the Bank.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Bank has established the Reliance Savings Bank Employee Stock
Ownership Plan (the "ESOP") for eligible employees of the Bank. As part of the
Conversion, the ESOP borrowed funds from the Company to purchase approximately
3.5% of the Common Stock issued in the Conversion, or 89,125 shares of Common
Stock. Collateral for the loan is the Common Stock purchased by the ESOP. The
Bank will make scheduled discretionary cash contributions to the ESOP
sufficient to amortize the principal and pay interest on the loan. The loan
will be repaid principally from the Bank's contributions to the ESOP over a
period of 15 years. Shares purchased by the ESOP are held in a suspense
account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportionate to the repayment of principal and interest on the ESOP
loan will be allocated among participants on the basis of compensation in the
year of allocation. Shares awarded under the ESOP will not become vested until
the participants have completed five years of service (including past years of
service), which at such time, the shares will then become 100% vested.
Participants also become 100% vested on death, disability or attainment of age
65. Forfeitures will be reallocated among the remaining participating
employees in the same proportion as contributions. Benefits may be payable
upon death, retirement, early retirement, disability or separation from
service. Benefits may be paid either in shares of Common Stock or in cash.
-10-
<PAGE> 14
During the fiscal year ended June 30, 1997, the ESOP received $267,375 as
a result of a special distribution of $3.00 per share paid by the Company to its
shareholders in November 1996 ("Special Distribution"). The amount received
from the Special Distribution was used by the ESOP to pay principal and interest
on the ESOP loan. As a result, 38,891 shares of Common Stock were released from
the suspense account and were available for allocation to eligible participants'
accounts; however, due to Internal Revenue Code limitations, only 14,261 shares
of the Common Stock released from the suspense account were allocated to
eligible participants' accounts during fiscal 1997, and the remaining 24,630
shares of Common Stock are held in reserve. The shares of Common Stock held in
reserve will be allocated to eligible participants' accounts within the
limitations of the Internal Revenue Code over the next few years. In addition,
due to the increased payment on the ESOP loan during fiscal 1997 as a result of
the Special Distribution, payments on the ESOP loan will be temporarily reduced
as the ESOP will make interest-only payments until the year 2001.
Emjay Corporation is the trustee for the ESOP (the "Trustee"). The Bank's
Benefits Committee, consisting of Messrs. O. William Held, John T. Lynch and
Ms. Marjorie A. Spicuzza, will instruct the Trustee regarding investment of
funds contributed to the ESOP. The Trustee will vote all allocated shares held
in the ESOP in accordance with the instructions of participating employees.
The Trustee will vote unallocated shares as directed by the Bank's Board of
Directors.
RELIANCE SAVINGS BANK RECOGNITION AND RETENTION PLAN
In fiscal 1997, the Board of Directors of the Company and the Bank adopted
the Reliance Savings Bank Recognition and Retention Plan (the "Retention Plan")
as a method of providing officers of the Bank with a proprietary interest in
the Company and to encourage such persons to remain with the Company and the
Bank. Shareholder approval of the Retention Plan was required by the DFI-DSL,
and at a Special Meeting of Shareholders of the Company held on May 15, 1997
(the "Special Meeting"), the Retention Plan was approved by the affirmative
vote of a majority of the shares of Common Stock represented in person or by
proxy and voted at the Special Meeting.
Employee directors and management officers of the Bank are eligible to
participate in the Retention Plan. Under the Retention Plan, 102,494 shares of
Common Stock were authorized to be awarded to eligible participants. On May
15, 1997, 81,980 shares of Common Stock were awarded to the Bank's officers,
and as of June 30, 1997, 20,514 shares of Common Stock were available for
future awards under the Retention Plan.
The Retention Plan will either acquire the shares granted and to be
granted: (i) through open market purchases (which have been approved by the
DFI-DSL); (ii) from previously authorized but unissued shares from the Company
at the then-current per share price; or (iii) through a combination of (i) and
(ii) above. If additional authorized but unissued shares of Common Stock are
issued to the Retention Plan, the interests of existing shareholders will be
diluted.
The Retention Plan is administered by a committee of the Board of
Directors (the "Committee") consisting of two or more "non-employee" directors
as that term is defined under Rule 16b-3 promulgated by the SEC under the
Exchange Act. The members of the Committee consist of Messrs. Held and Lynch,
and Ms. Spicuzza. In May 1997, officers of the Bank were granted 81,980 shares
of Common Stock which vest at the rate of approximately 33 1/3% on the date of
grant (May 15, 1997) and 33 1/3% per year on the first and second anniversaries
-11-
<PAGE> 15
of the date of grant. The vesting schedule for any future awards under the
Retention Plan will be determined by the Committee at the time of the award.
All Retention Plan awards, whether or not vested at such time, shall
become immediately 100% vested upon termination of employment due to death,
disability or "retirement." Retirement includes any termination of employment
which constitutes normal retirement or early retirement under the ESOP or upon
reaching age 65, or such later retirement as may be agreed upon between the
Bank and such officer. If an officer terminates employment with the Bank or
the Company for reasons other than due to death, disability, retirement or a
Change in Control of the Bank or the Company, unvested Retention Plan awards
will be forfeited.
In the event a recipient of Retention Plan awards is terminated following
a Change of Control of the Company, all Retention Plan awards, whether or not
vested at such time, shall become immediately 100% vested. "Change of Control"
is defined to mean a change of control of a nature that: (i) would be required
to be reported to the SEC by the Company in a current report on Form 8-K; or
(ii) results in a change in control of the Bank or the Company within the
meaning of the Home Owners Loan Act of 1933 and the rules and regulations
promulgated by the Office of Thrift Supervision (or its predecessor agency)
(the "OTS"). In addition, under the Retention Plan and Stock Option Plan, a
Change of Control shall be deemed to have occurred at such time as: (i) any
"person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company or its
subsidiaries representing 25% or more of such entities' outstanding voting
securities; (ii) individuals who constitute the current Board of Directors of
the Company (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the effective date of the Retention Plan and Stock Option Plan whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Company's
shareholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be considered a member of the Incumbent Board; or (iii)
a plan of reorganization, merger, consolidation, sale of all or substantially
all the assets of the Company or similar transaction in which the Company is
not the surviving institution; or (iv) any change of control of the Company
instituted by an entity or individual other than current management of the
Company.
Recipients of awards will receive dividends paid on, and may direct the
voting with respect to, shares of Common Stock awarded to them prior to
vesting. Unallocated shares will be voted by the Committee in the same
proportion as unvested awarded plan shares are voted. Vested shares of Common
Stock are distributed to recipients as soon as practicable.
In the event the number of shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
of stock or other securities of the Company by reason of any stock dividend or
split, recapitalization, merger, consolidation, spin-off, reorganization,
combination or exchange of shares, or other similar corporate change, or other
increase or decrease in such shares without receipt or payment of any
consideration by the Company, the number of shares of Common Stock awarded and
the number of shares of Common Stock available for future awards under the
Retention Plan will be adjusted to prevent dilution or enlargement of the
rights granted under the Retention Plan.
-12-
<PAGE> 16
STOCK OPTION PLAN
In fiscal 1997, the Board of Directors of the Company adopted the Reliance
Bancshares, Inc. 1997 Stock Option Plan ("Stock Option Plan"). The purpose of
the Stock Option Plan is to provide directors, officers and employees of the
Company and the Bank with a proprietary interest in the Company, to recognize
management, employees and the Board of Directors for their contributions to the
success of the Bank and the Company, and to incite their future performance,
and to encourage such individuals to remain with the Bank. Shareholder
approval of the Stock Option Plan was required by the DFI-DSL, and at the
Special Meeting, the Stock Option Plan was approved by the affirmative vote of
a majority of the shares of Common Stock represented in person or by proxy and
voted at the Special Meeting.
Under the Stock Option Plan, all directors, officers and employees of the
Company and its subsidiaries are eligible to participate. The Stock Option
Plan authorizes the grant of: (i) options to purchase shares of Common Stock
intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code ("Incentive Stock Options"); (ii) options that do not so
qualify ("Non-Statutory Options"); and (iii) options which are exercisable only
upon a change in control of the Bank or the Company ("Limited Rights"). Under
the Stock Option Plan, options to purchase 256,234 shares of Common Stock, or
10% of the number of shares of Common Stock issued in connection with the
Conversion, were made available for granting to eligible participants. As of
June 30, 1997, options to purchase 221,066 shares of Common Stock had been
granted under the Stock Option Plan and options to purchase 35,168 shares of
Common Stock were available for future grants.
The following table sets forth certain information concerning the grant of
stock options to Mr. Bach under the Stock Option Plan during the fiscal year
ended June 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS
GRANTED TO PER SHARE
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR(2) ($/SH) DATE
---- ---------- -------------- ------ ----
<S> <C> <C> <C> <C>
Allan T. Bach ..... 39,857 39.3% $7.81 5/15/07
</TABLE>
- -------------
(1) The options granted are subject to a vesting schedule under the Stock
Option Plan and are exercisable as follows: (i) 13,285 - (5/15/97); (ii)
13,286 - (5/15/98); and (iii) 13,286 - (5/15/99).
(2) Options to purchase 221,066 shares of Common Stock were granted to
eligible participants under the Stock Option Plan during the fiscal year
ended June 30, 1997, of which options to purchase 101,490 shares were
granted to officers and employees.
-13-
<PAGE> 17
The following table sets forth certain information concerning the exercise
of stock options granted under the Stock Option Plan by Mr. Bach during the
fiscal year ended June 30, 1997 and the number and value of his unexercised
stock options at June 30, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allan T. Bach 0 $ 0 13,285 26,572 $7,572 $15,146
</TABLE>
- ------------------
(1) The value of Unexercised In-the-Money Options is based upon the
difference between the fair market value of the stock options ($8.38) and
the exercise price of the options ($7.81) at June 30, 1997.
In the event of a stock split, reverse stock split or stock dividend, the
number of shares of Common Stock subject to the options awarded under the Stock
Option Plan and the exercise price per share under the option shall be adjusted
to reflect such increase or decrease in the total number of shares of Common
Stock outstanding.
The shares of Common Stock to be issued by the Company upon the exercise
of options by optionees may be acquired either: (i) through open market
purchases by the Company (subject to prior approval by the DFI-DSL); (ii) from
previously authorized but unissued shares of Common Stock; or (iii) through a
combination of (i) and (ii) above. If additional authorized but unissued
shares of Common Stock are issued upon the exercise of options, the interests
of existing shareholders will be diluted.
The Stock Option Plan is administered jointly by the Board of Directors of
the Company and a committee of the Board of Directors (the "Committee")
consisting of two or more "non-employee" directors as that term is defined
under Rule 16b-3 promulgated by the SEC under the Exchange Act. The Board of
Directors will make the following determinations with respect to grants to
non-employee directors and the Committee will make the following determinations
with respect to grants to eligible participants other than non-employee
directors: (i) the persons to whom options are granted; (ii) the terms at
which options are to be granted; (iii) the number of shares of Common Stock
subject to an individual grant; (iv) the vesting schedule applicable to
individual grants; and (v) the expiration date of the option (which shall not
be later than ten years from the date the option is granted). The exercise
price may be paid in cash or shares of Common Stock on the date of grant or
such greater amount as determined by the Committee with respect to grants to
eligible participants other than non-employee directors, and by the Board of
Directors with respect to grants to non-employee directors.
The options granted to directors, officers and employees under the Stock
Option Plan in fiscal 1997 vest at the rate of 33 1/3% per year commencing on
May 15, 1997, the date of shareholder approval of the Stock Option Plan.
-14-
<PAGE> 18
The aggregate fair market value of shares of Common Stock with respect to
which Incentive Stock Options may be granted to an eligible participant which
are exercisable for the first time in any calendar year may not exceed
$100,000. Any option granted in excess of such amount shall be treated as a
Non-Statutory Option. Incentive Stock Options granted to any person who is the
beneficial owner of more than 10% of the outstanding shares of Common Stock may
be exercised only for a period of five years following the date of grant and
the exercise price at the time of grant must be equal to at least 110% of the
fair market value of the Common Stock on the date of the grant.
No option granted in connection with the Stock Option Plan will be
exercisable after three months after the date on which the optionee ceases to
perform services for the Bank or the Company, except that in the event of
death, retirement or disability, all options, whether or not exercisable at
such time, may be exercisable for up to one year thereafter or such longer
period as determined by the Committee with respect to options held by eligible
participants other than non-employee directors and by the Board of Directors
with respect to options held by non-employee directors. Options held by
employees terminated for cause will terminate on the date of termination.
Termination "for cause" includes termination due to personal dishonesty,
incompetence, willful misconduct, the intentional failure to perform stated
duties, breach of fiduciary duty involving personal dishonesty, willful
violations of law, the entry of a final cease and desist order or the material
breach of any provisions of an employee's employment contract.
In the event of a Change of Control of the Company, all Incentive Stock
Options and Non-Statutory Options, whether or not exercisable at such time,
shall become immediately exercisable. If a participant is terminated due to
such Change of Control, all options shall be exercisable for a period of one
year following such Change of Control, or such longer period as determined by
the Committee; provided that in no event shall the period extend beyond the
option term and in the case of Incentive Stock Options, such options shall not
be eligible for treatment as Incentive Stock Options if exercised more than
three months following the date of a participant's cessation of employment.
In the event of a participant's termination of employment, the Company, if
requested by the participant, may elect to pay the participant, or beneficiary
in the event of death, in exchange for cancellation of the option, the amount
by which the fair market value of the Common Stock exceeds the exercise price
of the option on the date of the participant's termination of employment.
Incentive Stock Options may be transferred only by will or the laws of
descent and distribution. Non-Statutory Options may be transferred by
participants pursuant to the laws of descent and distribution and during a
participant's lifetime, by participants to members of their "immediate family"
(as defined in the Stock Option Plan), trusts for the benefit of members of
their immediate family and charitable institutions to the extent permitted
under Section 16 of the Exchange Act and subject to federal and state
securities laws.
DIRECTORS' COMPENSATION
DIRECTORS' FEES
The Board of Directors of the Company meets monthly and did not receive
directors' fees for meetings attended during the fiscal year ended June 30,
1997. For the fiscal year ended June 30, 1997, each member of the Board of
Directors of the Bank received a $1,250 directors' meeting fee per meeting
attended. The Chairman of the Board, Mr. O. William Held, received an
additional $200 for each Board of Directors meeting attended. In addition,
directors who are not also employees of the Bank received $250 for attending a
special meeting of the Board of Directors.
For certain non-employee directors who formerly were employees of the
Bank, the Bank pays the cost of their health insurance as follows: (i) Mr.
Held - 100% of the cost for single coverage ($2,628); and (ii) Ms. Spicuzza -
100% of the cost of her Medicare supplement ($3,138). The Bank does not pay
for health insurance coverage for Mr. Lynch.
-15-
<PAGE> 19
NON-QUALIFIED DEFERRED RETIREMENT PLAN FOR DIRECTORS
The Bank maintains the Reliance Savings Bank Non-qualified Deferred
Retirement Plan for Directors (the "Deferred Retirement Plan"), which became
effective June 30, 1994, whereby directors of the Bank can elect to defer
receipt of all or any portion of their directors' fees payable in each calendar
year (the "Deferred Benefit"). In addition, each director also is eligible to
receive a "Service Credit Benefit" upon retirement from active service on the
Board of Directors. Each director receives one service credit for each full
year of service on the Board of Directors, with a maximum of five service
credits. The "Service Credit Benefit" for each director equals $10,000 for each
service credit received. Directors Bach, Held, Lynch and Barnharst each have
accumulated three years of service under the Deferred Retirement Plan.
Director Spicuzza does not participate in the Deferred Retirement Plan.
The Deferred Benefit and Service Credit Benefit are payable upon the
director's termination of service with the Bank. Distributions of the Deferred
Benefit and Service Credit Benefit under the Deferred Retirement Plan are made
in equal monthly installments over a five-year period commencing the first
month after such termination of service; provided, however, that if a director
is terminated for cause, all rights such director may have to the Service
Credit Benefit will be forfeited. Distributions pursuant to the Deferred
Retirement Plan will be made in a lump sum upon termination of service due to
death or if such director dies prior to receipt of the entire Deferred Benefit
and/or Service Credit Benefit. The distributions also may be accelerated in
cases of medical emergency or a showing of good cause.
The Deferred Retirement Plan is administered by Northwestern Mutual Life
Insurance Company. The Bank has acquired permanent life insurance policies on
the lives of participants in the Deferred Retirement Plan to fund such plan.
The cash value of the policies totalled $202,891 at June 30, 1997. The
directors have no rights, title or interest in the insurance policies.
INDEBTEDNESS OF MANAGEMENT AND CERTAIN TRANSACTIONS
Current federal law requires that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the
greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested
members of the Board of Directors.
The Bank's policy provides that all loans or extensions of credit to
executive officers and directors are to be made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and do not involve more than the normal risk of collectability
or present other unfavorable features. All loans to executive officers and
directors have been made by the Bank in the ordinary course of business and
were not made with favorable terms nor involved more than the normal risk of
collectability or presented unfavorable features. All loans or extensions of
credit to executive officers and directors were current as of June 30, 1997.
The Company and the Bank intend that all transactions in the future
between the Company and the Bank and executive officers, directors, holders of
10% or more of the shares of any class of common stock of the Company and
-16-
<PAGE> 20
affiliates thereof, will contain terms no less favorable to the Company or the
Bank than could have been obtained by them in arms' length negotiations with
unaffiliated persons and will be approved by a majority of independent outside
directors of the Company or the Bank, as applicable, not having any interest in
the transaction.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of the shares of Common
Stock outstanding, to file reports of ownership and changes in ownership with
the SEC and the National Association of Securities Dealers, Inc. Officers,
directors and greater than ten percent shareholders are required by regulation
to furnish the Company with copies of all Section 16(a) forms they file. Based
upon review of the information provided to the Company, the Company believes
that during the fiscal year ended June 30, 1997, officers, directors and
greater than ten percent shareholders complied with all Section 16(a) filing
requirements.
SHAREHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
Any proposal which a shareholder wishes to have included in the proxy
materials of the Company relating to the 1998 annual meeting of the
shareholders of the Company, which is scheduled to be held in October 1998,
must be received at the principal executive offices of the Company, 3140 South
27th Street, Milwaukee, Wisconsin 53215, Attention: Carol A. Barnharst,
Secretary, no later than May 21, 1998. If such proposal is timely submitted
and is in compliance with all of the requirements of Rule 14a-8 under the
Exchange Act, it will be included in the proxy statement and set forth on the
form of proxy issued for such annual meeting of shareholders. It is urged that
any such proposals be sent certified mail, return receipt requested.
Shareholder proposals which are not submitted for inclusion in the
Company's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before an annual meeting pursuant to Article VII of the Company's
Articles of Incorporation, which provides that: (i) with respect to proposals
to be brought before an annual meeting, such proposal must be received by the
Company not less than 60 days nor more than 90 days prior to the date of the
previous year's annual meeting of shareholders, or in the event no annual
meeting was held in the previous year, no later than ten days following the
date notice of the annual meeting is mailed to shareholders; and (ii) with
respect to proposals to be brought before a special meeting, not later than the
close of business on the tenth day following the date notice of such special
meeting is mailed to shareholders.
In accordance with Article VII of the Company's Articles of Incorporation,
the advance notice of a proposal described above must set forth certain
information, including the shareholder's name and address, as they appear on
the Company's record of shareholders, the class and number of shares of the
Company Common Stock beneficially owned by such shareholder, a brief
description of the proposed business, the reason for considering the business
at the shareholder meeting and any material interest of the shareholder in the
proposed business. In addition, with respect to nominations for election to
the Board of Directors made by a shareholder, in accordance with Article VII of
the Company's Articles of Incorporation and Article III of the Company's
By-laws, the following information must be provided: (i) the name and address
of the shareholder who intends to make the nomination and of the person(s) to
be nominated; (ii) a representation that the shareholder is a holder of record
of the stock of the Company entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting and to nominate the person(s)
specified in the notice; (iii) a description of all arrangements or
understandings between the shareholder and each nominee and any other person(s)
(naming such person(s)) pursuant to which the nomination(s) are to be made by
the
-17-
<PAGE> 21
shareholder; (iv) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the SEC; and (v) written consent of each nominee
to serve as a director of the Company if so elected.
OTHER MATTERS WHICH MAY PROPERLY
COME BEFORE THE ANNUAL MEETING
The Board of Directors knows of no business which will be presented for
consideration at the Annual Meeting other than as stated in the Notice of
Annual Meeting of Shareholders. If, however, other matters are properly
brought before the Annual Meeting or any adjournments or postponements thereof,
it is the intention of the persons named in the accompanying Proxy to vote the
shares represented thereby on such matters in accordance with their best
judgment.
A COPY OF THE FORM 10-KSB (WITHOUT EXHIBITS) FOR THE FISCAL YEAR ENDED
JUNE 30, 1997 IS FILED WITH THE SEC AND WILL BE FURNISHED WITHOUT CHARGE TO
SHAREHOLDERS OF RECORD UPON WRITTEN REQUEST TO RELIANCE BANCSHARES, INC., CAROL
A. BARNHARST, SECRETARY, 3140 SOUTH 27TH STREET, MILWAUKEE, WISCONSIN 53215.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Carol A. Barnharst
Milwaukee, Wisconsin Carol A. Barnharst
September 17, 1997 Vice President, Chief Financial Officer,
Secretary and Treasurer
================================================================================
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
================================================================================
-18-
<PAGE> 22
RELIANCE BANCSHARES, INC.
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 21, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders (the "Annual Meeting") and the Proxy Statement and,
revoking any proxy heretofore given, hereby constitutes and appoints Messrs.
Allan T. Bach and O. William Held, and any of the other directors of Reliance
Bancshares, Inc. (the "Company"), to represent and to vote, as designated
below, all the shares of common stock, $1.00 par value per share ("Common
Stock"), of the Company held of record by the undersigned on September 5, 1997,
at the Annual Meeting which will be held on October 21, 1997, at 2:00 p.m.,
Milwaukee time, at the Clarion Hotel & Conference Center (formerly the Quality
Inn Airport), 5311 South Howell Avenue, Milwaukee, Wisconsin 53207, or any
adjustments or postponements thereof.
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED BELOW, BUT IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE MATTERS
LISTED BELOW. If any other business is presented at the Annual Meeting or any
adjournments or postponements thereof, this proxy will be voted by the Board of
Directors of the Company in their best judgment. At the present time, the
Board of Directors of the Company knows of no other business to be presented at
the Annual Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE
RELIANCE BANCSHARES, INC. ANNUAL MEETING OF SHAREHOLDERS
Please mark your votes as in this example: [X]
1. ELECTION OF DIRECTOR
John T. Lynch
<TABLE>
<S> <C>
[ ] FOR nominee listed above [ ] WITHHOLD AUTHORITY
(except as noted to the contrary below) to vote for nominee listed above
</TABLE>
[INSTRUCTION: To withhold authority to vote for the nominee, write the
nominee's name in the space provided below].
----------------------------------------------------------
2. RATIFICATION OF THE APPOINTMENT OF SCHENCK & ASSOCIATES, S.C. (THE
SUCCESSOR TO MEIER, CLANCY, GEORGE & CO. LLP FOLLOWING THE MERGER OF
MEIER, CLANCY, GEORGE & CO. LLP WITH AND INTO SCHENCK & ASSOCIATES, S.C.)
AS INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING JUNE 30,
1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR ANY
ADJOURNMENTS OR POSTPONEMENTS THEREOF.
Dated: ,1997
--------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
Signatures
IMPORTANT: Please sign your name exactly as it
appears hereon. When signing as an attorney,
administrator, agent, corporation, officer, executor,
trustee, guardian or similar position, please add
your full title to your signature. If shares of
common stock are held jointly, each holder may sign
but only one signature is required.
