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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 1998
Commission file under 0-27624
RELIANCE BANCSHARES, INC.
(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
(Issuer's telephone number, including area code)
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
COMMON STOCK, $1.00 PAR VALUE PER SHARE
(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 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
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: $3,409,000 (Total interest
and dividend income and total non-interest income.)
As of September 16, 1998, there were issued 2,562,344 shares of Common Stock of
the Registrant and 2,395,564 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 16, 1998 was $20.03 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.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,395,564 shares of common stock, as
of September 16, 1998.
Transitional Small Business Disclosure Format (1) Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-KSB: Portions of the Proxy Statement for the 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
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FORM 10-KSB TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Part I
<S> <C> <C>
Item 1 Description of Business 3
Item 2 Description of Property 33
Item 3 Legal Proceedings 33
Item 4 Submission of Matters to a Vote of Security Holders 33
Part II
Item 5 Market for Common Equity and Related Stockholder Matters 33
Item 6 Management's Discussion and Analysis or Plan of Operations 34
Item 7 Financial Statements 51
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 78
Part III
Item 9 Directors, Executive Officers, and Control Persons; Compliance
with Section 16(A) of the Exchange Act 78
Item 10 Executive Compensation 78
Item 11 Security Ownership of Certain Beneficial Owners and Management 78
Item 12 Certain Relationships and Related Transactions 78
Item 13 Exhibits and Reports on Form 8-K 79
Signatures 80
Shareholder Information 81
</TABLE>
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PART I
ITEM 1. 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.
PENDING MERGER
On June 30, 1998, the Company signed a definitive Agreement and Plan of
Reorganization that provides for the acquisition of the Company and thus the
Bank by St. Francis Capital Corporation ("St. Francis"). Under the terms of the
definitive agreement, St. Francis will acquire all of the outstanding shares of
the Company through a merger transaction pursuant to which the Company's
shareholders will elect to receive either cash or shares of St. Francis's common
stock in exchange for their shares (the "Merger"). Consummation of the
transaction is subject to regulatory approval, approval of the Company's
shareholders and the satisfaction of certain other conditions.
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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.
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 historicall 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 largest component of the Bank's gross loan portfolio, which totaled $30.7
million at June 30, 1998 was first mortgage loans secured by owner-occupied
one-to four-family residences. At June 30, 1998, one-to four-family mortgage
loans totaled $9.3 million or 30.31% of gross loans. Of the total one-to
four-family mortgage loans, $2.7 million or 29.03% were ARM loans. Of the
remaining loans held at June 30, 1998, 24.37% or $7.5 million were commercial
real estate loans, 9.17% or $2.8 million were residential construction loans,
11.14% or $3.4 million were multi-family mortgage loans, 24.42% or $7.5 million
were commercial construction and land development loans, and the balance were
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, 1998, the
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maximum amount which the Bank could lend under these limits to any one borrower
and borrower's related entities was $3.3 million. At June 30, 1998, the Bank had
loans or groups of loans to related borrowers with outstanding balances of $4.3
million. The Bank effectuated a $4.0 million participation agreement with
another lender to reduce the loans to below the limitation. At that date, the
Bank had nine borrowers or groups of borrowers with outstanding lending
relationships in excess of $400,000, for a total of $11.5 million, all of which
loans are performing in accordance with their terms. The Bank's single largest
borrowing relationship at June 30, 1998 had multiple loans aggregating $4.3
million. All of such loans are performing in accordance with their terms.
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,
----------------------------------------------------
1996 1997
----------------------- -----------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C>
One-to four-family $10,745 40.46% $11,035 37.04%
Multi-family 4,585 17.26% 4,604 15.45%
Commercial real estate 4,163 15.68% 5,376 18.05%
Residential construction 4,311 16.23% 4,899 16.44%
Commercial construction/
land development 2,390 9.00% 3,521 11.82%
------- -------- ------- -------
Total mortgage loans 26,194 98.63% 29,435 98.80%
Consumer loans:
Home equity 356 1.34% 355 1.19%
Other consumer 7 0.03% 2 0.01%
------- -------- ------- -------
Total consumer loans 363 1.37% 357 1.20%
------- -------- ------- -------
Gross loans receivable 26,557 100.00% 29,792 100.00%
======= =======
Less:
Undisbursed loan proceeds 3,366 1,890
Allowance for loan losses 126 147
Deferred loan fees and discounts 134 154
------- -------
Total additions / deductions 3,626 2,191
------- -------
Loans receivable, (net) $22,931 $27,601
======= =======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------
1998
------------------------
Percent
of
Amount Total
------ -----
(Dollars in thousands)
Mortgage loans:
<S> <C> <C>
One-to four-family $ 9,315 $ 30.31%
Multi-family 3,423 11.14%
Commercial real estate 7,489 24.37%
Residential construction 2,817 9.17%
Commercial construction/
land development 7,503 24.42%
------- -------
Total mortgage loans 30,547 99.41%
Consumer loans:
Home equity 177 0.58%
Other consumer 2 0.01%
------- -------
Total consumer loans 179 0.59%
------- -------
Gross loans receivable 30,726 100.00%
=======
Less:
Undisbursed loan proceeds 4,595
Allowance for loan losses 169
Deferred loan fees and discounts 164
-------
Total additions / deductions 4,928
-------
Loans receivable, (net) $25,798
=======
</TABLE>
Contractual Principal Repayments
The following table sets forth the maturity or period to repricing of the Bank's
loan portfolio at June 30, 1998. 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.
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------------------------------------------------
One-to Multi-Family / Consumer Total
Four-Family(1) Non-residential (1) Loans Loans
-------------- ------------------- ----- -----
Amounts due(2): (Dollars in thousands)
<S> <C> <C> <C> <C>
Within one year $ 2,563 $ 2,798 $ 17 $ 5,378
After one year:
Two to three years 3,527 12,140 150 15,817
Three to five years 216 74 -- 290
Five to ten years 629 1,058 11 1,698
Ten to twenty years 1,346 754 -- 2,100
Over twenty years 4,129 1,314 -- 5,443
------- ------- ---- -------
Total due or repricing
after one year 9,847 15,340 161 25,348
------- ------- ---- -------
Total amounts due or
repricing 12,410 18,138 178 30,726
Less:
Deferred fees and discounts (50) (114) -- (164)
Allowance for loan losses (66) (102) (1) (169)
------- ------- ---- -------
Gross loans receivable $12,294 $17,922 $177 $30,393
======= ======= ==== =======
</TABLE>
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The following table sets forth at June 30, 1998, 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, 1999
----------------------------------
Fixed Adjustable Total
----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to four-family $ 8,872 $ 975 $ 9,847
Multi-family / non-residential 11,403 3,937 15,340
Consumer loans 181 -- 161
------- ------ -------
Gross loans receivable 20,436 4,912 25,348
Mortgage-backed securities 420 -- 420
------- ------ -------
Gross loans receivable and
mortgage-backed securities $20,856 $4,912 $25,768
======= ====== =======
</TABLE>
- ----------------
(1) Includes some residential construction loans.
(2) These amounts are net of loan in process.
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, 1998, $12.1 million, or 39.50%, 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, $2.8 million were in the Bank's residential
construction loan category. At June 30, 1998, $9.4 million, or 77.69% of the
Bank's one-to four-family residential mortgage loans consisted of fixed rate
loans and $2.7 million, or 22.31%, consisted of balloon loans and ARM loans. At
June 30, 1998, the average outstanding one-to four-family loan balance was
$75,000 and the largest outstanding one-to four-family loan balance was
$548,000.
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"), an 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
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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 or denial within established Bank policy guidelines. Most
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 orde 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, 1998, the Bank had 17 one-to four-family construction loans in its
portfolio, aggregating $2.8 million, and the average outstanding residential
construction loan balance was $166,000 and the largest outstanding residential
construction loan balance was $548,000. 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
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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.
Construction lending is generally considered to involve a higher degree of
credit risk than residential mortgage lending. The Bank's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial esitmate
of the property's value at completion of construction and the estimated cost
(including interest) of construction. If the estimate of the value proves to be
inaccurate, the Bank may be confronted with, at or before maturity of the loan,
loan security with a value that is insufficient to assure full repayment. In
addition, construction lending entails the risk that the project may not be
completed due to cost overruns or changes in market conditions. These risks are
compounded in the Bank's case because it lends large amounts of money to several
home builders that, in turn, use the funds to finance the construction of homes
for speculation and model homes. If a builder experiences financial problems
that affects its ability to complete homes for which the Bank has advanced
construction funds, the Bank has more credit risk than if it had made one
residential construction loan to a single borrower because the credit is
concentrated in that single borrower. Moreover, a builder's ability to repay
construction loans will be dependent on the builder's ability to sell the newly
constructed homes upon completion, which can be adversely affected by changes in
the economy, the market for housing and the demand for, and the supply of, homes
constructed by that builder.
At June 30, 1998, the largest aggregate amount of loans outstanding to any one
borrower totaled $4.3 million, and consisted of three commercial properties and
four single family properties located in Waukesha County, Wisconsin. At June 30,
1998, all of these loans were current and performing in accordance with their
terms. These loans did exceed the regulatory "loans to one borrower" limitation
at June 30, 1998. The Bank effectuated a $4.0 million participation agreement
with another lender to reduce the loans to below the limitation. 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 13 multi-family
loans which at June 30, 1998 totaled $3.4 million, or 11.14% of the Bank's gross
loans. The average outstanding loan balance on each multi-family loan at June
30, 1998 was $263,300. All payments under multi-family loans originated by the
Bank were current and performing in accordance with their terms at June 30,
1998. 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. Th 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, the Bank gets
individual guarantees for all of its multi-family loans.
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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, 1998 had an outstanding balance of
$797,800 and was secured by a 16-unit apartment building located in Pewaukee,
Wisconsin. At June 30, 1998, 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, 1998, the Bank's commercial real
estate loan portfolio consisted of 23 loans totaling $7.5 million, or 24.37%, 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. Th 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%.
The average outstanding loan balance on each commercial/non-residential loan at
June 30, 1998 was $325,600. The largest commercial real estate loan at June 30,
1998 had an outstanding balance of $1,329,000 and was secured by an office
building located in Brookfield, Wisconsin. The concentration of commercial real
estate loans to one borrower totaled $1,526,700 at June 30, 1998 and consisted
of two loans secured by an office building in Brookfield, Wisconsin. All
payments under the Bank's commercial rea estate loans were current at June 30,
1998.
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, 1998, the Bank's
commercial construction and land development loan portfolio totaled $7.5 million
of the Bank's gross loans. The Bank's commercial construction and
9
<PAGE> 10
land development lending more than doubled between 1998 and 1997. 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 wit 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, 1998, 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 two land
development loans in its portfolio, the largest consisting of a loan of
$3,200,000 secured by residential subdivision property located in Johnson's
Creek, Wisconsin. At June 30, 1998, 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. Like
residential construction loans to builders for speculation and model homes,
commercial construction and land development loans involve inherent risks due to
the extension of large amounts of credit to a single borrower. But the risks
associated with commercial construction and land development loans are greater
than those involved in residential construction because the individual projects
tend to be much larger. Accordingly, if the builder cannot complete the
commercial project or land development for which the loan is made, the risk of
default is high and the amount of credit advanced is large. Furthermore, even if
a commercial project is completed, repayment of the construction loan is
contingent on the builder's ability to sell the property, which in turn, is
often subject to the market prospects for leasing the property. Land development
loans are especially risky, since the credit is secured by raw land. If the
borrower were to default on the loan, the Bank would own the land, which would
not be as readily marketable as developed property and the Bank may need to
invest additional funds in the property to improve its marketability. 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.
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, 1997
and 1998, the Bank's consumer loans totaled $357,000 and $179,000, respectively,
or 1.20% and 0.59%, respectively, of gross loans at those dates. Home equity
loans comprised 99.4% and 98.9% of other consumer loans at June 30, 1997 and
1998, 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.
10
<PAGE> 11
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 and principal
repayments for the periods indicated. During the periods, the Bank did not
purchase or sell any loans.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1996 1997 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period $ 21,936 $ 26,194 $ 29,435
Mortgage loans originated:
One-to four-family 3,236 233 1,992
Multi-family -- 332 --
Commercial real estate 1,965 200 1,352
Residential construction 3,160 4,815 4,095
Commercial construction / land development 940 2,893 6,206
-------- -------- --------
Total mortgage loans originated 9,301 8,473 13,645
Principal repayments (5,043) (5,232) (12,533)
Sale of loans -- -- --
Mortgage loans purchased (1) -- -- --
-------- -------- --------
At end of period $ 26,194 $ 29,435 $ 30,547
======== ======== ========
Consumer loans (gross):
At beginning of period 12 363 357
Loans originated 371 -- --
Principal repayments (20) (6) (178)
-------- -------- --------
At end of period $ 363 $ 357 $ 179
======== ======== ========
</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, from 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 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, 1998 the Bank's retained
interest in this commercial real estate loan was $369,200 while the sold
participation interest in this loan totaled $121,900.
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
11
<PAGE> 12
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, 1998, the Bank held 5 participation loans in its loan portfolio
totaling $2.5 million, or 8.04%, of the Bank's gross loan portfolio, as follows:
a multi-family loan of $704,000 (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 $474,700 (out of an original entire
loan amount of $2.9 million) secured by a hotel and originated in 1994; a land
development loan of $750,000 (out of an original entire loan amount of
$1,500,000) and originated in 1998; a multi-family loan of $407,200 (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 $135,300 (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 from 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, 1997, the
Bank did not have any loan brokering opportunities and therefore did not receive
any loan brokering fees. For the year ended June 30, 1998, the Bank received
real estate loan brokering fees of $11,000 for loan opportunities in the
aggregate amount of $2.2 million.
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. 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 a 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
12
<PAGE> 13
amounts are amortized to interest income using the level yield method over the
contractual life of the related loans. Deferred loan fees totaled $134,000,
$153,000 and $164,000 at June 30, 1996, 1997 and 1998, 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, 1998, the Bank had 2 loans delinquent more than 89 days for a total
of $197,000 which were classified as nonperforming. The Bank had no classified
assets at June 30, 1998. At June 30, 1997 and 1996, 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, 1996, 1997, and 1998, delinquencies in the Bank's loan portfolio
were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------
At June 30, 1996
-------------------------------------------------------------
60 - 89 Days 90 Days or More (1)
-------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of loans of loans of loans of loans
-------- -------- -------- --------
-------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------
Mortgage loans:
<S> <C> <C> <C> <C>
One-to four-family 0 $ -- 0 $ --
Multi-family 0 -- 0 --
Commercial real estate 0 -- 0 --
Residential construction 0 -- 0 --
Commercial construction /
land development 0 -- 0 --
----------- ----------- ----------- ----------
Total mortgage loans 0 -- 0 --
========== =========== =========== ==========
Consumer loans:
Home equity 0 -- 0 --
Other consumer 0 -- 0 --
----------- ----------- ----------- ----------
Total consumer loans 0 -- 0 --
========== =========== =========== ==========
Total gross loans 0 -- 0 $ --
========== =========== =========== ==========
Delinquent loans to gross loans 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
-------- -------- -------- --------
-------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------
Mortgage loans:
<S> <C> <C> <C> <C>
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)
<CAPTION>
----------------------------------------------------------------
At June 30, 1998
----------------------------------------------------------------
60 - 89 Days 90 Days or More (1)
----------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of loans of loans of loans of loans
-------- -------- -------- --------
----------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------
Mortgage loans:
<S> <C> <C> <C> <C>
One-to four-family 1 $ 31 2 $ 197
Multi-family 0 -- 0 --
Commercial real estate 0 -- 0 --
Residential construction 0 -- 0 --
Commercial construction /
land development 0 -- 0 --
----------- ----------- ----------- -----------
Total mortgage loans 1 31 2 197
=========== =========== =========== ===========
Consumer loans:
Home equity 0 -- 0 --
Other consumer 0 -- 0 --
----------- ----------- ----------- -----------
Total consumer loans 0 -- 0 --
=========== =========== =========== ===========
Total gross loans 1 $ 31 2 $ 197
=========== =========== =========== ===========
Delinquent loans to gross loans 0.10% 0.64%
(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 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 of collection.
13
<PAGE> 14
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, 1998, 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,
------------------------------------------------------
1996 1997 1998
--------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans $ -- $ -- $ 197
Nonaccrual consumer loans -- --
Real estate in judgement -- -- --
------------- --------------- ---------------
Total non-performing assets $ -- $ -- $ 197
============= =============== ===============
Total non-performing assets to gross loans receivable 0.00% 0.00% 0.64%
============= =============== ===============
Total non-performing assets to total assets 0.00% 0.00% 0.46%
============= =============== ===============
Interest on non-performing loans on the accrual basis $ -- $ -- $ 6
Accrued interest received on non-performing loans -- -- --
------------- --------------- ---------------
Net reduction of interest income $ -- $ -- $ 6
============= =============== ===============
</TABLE>
There are no concentrations of loans exceeding 10% of loans which are not
otherwise disclosed as a category of loans.
As of June 30, 1998, 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, 1998, 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 further write down
the REO directly or do so indirectly by providing 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 Doubtful require the Bank to
establish prudent general allowances for loan losses. Assets classified as
14
<PAGE> 15
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, 1998, 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 an
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 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. 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, 1996, 1997 and 1998 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.
15
<PAGE> 16
The following table sets forth the Bank's allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------
1996 1997 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 104 $ 126 $ 147
Provision for loan losses 22 21 22
Charge-offs net of recoveries
Mortgage loans -- -- --
Consumer loans -- -- --
------ ------ ------
Total charge-offs (net) -- -- --
------ ------ ------
Balance at end of period $ 126 $ 147 $ 169
====== ====== ======
Ratio of allowance for loan losses to gross receivables
at the end of period 0.47% 0.49% 0.55%
Ratio of allowance for loan losses to non-performing loans
at the end of period 0.00% 0.00% 85.67%
Ratio of allowance for loan losses to total non-performing
assets at the end of period 0.00% 0.00% 85.67%
Ratio of net charge-offs to average gross loans outstanding
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, 1999 will exceed the amount allocated to any individual category of loans.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
At June 30,
------------------------------------------------------------------------------------------
1996 1997
------------------------------------------------------------------------------------------
% of Total % of Total
Loans in Loans in
Category Category
% of To Total % of To Total
Total Loans Outstanding Total Loans Outstanding
Amount by Category Loans Amount by Category Loans
------ ----------- ----- ------ ---------- -----
------------------------------------------------------------------------------------------
(Dollars in thousands)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Breakdown of Allowance:
Mortgage Loans
One-to four-family $ 51 0.47% 40.46% $ 53 0.49% 36.26%
Commercial real estate 20 0.47% 15.68% 27 0.49% 18.32%
Multi-family 22 0.47% 17.26% 23 0.49% 15.95%
Commercial construction 11 0.47% 9.00% 10 0.49% 6.60%
Residential construction 20 0.47% 16.23% 32 0.49% 21.67%
---- ---- ------ ---- ---- ------
Total mortgage loans 124 0.00% 98.63% 145 0.00% 98.80%
Consumer loans 2 1.37% 2 1.20%
---- ------ ---- ------
Total allowance for loan losses $126 100.00% $147 100.00%
==== ====== ==== ======
<CAPTION>
----------------------------------------------
At June 30,
----------------------------------------------
1998
----------------------------------------------
% of Total
Loans in
Category
% of To Total
Total Loans Outstanding
Amount by Category Loans
------ ----------- -----
----------------------------------------------
(Dollars in thousands)
----------------------------------------------
<S> <C> <C> <C>
Breakdown of Allowance:
Mortgage Loans
One-to four-family $ 51 0.55% 30.32%
Commercial real estate 41 0.55% 24.37%
Multi-family 19 0.55% 11.14%
Commercial construction 42 0.55% 24.42%
Residential construction 15 0.55% 9.17%
---- ---- ------
Total mortgage loans 168 0.00% 99.42%
Consumer loans 1 0.58%
---- ------
Total allowance for loan losses $169 100.00%
==== ======
</TABLE>
(1) The Bank expects to maintain at a minimum an allowance of .40% of its
loan portfolio.
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 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
16
<PAGE> 17
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, 1996, 1997 and 1998, 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 carries the assets 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.
During the year ended June 30, 1998, the Bank transferred its investments form
its held-to-maturity portfolio to its available-for-sale portfolio. This was
done as the result of the sale, from its held-to-maturity portfolio, of a
$200,000 REMIC, on which a $1,375 realized loss was incurred, whose nature and
volatility was inconsistent with the Company's conservative investment
objectives. The remaining investments in the held-to-maturity portfolio
transferred to the available-for-sale portfolio had an amortized cost of $3.8
million and resulted in an unrealized gain of $48,000.
Mortgage-Backed Securities and CMOs
At June 30, 1998, the Bank's mortgage-backed securities portfolio totaled
$420,000, and consisted of $406,000 of GNMA participation certificates and
$14,000 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
17
<PAGE> 18
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.
At June 30, 1998, the Bank had no CMOs in its portfolio, as compared to its
portfolio of 100,000 as of June 30, 1997. The CMOs owned by the Bank at June 30,
1997 were issued by the FHLMC.
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 sale at June 30, 1998. At June 30, 1998, the Bank did not
have any mortgage-backed and related securities held for investment.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
At June 30, 1998
-----------------------------------------------------------------
One Year or Less Over One to Five Years
-----------------------------------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
-----------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ -- -- $ -- --
FHLMC -- -- 14 9.00%
Mortgage-related securities:
CMOs -- -- -- --
---------- -------- ----------- ----------
Total mortgage-backed and related
securities $ -- -- $ 14 9.00%
========== ======== =========== ==========
<CAPTION>
-----------------------------------------------------------
At June 30, 1998
-----------------------------------------------------------
Over Five to Ten Years Over Ten Years
-----------------------------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
-----------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ 147 8.57% $ 259 10.80%
FHLMC -- -- -- --
Mortgage-related securities:
CMOs -- -- -- --
---------- -------- --------- ----------
Total mortgage-backed and related
securities $ 147 8.57% $ 259 10.80%
========== ======== ========= ==========
<CAPTION>
-------------------------------------------------------------
At June 30, 1998
-------------------------------------------------------------
Mortgage-Backed and Related Securities
Total
-------------------------------------------------------------
Average
Remaining Approximate Weighted
Years to Carrying Market Average
Maturity Value Value Yield
-------- ----- ----- -----
-------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA 13.20 $ 406 $ 442 9.99%
FHLMC 2.92 14 14 9.00%
Mortgage-related securities:
CMOs -- -- -- --
---------- ----------- ----------- ---------
Total mortgage-backed and related
securities 12.75 $ 420 $ 456 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 sale. The mortgage-backed and related
securities portfolio was classified as held for investment as of June 30, 1997
and previous years. The portfolio was transferred to available for sale during
the year ended June 30, 1998 as the result of the sale of the sale of FHLMC CMO.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
At June 30,
-----------------------------------------------------------------------------------------------
1996 1997 1998
-----------------------------------------------------------------------------------------------
Carrying Market Carrying Market Carrying Market
Value % of Total Value Value % of Total Value Value % of Total Value
-------- ---------- ------ -------- ---------- ------ -------- ---------- ------
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------------
Mortgage-backed securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA $ 679 84.88% $ 735 $ 568 82.92% $ 616 $ 406 96.67% $ 442
FHLMC 21 2.63% 22 17 2.48% 19 14 3.33% 14
Mortgage-related securities:
CMOs 100 12.49% 95 100 14.60% 97 -- 0.00% --
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and related
securities $ 800 100.00% $ 852 $ 685 100.00% $ 732 $ 420 100.00% $ 456
======= ====== ======= ======= ====== ======= ======= ====== =======
-----------------------------------------------------------------------------------------------
</TABLE>
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,
--------------------------------------
1996 1997 1998
--------- -------- --------
(Dollars in thousands)
Mortgage-backed and related securities held for
investment
<S> <C> <C> <C>
At beginning of period $ 1,020 $ 800 $ 685
Purchases -- -- --
Sales -- -- (100)
Repayments (221) (115) (165)
Increase in market value -- -- 36
Premium / discount amortization 1 -- --
--------- -------- --------
At end of period $ 800 $ 685 $ 456
========= ======== ========
</TABLE>
18
<PAGE> 19
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, 1998, U.S. government and agency obligation investments totaled $2.0
million, or 17.78% of the Bank's total investment portfolio. The amount of these
securities decreased significantly during the year ended June 30, 1998 due to
the repayment of borrowings. At June 30, 1998, mutual fund investments,
consisting of adjustable and floating rat mortgage securities issued or
guaranteed by the U.S. government or its agencies, totaled $4.7 million, or
40.81%, 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.
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, 1998 and all mutual fund investments contained in the Bank's investment
securities portfolio at June 30, 1998.
<TABLE>
<CAPTION>
Carrying Market
Value at Value at
June 30, 1998 June 30, 1998
-------------------------------
(In thousands)
<S> <C> <C>
Federated ARMS Fund, Institutional Shares, 251,004.016 shares $ 2,500 $ 2,430
Asset Management Fund, Inc., Adjustable Rate Mortgage (ARM) Portfolio, 122,517.732 shares 1,225 1,218
Federated Short-Term Income Fund (A Portfolio of Private Income Securities Trust),
Institutional Shares, 109,409.190 shares 1,000 956
FHLB Bond, due 06/23/2008 2,000 2,006
</TABLE>
19
<PAGE> 20
COMPOSITION OF THE COMPANY'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 Company's investment
securities.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
At June 30,
---------------------------------------------------------------------
1996 1997
---------------------------------------------------------------------
Amortized Amortized
Cost or Cost
Carrying Market Carrying Market
Value % of Total Value Value % of Total Value
---------------------------------------------------------------------
(Dollars in thousands)
---------------------------------------------------------------------
<S> <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 5,350 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
Certificates of deposit -- -- -- -- -- --
Equity securities - FHLB stock -- -- -- -- -- --
Equity securities - FHLMC stock 577 7.32% 28 946 8.24% 28
------- ------ ------- ------- ------ -------
Total investment securities available
for sale $ 7,882 100.00% $ 7,508 $11,481 100.00% $10,675
======= ====== ======= ======= ====== =======
Securities held to maturity:
U.S. Government and other
agency obligations $11,178 96.12% $11,162 $ 3,189 86.59% $ 3,202
Certificates of deposit 294 2.53% 294 294 7.98% 294
FHLB stock 157 1.35% 157 200 5.43% 200
------- ------ ------- ------- ------ -------
Total securities held to maturity $11,629 100.00% $11,613 $ 3,683 100.00% $ 3,696
======= ====== ======= ======= ====== =======
---------------------------------------------------------------------
<CAPTION>
---------------------------------
At June 30,
---------------------------------
1998
---------------------------------
Amortized
Cost or
Carrying Market
Value % of Total Value
---------------------------------
(Dollars in thousands)
---------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Government and other
agency obligations $ 2,006 17.94% $ 2,000
Equity securities - mutual funds 4,604 41.18% 4,725
Corporate debt securities 2,585 23.12% 2,585
Certificates of deposit 493 4.41% 486
Equity securities - FHLB stock 200 1.79% 200
Equity securities - FHLMC stock 1,293 11.56% 28
------- ------ -------
Total investment securities available
for sale $11,181 100.00% $10,024
======= ====== =======
Securities held to maturity:
U.S. Government and other
agency obligations $ -- -- $ --
Certificates of deposit -- -- --
FHLB stock -- -- --
------- ------ -------
Total securities held to maturity $ -- -- $ --
======= ====== =======
</TABLE>
The table below sets forth certain information regarding the carrying value or
amortized cost, weighted cost, weighted average yields and maturities of the
Company's investment securities at June 30, 1998.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
At June 30, 1998
------------------------------------------------------------------------
One Year or Less Over One to Five Years Over Five to Ten Years
------------------------------------------------------------------------
Carrying Carrying Carrying
Value or Weighted Value or Weighted Value or Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
------------------------------------------------------------------------
(Dollars in thousands)
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and other
agency obligations $ -- -- $ -- -- $ 2,006 6.66%
Equity securities - mutual funds -- -- -- -- -- --
Corporate debt securities -- -- -- -- -- --
Certificates of deposit 394 6.21% 99 5.60% -- --
Equity securities - FHLB stock -- -- -- -- -- --
Equity securities - FHLMC stock -- -- -- -- -- --
-------- ------- --------
Total investment securities available
for sale $ 394 6.21% $ 99 5.60% $ 2,006 6.66%
======== ======= ========
Securities held to maturity:
U.S. Government and other
agency obligations $ -- -- $ -- -- $ -- --
Certificates of deposit -- -- -- -- -- --
FHLB stock -- -- -- -- -- --
-------- ---- ------- ---- -------- ----
Total securities held to maturity $ -- -- $ -- -- $ -- --
======== ======= ========
------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------------------------------------
At June 30, 1998
-------------------------------------------------------------------------------------
No
Contractual
Over Ten Years Maturity Investment Securities Totals
-------------------------------------------------------------------------------------
Carrying Carrying Average Carrying
Value or Weighted Value or Remaining Value or Approximate Weighted
Amortized Average Amortized Years to Amortized Market Average
Cost Yield Cost Maturity Cost Value Yield
-------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and other
agency obligations $ -- -- $ -- 9.92 $ 2,000 $ 2,006 6.60%
Equity securities - mutual funds -- -- 4,604 -- 4,725 4,604 5.48%
Corporate debt securities 2,585 5.70% -- 23.55 2,585 2,585 5.70%
Certificates of deposit -- -- -- 0.56 486 493 5.96%
Equity securities - FHLB stock -- -- 200 -- 200 200 --
Equity securities - FHLMC stock -- -- 1,293 -- 28 1,293 39.70%
------- ------ -------- --------
Total investment securities available
for sale $2,585 5.70% $6,097 $ 10,024 $ 11,181 5.77%
======= ====== ======== ========
Securities held to maturity:
U.S. Government and other
agency obligations $ -- -- $ -- -- $ -- $ -- --
Certificates of deposit -- -- -- -- -- -- --
FHLB stock -- -- -- -- -- -- --
------- ------ -------- --------
Total securities held to maturity $ -- -- $ -- -- $ -- $ -- --
======= ====== ======== ========
-------------------------------------------------------------------------------------
</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.
20
<PAGE> 21
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, the
characteristics of its local market area and depositors shifting funds to mutual
funds and other securities for higher rates of return are primary contributors
to this continued decline. See "--Market Area and Competition".
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Deposits $ 2,289 $ 4,518 $ 4,429
Withdrawals 7,334 5,926 5,508
------------ ------------ ------------
Net deposits (withdrawals) (5,045) (1,408) (1,079)
Interest credited on deposits 933 804 814
------------ ------------ ------------
Total increase (decrease) in deposits $ (4,112) $ (604) $ (265)
============ ============ ============
</TABLE>
At June 30, 1997 and 1998, the Bank had outstanding $1.40 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, 1997 June 30, 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 100 $ --
Over three through six months 112 --
Over six through twelve months 843 1,196
Over twelve months 347 206
------ ------
Total $1,402 $1,402
====== ======
</TABLE>
21
<PAGE> 22
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,
-----------------------------------------------------------------------------------------------------
1996 1997 1998
-----------------------------------------------------------------------------------------------------
Percent of Weighted Percent of Weighted Percent of Weighted
Total Average Total Average Total Average
Amount Deposits Nominal Rate Amount Deposits Nominal Rate Amount Deposits Nominal Rate
------- ---------- ------------ ------ ---------- ------------ ------ ---------- ------------
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deposit accounts
Non-interest bearing $ 89 0.49% -- $ 35 0.20% -- $ 68 0.39% --
Interest-bearing NOW 126 0.69% 2.50% 92 0.52% 2.50% 35 0.20% 2.50%
Money market 952 5.23% 3.45% 926 5.26% 3.45% 852 4.92% 3.40%
Passbook 2,775 15.25% 2.78% 2,660 15.12% 2.78% 2,350 13.56% 2.77%
-------- ------ -------- ------ -------- ------
Total demand accounts 3,942 21.66% 2.87% 3,713 21.10% 2.91% 3,305 19.07% 2.87%
Certificates of deposit
Six months and less 7,230 39.73% 5.59% 6,410 36.43% 5.59% 6,452 37.23% 5.62%
6 to 12 months 3,533 19.41% 5.49% 4,326 24.58% 5.49% 3,972 22.91% 5.66%
13 to 36 months 2,813 15.46% 5.84% 2,807 15.95% 5.84% 3,221 18.59% 5.91%
37 to 60 months 632 3.47% 6.01% 289 1.64% 6.01% 380 2.20% 6.22%
61 to 90 months 50 0.27% 8.00% 51 0.29% 8.00% -- 0.00% --
Jumbo (over 90 months) -- 0.00% 0.00% -- 0.00% 0.00% -- 0.00% --
-------- ------ -------- ------ -------- ------
Total certificates of deposit 14,258 78.34% 5.64% 13,883 78.90% 5.63% 14,025 80.93% 5.71%
-------- ------ -------- ------ -------- ------
Total deposit accounts $ 18,200 100.00% 5.04% $ 17,596 100.00% 5.05% $ 17,330 100.00% 5.17%
======== ====== ======== ====== ======== ======
-----------------------------------------------------------------------------------------------------
</TABLE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at June 30, 1996, 1997 and 1998 and the periods
to maturity of the certificate accounts outstanding at June 30, 1998.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
At June 30, Period to Maturity from June 30, 1998
----------------------------------------------------------------------------------------------------
Within One to
1996 1997 1998 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 $ 10 $ 11 $ 11 $ 11 $ -- $ -- $ 11
4.00% to 4.99% 95 -- -- -- -- -- --
5.00% to 5.99% 11,180 11,138 9,938 7,971 1,738 229 9,938
6.00% to 6.99% 2,402 2,467 3,797 2,380 1,319 98 3,797
7.00% to 7.99% 521 216 227 63 164 -- 227
8.00% to 8.99% 50 51 52 -- -- 52 52
9.00% to 9.99% -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total $ 14,258 $ 13,883 $ 14,025 $ 10,425 $ 3,221 $ 379 $ 14,025
======== ======== ======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------
</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, 1997 and 1998, the Bank had $4.0 million and $2.0 million,
respectively, 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 deposi funds in excess of insurable
limits. Both of these transactions are treated
22
<PAGE> 23
as borrowings on the Bank's financial statements. These transactions are
authorized by the Bank's Investment Policy and are governed by agreements with
primary government dealers under PSA Master Repurchase Agreements. At June 30,
1997, the Company had $2.0 million outstanding reverse repurchase agreements or
repurchase agreements. At June 30, 1998, the Company had no outstanding reverse
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,
---------------------------------
1996 1997 1998
---------------------------------
(Dollars in thousands)
FHLB-Chicago advances:
<S> <C> <C> <C>
Average balance outstanding $ 134 1,775 $ 3,812
Maximum amount outstanding at any month-end during the period 650 4,000 4,000
Balance outstanding at end of period -- 4,000 2,000
Weighted average interest rate during the period (1) 5.82% 5.91% 6.06%
Weighted average interest rate at end of period -- 5.97% 6.19%
Reverse repurchase agreements:
No activity $ -- $ -- $ --
Repurchase agreements:
Average balance outstanding $ -- $ 1,347 $ 532
Maximum amount outstanding at any month-end during the period -- 3,000 2,000
Balance outstanding at end of period -- 2,000 --
Weighted average interest rate during the period (1) -- 5.72% 5.80%
Weighted average interest rate at end of period -- 5.70% --
</TABLE>
-----------------------------
(1) Computed on the basis of average monthly balances
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 SAIF. The Bank is
subject to extensive regulation by the DSL, 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
Board of Governors of the Federal Reserve System ("FRB").
PENDING FINANCIAL MODERNIZATION LEGISLATION
On May 13, 1998, the U.S. House of Representatives passed a sweeping financial
modernization bill, H.R. 10, "The Financial Services Act of 1998", by a vote or
214 to 213. The bill was first proposed by the Clinton Administration on May 21,
1997. The final House version differs in many significant respects from the
Administration's proposed bill. The House bill has been sent to the U.S. Senate
for its consideration. The Senate began hearings on the legislation on June 17,
1998. If passed by the Senate the bill would not become law unless it is signed
by the President. Since there are few legislative days left to act in the 105th
Congress, many observers believe is an inadequate amount of time for the Senate
to act on the legislation in the 1998 legislative year. In addition, the
Administration has commented publicly that it will not support the legislation
in the form passed by the House. Accordingly, whether the bill will pass in the
near future remains uncertain and the ultimate form the legislation might take
if enacted cannot be predicted at this time.
The bill, among other things, addresses the ongoing debate concerning mixing
banking and commerce. Under the proposal, banks could affiliate with insurance
and securities companies in a holding company structure, subject to functional
regulation. Much of the debate concerning the legislation has centered on
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whether non-banking activities can be conducted through subsidiaries of the
bank, rather than only through holding companies. In this regard, H.R. 10
requires banks to move non-banking activities to holding companies regulated by
the Board of Governors of the Federal Reserve System, thereby removing them from
under the bank. Securities activities would be regulated by the Securities and
Exchange Commission, and state regulators would oversee insurance activities.
The proposal provides for further study of the issues relating to merging the
SAIF and BIF. If adopted, the legislation would represent the most significant
overhaul of financial services laws since the 1930s when the Glass-Steagall Act
of 1933 was enacted.
With respect to the thrift industry, H.R. 10 does not contain provisions
eliminating the federal thrift charter and requiring all federal thrifts to
convert into national banks within two years. The bill allows existing unitary
thrift holding companies to continue operating, but it prohibits the
establishment of any new unitary thrifts, if the application for unitary thrift
status is filed after March 31, 1998. Prior versions of the bill would have
eliminated the federal thrift charter, while allowing existing unitary thrift
holding companies to retain their status and affiliations with nonfinancial
enterprises and to engage in all currently permissible activities.
WISCONSIN SAVINGS BANK REGULATION
Regulations administered by the DSL govern various aspects of the activities and
operations of the Bank, as a Wisconsin-chartered savings bank.
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 DSL. Savings banks are
required to pay examination fees and annual assessments to fund the supervisory
operations of the DSL. Based on the assessment rates published by the DSL and
the Bank's total assets of $43.4 million at December 31, 1997, the Bank paid
$1,822 in assessments for the period ended June 30, 1998.
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 DSL, 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
24
<PAGE> 25
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, 1998, the Bank had loans or groups
of loans totaling $4.3 million which exceeded the loans-to-one borrower
limitations of $3.3 million. The Bank effectuated a $4.0 million participation
agreement with another lender to reduce the loans to below the limitation.
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, 1998, the Bank maintained over 80% 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 DSL 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 DSL'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 fo 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, 1998, the Bank's liquidity ratio was
78.56%.
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 less 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
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<PAGE> 26
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 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, 1998, 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-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, 1998, 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.
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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.
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, 1998, the Bank's
ratio of Tier 1 capital to total assets was 48.92% or 45.92% 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.
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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, 1998, the
Bank's Tier 1 capital to risk-weighted assets was 69.71% or 65.71% in excess of
the FDIC requirement and the Bank's total capital to risk-weighted assets was
49.32% or 41.32% 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. If the DSL determines
that the financial condition, history, management or earning prospects of a
savings bank are not adequate, the DSL may require a higher minimum capital
level for the savings bank. If a savings banks' capital ratio falls below the
required level, the DSL may direct the savings bank to adhere to a specific
written plan established by the DSL 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, 1998, the Bank's total capital,
as calculated under Wisconsin law, was $21.2 million or 51.08% of total assets,
which was 45.08% in excess of the required amount.
INSURANCE OF DEPOSITS
The Bank's deposits are insured to applicable limits under the 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.
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 $10,900 for
the fiscal year ended June 30, 1998. 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 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 continu 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 SAIF. The FDIC also insures commercial bank deposits under the 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.
28
<PAGE> 29
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 "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 t 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
29
<PAGE> 30
lend to affiliated persons as a class to an amount not exceeding the
institution's unimpaired capital and unimpaired surplus.
In addition, the DSL'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 DSL, 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 DSL 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.
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 15, 1997, 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.
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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 1998, a depository institution must maintain average daily
reserves equal to 3% of the first $52 million of net transaction accounts and an
initial reserve of $1.6 million, plus 10% of that portion of total transaction
accounts in excess of $52 million. The first $4.3 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, 1998, 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, 1998.
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 $200,000 at June 30,
1998.
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 FHLB-Chicago. At June 30, 1998, the Bank had $2.0 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.
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<PAGE> 32
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, an 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.
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 DSL.
32
<PAGE> 33
33
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, 1998
- -------- ------ --------------- -------------
<S> <C> <C> <C>
3140 South 27th Street 1953 Owned $41,000
Milwaukee, WI 53215
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than routine
legal proceedings incidental to the Company's business, which in the aggregate
involve amounts that are believed by management to be immaterial to the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 16 to the "Notes to Financial Statements
of Reliance Bancshares, Inc."
As of September 16, 1998, there were 283 registered shareholders of record.
Shares outstanding at September 16, 1998 were 2,395,564.
33
<PAGE> 34
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At or For the Years Ended June 30,
----------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands
except per share data)
<S> <C> <C> <C>
Earnings Per Share $ .23 $ .25 $ .21
Cash Dividends Per Share(1) 0.00 3.00 N/A
Return on Average Equity 2.43% 2.44% 3.45%
Return on Average Assets 1.24% 1.32% 1.40%
BALANCE ShEET DATA
Total Assets $42,289 $47,009 $47,752
Loans Receivable, net 25,798 27,601 22,931
Investment Securities Available for Sale 10,501 11,481 7,882
Investment Securities Held to Maturity -- 3,189 11,178
Mortgage-Backed Securities 456 685 800
Other Interest-earning Assets 486 494 451
Cash and Cash Equivalents 4,346 3,048 4,055
Deposits 17,330 17,596 18,200
FHLB Advances and Other Borrowings 2,000 6,008 --
Stockholders' Equity, Substantially Restricted 22,372 22,966 29,348
INCOME STATEMENT DATA
Total Interest and Dividend Income $ 3,360 $ 3,472 $ 2,724
Total Interest Expense 1,189 1,072 1,153
Provision for Loan Losses 22 22 22
Net Interest Income after Provision for Loan Losses 2,149 2,378 1,549
Total Non-Interest Income 49 36 17
Total Non-Interest Expenses 1,261 1,431 721
Income before Income Tax Expense 937 983 845
Income Tax Expense 366 367 331
Net Income 571 616 514
- ----------------------------
</TABLE>
(1) Payment of a special distribution on November 15, 1996 of which $2.925
represented a return of capital.
34
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL RATIOS AND OTHER DATA (CONT.)
<TABLE>
<CAPTION>
At June 30,
---------------------------------
1998 1997 1996
---- ---- ----
PERFORMANCE RATIOS
<S> <C> <C> <C>
Interest Rate Spread during Period(1) 2.23% 2.55% 2.25%
Net Interest Margin(1) 4.91% 5.29% 4.42%
Non-interest Expense to Average Assets 2.73% 3.07% 1.97%
Non-interest Income to Average Assets 0.11% 0.08% 0.05%
Average Interest-earning Assets to Average
Interest-bearing Liabilities 199.57% 215.89% 166.94%
ASSET QUALiTY RATIOS
Nonperforming Loans to Gross Loans(2) 0.64% 0.00% 0.00%
Nonperforming Loans to Total Assets(2) 0.46% 0.00% 0.00%
Allowance for Loan Losses to Nonperforming Loans(2) 85.67% 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 69.71% 74.18% 91.80%
Total Risk-based Capital Ratio 49.32% 46.52% 49.64%
Leverage Ratio 48.92% 46.18% 49.31%
Wisconsin Capital to Assets Ratio for the Bank 51.08% 47.66% 50.24%
Average Stockholders' Equity to Average Assets 50.88% 54.08% 40.71%
Stockholders' Equity to Total Average Assets 48.39% 49.28% 61.46%
OTHER DATA
Number of Deposit Accounts 1,462 1,565 1,757
Number or Real Estate Loans Outstanding 205 229 238
Number of Consumer Loans Outstanding 4 8 9
Real Estate Loans Originated (in thousands) $ 13,645 $ 8,473 $ 9,301
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".
35
<PAGE> 36
GENERAL
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 alternatives, account maturities and the levels of
personal income and savings in the Bank's primary market area.
The operations of the Company rely upon computer equipment and software programs
to maintain its account records. The "Year 2000" issue concerns a problem
resulting from computer programs being written using two digits rather than four
digits to define the applicable year. Any of Company's software programs, or
software programs used by its third-party providers, that are date-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. If not
corrected, this problem could cause a major system failure or miscalculations
and represent a material cost to the Company. Reliance Savings Bank has
developed a Year 2000 Compliance Plan and has conducted a review of its computer
systems and its third-party systems identifying those that could be affected by
the "Year 2000" issue. The Company believes that, with modifications to existing
software used by the Company and by its third-party providers, the Year 2000
problem will not pose significant operational problems for the Company. The
Company does not anticipate costs to remedy the "Year 2000" issue will have a
material impact of the financial condition of the Company.
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.
36
<PAGE> 37
Financial highlights and operating strategies of the Bank include the following:
1 - PROFITABILITY AND CAPITAL STRENGTH. 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, 1997 and 1998, the Company's net income was $616,000
and $572,000, respectively. The Company's return on average assets for the years
ended June 30, 1997 and 1998 was 1.32% and 1.24%, respectively. The Company's
return on average equity for the years ended June 30, 1997 and 1998 was 2.44%
and 2.43%, respectively.
At June 30, 1998, the Company had $22.4 million of stockholders' equity, or
52.90% of total assets, and met all of its regulatory capital requirements, in
each case on a fully phased-in basis, with GAAP capital of 52.90% of total
assets and Tier 1 capital of 48.92% of total risk-weighted assets.
2 - DIVERSIFICATION OF LENDING ACTIVITIES. The largest portion of the Bank's
loan portfolio is one- to four-family residential mortgage loans, which amounted
to $9.3 million, or 30.31% of total gross loans, at June 30, 1998. The remaining
$21.2 million, or 69.69% of total gross loans, at June 30, 1998 consisted of
$3.4 million of multi-family loans, $7.5 million of commercial real estate
loans, $2.8 million of residential construction loans, $7.5 million of
commercial construction and land development loans, and $179,000 of consumer
loans.
3 - ASSET QUALITY. The Bank focuses on high asset quality in its lending
activities. At June 30, 1998, the Bank had two non-performing loans totaling
$197,000 representing only 0.46% of total assets, and the Bank had no
non-performing assets during the last three fiscal years. Moreover, the Bank has
not had any loan charge-offs during the last three fiscal years. During the
years ended June 30, 1997 and 1998, respectively, the Bank added $22,000 to its
allowance for loan losses and there were no charge-offs.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
GENERAL
Net income for the year ended June 30, 1998 decreased 5.6% to $572,000 compared
to $616,000 for the year ended June 30, 1997. The decrease in the net income was
primarily attributable to an decrease in net interest income. Net interest
income decreased 9.5% to $2.17 million for the year ended June 30, 1998 compared
to $2.40 million for the year ended June 30, 1997, due primarily to a increase
in average interest-bearing liabilities, a decrease in interest-earning assets,
and a decrease in the interest rate spread. Non-interest income increased 41.7%
to $51,000 for the year ended June 30, 1998 compared to $36,000 for the year
ended June 30, 1997. Non-interest expense decreased 11.8% to $1,262,000 for the
year ended June 30, 1998 compared to $1,431,000 for the year ended June 30,
1997, primarily due to a $96,000 decrease in compensation and benefits and a
$151,000 decrease in federal insurance premiums partially offset by a $65,000
increase in professional services. Income taxes decreased 0.3% to $366,000 for
the year ended June 30, 1998 compared to $367,000 for the year ended June 30,
1997. The return on average assets decreased to 1.24% for the year ended June
30, 1998 compared to 1.32% for the year ended June 30, 1997. The return on
average equity decreased to 2.43% for the year ended June 30, 1998 compared to
2.44% for the year ended June 30, 1997.
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 decreased $229,000 to $2.17 million for the year ended June
30, 1998 compared to $2.40 million for the year ended June 30, 1997. The
decrease was due to a $112,000 decrease in total interest income and an increase
in total interest expense of $117,000. The decrease in net interest income was
the result of a 5.5% increase in average interest-bearing liabilities, and a
2.4% decline in average interest-earning assets, coupled with a 32 basis point
decrease in the interest rate spread. The decrease in interest rate spread
between June 30, 1998 and 1997 was due primarily to the increase in the average
cost of deposit accounts by 11 basis points and a 77 basis point increase in the
average cost of borrowings, while the average yield on interest-earning assets
declined 6 basis points for the same period.
37
<PAGE> 38
The decrease in average interest-earning assets over interest-bearing
liabilities between June 30, 1998 and 1997 was due to the increase in the
average borrowings between periods of $1.48 million and a decrease in the
average balances of deposits accounts of $316,000 while the average balances of
loans and investments decreased by $1.11 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 decreased $112,000, or 3.2% to $3.36 million for the year
ended June 30, 1998 compared to $3.47 million for the year ended June 30, 1997,
as a result of an decrease in the average balance of interest-earning assets and
a decrease in the average yield on interest-earning assets. The average yield on
interest-earning assets decreased 6 basis points to 7.60% for the year ended
June 30, 1998 compared to 7.66% for the year ended June 30, 1997. For the year
ended June 30, 1998, the Bank's average yield on investments was 5.41% compared
to 6.07% for the year ended June 30, 1997. Total interest-earning assets
decreased 2.4% to $44.2 million for the year ended June 30, 1998 from $45.3
million for the year ended June 30, 1997.
Interest income on loans increased to $2.41 million for the year ended June 30,
1998 compared to $2.23 million for the year ended June 30, 1997. The increase
was primarily due to an increase in average loan balances of $1.8 million, and
an increase in the average yield of 6 basis points. Interest income on
investments decreased to $886,000 for the year ended June 30, 1998 from
$1,162,000 for the year ended June 30, 1997.
Interest income on mortgage-backed and related securities declined to $48,000
for the year ended June 30, 1998 compared to $68,000 for the year ended June 30,
1997. The decline was due to a reduction in the balance of mortgage-backed and
related securities.
INTEREST EXPENSE
Total interest expense consists of interest expense on deposits which increased
$4,000, or 0.4% to $915,000 for the year ended June 30, 1998 from $911,000 for
the year ended June 30, 1997 and interest expense on borrowings which increased
$113,000 to $274,000 for the year ended June 30, 1998 from $161,000 for the year
ended June 30, 1997. The general increase in market rates of interest during the
year ended June 30, 1998 resulted in increases in average rates paid on all of
the Bank's major categories of deposits to 5.18% for the year ended June 30,
1998 from 5.07% for the year ended June 30, 1997. This increase was partially
offset by a $316,000 decrease in average deposits to $17.7 million for the year
ended June 30, 1998 from $18.0 million for the year ended June 30, 1997. 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 due to general demographic changes
in the Bank's local market area and to competition from alternative investments
that were more attractive to depositors during the period.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $22,000 for both years ended June 30, 1998 and
1997. 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. The amount of the
provision for loan losses for both the years ended June 30, 1998 and 1997
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
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<PAGE> 39
allowance for loan losses totaled $169,000 and $147,000 at June 30, 1998 and
1997, respectively. The allowance for loan losses was 0.55% of gross loans at
June 30, 1998 and 0.49% of gross loans at June 30, 1997. Nonperforming loans
totaled $197,000 at June 30, 1998. There were no nonperforming loans at June 30,
1997. There were no charge-offs recorded by the Company for the years ended June
30, 1998 and 1997.
NON-INTEREST INCOME
Non-interest income increased to $51,000 for the year ended June 30, 1998
compared to $36,000 for the year ended June 30, 1997. The change was due in part
to an $28,000 investment gain during the year ended June 30, 1998 compared to an
$2,000 investment gain during the year ended June 30, 1997. The remainder of the
change was due to a decrease in the cash surrender value of life insurance of
$20,000 and a increase in real estate loan brokerage fee income of $11,000 for
the year ended June 30, 1998.
NON-INTEREST EXPENSE
Non-interest expense decreased $169,000, or 11.8%, to $1,262,000 for the year
ended June 30, 1998 from $1,431,000 for the year ended June 30, 1997. The
decrease was due primarily to a decrease in compensation and benefits of $96,000
due to decreases in ESOP expense and pension expense and a decrease in federal
insurance premiums of $151,000 partially offset by an increase in fees for
professional services of $65,000. Non-interest expense as a percentage of
average assets (on an annualized basis) was 2.73% and 3.07%, respectively, for
the years ended June 30, 1998 and 1997.
INCOME TAX EXPENSE
Income tax expense decreased $1,000, or 0.3%, to $366,000 for the year ended
June 30, 1998 from $367,000 for the year ended June 30, 1997, primarily due to
decreased income before income taxes. The decrease reflects the decrease in
income before taxes from $983,000 for the year ended June 30, 1997 to $938,000
for the year ended June 30, 1998. The Company's effective tax rates were 39.0%
and 37.3%, respectively, for the years ended June 30, 1998 and 1997.
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 interest
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 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
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<PAGE> 40
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 on 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 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 a mortgage-backed pool
yielding over 10%.
INTEREST EXPENSE
Total interest expense decreased $81,000, or 7.0% to $1.07 million for the year
ended June 30, 1997 from $1.15 million 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.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $22,000 for both years ended June 30, 1997 and
1996. 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. 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 0.49% and 0.47% of gross loans at June 30, 1997 and 1996,
respectively. There were no nonperforming loans at June 30, 1997 and 1996..
There were no charge-offs recorded by the Company 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.
40
<PAGE> 41
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 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 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. 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.
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
---------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 4,346 $ 3,048 $ 4,055
Investment securities 10,987 14,964 19,354
Mortgage-backed securities 456 685 800
Loans receivable, net 25,798 27,601 22,931
LIABILITIES:
Deposits 17,330 17,596 18,200
Borrowings 2,000 6,008 - -
Stockholders' equity,
substantially restricted 22,372 22,966 29,348
</TABLE>
The statements of financial condition at June 30, 1998 and 1997 are consolidated
(see "Principles of Consolidation" in the Notes to Consolidated Financial
Statements).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased to $4.3 million at June 30, 1998 from $3.0
million at June 30, 1997. The increase was attributable to the decrease in
investment securities during the period and the decrease in borrowings.
INVESTMENT SECURITIES
Investment securities decreased to $11.4 million at June 30, 1998 from $15.6
million at June 30, 1997. The change was primarily due to the sale of investment
securities to repay borrowings in the aggregate amount of $4.0 million.
Mortgage-backed and related securities declined to $463,000 at June 30, 1998
from $685,000 at June 30, 1997. The decrease was the result of normal principal
payments and from the sale of the $100,000 CMO. 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
41
<PAGE> 42
Net loans receivable decreased to $25.8 million at June 30, 1998 from $27.6
million at June 30, 1997. The net change in loans arising from originations and
principal repayments for the years ended June 30, 1998 and 1997 was $(1,720,000)
and $290,000 for one- to four-family loans, respectively; $(1,181,000) and
$19,000 for multi-family loans, respectively; $1.9 million and $1.7 million for
construction and land development loans, respectively; and, $2.1 million and
$1.2 million 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 $9.3 million at June 30, 1998, compared to $11.0
million at June 30, 1997; commercial construction and land development loans
were $10.3 million at June 30, 1998, compared to $8.4 million at June 30, 1997;
multi-family loans were $3.4 million at June 30, 1998, compared to $4.6 million
at June 30, 1997; and commercial real estate loans were $7.5 million at June 30,
1998, compared to $5.4 million at June 30, 1997. 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 $17.3 million and $17.6 million at June 30, 1998 and 1997,
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 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, 1998, the Bank's certificate of
deposit accounts increased by $142,000 and non-certificate accounts declined by
$408,000. At June 30, 1998 and 1997, demand accounts, which consist of
interest-bearing and noninterest-bearing NOW accounts, money market accounts and
passbook accounts, were $3.3 million and $3.7 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 $2.0 million and $6.0 million in outstanding advances or other
borrowings at June 30, 1998 and 1997, respectively. This decrease is primarily
attributable to the narrowing spread between the yield on investments and the
cost of borrowings and management's decision to repay the borrowings as they
came due.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity declined to $22.4 million at June 30, 1998
from $23.0 million at June 30, 1997. The decrease was primarily attributable to
the stock repurchased through the various share repurchase programs initiated to
improve the return on equity. Stockholders' equity increased as a result of the
Company's net income of $572,000 for the year ended June 30, 1998. 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, 1998, the unrealized gain was $239,000, which was net of assumed taxes of
$154,000, and for the year ended June 30, 1997, the unrealized gain was 263,000,
which was net of assumed taxes of $169,000.
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 year ended June
30, 1998, rates in general declined more significantly than during the year
ended June 30, 1997 causing mortgage loan prepayments to increase more than two
times the level experienced during the preceding year. For the years ended June
30, 1998 and 1997, 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
42
<PAGE> 43
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 Wisconsin
law. 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 78.56% and 75.05%, at June 30, 1998 and 1997, respectively.
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, 1998 and 1997, cash and cash
equivalents were $4.3 million and $3.0 million, respectively. The increase in
cash and cash equivalents was attributable to the increase in mortgage loan
repayments during the year.
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, 1998 and 1997, respectively, the Bank originated $13.6
million and $8.5 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, 1998 and 1997, respectively, the Bank received principal
repayments on loans totaling $12.5 million and $5.2 million, and principal
repayments on mortgage-backed and related securities of $166,000 and $115,000.
At June 30, 1998, the Bank had $946,000 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, 1998 were $10.4 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. 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.
A summary of the Bank's regulatory capital follows:
43
<PAGE> 44
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1998 1997
---------------------------- -----------------------
Percent of Percent of
Amount Assets Amount Assets
------------ --------- ------- --------
<S> <C> <C> <C> <C>
Total capital under generally accepted accounting principals $20,157 47.28% $21,026 50.67%
======= ======== ======= ========
Tier 1 capital leverage $19,670 46.18% $20,297 48.92%
Tier 1 capital leverage requirement 1,278 3.00% 1,245 3.00%
------- -------- ------- --------
Excess $18,392 43.18% $19,052 45.92%
======= ======== ======= ========
Tier 1 risk-based capital $19,670 74.18% $20,297 69.71%
Tier 1 risk-based capital requirement 1,061 4.00% 1,165 4.00%
------- -------- ------- --------
Excess $18,609 70.18% $19,132 65.71%
======= ======== ======= ========
Total risk-based capital $19,817 46.52% $20,466 49.32%
Total risk-based capital requirement 2,122 8.00% 2,329 8.00%
------- -------- ------- --------
Excess $17,695 38.52% $18,137 41.32%
======= ======== ======= ========
Wisconsin regulatory capital $20,304 47.66% $21,195 51.08%
Wisconsin regulatory capital requirement 2,556 6.00% 2,489 6.00%
------- -------- ------- --------
Excess $17,748 41.66% $18,706 45.08%
======= ======== ======= ========
</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 of 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 $17.3 million and $17.6 million at June 30, 1998 and 1997,
respectively. The Bank's certificates of deposit accounts at June 30, 1998 and
1997 were $14.0 million and $13.9 million, respectively, and demand accounts,
which consist of NOW accounts, money market accounts and passbook accounts, were
$3.3 million and $3.7 million, respectively, at June 30, 1998 and 1997. The net
decrease was 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 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 represented an attractive
investment alternative compared to other available investments. The repurchased
shares became treasury shares and have been used for general corporate purposes.
The Company has notified the Wisconsin Department of Financial Institutions, and
the FDIC of the
44
<PAGE> 45
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. In total, 126,424 shares
were repurchased at an approximate cost of $1,125,000.
Also on June 20, 1997, the Company announced that the administrators of the
Reliance Savings Bank Recognition and Retention Plan (the "Retention Plan")
would 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. Approximately 69,000 shares were purchased at an approximate cost of
$611,000.
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.
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.
45
<PAGE> 46
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for years beginning after June 15,
1999, although earlier adoption is permitted. This standard establishes new
rules for the recognition and measurement of derivatives and hedging activities.
It requires all derivatives to be recorded on the balance sheet at fair value,
although the timing of recognition in earnings will depend on the classification
of the hedge according to criteria established by SFAS 133. Changes in fair
value of derivatives that do not meet these criteria are required to be included
in earnings in the period of the change. The Company has no determined the
impact that Statement 133 will have on its financial statements and believes
that such determination will no be meaningful until closer to the date of
initial adoption.
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 and
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.
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
46
<PAGE> 47
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, 1998, 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 $7.4 million,
representing a positive cumulative one year gap ratio of 17.4%. 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, 1998, 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, 1998 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 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.
47
<PAGE> 48
<TABLE>
<CAPTION>
At June 30, 1998
---------------------------------------------------------------
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
-------- ------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1)
Mortgage loans (2)
Fixed $ 1,136 $ 3,330 $ 4,644 $ 897 $ 7,079 $17,086
Variable 559 4,160 3,818 -- -- 8,537
Consumer loans (2) 23 65 81 3 5 177
Mortgage-backed securities 7 20 53 55 285 420
Investment securities
and other assets 11,951 95 99 -- 3,764 15,909
------- ------- ------- ------- -------- -------
Total interest-earning assets $13,676 $ 7,670 $ 8,695 $ 955 $ 11,133 $42,129
======= ======= ======= ======= ======== =======
Interest-bearing liabilities
Deposits (3)
NOW Accounts $ 10 $ 31 $ 40 $ 14 $ 8 $ 103
Money market accounts 168 505 115 41 23 852
Passbook accounts 235 705 902 325 183 2,350
Certificates of deposit 3,834 6,590 3,221 380 -- 14,025
Borrowings 2,000 -- -- -- -- 2,000
------- ------- ------- ------- -------- -------
Total interest-bearing liabilities $ 6,247 $ 7,831 $ 4,278 $ 760 $ 214 $19,330
======= ======= ======= ======= ======== ========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 7,429 $ (161) $ 4,417 $ 195 $ 10,919 $22,799
======= ======= ======= ======= ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 7,429 $ 7,268 $11,685 $11,880 22,799 $22,799
======= ======= ======= ======= ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as
a percent of total assets 17.57% 17.19% 27.63% 28.09% 53.91% 53.91%
======= ======= ====== ======= ======== ========
</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 $4,926,000 at June 30, 1998. 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 having 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 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 $5.7 million or 12.9% 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
48
<PAGE> 49
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, 1998, 1997 and 1996, and reflects the average yield on
assets and average cost of liabilities for the periods indicated.
<TABLE>
<CAPTION
Year Ended June 30,
-------------------------------------------------------------------------------------
1996 1997
----------------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Paid Balance Interest Rate Paid
------------- ------------- ------------ ------------ -------------------------
Assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 22,079 $ 1,887 8.55% $ 25,290 $ 2,230 8.82%
Mortgage-backed and related securities 895 84 9.39% 716 68 9.50%
Investment and other securities 12,444 743 5.97% 19,156 1,162 6.07%
Federal Home Loan Bank stock 153 10 6.54% 168 12 7.14%
------------- ------------- ------------ ----------- ---------- -----------
Total interest-earning assets (1) 35,571 2,724 7.66% 45,330 3,472 7.66%
============ ===========
Noninterest earning assets 1,021 -- 1,273 --
------------- ------------- ----------- ----------
Total assets $ 36,592 $ 2,724 $ 46,603 $ 3,472
============= ============= =========== ==========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Total deposits $ 21,167 $ 1,146 5.41% $ 17,971 $ 911 5.07%
Advances from borrowers for
taxes and insurance 7 -- -- -- -- --
Borrowings 134 7 5.22% 3,025 161 5.32%
------------- ------------- ------------ ----------- ---------- -----------
Total interest-bearing liabilities 21,308 1,153 5.41% 20,996 1,072 5.11%
============ ===========
Noninterest bearing liabilities 387 -- 403 --
Retained Earnings 14,897 -- 25,204 --
------------- ------------- ----------- ----------
Total liabilities and retained earnings $ 36,592 $ 1,153 $ 46,603 $ 1,072
============= ============= =========== ==========
Net interest income / $ 1,571 $ 2,400
============= ==========
interest rate spread (2) 2.25% 2.55%
============ ===========
Net interest-earning assets / $ 14,263 $ 24,334
============= ===========
net interest margin (3) 4.42% 5.29%
============ ===========
Average interest-earning assets to
average interest-bearing liabilities 166.9% 215.9%
============= =========
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1998
----------------------------------------------
Average
Average Yield/
Balance Interest Rate Paid
------------ ------------ ------------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans $ 27,150 $ 2,412 8.88%
Mortgage-backed and related securities 506 48 9.49%
Investment and other securities 16,363 886 5.41%
Federal Home Loan Bank stock 200 14 7.00%
--------- --------- ------------
Total interest-earning assets (1) 44,219 3,360 7.60%
============
Noninterest earning assets 2,013 --
--------- ---------
Total assets $ 46,232 $ 3,360
========= =========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Total deposits $ 17,655 $ 915 5.18%
Advances from borrowers for
taxes and insurance -- -- --
Borrowings 4,502 274 6.09%
--------- --------- ------------
Total interest-bearing liabilities 22,157 1,189 5.37%
============
Noninterest bearing liabilities 554 --
Retained Earnings 23,521 --
--------- ---------
Total liabilities and retained earnings $ 46,232 $ 1,189
========= =========
Net interest income / $ 2,171
=========
interest rate spread (2) 2.23%
============
Net interest-earning assets / $ 22,062
=========
net interest margin (3) 4.91%
============
Average interest-earning assets to
average interest-bearing liabilities 199.6%
=========
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average rate paid on interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
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 include fees which are considered
adjustments to yields. The amount of interest income resulting from the
recognition of loan fees was $91,000, $68,000 and $22,000 for the years ended
June 30, 1998, 1997 and 1996, 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
49
<PAGE> 50
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, 1997
Compared to
Year Ended June 30, 1998
--------------------------------------------------------------
Increase (Decrease)
Due to
--------------------------------------------------------------
Rate Volume Net
------------------- -------------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 17 $ 165 182
Mortgage-backed and
related securities - - (20) (20)
Investments and other
securities (117) (159) (276)
Federal Home Loan
Bank stock - - 2 2
------------------- -------------------- --------------------
Total interest-earning assets $ (100) $ (12) (112)
=================== ==================== ====================
Interest-bearing liabilities:
Total deposits $ 19 $ (15) 4
Advances from borrowers
for taxes and insurance - - - - - -
Borrowings 25 88 113
------------------- -------------------- --------------------
Total interest-bearing liabilities $ 44 $ 73 117
=================== ==================== ====================
Net change in net interest income $ (144) $ (85) (229)
=================== ==================== ====================
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1996
Compared to
Year Ended June 30, 1997
-------------------------------------------------------------
Increase (Decrease)
Due to
-------------------------------------------------------------
Rate Volume Net
------------------- ------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 62 $ 281 $ 343
Mortgage-backed and
related securities 1 (17) (16)
Investments and other
securities 12 407 419
Federal Home Loan
Bank stock 1 1 2
------------------- ------------------- -------------------
Total interest-earning assets $ 76 $ 672 $ 748
=================== =================== ===================
Interest-bearing liabilities:
Total deposits $ (70)$ (165) $ (235)
Advances from borrowers
for taxes and insurance - - - - - -
Borrowings - - 154 154
------------------- ------------------- -------------------
Total interest-bearing liabilities $ (70) $ (11) $ (81)
=================== =================== ===================
Net change in net interest income $ 146 $ 683 $ 829
=================== =================== ===================
</TABLE>
50
<PAGE> 51
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' 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, 1998 and 1997 and the
related consolidated statements of income, retained earnings, and cash flows for
the three years in the period ended June 30, 1998. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these consolidated 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, 1998 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended June 30, 1998
in conformity with generally accepted accounting principles.
SCHENCK & ASSOCIATES, SC
Brookfield, Wisconsin
July 31, 1998
51
<PAGE> 52
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30,
------------------------------------
1998 1997
--------------- ---------------
(In Thousands)
Assets:
<S> <C> <C>
Cash $ 842 $ 829
Cash equivalent interest-bearing deposits 3,504 2,219
-------- --------
Total cash and cash equivalents 4,346 3,048
Investments
Certificates of deposit 493 294
Investment securities available for sale, at fair value 10,949 11,481
Investment securities held to maturity
(estimated market value of $3,934 in 1997) - - 3,874
Federal Home Loan Bank stock - at cost 200 200
Loans receivable - net 25,798 27,601
Accrued interest receivable 87 182
Office properties and equipment 75 86
Prepaid expenses and other assets 341 243
-------- --------
Total assets $ 42,289 $ 47,009
======== ========
Liabilities and Equity:
Deposit accounts $ 17,330 $ 17,596
Borrowed funds 2,000 6,008
Income taxes:
Current 20 - -
Deferred 263 197
Accrued and other liabilities:
Interest 31 32
Other 273 210
-------- --------
Total liabilities 19,917 24,043
-------- --------
Commitments and contingencies - - - -
Stockholders' equity:
Common stock, $1.00 par value; 6,000,000 shares authorized;
2,562,344 shares issued 2,562 2,562
Additional paid-in-capital 10,001 9,947
Unearned ESOP compensation (449) (449)
Unrealized gain on securities available for sale, net of
applicable deferred income taxes 729 490
Retained earnings - substantially restricted 11,043 10,471
Treasury stock, at cost, 166,780 and 6,519 shares (1,514) (55)
-------- --------
Total stockholders' equity 22,372 22,966
-------- --------
Total liabilities and stockholders' equity $ 42,289 $ 47,009
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE> 53
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Mortgage loans $ 2,412 $ 2,230 $ 1,886
Investment securities 886 1,162 743
Mortgage-backed and related securities 48 68 84
Other loans - - - - 1
Dividends on stock in Federal Home Loan Bank 14 12 10
---------- ---------- ----------
Total interest and dividends 3,360 3,472 2,724
---------- ---------- ----------
Interest expense:
Deposits and escrows 915 911 1,146
Notes payable and other borrowings 274 161 7
---------- ---------- ----------
Total interest expense 1,189 1,072 1,153
---------- ---------- ----------
Net interest income 2,171 2,400 1,571
Provision for loan losses 22 22 22
---------- ---------- ----------
Net interest income after provision for loan losses 2,149 2,378 1,549
---------- ---------- ----------
Noninterest income:
Gain (loss) on sale of investments 28 2 (3)
Other income 13 23 9
Loan fees and service charges 10 11 11
---------- ---------- ----------
Total noninterest income 51 36 17
---------- ---------- ----------
Operating income 2,200 2,414 1,566
---------- ---------- ----------
Noninterest expense:
Compensation and benefits 668 764 358
Occupancy 29 30 30
Advertising 8 7 7
Furniture and equipment 12 14 22
Federal insurance premiums 11 162 50
Professional services 251 186 31
Data processing 74 72 70
Stationery, communications, and other operating 99 96 60
Directors' fees and expenses of directors, officers
and employees 110 100 93
---------- ---------- ----------
Total noninterest expense 1,262 1,431 721
---------- ---------- ----------
Income before income taxes 938 983 845
---------- ---------- ----------
Income taxes:
Current 455 433 336
Deferred (89) (66) (5)
---------- ---------- ----------
Total income taxes 366 367 331
---------- ---------- ----------
Net income $ 572 $ 616 $ 514
========== ========== ==========
Earnings per share (basic and diluted) $ 0.24 $ 0.25 $ 0.21
========== ========== ==========
Dividends per share $ - - $ 3.00 $ - -
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE> 54
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on
Securities
Available
for Sale, Net
Additional Unearned of Applicable Total
Common Paid-in ESOP Deferred Retained Treasury Stockholders'
Stock Capital Compensation Income Taxes Earnings Stock Equity
------- ---------- ------------ ------------ -------- ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995
$ -- $ -- $ -- $ 83 $ 9,533 $ -- $ 9,616
Sale of 2,562,344 shares of common stock
at $8 per share, net of related expensed 2,562 17,225 (713) -- -- -- 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 -- -- 144
-------- --------- ------- ----- ------- ------- --------
Balances at June 30, 1996 2,562 17,225 (713) 227 10,047 -- 29,348
Net income -- -- -- -- 616 -- 616
Cash dividend ($3.00 per share) -- (7,374) 249 -- (192) -- (7,317)
Purchase of treasury stock -- -- -- -- -- (283) (283)
Issuance of treasury stock for retention plan -- (15) -- -- -- 228 213
Amortization of unearned ESOP compensation -- 111 15 -- -- -- 126
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $169 -- -- -- 263 -- -- 263
-------- --------- ------- ----- ------- ------- --------
Balances at June 30, 1997 2,562 9,947 (449) 490 10,471 (55) 22,966
Net income -- -- -- -- 572 -- 572
Purchase of treasury stock -- -- -- -- -- (1,736) (1,736)
Issuance of treasury stock for retention and
option plans -- -- -- -- -- 277 277
Amortization of unearned ESOP compensation -- 54 -- -- -- -- 54
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $154 -- -- -- 239 -- -- 239
-------- --------- ------- ----- ------- ------- --------
Balances at June 30, 1998 $2,562 $10,001 $(449) $ 729 $11,043 $(1,514) $ 22,372
======== ========= ======= ===== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE> 55
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 572 $ 616 $ 514
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for depreciation 16 18 23
Provision for loan losses 22 22 22
Amortization of premiums, discounts and fees - net (100) (79) (33)
ESOP expenses 54 126 --
Increase (decrease) in income taxes payable 20 (5) (59)
Provision for (reduction of) deferred income taxes (89) (66) (4)
(Increase) decrease in interest receivable 95 (9) (78)
Net increase (decrease) in accrued/other liabilities 62 126 15
Net (increase) decrease in prepaid expense and other assets (98) (31) 9
Loss (gain) on investments (28) (2) 3
---------- ---------- ----------
Net cash provided (used) by operating activities 526 716 412
---------- ---------- ----------
Cash Flows from Investing Activities:
Purchases of Federal Home Loan Bank stock -- (43) (5)
Proceeds from sale/maturities of investment securities
held to maturity -- 9,460 5,434
Purchase of investment securities held to maturity -- (1,000) (12,188)
Proceeds from sale/maturities of investment securities
available for sale 11,371 3,192 1,505
Purchase of investment securities available for sale (7,000) (6,818) (4,994)
Net (increase) decrease in loans 1,873 (4,624) (1,896)
Principal payments collected on mortgage-backed
securities 266 115 220
Purchase of fixed assets (5) (20) --
---------- --------- ---------
Net cash provided (used) by investing activities 6,505 262 (11,924)
--------- ---------- ----------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock -- -- 19,074
Purchase of treasury stock (1,736) (283) --
Treasury stock issued 277 213 --
Repayments of short-term borrowing (2,000) -- (650)
Proceeds from short-term borrowing -- 4,000 650
Proceeds from securities sold under repurchase agreements -- 4,053 --
Payments on securities sold under repurchase agreements (2,008) (2,046) --
Increase (decrease) in deposit accounts (266) (605) (4,112)
Increase (decrease) in advance payments by borrowers -- -- (172)
Payment of cash dividend -- (7,317) --
---------- ---------- ----------
Net cash provided (used) by financing activities (5,733) (1,985) 14,790
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 1,298 (1,007) 3,278
Cash and Cash Equivalents at beginning of period 3,048 4,055 777
---------- ---------- ----------
Cash and Cash Equivalents at end of period $ 4,346 $ 3,048 $ 4,055
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE> 56
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest on deposit accounts $ 147 $ 148 $ 183
Income taxes 436 438 395
Interest on borrowings 274 161 18
Noncash investing activities:
Loans transferred to foreclosed properties and real
estate in judgment - - - - - -
Total increase in unrealized gain on securities available
for sale 398 432 236
Investments transferred to available-for-sale from
held-to-maturity, at cost 3,818 - - - -
Accounting Policies Note: Cash equivalents include demand deposits at other financial institutions and
the Federal Home Loan Bank.
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE> 57
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, 1998.
Gains and losses on the sale of securities available for sale are determined
using the specific identification method.
57
<PAGE> 58
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, 1998 and 1997, 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, 1998 - $5,687, June 30, 1997 - $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.
58
<PAGE> 59
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, 1998 and 1997 is 2,399,250 and 2,456,131 shares of
common stock.
59
<PAGE> 60
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.
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 12 for
additional information concerning SFAS No. 123.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform to current year
presentation.
60
<PAGE> 61
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, 1998
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Equity securities - common stock $ 28 $ 1,265 $ -- $ 1,293
Mortgage-backed securities 423 40 -- 463
U. S. Government and other marketable securities 4,585 5 -- 4,590
Equity securities - mutual funds 4,725 -- 122 4,603
-------- ----------- ------ ----------
Total $ 9,761 $ 1,310 $ 122 $ 10,949
======== =========== ====== ==========
<CAPTION>
June 30, 1997
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Equity securities - common stock $ 28 $ 918 $ -- $ 946
Corporate debt securities 5,122 12 2 5,132
Equity securities - mutual funds 5,525 -- 122 5,403
-------- ----------- ------ ----------
Total $ 10,675 $ 930 $ 124 $ 11,481
======== =========== ====== ==========
</TABLE>
Detail of sales of investment securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Proceeds
from Gross Gross
Sales Gains Losses
-------------------- -------------------- --------------------
(In thousands)
<S> <C> <C> <C>
Year Ended:
June 30, 1998 $ 11,046 $ 32 $ 4
June 30, 1997 3,652 2 --
June 30, 1996 500 -- 3
</TABLE>
61
<PAGE> 62
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
-------------------- -------------------- -------------------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 685 $ 50 $ 3 $ 732
U.S. Treasury obligations and
obligations of U.S. agencies 3,189 13 -- 3,202
------------------- ----------------- ------------------ ------------------
$ 3,874 $ 63 $ 3 $ 3,934
=================== ================= ================== ==================
</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, 1998
-------------------------------------------------------------------------------
Held to maturity Available for sale
----------------------------------------- -------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------------------- -------------------- -------------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Within one year or no maturity $ -- $ -- $ 4,753 $ 5,896
Greater than one year but less
than five years -- -- 14 15
Greater than five years but less
than ten years -- -- 147 160
Greater than ten years -- -- 4,847 4,878
------------------ --------------- ----------------- -----------------
Total $ -- $ -- $ 9,761 $ 10,949
================== =============== ================= =================
</TABLE>
62
<PAGE> 63
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1998 1997
------------------ ------------------
(In thousands)
<S> <C> <C>
First mortgage loans:
One-to-four family residential $ 9,315 $ 11,035
Multi-family residential 3,423 4,604
Commercial 7,489 5,376
Construction 10,320 8,420
Consumer and other loans:
Savings account 2 2
Second mortgages 177 355
----------------- ------------------
Total loans 30,726 29,792
----------------- ------------------
Less:
Undisbursed loan proceeds 4,595 1,890
Deferred loan fees 164 154
Allowance for loan losses 169 147
----------------- ------------------
4,928 2,191
----------------- ------------------
Loans receivable - net $ 25,798 $ 27,601
================= ==================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 147 $ 126 $ 104
Provisions charged against income 22 21 22
Charge-offs and recoveries - net -- -- --
------------------ ------------------ ------------------
Balance at end of year $ 169 $ 147 $ 126
================== ================== ==================
</TABLE>
The existing allowance for loan losses is considered neither inadequate nor
excessive relative to credit risk.
Loans receivable from officers and directors aggregated $19,090, and $154,801 at
June 30, 1998 and 1997.
The Bank did not have any specific allowance for loan losses at June 30, 1998
and 1997. 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.
63
<PAGE> 64
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1998 1997
----------------- ------------------
(In thousands)
<S> <C> <C>
Investment securities $ 40 $ 107
Mortgage-backed securities 3 5
Loans receivable 44 70
----------------- ------------------
$ 87 $ 182
================= ==================
</TABLE>
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1998 1997
----------------- ------------------
(In thousands)
<S> <C> <C>
Land $ 7 $ 7
Office building 147 147
Furniture, fixtures and equipment 116 111
Automobile 32 32
----------------- ------------------
302 297
Less: accumulated depreciation 227 211
----------------- ------------------
$ 75 $ 86
================= ==================
</TABLE>
Depreciation charged to operations totaled $16,000, $18,000, and $23,000 for the
years ended June 30, 1998, 1997, and 1996.
64
<PAGE> 65
NOTE 7 - DEPOSIT ACCOUNTS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- ---------------------------------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
--------------- --------------- -------------- --------------- --------------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Non-interest bearing $ 68 0.39% -- $ 35 0.20% --
NOW 35 0.20% 2.50% 92 0.52% 2.50%
Passbook 2,350 13.56% 2.77% 2,660 15.13% 2.78%
Money market 852 4.92% 3.40% 926 5.26% 3.45%
--------------- --------------- --------------- ---------------
Total demand accounts $ 3,305 19.07% 2.87% $ 3,713 21.10% 2.89%
--------------- --------------- --------------- ---------------
Certificate accounts:
3.00% to 3.99% $ 11 0.06% 3.40% $ 11 0.06% 3.40%
4.00% to 4.99% -- -- -- -- -- --
5.00% to 5.99% 9,938 57.35% 5.50% 11,138 63.30% 5.52%
6.00% to 6.99% 3,797 21.91% 6.15% 2,467 14.02% 6.10%
7.00% to 7.99% 227 1.31% 7.30% 216 1.23% 7.30%
8.00% to 8.99% 52 0.30% 8.00% 51 0.29% 8.00%
--------------- --------------- --------------- ---------------
Total certificates $ 14,025 80.93% 5.71% $ 13,883 78.90% 5.65%
--------------- --------------- --------------- ---------------
Total deposit accounts $ 17,330 100.00% 5.17% $ 17,596 100.00% 5.07%
=============== =============== =============== ===============
</TABLE>
Deposit accounts with individual balances of $100,000 or more totaled $1,402,000
and $1,402,000 at June 30, 1998 and 1997, respectively.
On June 30, 1998, certificate accounts have scheduled maturity dates as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
-----------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Totals
------------- ---------------- ---------------- ---------------- --------------- ---------------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
3.00% to 3.99% $ 11 $ -- $ -- $ -- $ -- $ -- $ 11
4.00% to 4.99% -- -- -- -- -- -- --
5.00% to 5.99% 7,971 1,457 281 20 209 -- 9,938
6.00% to 6.99% 2,380 826 493 5 93 -- 3,797
7.00% to 7.99% 63 164 -- -- -- -- 227
8.00% to 8.99% -- -- -- -- 52 -- 52
------------- ---------------- ---------------- ---------------- --------------- ---------------- ----------
$ 10,425 $ 2,447 $ 774 $ 25 $ 354 $ -- $ 14,025
============= ================ ================ ================ =============== ================ ==========
</TABLE>
Interest expense on deposit accounts consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------------------------------------
1998 1997 1996
---------------- --------------- ----------------
(In thousands)
<S> <C> <C> <C>
Passbook, money market, and
certificate accounts $ 913 $ 908 $ 1,144
NOW accounts 2 3 2
---------------- --------------- ----------------
$ 915 $ 911 $ 1,146
================ =============== ================
</TABLE>
65
<PAGE> 66
NOTE 8 - BORROWINGS
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1998 1997
-------------------------------- ---------------------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
---------------- ---------------- --------------- ---------------- ---------------
(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 1998 2,000 6.19% 4,000 5.97%
---------------- ----------------
$ 2,000 $ 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 $532,000 for the year ended June 30, 1998, and the maximum outstanding
at any month-end during 1998 was $2.0 million.
FHLB advances are collateralized by residential real estate loans with a
carrying value of $12.4 million at June 30, 1998, 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 9 - 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.
66
<PAGE> 67
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, 1998
-------------------------------------------------------------------------------------------------
Amount Ratios
Actual Required Excess Actual Required Excess
--------------- --------------- --------------- --------------- --------------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 20,297 $ 1,165 $ 19,132 69.71% 4.00% 65.71%
Total risk-based capital 20,466 2,329 18,137 49.32% 8.00% 41.32%
Leverage ratio 20,297 1,245 19,052 48.92% 3.00% 45.92%
State of Wisconsin 21,195 2,489 18,706 51.08% 6.00% 45.08%
</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, 1998:
<TABLE>
<CAPTION>
Tier 1 Total
Risk-Based Risk-Based Leverage State of
Capital Capital Ratio Wisconsin
---------------- ---------------- -------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Total consolidated stockholders' equity $ 22,372 $ 22,372 $ 22,372 $ 22,372
Holding Company stockholders' equity
not available for regulatory purposes (1,346) (1,346) (1,346) (1,346)
General loss allowances -- 169 -- 169
Unrealized gain on securities available for sale (729) (729) (729) --
---------------- ---------------- -------------- ---------------
$ 20,297 $ 20,466 $ 20,297 $ 21,195
================ ================ ============== ===============
</TABLE>
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Current tax provision:
Federal $ 360 $ 341 $ 264
State 95 92 72
------------------- ------------------- -------------------
Total current $ 455 $ 433 $ 336
=================== =================== ===================
Deferred tax provision (credit):
Federal (71) (52) (4)
State (18) (14) (1)
------------------- ------------------- -------------------
Total deferred $ (89) $ (66) $ (5)
=================== =================== ===================
Total provision for income taxes $ 366 $ 367 $ 331
=================== =================== ===================
</TABLE>
At June 30, 1998, the Bank has a net capital loss carryforward for tax return
purposes of $14,781 which, if unused, $591 expires in 1999, $11,172 expires in
2000, and $3,018 expires in 2001.
67
<PAGE> 68
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 June30,
-------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Federal taxes at statutory rates $ 319 $ 334 $ 287
Increase (decrease) resulting from:
State income taxes - net of
federal income tax benefit 49 51 44
Increase in cash value of life insurance (1) (9) --
Other - net (1) (9) --
------------------- ------------------- -------------------
Provision for income taxes $ 366 $ 367 $ 331
=================== =================== ===================
</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,
----------------------------------------
1998 1997
------------------- -------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 65 $ 60
Allowance for loan losses 58 49
Accrued expenses 43 37
Deferred compensation 72 47
Other 14 10
------------------- -------------------
Gross deferred tax assets $ 252 $ 203
=================== ===================
Deferred tax liabilities:
Accrued income $ 38 $ 75
FHLB stock dividends 6 6
Depreciation 1 3
Unrealized gain on securities 470 316
------------------- -------------------
Gross deferred tax liabilities $ 515 $ 400
=================== ===================
Net deferred tax asset (liability) $ (263) $ (197)
=================== ===================
</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, 1998, 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.
68
<PAGE> 69
NOTE 11 - FORECLOSED PROPERTIES AND REAL ESTATE IN JUDGMENT
Foreclosed properties and real estate in judgment is summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1998 1997
------------------ -----------------
(In thousands)
<S> <C> <C>
Real estate in judgment subject to redemption $ -- $ --
Foreclosed properties -- --
Allowance for losses -- --
------------------ -----------------
$ -- $ --
================== =================
</TABLE>
NOTE 12 - 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 $1,000,
$31,000 and $29,000 were made for the years ended June 30, 1998, 1997 and 1996,
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. 6,164 and 16,196 shares were
allocated to participants for the year ended June 30, 1998 and 1997. Expense to
the ESOP was $54,000, and $127,000 for 1998 and 1997. ESOP shares as of June 30
were as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Allocated shares 22,360 16,196
Shares ratably released for allocation -- --
Unreleased shares 66,765 72,929
------------------ ------------------
Total ESOP shares 89,125 89,125
================== ==================
Fair value of unreleased shares at June 30 $ 550,811 $ 610,780
================== ==================
</TABLE>
69
<PAGE> 70
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 $219,000 at June 30, 1998. 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, 1998 and 1997, $121,114 and $88,450 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 vested 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 $211,000 and $242,000 for the
years ended June 30, 1998 and 1997. Since the plan was adopted during 1997,
there are no expenses for the year ended June 30, 1996.
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. On April 8, 1998, 38,204 shares were granted under the plan. The
options vested one-third on May 15, 1997 and one-third on May 15, 1998, and will
vest 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 1998 and 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 $96,000 and $171,000 and $.04 and $.07.
Assumptions used to estimate the value was a risk free interest rate of 5.44%,
expected life of ten years, volatility of 21% and no expected dividends.
The following is a summary of stock option transactions for the year ended June
30, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
------------------- -------------------
<S> <C> <C>
Initial grant date - May 15, 1997 221,066 $ 7.81
Granted 38,204 9.25
Exercised (8,137) 7.81
Forfeited (4,036) 7.81
------------------ ------------------
Outstanding at June 30, 1998 247,097 $ 8.03
================== ==================
Available for future grant at year-end 1,000
==================
</TABLE>
70
<PAGE> 71
NOTE 13 - 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,
----------------------------------------
1998 1997
------------------- -------------------
(In thousands)
<S> <C> <C>
Commitments to extend credit
Fixed Rate $ 946 $ 1,890
</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 14 - 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 no 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
71
<PAGE> 72
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.
72
<PAGE> 73
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,
----------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------- ------------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 4,346 $ 4,346 $ 3,048 $ 3,048
Certificates of deposit 493 493 294 294
Securities available for sale 10,949 10,949 11,481 11,481
Securities held to maturity - - - - 3,874 3,934
Loans receivable 25,798 26,947 27,601 28,859
Financial Liabilities:
Deposits:
Demand deposits 3,305 3,305 3,713 3,713
Certificates 14,025 14,921 13,883 14,609
Borrowed funds 2,000 2,000 6,008 6,008
</TABLE>
73
<PAGE> 74
NOTE 15 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of June 30, 1998
and 1997 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.
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF FINANCIAL CONDITION
(In thousands)
June 30,
-----------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
ASSETS
Cash $ 49 $ 416
Cash equivalent interest-bearing deposits 1,950 936
Investment securities available for sale -- 1,005
Investment securities held to maturity -- 1,992
Investment in savings bank subsidiary 21,026 20,157
Loan to ESOP 449 449
Other assets 107 28
-------------------- --------------------
Total assets $ 23,581 $ 24,983
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowed funds $ -- $ 2,008
Liabilities 8 9
-------------------- --------------------
Total liabilities 8 2,017
Stockholders' equity 23,573 22,966
-------------------- --------------------
Total liabilities and stockholders' equity $ 23,581 $ 24,983
==================== ====================
<CAPTION>
CONDENSED STATEMENT OF INCOME
(In thousands)
Year Ended Year Ended
June 30, June 30,
1998 1997
-------------------- --------------------
<S> <C> <C>
Interest income $ 180 $ 404
Interest expense 34 75
-------------------- --------------------
Net interest income 146 329
Non-interest income -- 2
-------------------- --------------------
Operating income 146 331
Non-interest expense
Compensation and employee benefits 11 6
Professional services 94 88
Other 43 34
-------------------- --------------------
Total non-interest expense 148 128
-------------------- --------------------
Income (loss) before income taxes and equity
in undistributed earnings of subsidiary (2) 203
Income tax (1) 80
-------------------- --------------------
Income (loss) before equity in undistributed
earnings of subsidiary (1) 123
Equity in undistributed earnings of subsidiary 815 753
-------------------- --------------------
Net income $ 814 $ 876
==================== ====================
</TABLE>
74
<PAGE> 75
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, June 30,
1998 1997
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 814 $ 876
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (869) (1,114)
Amortization (8) (7)
ESOP expenses 54 126
Net (increase) decrease in other assets (79) 22
Net increase (decrease) in other liabilities 1 (5)
Loss (gain) on investments -- (2)
-------------------- --------------------
Net cash provided by operating activities (87) (104)
-------------------- --------------------
Cash flows from investing activities:
Purchase of investment securities available for sale -- (4,000)
Proceeds from sales/maturities of investment securities
available for sale 3,000 3,462
Proceeds from sales/maturities of investment securities
held to maturity -- 5,000
Payment received on loan to ESOP -- 248
-------------------- --------------------
Net cash provided (used) by investing activities 3,000 4,710
-------------------- --------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock upon conversion -- --
Cash dividends -- (7,317)
Purchase of treasury stock (526) (283)
Treasury stock issued 268 213
Proceeds from securities sold under repurchase agreements - - 4,053
Payments on securities sold under repurchase agreements (2,008) (2,046)
-------------------- --------------------
Net cash provided (used) by financing activities (2,266) (5,380)
-------------------- --------------------
Increase (decrease) in cash and cash equivalents 647 (774)
Cash and cash equivalents at beginning of year 1,352 2,126
-------------------- --------------------
Cash and cash equivalents at end of year $ 1,999 $ 1,352
==================== ====================
</TABLE>
75
<PAGE> 76
NOTE 16 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1997 1997 1998 1998
--------------- -------------------- -------------------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
Interest and divided income $ 856 $ 837 $ 849 $ 818
Interest expense 315 302 286 286
--------------- --------------- --------------- --------------
Net interest income 541 535 563 532
Provision for loan losses 5 5 6 6
--------------- --------------- --------------- --------------
Net interest income after provision for
loan losses 536 530 557 526
Non-interest income (2) 16 2 35
Non-interest expense 253 341 332 336
--------------- --------------- --------------- --------------
Income before income taxes 281 205 227 225
Income taxes 118 76 80 92
--------------- --------------- --------------- --------------
Net income $ 163 $ 129 $ 147 $ 133
=============== =============== =============== ==============
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1996 1996 1997 1997
--------------- -------------------- -------------------- --------------
(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
=============== =============== =============== ==============
</TABLE>
The following schedule is a summary of earnings per share and market information
during the years ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1997 1997 1998 1998
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Earnings per share $ 0.07 $ 0.05 $ 0.07 $ 0.05
Dividends paid -- -- -- --
Market information:
Trading range
High 9.000 9.750 10.125 8.875
Low 7.750 8.250 8.750 8.063
Close 8.500 9.500 8.875 8.250
Three Months Ended
-----------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1996 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
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
</TABLE>
76
<PAGE> 77
NOTE 17 - 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 the year ended June 30,
1997 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.
NOTE 18 - PENDING MERGER
On June 30, 1998, the Company signed a definitive Agreement and Plan of
Reorganization that provides for the acquisition of the Company and thus the
Bank by St. Francis Capital Corporation ("St. Francis"). Under the terms of the
definitive agreement, St. Francis will acquire all of the outstanding shares of
the Company through a merger transaction pursuant to which the Company's
shareholders will elect to receive either cash or shares of St. Francis's common
stock in exchange for their shares (the "Merger"). Consummation of the
transaction is subject to regulatory approval, approval of the Company's
shareholders and the satisfaction of certain other conditions.
77
<PAGE> 78
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 25, 1998, relating to the 1998 Annual Meeting of the
Shareholders scheduled for October 26, 1998, 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 25, 1998, 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 is included under the heading "Compensation of
Executive Officers and Directors" in the Registrant's definitive Proxy Statement
dated September 25, 1998, relating to the 1998 Annual Meeting of Shareholders
scheduled for October 26, 1998, 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 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 25, 1998, relating to the 1998 Annual Meeting of Shareholders
scheduled for October 26, 1998, 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 is included under the heading "Indebtedness of
Management and Certain Transactions" in the Registrant's definitive Proxy
Statement dated September 25, 1998, relating to the 1998 Annual Meeting of
Shareholders scheduled for October 26, 1998, 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.
78
<PAGE> 79
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(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)
10.7 Amendment to Employment Agreement - Mr. Allan T. Bach
10.8 Amendment to Employment Agreement - Ms. Carol A. Barnharst
21 Subsidiaries of Registrant
23 Consent of Schenck & Associates SC
27 Financial Data Schedule
- ------------------------------------
(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).
(b) Reports of Form 8-K
No reports on Form 8-K were filed by the Registrant during the three
months ended June 30, 1998.
79
<PAGE> 80
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RELIANCE BANCSHARES, INC.
Dated: September 17, 1998 By: /s/ Allan T. Bach
-----------------------------------
Allan T. Bach, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Carol A. Barnharst
-------------------------------------
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/ Allan T. Bach Chairman of the Board, September 17, 1998
- ---------------------------- President, Chief Executive Officer,
Allan T. Bach and Director
/s/ Carol A. Barnharst Vice President, Chief Financial September 17, 1998
- ---------------------------- Officer, Secretary, Treasurer,
Carol A. Barnharst and Director
/s/ O. William Held Director September 17, 1998
- ----------------------------
O. William Held
/s/ John T. Lynch Director September 17, 1998
- ----------------------------
John T. Lynch
/s/ Marjorie A. Spicuzza Director September 17, 1998
- ----------------------------
Majorie A. Spicuzza
</TABLE>
80
<PAGE> 81
SHAREHOLDER INFORMATION
<TABLE>
<CAPTION>
<C> <C> <C>
BOARD OF DIRECTORS OF HEADQUARTERS ANNUAL MEETING
RELIANCE BANCSHARES, INC.
The annual meeting of
AND RELIANCE SAVINGS RELIANCE BANCSHARES, INC. shareholders of Reliance
BANK 3140 South 27th St. Bancshares, Inc. will held at
ALLAN T. BACH Milwaukee, WI 53215 2:00 p.m., Milwaukee time,
Chairman of the Board, (414) 671-2222 October 26, 1998 at the
Director, President and Chief Clarion Hotel & Conference
Executive Officer of the RELIANCE SAVINGS BANK Center, 5311 South Howell
Company; Director, President and 3140 South 27th St. Avenue, Milwaukee, Wisconsin
Chief Executive Officer of Milwaukee, WI 53215
the Bank since 1991 (414) 671-2222
CAROL A. BARNHARST
Director, Vice President, RELIANCE SAVINGS BANK - AUDITORS
Secretary, Treasurer and Chief BANK OFFICE LOCATIONS Schenck & Associates, SC
Financial Officer of the MAIN OFFICE 3245 North 124th Street
Company; Director, Chief 3140 South 27th St. Brookfield, WI 53005
Financial Officer and Vice Milwaukee, WI 53215
President of the Bank since 1981
O. WILLIAM HELD
Director of the Company; SHAREHOLDER / MEDIA LEGAL COUNSEL
Chairman of the Board and RELATIONS Schiff Hardin & Waite
Director of the Bank since Shareholders, investors, 6600 Sears Tower
1985; President and Chief analysts, the news media and Chicago, IL 60606
Executive Officer of the Bank other interested in additional
prior to his retirement in 1991 information may contact Allan
T. Bach, Chairman of the
JOHN T. LYNCH Board, President and Chief
Director of the Company; Executive Officer of the TRANSFER AGENT
Director of the Bank since Company, at the Company's Firstar Trust Company
1988, practices law as a sole Headquarters. 615 E. Michigan Street
practitioner, owns and Fourth Floor
manages residential rental Milwaukee, WI 53202
properties Telephone: (414) 276-3737
ANNUAL REPORT ON FORM
MARJORIE A. SPICUZZA 10-KSB
Director of the Company; A copy of Reliance
Director of the Bank since Bancshares, Inc.'s Form 10-
1980; prior to her retirement in KSB filed with the Securities STOCK LISTING INFORMATION
1985, President and Chief and Exchange Commission is The shares of Common Stock
Executive Officer of the Bank available without charge by of Reliance Bancshares, Inc.
writing: are publicly traded on the
EXECUTIVE OFFICERS OF NASDAQ "Small Cap" Market
RELIANCE BANCSHARES, INC. Carol A. Barnharst, Secretary under the symbol "RELI".
AND RELIANCE SAVINGS BANK Reliance Bancshares, Inc.
ALLAN T. BACH 3140 South 27th St.
Chairman of the Board, Milwaukee, WI 53215
President and Chief Executive
Officer of the Company; STOCK PRICE INFORMATION
President and Chief Executive At September 16, 1998, the
Officer of the Bank closing bid price of the
Common Stock was $9.00
CAROL A. BARNHARST per share.
Vice President, Chief Financial
Officer and Secretary &
Treasurer of the Company and
Vice President and Chief
Financial Officer of the Bank SHAREHOLDERS AND SHARES OUTSTANDING
As of September 16, 1998
there were 283 registered
shareholders of record.
Shares outstanding at
September 16, 1998
were 2,395,564.
</TABLE>
81
<PAGE> 1
EXHIBIT 10.7
EXECUTION COPY
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
--------------------
WHEREAS, Reliance Bancshares, Inc. (the "Company"), Reliance Savings Bank
(the "Bank"), and Allan T. Bach (the "Executive") entered into an Employment
Agreement ("Agreement") effective as of the 18th day of April, 1996; and
WHEREAS, the parties are mutually desirous of amending the Agreement in
certain respects; and
WHEREAS, the Boards of Directors of the Bank and the Company have approved
and authorized their entry into this First Amendment to the Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth in the Agreement and set forth below, the Agreement is amended as
follows, effective May 1, 1998:
1. The date in the sentence of the Agreement is amended to be the 18th
day of April, 1996;
2. The following paragraph is added at the end of Section 2 of the
Agreement:
Notwithstanding the preceding provisions of this Section, the current
period of Executive's employment under the Agreement that expires on April 17,
1999, is extended to a period ending on April 17, 2001. The preceding
provisions of this Section shall apply with respect to the adding of an
additional year to the remaining term of employment ending on each date
immediately preceding the anniversary of the Commencement Date.
3. The heading of Section 6 of the Agreement shall be amended to read
"Termination Following a Change In Control."
<PAGE> 2
4. The portion of Section 6(iii) of the Agreement preceding paragraph (A)
thereof shall be amended as follows:
(iii) Benefits Upon Termination After a Change In Control. If this
Agreement is terminated (1) by Executive for good reason following a change
in control, or (2) by the Employers within twenty-four(24) months of the
effective date of a change in control other that for cause, death, disability
or retirement, then following the Termination Date:
5. The reference to section 5(iii) in Section 7(ii) of the Agreement is
amended to refer to Section 5(iv).
Except as provided above, the provisions of the agreement shall
continue in full force and effect.
IN WITNESS WHEREOF, the undersigned have duly executed this First Amendment
to the Employment Agreement as of this 8th day of May, 1998.
EXECUTIVE:
/s/ Allan T. Bach
--------------------------
Allan T. Bach
RELIANCE BANCSHARES, INC.
By:/s/ O. William Held
-----------------------
O. William Held
RELIANCE SAVINGS BANK
By:/s/ O. William Held
-----------------------
O. William Held
2
<PAGE> 1
EXHIBIT 10.8
EXECUTION COPY
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
WHEREAS, Reliance Bancshares, Inc. (the "Company"), Reliance Savings Bank
(the "Bank"), and Carol A. Barnharst (the "Executive") entered into an
Employment Agreement ("Agreement") effective as of the 18th day of April, 1996;
and
WHEREAS, the parties are mutually desirous of amending the Agreement in
certain respects; and
WHEREAS, the Boards of Directors of the Bank and the Company have approved
and authorized their entry into this First Amendment to the Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth in the Agreement and set forth below, the Agreement is amended as
follows, effective May 1, 1998:
1. The following paragraph is added at the end of Section 2 of the
Agreement:
Notwithstanding the preceding provisions of this Section, the current
period of Executive's employment under the Agreement that expires on April
17, 1999, is extended to a period ending on April 17, 2001. The preceding
provisions of this Section shall apply with respect to the adding of an
additional year to the remaining term of employment ending on each date
immediately preceding the anniversary of the Commencement Date.
2. The heading of Section 6 of the Agreement shall be amended to read
"Termination Following a Change In Control."
3. The portion of Section 6(iii) of the Agreement preceding paragraph
(A) thereof shall be amended to read as follows:
<PAGE> 2
(iii) Benefits Upon Termination After a Change In Control. If this
Agreement is terminated (1) by Executive for good reason following a
change in control, or (2) by the Employers within twenty-four (24) months
of the effective date of a change in control other than for cause, death,
disability or retirement, then following the Termination Date:
4. The reference to Section 5(iii) in Section 7(ii) of the Agreement is
amended to refer to Section 5(iv).
Except as provided above, the provisions of the Agreement shall continue
in full force and effect.
IN WITNESS WHEREOF, the undersigned have duly executed this First
Amendment to the Employment Agreement as of this 8th day of May, 1998.
EXECUTIVE:
/s/ Carol A. Barnharst
-----------------------------------
Carol A. Barnharst
RELIANCE BANCSHARES, INC.
By: /s/ O. William Held
-----------------------------------
O. William Held
RELIANCE SAVINGS BANK
By: /s/ O. William Held
-----------------------------------
O. William Held
2
<PAGE> 1
[TO COME]
<PAGE> 1
EXHIBIT 23
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 31, 1998, with respect to the consolidated
financial statements of Reliance Bancshares, Inc. in the Form 10-KSB for the
fiscal year ended June 30, 1998 of Reliance Bancshares, Inc.
/s/ Schenck & Associates, SC
Certified Public Accountants
Brookfield, Wisconsin
September 16, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 842
<INT-BEARING-DEPOSITS> 3,504
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,949
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 25,798
<ALLOWANCE> 169
<TOTAL-ASSETS> 42,289
<DEPOSITS> 17,330
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 587
<LONG-TERM> 0
0
0
<COMMON> 2,562
<OTHER-SE> 19,810
<TOTAL-LIABILITIES-AND-EQUITY> 42,289
<INTEREST-LOAN> 2,412
<INTEREST-INVEST> 948
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,360
<INTEREST-DEPOSIT> 915
<INTEREST-EXPENSE> 1,189
<INTEREST-INCOME-NET> 2,171
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 28
<EXPENSE-OTHER> 1,262
<INCOME-PRETAX> 938
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 572
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<YIELD-ACTUAL> 2.23
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 147
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 169
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 169
</TABLE>
