<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [FEE REQUIRED] For the Fiscal Year Ended September 30, 1996
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-25768
RELIANCE FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 43-1703958
(State or Other Jurisdiction of Inc. or Orgn.)(I.R.S. Employer ID No.)
8930 GRAVOIS AVENUE, ST. LOUIS, MISSOURI 63123
(Address of Principal Executive Office) (Zip Code)
(314) 631-7500
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. / X /.
As of December 13, 1996, there were 447,200 shares of the Registrant's
Common Stock issued and 425,700 shares of the Registrant's Common Stock
outstanding.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the average bid and ask price of
such stock as of December 13, 1996 was approximately $5.9 million.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM I. BUSINESS
RELIANCE FINANCIAL, INC.
Reliance Financial, Inc. (the "Company") is a Delaware corporation that
was organized in December 1994. On April 7, 1995, the Company acquired 100%
of the capital stock of Reliance Federal Savings and Loan Association of St.
Louis County (the "Savings Bank"), and sold 430,000 shares of common stock in
a subscription offering for a purchase price of $10.00 per share (the
"Offering"). Net proceeds from the Offering were $3.6 million. The Company
retained 50% of the net Offering proceeds and used a portion of the proceeds
to originate a loan to the Savings Bank's Employee Stock Ownership Plan, and
used the balance of the net proceeds to purchase all of the common stock of
the Savings Bank. Immediately following the Offering, the only significant
assets of the Company were the common stock of the Savings Bank, the loan to
the ESOP, and $1.6 million in cash, cash equivalents, and certificates of
deposit. The Company is registered as a savings and loan holding company
with the Office of Thrift Supervision (the "OTS").
The business of the Company and its subsidiaries will be discussed herein
as activities of the Company (on a consolidated basis), and references to the
Company's historical investment activities include the activities of the
Savings Bank prior to April 7, 1995 unless otherwise noted.
The Company employs executive officers and a support staff if and as the
need arises. Such personnel are provided by the Savings Bank and are paid
separate remuneration for such services. At September 30, 1996, the Company
had total consolidated assets of $32.7 million, total consolidated deposits
of $24.2 million, and consolidated stockholders' equity of $6.8 million. The
Company's executive office is located at 8930 Gravois Avenue, St. Louis,
Missouri 63123 and its telephone number is (314) 631-7500.
RELIANCE FEDERAL SAVINGS AND LOAN ASSOCIATION OF ST. LOUIS COUNTY
The Savings Bank is a federally chartered stock savings institution
headquartered in St. Louis, Missouri, engaged primarily in the business of
originating one- to four-family residential mortgage loans in its market
area. The Savings Bank's policy is to originate for retention in its loan
portfolio fixed rate mortgage loans with maturities of 15 years or less. At
September 30, 1996, 42.5% of the Savings Bank's one- to four-family
residential mortgage loan portfolio consisted of fixed-rate loans, a majority
of which were originated for terms of 15 years or less. In addition to
fixed-rate loans, the Savings Bank also originates for retention in its one-
to four-family residential mortgage loan portfolio, adjustable-rate mortgage
("ARM") loans and 3-, 5- and 7-year "balloon" loans. At September 30, 1996,
51.4% and 6.1% of the Savings Bank's one- to four-family residential mortgage
loan portfolio was comprised of ARM loans and 3-, 5- and 7-year balloon
loans, respectively. In the past, the Savings Bank originated a significant
number of consumer loans (primarily boat loans) and a limited number of
multi-family and commercial loans. However, in recent years, the Savings
Bank generally has not originated such loans.
The Savings Bank also invests in various types of securities and assets
that are permissible investments for federal savings associations, including
money market mutual funds, interest-earning deposits in other financial
institutions, mortgage-backed securities, and securities issued or guaranteed
by the United States Government or agencies thereof. The Savings Bank funds
its lending and investment activities primarily from deposits received,
repayment of principal and interest on its mortgage loans, and borrowings
from the Federal Home Loan Bank (the "FHLB") of Des Moines, Iowa. At
September 30, 1996, core deposits, consisting of passbook accounts, NOW
accounts and money market deposits totalled $9.1 million, or 37.5% of total
deposits, and certificates of deposit totalled $15.1 million, or 62.5%, of
total deposits.
2
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At September 30, 1996, the Savings Bank's net loan portfolio totalled
$21.1 million, or 64.7%, of total assets. At September 30, 1996, $18.5
million, or 87.7%, of the Savings Bank's loan portfolio consisted of one- to
four-family residential mortgage loans.
MARKET AREA AND COMPETITION
The Savings Bank is a community-oriented savings institution offering a
variety of financial products and services to the community it serves. The
Savings Bank's market area is St. Louis County, located in East-Central
Missouri, in the incorporated area generally known as Affton. Affton is
primarily a mature and fully developed residential area, with very little
manufacturing and only modest commercial activity. The vast majority of the
Savings Bank's lending is in the area surrounding its office. To a lesser
extent, the Savings Bank also originates loans in counties in Missouri
contiguous to St. Louis County, such as Jefferson County and St. Charles
County. To supplement mortgage loan origination in its market area, the
Savings Bank purchases loans secured by properties within the State of
Missouri originated by other financial institutions. To reduce the
credit-risk associated with the purchase of these loans, the Savings Bank
will continue its present policy of re-underwriting loans using its own
underwriting standards which includes a review of the borrower's payment
history and the on-site inspection of the properties collateralizing the
loans. The Savings Bank's principal market for deposits is concentrated in
the neighborhood surrounding its full service office in St. Louis County,
Missouri.
St. Louis, Missouri's largest city, is located in St. Louis County in
East-Central Missouri and is served by Lambert International Airport. The
population of St. Louis County has increased to an estimated 1.0 million in
1994 from 994,000 in 1990. The area's economy is affected primarily by the
manufacturing, construction, transportation and communication industries.
Major non-governmental employers in the area include McDonnell Douglas Corp.,
Barnes Jewish Christian Health System, Ralston Purina, Anheuser-Busch,
Monsanto, Chrysler, Ford, Southwestern Bell Corp. and Trans World Airlines.
As of October 1994, the unemployment rate was 4.8% in St. Louis County,
compared to 3.1% nationally.
The Savings Bank faces significant competition in the origination of
loans from other savings associations, mortgage banking companies, credit
unions, insurance companies, and commercial banks, many of which have greater
financial and marketing resources. The Savings Bank also faces significant
competition in attracting deposits. Historically, most direct competition
for deposits has been from other savings banks, savings associations,
commercial banks and credit unions. The Savings Bank faces additional
competition for deposits from short-term money market funds and other
corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies. Competition
has also increased as a result of the lifting of restrictions on the
interstate operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Savings Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences and, to a lesser extent, construction loans, multifamily loans,
and commercial real estate loans. The Savings Bank also originates a limited
amount of consumer loans. At September 30, 1996, the Savings Bank's gross
loan portfolio totalled $21.9 million, of which $18.5 million, or 87.7% of
loans receivable, net, were one- to four-family residential mortgage loans
held for investment. The remainder of the Savings Bank's mortgage loans at
September 30, 1996 consisted of $1.0 million of multifamily loans, $1.5
million of real estate construction loans and $785,000 of commercial real
estate loans. The Savings Bank's consumer loans consist primarily of boat
loans. Consumer loans totalled $87,000 at September 30, 1996.
3
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ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the
composition of the Savings Bank's loan portfolio in dollar amounts and in
percentages at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential (1) $18,546 87.71% $18,083 90.27% $16,840 84.88%
Multi-family, 5 or more units 984 4.65 1,214 6.06 1,316 6.63
Construction 1,526 7.22 -- -- 366 1.84
Commercial 785 3.71 832 4.15 1,278 6.44
------- ------ ------- ------ ------- ------
Total real estate loans 21,841 103.29% 20,129 100.48 19,800 99.79
------- ------ ------- ------ ------- ------
Consumer and other loans:
Boat loans 87 0.41 260 1.30 554 2.79
Savings account loans -- 0.00 19 0.10 35 0.18
Consumer loans -- 0.00 -- 0.00 3 0.02
------- ------ ------- ------ ------- ------
Total consumer and other loans 87 0.41 279 1.40 592 2.99
------- ------ ------- ------ ------- ------
Total gross loans receivable 21,928 103.70% 20,408 101.88 20,392 102.78
Less:
Loans in process 560 2.65 -- -- 129 0.65
Allowance for losses 204 0.96 305 1.53 388 1.95
Unearned discount 8 0.04 65 0.32 21 0.10
Deferred loan fees, net 12 0.05 7 0.03 15 0.08
------- ------ ------- ------ ------- ------
Loans receivable, net $21,144 100.00% $20,031 100.00% $19,839 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
TYPE OF SECURITY:
Residential:
One- to four-family dwelling units (1) 18,546 87.71 $18,083 90.27% $16,840 84.88%
5 or more dwelling units 984 4.65 1,214 6.06 1,316 6.63
Construction 1,526 7.22 -- -- 366 1.84
Commercial 785 3.71 832 4.15 1,278 6.44
Savings accounts -- 0.00 260 1.30 554 2.79
Boat loans 87 0.41 19 0.10 35 0.18
Other loans -- 0.00 -- -- 3 0.02
------- ------ ------- ------ ------- ------
Subtotal 21,928 103.70 20,408 101.88 20,392 102.78
Less:
Loans in process 560 2.65 -- -- 129 0.65
Allowance for losses 204 0.96 305 1.53 388 1.95
Unearned discount 8 0.04 65 0.32 21 0.10
Deferred loan fees, net 12 0.05 7 0.03 15 0.08
------- ------ ------- ------ ------- ------
Total gains $21,144 100.00% $20,031 100.00% $19,839 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
- -------------------------------------
(1) Includes construction loans converted to permanent loans and FHA/VA loans.
Loan Maturity Schedule. The following table sets forth certain
information as of September 30, 1996, regarding the dollar amount of gross
loans maturing in the Savings Bank's portfolio based on their contractual
principal payments.
<TABLE>
<CAPTION>
Ten
Due During the Three Five Through Fifteen
Years Ended September 30, Through Through Fifteen Years
1997 1998 1999 Five Years Ten Years Years or More Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential $899,334 $977,819 $1,063,183 $2,412,877 $7,437,903 $3,458,037 $3,823,041 $20,072,194
Multi-family, 5 or more units 62,459 68,335 74,763 171,286 457,268 149,615 -- 983,726
Commercial loans 44,399 48,780 53,598 68,172 205,253 310,694 53,924 784,820
Consumer loans 34,557 38,938 13,976 -- -- -- -- 87,471
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $1,040,749 $1,133,872 $1,205,520 $2,652,335 $8,100,424 $3,918,346 $3,876,965 $21,928,211
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
</TABLE>
4
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The following table sets forth the dollar amount of all gross loans at
September 30, 1996 that have fixed interest rates and have floating or
adjustable interest rates and which are due after September 30, 1997.
<TABLE>
<CAPTION>
Floating Or
Fixed Rates Adjustable Rates (1) Total
----------- -------------------- -----------
<S> <C> <C> <C>
Real estate loans:
One- to four-family residential. . . . .$8,231,191 $10,941,669 $19,172,860
Multi-family, 5 or more units. . . . . . 271,607 649,660 921,267
Commercial loans . . . . . . . . . . . . 57,772 682,649 740,421
Consumer loans . . . . . . . . . . . . . . 52,914 -- 52,914
---------- ----------- -----------
Total. . . . . . . . . . . . . . . . .$8,613,484 $12,273,978 $20,887,462
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ------------------------------------
(1) Includes 3-, 5- and 7-year balloon mortgage loans.
One- To Four-Family Residential Real Estate Loans. The Savings Bank's
primary lending activity consists of the origination of one- to four-family
owner-occupied residential mortgage loans, substantially all of which are
collateralized by properties located in the Savings Bank's market area. At
September 30, 1996, $7.3 million, or 39.5%, of the Savings Bank's one- to
four-family mortgage loans had fixed rates, generally of intermediate (5-7
year) terms, with a limited amount of longer-term fixed-rate loans, not to
exceed 15 years in maturity. The remainder of the Savings Bank's one- to
four-family mortgage loans ($11.2 million, or 60.5% at September 30, 1996)
had variable rates. Of the Savings Bank's variable rate loans at September
30, 1996, $10.0 million, or 89.4%, were one- and three-year ARM loans and
$1.2 million, or 10.6%, were 3-, 5- or 7-year balloon loans.
The Savings Bank originates ARM loans to reduce interest rate risk.
Currently, the Savings Bank's ARM loans adjust at 250-275 basis points above
the one-year Treasury Bill rate or the 8th District Quarterly Cost of Funds
Index. Such loans are originated with terms ranging 15 to 30 years depending
on customer preference. Currently, ARM loans originated by the Savings Bank
provide for maximum adjustments of 2% per adjustment, with overall
adjustments of 6.5%.
The Savings Bank currently offers fixed rate one- to four-family
residential mortgage loans with terms ranging from 5 to 15 years. One- to
four-family residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms because borrowers
may refinance or prepay loans at their option. The average length of time
that the Savings Bank's one- to four-family residential mortgage loans remain
outstanding varies significantly depending upon trends in market interest
rates and other factors. Accordingly, estimates of the average length of
one- to four-family loans that remain outstanding cannot be made with any
degree of accuracy. At September 30, 1996, the average weighted life of the
Savings Bank's one- to four-family residential mortgage loans was
approximately 14.9 years.
Originations of fixed rate mortgage loans are monitored on an ongoing
basis and are affected significantly by the level of market interest rates,
the Savings Bank's interest rate gap position, and loan products offered by
the Savings Bank's competitors. The Savings Bank's fixed rate mortgage loans
amortize on a monthly basis with principal and interest due each month. To
make the Savings Bank's loan portfolio more interest rate sensitive, the
Savings Bank currently emphasizes the origination of loans with terms of 15
years or less. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Interest Rate Sensitivity Analysis."
The Savings Bank is a portfolio lender. It has not sold loans in the
secondary mortgage market since 1989 and does not intend to conduct secondary
market sales in the foreseeable future. One- to four-family loans are
underwritten and originated according to policies approved by the board of
directors. In the current lending environment, loan repayments have exceeded
demand for loans.
The Savings Bank also originates a number of one- to four-family
construction loans that convert to permanent loans after the initial
construction period, which generally is six months but which may not exceed
12 months. The
5
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Savings Bank makes a limited number of loans to builders for houses built on
"spec." At September 30, 1996, the Savings Bank had $1.5 million of
construction loans outstanding.
Commercial Real Estate and Multi-Family Lending. The Savings Bank
originates commercial real estate and multi-family loans on a limited basis.
At September 30, 1996, such loans represented $1.8 million, or 8.4%, of the
Savings Bank's gross loan portfolio. The Savings Bank generally does not
solicit such loans, and originates such loans selectively and on a
case-by-case basis. Because of the increased credit risk associated with
such loans and the low level of demand for such loans in the Savings Bank's
market area, the Savings Bank anticipates its commercial real estate and
multi-family loan portfolio to decrease in the foreseeable future. The
largest such loan at September 30, 1996 was $339,000.
The Savings Bank's commercial real estate loans typically are secured by
free-standing retail outlets. The Savings Bank generally makes such loans in
amounts up to 75% of the appraised value of the property.
The Savings Bank's multi-family loans are typically secured by
residential properties containing 6, 8 or 12 dwelling units located in its
market area. The Savings Bank makes such loans in amounts up to 75% of the
appraised value of the property. Currently, the Savings Bank requires cash
flow analysis on the properties, which is updated each year. The Savings
Bank generally requires a positive cash flow on all multi-family properties.
Multi-family loans are offered with fixed or adjustable interest rates.
Fixed-rate loans generally bear interest of 300 to 400 basis points over the
equivalent term U.S. Treasury issue and adjustable rate loans generally bear
initial rates of 350 basis points over the equivalent term U.S. Treasury
issue and adjust periodically to 350 basis points over the equivalent term
U.S. Treasury issue.
Multi-family and commercial real estate loans generally are for larger
loan amounts and involve greater risks than one- to- four family residential
mortgage loans. Because payments on loans secured by such properties are
often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to adverse
conditions in the real estate market or the economy. The Savings Bank seeks
to minimize these risks in a variety of ways, including limiting the size of
such loans and strictly scrutinizing the financial condition of the borrower,
the quality of the collateral and the management of the property securing the
loan. The Savings Bank obtains appraisals on each property in accordance
with applicable regulations.
Consumer and Other Lending. The Savings Bank also offers consumer loans
which consist primarily of savings account loans.
Between 1985 and 1990, the Savings Bank made a substantial number of
loans on new and used boats. Management of the Savings Bank at that time was
attracted by the relatively high interest rates and short amortization
schedules offered by these loans compared to alternative investments. The
Savings Bank has virtually eliminated its origination of boat loans due, in
part, to increased levels of delinquencies and repossessions on boat loans
originated directly by the Savings Bank. While boat loans still constitute
$87,000, or 0.41%, of the Savings Bank's loan portfolio at September 30,
1996, management of the Savings Bank does not currently anticipate that the
origination of boat loans will constitute a significant part of its consumer
loan portfolio in the future.
Consumer loans entail greater risks than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which
are unsecured or secured by rapidly depreciable assets such as boats. In
such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance,
since there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore,
the application of various federal and state laws, including federal and
state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. While the Savings Bank has greatly reduced its
portfolio of non-performing consumer loans, no assurance can be given that
the Savings Bank's delinquency rate on consumer loans will remain low in the
future.
6
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The Savings Bank's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Savings Bank the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells or otherwise disposes of
the underlying real property serving as security for the loan. Due-on-sale
clauses are an important means of adjusting the rates on the Savings Bank's
fixed rate mortgage loan portfolio, and the Savings Bank has generally
exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by
an appraisal at the time of loan origination. Such regulations permit a
maximum loan-to-value ratio of 100% for residential property and 90% for all
other real estate loans. The Savings Bank's lending policies limit the
maximum loan-to-value ratio on fixed rate loans without private mortgage
insurance to 80% of the lesser of the appraised value or the purchase price
of the property to serve as collateral for the loan.
The Savings Bank makes one- to four-family real estate loans with
loan-to-value ratios of up to 80%. The Savings Bank requires fire and
casualty insurance, appraisals by an independent certified appraiser, and a
certificate of title, on all properties securing real estate loans made by
the Savings Bank.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Savings Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's employment, income, and credit standing. In the
case of a real estate loan, an appraiser approved by the Savings Bank
appraises the real estate intended to collateralize the proposed loan. An
underwriter in the Savings Bank's loan department checks the loan application
file for accuracy and completeness, and verifies the information provided.
Pursuant to the Savings Bank's written loan policies, all loans over $300,000
must be approved by the board of directors, which meets monthly. However,
the Savings Bank's Chief Executive Officer and Executive Vice President have
authority to approve loans up to $175,000. After the loan is approved, a
loan commitment letter is promptly issued to the borrower.
To supplement mortgage loan origination in its market area, the Savings
Bank anticipates purchasing loans secured by properties within the State of
Missouri originated by other financial institutions, to the extent attractive
purchases are available. To reduce the credit-risk associated with the
purchase of these loans, the Savings Bank will continue its present policy of
re-underwriting loans using its own underwriting standards which includes a
review of the borrower's payment history and the on-site inspection of the
properties collateralizing the loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest
rate, amortization term, a brief description of the required collateral, and
required insurance coverage. Commitments are typically issued for 45-day
periods in the case of loans to refinance, 45-day periods in the case of
loans to purchase existing real estate, and 45-day periods for construction
loans. The borrower must provide proof of fire and casualty insurance on the
property serving as collateral, which insurance must be maintained during the
full term of the loan. A certificate of title, based on a title search of the
property, is required on all loans secured by real property. There was
$93,000 in commitments for one-to-four family loans and $560,000 of loans in
process for one-to-four family construction loans as of September 30, 1996.
7
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Origination of Loans. The table below summarizes the Savings Bank's loan
and mortgage-backed securities activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Total gross loans receivable at
beginning of year. . . . . . . . . . . . . . .$20,408 $20,392 $23,406
Loan originations:
Real estate:
One- to four-family residential. . . . . . . 1,250 802 993
Multi-family, 5 or more units. . . . . . . . 13 -- 86
Construction . . . . . . . . . . . . . . . . 1,678 509 658
Commercial . . . . . . . . . . . . . . . . -- -- 192
Consumer and other loans
Boat loans . . . . . . . . . . . . . . . . . -- -- --
Savings account loans. . . . . . . . . . . . -- -- 21
Consumer loans . . . . . . . . . . . . . . . -- -- --
------ ------- -------
Total loans originated . . . . . . . . . . 2,941 1,311 1,950
Loans purchased. . . . . . . . . . . . . . . . . 3,387 3,212 1,372
Loans sold . . . . . . . . . . . . . . . . . . . -- -- --
Loans transferred to REO . . . . . . . . . . . . (41) (21) --
Loans transferred to Repo assets . . . . . . . . -- -- (65)
Loan repayments. . . . . . . . . . . . . . . . . (4,735) (4,412) (6,044)
Other loan activity, net . . . . . . . . . . . . (32) (74) (227)
------ ------- -------
Total gross loans receivable at
end of year . . . . . . . . . . . . . . . $21,928 $20,408 $20,392
------- ------- -------
------- ------- -------
Mortgage-backed securities at beginning
of year. . . . . . . . . . . . . . . . . . . . $5,650 $6,299 $3,197
Purchases. . . . . . . . . . . . . . . . . . . . -- -- 3,860
Sales. . . . . . . . . . . . . . . . . . . . . . -- -- --
Repayments, net. . . . . . . . . . . . . . . . . (149) (649) (758)
------ ------- -------
Mortgage-backed securities at end
of year. . . . . . . . . . . . . . . . . . . $5,501 $5,650 $6,299
------ ------ ------
------ ------ ------
</TABLE>
Loan Service Charges and Other Income. In addition to interest earned on
loans, the Savings Bank receives fees in connection with loan originations,
loan modifications, late payments and for miscellaneous services related to
its loans, including loan servicing. Income from these activities varies
from period to period with the volume and type of loans originated.
In connection with the origination of mortgage loans, the Savings Bank
charges points for origination, commitment and discounts, and fees for
processing and closing in addition to requiring borrower reimbursement for
out-of-pocket fees for 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
Savings Bank originates loans, the point structure varies considerably,
depending upon the type of mortgage loan being made, its interest rate and
other competitive factors. Origination fees ranging from zero to two points
generally are quoted on mortgage loan originations. The amount of the
origination fee is typically higher with a lower interest rate quoted and
lower if a higher interest rate is established for the loan. Since the
availability of zero point mortgage loans in recent years, most
8
<PAGE>
borrowers typically accept a slightly higher interest rate and pay zero
points. Commitment fees are paid by the applicant at the time of loan
commitment, whereas the origination and discount fees are paid at time of
closing. Accounting standards adopted under SFAS 91 prescribe the accounting
treatment for origination and commitment fees. Loan origination and
commitment fees and certain direct loan origination costs are deferred and
the net amounts amortized as an adjustment of the related loan's yield.
These amounts are amortized to interest income using the level yield method
over the contractual life of the related loans. Deferred loan fees totalled
$12,000, $7,000 and $16,000 at September 30, 1996, 1995 and 1994,
respectively.
Loan Concentration. FIRREA amended the Home Owners' Loan Act ("HOLA") to
limit the amount of credit a savings association could extend to any single
borrower or related group of borrowers generally to 15% of the savings
association's unimpaired capital and surplus. The applicable regulations
also provide that additional amounts of credit may be extended to such
borrowers, in certain circumstances, in amounts up to 10% of the savings
association's unimpaired capital and surplus, if such credit is secured by
readily marketable collateral, which generally does not include real estate.
Loans originated prior to the enactment of the FIRREA, however, are deemed to
comply with the limits imposed by FIRREA if made in accordance with the then
applicable lending limits. At September 30, 1996, the Savings Bank had one
borrower that had a concentration in excess of the loans-to-one-borrower
limitation. At September 30, 1996, the maximum dollar amount of loans to one
borrower that the Savings Bank was authorized to make was $809,000. At that
date, the largest concentration of loans to any one borrower totalled
$960,000. All of these loans were originated prior to the enactment of
FIRREA.
Mortgage-Backed Securities. The Savings Bank also invests in
mortgage-backed securities. At September 30, 1996, mortgage-backed
securities totalled $5.5 million, or 16.8%, of total assets. At September
30, 1996, $2.0 million, or 35.5%, of the Savings Bank's portfolio of
mortgage-backed securities had fixed-rates. All mortgage-backed securities
at September 30, 1996 were guaranteed by the GNMA or insured by either the
FNMA or the FHLMC. At that date, the market value of the Savings Bank's net
mortgage-backed securities portfolio totalled approximately $5.3 million. At
September 30, 1996, 1995 and 1994, the book value of the Savings Bank's
mortgage-backed securities portfolio totalled $5.5 million, $5.6 million and
$6.3 million, respectively.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgage loans with
varying interest rates and maturities. The mortgage loans backing the
mortgage-backed securities are variable or fixed-rate loans. The interest
rate risk characteristics of the underlying pool of mortgages as well as the
prepayment risk are passed on to the holder of the mortgage-backed
securities. Consequently, in a declining interest rate environment there is a
risk that mortgage-backed securities will prepay faster than anticipated
thereby adversely affecting the yield to maturity and the related market
value of the mortgage-backed securities. Moreover, there can be no assurance
that the Savings Bank would be able to reinvest the cash flow from prepaid
mortgage-backed securities into comparable yielding investments. In a rising
interest rate environment the value of the mortgage-backed securities may be
impaired since mortgage-backed securities with fixed-rate underlying mortgage
loans will be worth less as investors seek higher yielding investments.
The Savings Bank's mortgage-backed securities portfolio includes
collateralized mortgage obligations ("CMO"). The Savings Bank invests in
mortgage-backed securities to supplement local loan originations as well as
to reduce interest rate risk exposure, because mortgage-backed securities are
more liquid than mortgage loans.
CMOs are securities created by segregating or partitioning cash flows
from mortgage pass-through securities or from pools of mortgage loans. CMOs
provide a broad range of mortgage investment vehicles by tailoring cash flows
from mortgages to meet the varied risk and return preferences of investors.
These securities enable the issuer to "carve up" the cash flow from the
underlying securities and thereby create multiple classes of securities with
different maturity and risk characteristics. CMOs are typically issued by a
special-purpose entity (the "issuer") that may be organized in a variety of
legal forms, such as a trust, a corporation, or a partnership. Accordingly,
a CMO instrument may be purchased in equity form (E.G., trust interests,
stock and partnership interests) or nonequity form (E.G., participating debt
securities). All of the Savings Bank's CMOs are nonequity interests. CMOs
are collateralized by mortgage loans or mortgage-backed securities that are
transferred to the CMO trust or pool by a sponsor. The issue is structured
so that
9
<PAGE>
collections from the underlying collateral provide a cash flow to make
principal and interest payments on the obligations, or "tranches," of the
issuer.
CMOs totalled $3.5 million, or 64.5%, of the Savings Bank's total
mortgage-backed securities portfolio on September 30, 1996, all of which were
backed by federal agency collateral and all of which had floating rates. The
margin ranged from 100 to 150 basis points over the 11th District Cost of
Funds Index, and adjusts monthly.
Effective February 1992, the OTS adopted Thrift Bulletin 52 ("TB 52").
Among other things, TB 52 sets forth certain guidelines with respect to
depository institutions' investment in certain "high risk mortgage
securities." "High-risk mortgage securities" are defined as any mortgage
derivative product that at the time of purchase, or at any subsequent date,
meets any of three tests that are set forth in TB 52. High-risk mortgage
securities may be purchased only in limited circumstances, and if held in a
portfolio, must be reported as trading assets at market value, or as
available-for-sale assets at the lower of cost or market value. In certain
circumstances, OTS examiners may seek the orderly divestiture of high-risk
mortgage securities. Prior to purchasing a mortgage derivative security the
Loan/Investment Committee obtains an analysis of whether the mortgage
security meets any one of the three TB 52 tests, and falls into the category
of "high-risk mortgage security." The committee thereafter presents such
analysis to the Board. The Savings Bank documents no less frequently than
annually whether a change in the characteristics of any mortgage derivative
security in its portfolio causes such security to become a "high-risk
mortgage security." As of September 30, 1996, the Savings Bank does not hold
any "high-risk mortgage securities" in its portfolio.
Set forth below is a table showing the Savings Bank's purchases and
repayments of mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning
of year $5,650 $6,299 $3,197
Purchases -- -- 3,860
Sales -- -- --
Repayments, net (149) (649) (758)
------ ------ ------
Mortgage-backed securities at end
of year $5,501 $5,650 $6,299
------ ------ ------
------ ------ ------
</TABLE>
Delinquencies and Classified Assets
Delinquent Loans. Management performs a monthly review of all
delinquent loans, which is then presented monthly to the Board of Directors.
The procedures taken by the Savings Bank with respect to delinquencies vary
depending on the nature of the loan and period of delinquency.
The Savings Bank's policies generally provide that delinquent mortgage
loans be reviewed and that a written late charge notice be mailed no later
than the 30th day of delinquency. A delinquency letter is sent if the loan
continues to be delinquent after 60 days. After 90 days, the Savings Bank
sends a letter demanding the loan be brought current within 30 days. After
120 days, the Savings Bank accelerates the loan and begins foreclosure
efforts.
The Savings Bank's general policy is not to accrue interest on all loans
90 days past due. The Savings Bank will discontinue the accrual of interest
on loans and establish a reserve upon a determination that the loan may
result in a loss. Interest on loans contractually delinquent 90 days or more
is excluded from earnings in all cases. Property acquired by the Savings Bank
as a result of a foreclosure on a mortgage loan is classified as foreclosed
real estate and is recorded at the lower of the investment on the related
loan or fair value at the date of acquisition and carried at the lower of
cost or
10
<PAGE>
fair value, less anticipated selling costs. At September 30, 1996, 1995, and
1994, the Savings Bank had $67,000, $43,000 and $286,000, respectively, in
loans that were 90 days or more delinquent. Such delinquent loans
represented 0.32%, 0.21% and 1.44% of net loans receivable at September 30,
1996, 1995 and 1994, respectively.
Delinquent Loans and Troubled Assets
The following table sets forth information with respect to the Savings
Bank's delinquent loans and other problem assets at September 30, 1996.
At September 30, 1996
---------------------
Balance Number
------- ------
(In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent . . . . . . . . . . . . $354 5
Loans 90 days or more delinquent (1) . . . . . . . . . 67 2
Commercial real estate:
Loans 60 to 89 days delinquent . . . . . . . . . . . . 0 --
Loans 90 days or more delinquent (1) . . . . . . . . . 0 --
Consumer loans (60 days delinquent). . . . . . . . . . . 0 --
Foreclosed real estate and repossessions . . . . . . . . 0 --
Other non-performing assets. . . . . . . . . . . . . . . 0 --
Restructured loans within the meaning of
Statement of Financial Accounting
Standards No. 15 (not included in other
non-performing categories above) . . . . . . . . . . . 0 --
Total non-performing assets. . . . . . . . . . . . . . . 67 2
- -----------------------------
(1) Interest accruals on loans are generally discontinued when the payment of
principal or interest is contractually more than 90 days past due.
11
<PAGE>
The following table sets forth information with respect to nonperforming
assets in the Savings Bank's portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------
1996 1995 1994
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Delinquent loans: (1)
One- to four-family residential $67 $43 $110
All other mortgages -- -- --
Commercial non-real estate -- -- 174
Consumer loans, other -- -- 2
---- ---- ----
Total delinquent loans 67 43 286
---- ---- ----
Total foreclosed real estate -- 6 --
---- ---- ----
Total repossessed assets -- -- --
---- ---- ----
Troubled debt restructurings before
the effective date of SFAS No. 114
and 118 $-- $299 $320
---- ---- ----
Total nonperforming assets $67 $348 $606
---- ---- ----
---- ---- ----
Total loans delinquent 90 days or
more to net loans receivable 0.32% 0.21% 1.44%
Total loans delinquent 90 days or
more to total assets 0.21 0.13 0.89
Total nonperforming assets to
total assets 0.21 1.06 1.88
</TABLE>
- ------------
(1) Represents loans delinquent 90 days or more.
CLASSIFIED ASSETS. Federal regulations require the classification of loans
and other assets such as debt and equity securities, considered by the OTS to be
of lesser quality, as "substandard", "doubtful" or "loss" assets. The Savings
Bank's classification policies provide that assets will be classified according
to OTS regulations. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified as "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "special mention" by management.
12
<PAGE>
The following table sets forth the aggregate amount of the Savings Bank's
classified assets at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------
1996 1995 1994
---- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Special mention assets $-- $-- $ 4
Substandard assets 67 85 743
Doubtful assets -- -- 17
Loss assets -- -- --
---- ---- ----
Total classified assets $67 $85 $764
---- ---- ----
---- ---- ----
</TABLE>
The Savings Bank's policies provide that the Board of Directors review a
report of all classified assets on a monthly basis and that such classified
asset reports be provided to the OTS on a quarterly basis. When the Savings
Bank determines that an asset should be classified, it generally does not
establish a specific allowance for such asset unless it determines that a
loss on such asset is evident. The Savings Bank may increase, however, its
general valuation allowance in an amount deemed prudent. General valuation
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike
specific allowances, have not been allocated to particular problem assets.
The Savings Bank's policies provide for the establishment of a specific
allowance equal to 100% of each asset classified as "loss" or to charge-off
such amount. A savings institution's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review
by the OTS which can order the establishment of additional general or
specific loss allowances. The Savings Bank reviews the problem loans in its
portfolio on a monthly basis to determine whether any loans require
classification in accordance with applicable regulations and believes its
classification policies are consistent with OTS policies.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level considered adequate to absorb future loan losses. Management of the
Savings Bank, in determining the provision for loan losses, considers the risks
inherent in its loan portfolio and changes in the nature and volume of its loan
activities, along with the general economic and real estate market conditions.
The Savings Bank utilizes a two tier approach: (i) identification of problem
loans and the establishment of specific loss allowances on such loans; and
(ii) establishment of general valuation allowances on the remainder of its loan
portfolio. The Savings Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of potential
problem loans. Such system takes into consideration, among other things,
delinquency status, size of loans, type of collateral and financial condition of
the borrowers. Specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of the underlying
collateral. Although the Savings Bank maintains its allowance for losses on
loans at a level which it considers to be adequate to provide for losses, there
can be no assurance that such losses will not exceed the estimated amounts or
that the Savings Bank will not be required to make additions to the allowance
for losses on loans in the future. Future additions to the Savings Bank's
allowance for loan losses and any changes in the related ratio of the allowance
for loan losses to non-performing loans are dependent upon the economy, changes
in real estate values and interest rates, the view of the regulatory authorities
toward adequate reserve levels, and inflation.
13
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
information with respect to the Savings Bank's allowance for loan losses at or
for the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total gross loans receivable $21,928 $20,408 $20,392
-------- -------- -------
-------- -------- -------
Average net loans receivable $21,143 $19,904 $20,795
-------- -------- -------
-------- -------- -------
Allowance balances at beginning of year 305 388 434
Provision charged (credited) to expense (108) (87) (115)
Charge-offs:
Real estate -- (20) --
Consumer -- (1) --
Recoveries:
Real estate 5 19 30
Consumer 2 6 39
-------- -------- -------
Allowance balances at end of year $204 $305 $388
-------- -------- -------
-------- -------- -------
Allowance for loan losses as a percent of
total gross loans outstanding at
end of year 0.93% 1.49% 1.90%
Net loans charged off (recovered) as a
percent of average loans outstanding (0.03) (0.02) (0.33)
Ratio of allowance for loan losses to
total nonperforming loans at
end of year 304.48% 709.30% 135.66%
Ratio of allowance for loan losses to
non-performing assets at
end of year 304.48% 87.64% 64.03%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the
allocation of the allowance for loan losses by loan category for the periods
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------- ---------------------------
% OF % OF % OF
LOANS IN % OF LOANS IN % OF LOANS IN % OF
EACH ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE
CATEGORY TO GROSS CATEGORY TO GROSS CATEGORY TO GROSS
TO TOTAL LOANS IN TO TOTAL LOANS IN TO TOTAL LOANS IN
NET EACH NET EACH NET EACH
AMOUNT LOANS CATEGORY AMOUNT LOANS CATEGORY AMOUNT LOANS CATEGORY
------ -------- -------- ------ --------- -------- ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family and
multifamily $36 92.36% 0.18% $37 96.33% 0.19% $109 91.51% 0.60%
Real estate construction 2 7.22 0.13 -- -- -- 1 1.84 0.15
Commercial real estate 15 3.71 1.91 16 4.15 1.92 26 6.44 2.03
Consumer 2 0.41 2.29 5 1.40 1.79 11 2.99 1.86
Unallocated 149 -- -- 247 -- -- 241 -- --
----- ----- -----
Total allowance for loan
losses $204 0.93% $305 1.49% $388 1.90%
----- ----- -----
----- ----- -----
</TABLE>
14
<PAGE>
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured associations and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly. Additionally, the
Savings Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Historically, the Savings Bank has
maintained liquid assets above the minimum OTS requirements, and its average
liquidity ratio of 18.3% for September 1996 exceeded the 5% regulatory
liquidity requirement. The Savings Bank believes that its average level of
liquid assets is adequate to meet its normal daily activities.
The investment policy of the Savings Bank established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk,
and complement the Savings Bank's lending activities. The Savings Bank's
policies generally limit investment securities to investments qualifying as
eligible investments under OTS regulations. Investments are made with the
intent and ability to hold them to maturity. Day-to-day management of the
Savings Bank's investment activities is supervised by the Chief Executive
Officer. The Chief Executive Officer reports monthly on all investment
activities to the full Board of Directors of the Savings Bank.
At September 30, 1996, the Savings Bank had securities in the aggregate
carrying amount of $2,498,000 with a market value of $2,479,000. At
September 30, 1996, the Savings Bank's securities portfolio included
$1,689,000 of U.S. Government and federal agency obligations, and $336,000
investment in common stock of the FHLB of Des Moines. The Savings Bank also
invests in mutual funds which invest in FNMA, FHLMC and other federal agency
obligations. At September 30, 1996, the Savings Bank had a carrying value of
$473,000 in mutual funds. The value of the mutual funds fluctuates with
changes in the value of the underlying securities. However, the Savings Bank
believes that the risk of loss on this investment is limited given the type
of securities underlying the mutual funds. Such investments are liquid and
therefore allow the Savings Bank to respond to changing market conditions.
The securities portfolio is accounted for on an amortized cost basis,
excluding equity securities (mutual funds and FHLB common stock) which are
carried at market value. Finally, at September 30, 1996, the Savings Bank
and Company had $1.6 million in certificates of deposit at other financial
institutions and $1.0 million in other interest-earning assets, consisting
principally of FHLB deposits.
15
<PAGE>
INVESTMENT PORTFOLIO. The following table sets forth the carrying value of the
Savings Bank's investment portfolio at the dates indicated.
AT SEPTEMBER 30,
---------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Held to maturity: (1)
U.S. Government and agency obligations $1,689 $486 $484
Available for sale: (2)
Short-term U.S. Government
Securities Portfolio (3) 238 242 239
Mortgage Securities Portfolio 235 241 234
------ ------ ------
473 483 473
FHLB stock 336 329 329
------ ------ ------
Total securities 2,498 1,298 1,286
Interest-earning deposits in other
institutions (4) 2,546 4,656 3,710
------ ------ ------
Total investments $5,044 $5,954 $4,996
------ ------ ------
------ ------ ------
- ----------------
(1) Recorded at cost, adjusted for amortization of premiums and
accretion of discounts over the life of the security using the interest
method.
(2) Equity securities, consisting of mutual funds at market value. See
Note 1 and 3 of Notes to Consolidated Financial Statements. The
Short-term U.S. Government Securities Portfolio consists primarily of
U.S. Treasury, agency obligations and other debt securities maturing in
five years or less. The Intermediate-term Mortgage Securities
Portfolio consists primarily of collateralized mortgage obligations
(which are derivatives of mortgage-backed securities) issued by FHLMC,
FNMA and commercial enterprises. The Portfolio also invests in FHLMC
and FNMA pass-through certificates and, to a lesser extent, U.S.
Treasury instruments and certificates of deposit. The average maturity
of the Portfolio is approximately 7.6 years.
(3) Formerly known as Intermediate-Term Liquidity Portfolio.
(4) Includes certificates of deposit and FHLB deposits.
16
<PAGE>
INVESTMENT PORTFOLIO MATURITIES
The following table sets forth the scheduled maturities, carrying values,
market values, average lives, and average yields for the Company's investments
at September 30, 1996.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS TOTAL INVESTMENTS
--------------------- ------------------ ------------------- -------------------------------------
WEIGHTED WEIGHTED WEIGHTED AVERAGE WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET LIFE IN AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YEARS (1) YIELD
-------- -------- -------- -------- -------- -------- -------- ------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities: (1)
U.S. Government and
agency obligations $ -- -- % $1,689 6.25% $-- -- % $1,689 $1,670 3.39 6.25%
------ ------ --- ------ ------
Equity securities:
Mutual funds (3) 473 6.36 -- -- -- -- $473 $473 -- 6.36%
FHLB stock 336 7.25 -- -- -- -- 336 336 -- 7.25
------ ------ --- ------ ------
Total $ 809 6.73 $1,689 6.25 $ 0 0.00 $2,498 $2,479 2.29 6.41%
------ ------ --- ------ ------
Interest-earning deposits:
Certificates of deposit 695 6.37 891 6.51 -- -- 1,586 1,586 1.81 6.45
Other (2) 960 5.17 -- -- -- -- 960 960 -- 5.17
------ ------ --- ------ ------
Total 1,655 5.68 891 6.51 0 0.00 2,546 2,546 1.14 5.98
------ ------ --- ------ ------
Total investments $2,464 6.03% $2,580 6.34% $ 0 0.00% $5,044 $5,025 1.72 6.19%
------ ------ --- ------ ------
------ ------ --- ------ ------
</TABLE>
- ----------
(1) Excludes equity securities, FHLB stock and mutual funds.
(2) Consists primarily of interest-bearing deposits in the FHLB, which are
repriced daily.
(3) Invested in Asset Management Funds.
17
<PAGE>
Sources of Funds
GENERAL. Deposits are the major source of the Savings Bank's funds for
investment and lending purposes. In addition to deposits, the Savings Bank
derives funds from the amortization and prepayment of mortgage-backed securities
and loans, the maturity of investment securities, operations and, if needed,
advances from the FHLB. Scheduled principal repayments on mortgage-backed
securities and loans are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources or on a longer term basis for general business purposes, although
the Savings Bank has not relied heavily on other borrowing sources in recent
years.
DEPOSITS. The Savings Bank's deposits consist of passbook savings and
certificate accounts having a range of interest rates and terms, NOW accounts
and money market deposit accounts. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Savings Bank's deposits are
obtained primarily from the area in which its office is located. The Savings
Bank relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. Certificate accounts in
excess of $100,000 are not actively solicited by the Savings Bank nor does
the Savings Bank use brokers to obtain deposits. Further, the Savings Bank
has not emphasized the solicitation of deposit accounts by increasing the
rates of interest paid as quickly as some of its competitors nor has it
emphasized offering higher dollar amount deposit accounts with higher yields
to replace deposit account runoff. Management constantly monitors the
Savings Bank's deposit accounts, for activity, type of account and total
balances, competition rates, and the Savings Bank's cost of funds, adjusting
accordingly. Based on historical experience, management believes it will
retain a large portion of such accounts upon maturity.
DEPOSIT ACTIVITY. The following table sets forth the dollar change in
deposit accounts of the Savings Bank for the periods indicated.
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1996 1995 1994
----------- ----------- -----------
Net withdrawals ............. $(1,859,840) $(4,292,956) $(2,620,381)
Interest credited ........... 840,945 858,966 892,157
----------- ---------- -----------
Net increase (decrease)
in deposits ............ $(1,018,895) $(3,433,990) $(1,728,224)
----------- ---------- -----------
----------- ---------- -----------
18
<PAGE>
DEPOSIT FLOW. The following table sets forth the change in dollar amount of
deposit accounts in the various types offered by the Savings Bank between the
dates indicated.
<TABLE>
<CAPTION>
BALANCE BALANCE BALANCE
AT % AT % AT %
SEPTEMBER 30, OF TOTAL INCREASE/ SEPTEMBER 30, OF TOTAL INCREASE/ SEPTEMBER 30, OF TOTAL
1996 DEPOSITS (DECREASE) 1995 DEPOSITS (DECREASE) 1994 DEPOSITS
------------- -------- ---------- ------------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook savings.... $ 6,227,050 25.7% (380,782) $ 6,607,832 26.2% $(1,333,714) $ 7,941,546 27.7%
NOW accounts........ 1,533,669 6.3 73,849 1,459,820 5.8 95,595 1,364,225 4.8
Super NOW accounts.. 125,232 0.5 (30,223) 155,455 0.6 15,736 139,719 0.5
Money market
deposit accounts... 1,221,855 5.0 (205,976) 1,427,831 5.7 (881,719) 2,309,550 8.1
Certificates:
3 months.......... 42,238 0.2 (37,110) 79,348 0.3 22,685 56,663 0.2
6 months.......... 1,221,557 5.0 (92,135) 1,313,692 5.2 (994,114) 2,307,806 8.0
9 months.......... 1,633,632 6.8 (73,696) 1,707,328 6.8 1,086,395 620,933 2.2
12 months......... 4,416,884 18.2 758,764 3,658,120 14.5 (727,058) 4,385,178 15.2
18 months......... 624,966 2.6 (62,728) 687,694 2.7 (227,548) 915,242 3.2
24 months......... 1,089,320 4.5 135,984 953,336 3.8 357,881 595,455 2.1
30 months......... 1,446,940 6.0 (208,159) 1,655,099 6.5 (473,820) 2,128,919 7.4
36 months......... 508,100 2.1 (55,594) 563,694 2.2 65,675 498,019 1.7
48 months......... 771,516 3.2 17,646 753,870 3.0 (335,535) 1,089,405 3.8
5 years........... 2,881,034 11.9 (355,245) 3,236,279 12.8 105,025 3,131,254 10.9
6-8 years......... 489,966 2.0 (503,490) 993,456 3.9 (209,474) 1,202,930 4.2
----------- ------ ----------- ----------- ------ ----------- ----------- ------
Total deposits... $24,233,959 100.00% $(1,018,895) $25,252,854 100.00% $(3,433,990) $28,686,844 100.00%
----------- ------ ----------- ----------- ------ ----------- ----------- ------
----------- ------ ----------- ----------- ------ ----------- ----------- ------
</TABLE>
19
<PAGE>
DEPOSIT PROGRAMS. Deposit accounts in the Savings Bank as of September
30, 1996, were represented by the various types of deposit programs described
below.
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE TERM DEPOSIT TYPE BALANCE BALANCE DEPOSITS
- ------------- ------------ --------------------------------- -------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2.00% None NOW accounts $ 200 $ 1,534 6.33%
2.25 None Super NOW accounts 1,000 125 0.52
3.10 None Money market deposit accounts (1) 1,000 1,222 5.04
2.75 None Passbook (2) 100 6,227 25.70
5.29% CERTIFICATES OF DEPOSIT
- ---- ------------------------
3 months Three Month (3) 1,000 42 0.17
6 months Six Month (3) 1,000 1,222 5.04
9 months Nine Month (3) 1,000 1,634 6.74
1 year Deregulated (4) 500 4,417 18.23
1.5 years Deregulated (4) 500 625 2.58
2 years Deregulated (4) 500 1,089 4.50
2.5 years Deregulated (4) 500 1,447 5.97
3 years Deregulated (4) 500 508 2.10
4 years Deregulated (4) 500 771 3.17
5 years Deregulated (4) 500 2,881 11.89
6 to 8 years Deregulated (5) 500 490 2.02
------- -----
4.31% Total Deposits $24,234 100.00%
- ---- ------- -----
- ---- ------- -----
</TABLE>
- ------------------
(1) $1,000 required to open account; $1,000 average monthly balance thereafter.
(2) $100 required to open account; $100 average monthly balance thereafter.
(3) Includes retirement accounts; $1,000 required to open account.
(4) Includes retirement accounts; $500 required to open account.
(5) Includes retirement accounts; $500 required to open account; no longer
offered, rollovers only.
CERTIFICATES OF DEPOSIT BY RATES. The following table sets forth the
certificates of deposit classified by rates as of the dates indicated.
AT SEPTEMBER 30,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
RATE
- ----
2.65-2.99%. . . . . $ -- $ -- $ 89,439
3.00-3.99%. . . . . 200,738 1,429,076 8,229,659
4.00-4.99%. . . . . 2,733,312 3,527,685 3,814,160
5.00-5.99%. . . . . 10,396,312 7,183,614 2,069,308
6.00-6.99%. . . . . 1,503,566 2,000,802 205,049
7.00-7.99%. . . . . 5,000 606,147 876,867
8.00-8.99%. . . . . 3,453 319,153 1,132,800
9.00-9.99%. . . . . 283,772 535,439 514,522
----------- ------------ ------------
$15,126,153 $15,601,916 $16,931,804
----------- ------------ ------------
----------- ------------ ------------
20
<PAGE>
CERTIFICATES OF DEPOSIT MATURITY SCHEDULE. The following table sets
forth the amount and maturities of certificates of deposit at September 30,
1996.
<TABLE>
<CAPTION>
AMOUNT DUE
---------------------------------------------------------------------------
LESS THAN 1-2 2-3 3-4 4-5 OVER
ONE YEAR YEARS YEARS YEARS YEARS 5 YEARS TOTAL
-------- ------ ------ ------ ----- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate
- -----
3.15% - 3.99%. . . . . $ 201 $ -- $ -- $ -- $ -- $ -- $ 201
4.00% - 4.99%. . . . . 2,460 177 96 -- -- -- 2,733
5.00% - 5.99%. . . . . 6,199 2,019 1,346 244 512 76 10,396
6.00% - 6.99%. . . . . 525 306 142 514 -- 17 1,504
7.00% - 7.99%. . . . . 5 -- -- -- -- -- 5
8.00% - 8.99%. . . . . -- 3 -- -- -- -- 3
9.00% - 9.99%. . . . . 284 -- -- -- -- -- 284
------ ------ ------ ---- ---- --- -------
Total $9,674 $2,505 $1,584 $758 $512 $93 $15,126
------ ------ ------ ---- ---- --- -------
------ ------ ------ ---- ---- --- -------
</TABLE>
LARGE CERTIFICATES OF DEPOSIT. At September 30, 1996, the Savings Bank
had five certificates of deposit of $100,000 or more, amounting to $509,000
or 3.4% of the Savings Bank's aggregate time deposits.
CERTIFICATES
OF DEPOSITS
-------------
(IN THOUSANDS)
Three months or less . . . . . . . . . . . . . . . $ 100
Over three through six months. . . . . . . . . . . 103
Over six through nine months . . . . . . . . . . . 106
Over nine through twelve months. . . . . . . . . . --
Over twelve months . . . . . . . . . . . . . . . . 200
------
TOTAL $ 509
------
------
BORROWINGS. Deposits are the Savings Bank's primary source of funds.
The Savings Bank also occasionally obtains advances from the FHLB. Such
advances are made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and collateral
requirements. The maximum amount that the FHLB will advance to member
institutions, including the Savings Bank, for purposes other than meeting
withdrawals, fluctuates from time to time in accordance with the policies of
the OTS and the Federal Housing Finance Board. The maximum amount of FHLB
advances to a member institution generally is reduced by borrowings from any
other source. At September 30, 1996, the Savings Bank had $1.0 million in
advances from the FHLB at a rate of 5.81% and maturing on December 18, 1996.
PERSONNEL
As of September 30, 1996, the Savings Bank had nine full-time employees
and one part-time employee. The employees are not represented by a
collective bargaining unit, and the Savings Bank considers its relationship
with its employees to be good.
21
<PAGE>
FEDERAL AND STATE TAXATION
General
The Company and the Savings Bank file separate corporate federal income
tax return(s) on a September 30 fiscal year basis. The following discussion
of tax matters is intended only as a summary and does not purport to be a
comprehensive description of all tax rules applicable to the Savings Bank or
the Company.
Federal Taxation
Tax Bad Debt Reserves. Savings associations such as the Savings Bank that
meet certain definitional tests relating to the composition of assets and
other conditions prescribed by the Code are permitted to establish reserves
for bad debts and to make annual additions thereto which may, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve
deduction for "non-qualifying loans" is computed under the experience method.
For tax years beginning before December 31, 1995, the amount of the bad debt
reserve deduction for "qualifying real property loans" (generally loans
secured by improved real estate) may be computed under either the experience
method or the percentage of taxable income method (based on an annual
election). If a saving association elected the latter method, it could
claim, each year, a deduction based on a percentage of taxable income,
without regard to actual bad debt experience.
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually
sustained by the savings and loan association over a period of years.
Under recently enacted legislation, the percentage of taxable income
method has been repealed for tax years beginning after December 31, 1995. The
Savings Bank will continue to be permitted to use the experience method. The
Savings Bank will be required to recapture (I.E., take into income) over a
six-year period its applicable excess reserves, I.E, the balance of its
reserves for losses on qualifying loans and nonqualifying loans, as of
September 30, 1996, over the greater of (a) the balance of such reserves as
of December 31, 1987 (pre-1988 reserves) or (b) in the case of a bank which
is not a "large" association, an amount that would have been the balance of
such reserves as of September 30, 1996, had the bank always computed the
additions to its reserves using the experience method. Postponement of the
recapture is possible for a two-year period if an association meets a minimum
level of mortgage lending for 1996 and 1997. As of September 30, 1996, the
Savings Bank's tax bad debt reserve subject to recapture over a six-year period
totaled approximately $218,000.
If an association ceases to qualify as a "bank" (as defined in Code
Section 581) or converts to a credit union, the pre-1988 reserves and the
supplemental reserve are restored to income ratably over a six-year period,
beginning in the tax year the association no longer qualifies as a bank. The
balance of the pre-1988 reserves are also subject to recapture in the case of
certain excess distributions to (including distributions on liquidation and
dissolution), or redemptions of, shareholders.
Corporate Alternative Minimum Tax. For taxable years beginning after
December 31, 1986, the Internal Revenue Code of 1986, as amended (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of
20%. The excess of the tax bad debt reserve deduction using the percentage of
taxable income method over the deduction that would have been allowable under
an experience method is treated as a preference item for purposes of
computing the AMTI. Only 90% of AMTI can be offset by net operating losses.
For taxable years beginning after December 31, 1989, the adjustment to AMTI
based on book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses).
In addition, for taxable years beginning after December 31, 1986, and before
January 1, 1996, an environmental tax of .12% of the excess of AMTI (with
certain modifications) over $2.0 million is imposed on corporations,
including the Savings Bank, whether or not an Alternative Minimum Tax ("AMT")
is paid. The Savings Bank does not expect to be subject to the AMT.
22
<PAGE>
Distributions. To the extent that (i) the Savings Bank's tax bad debt
reserve for losses on qualifying real property loans exceeds the amount that
would have been allowed under an experience method and (ii) the Savings Bank
makes "non-dividend distributions" to stockholders that are considered to
result in distributions from the excess tax bad debt reserve or the reserve
for losses on loans ("Excess Distributions"), then an amount based on the
amount distributed will be included in the Savings Bank's taxable income.
Non-dividend distributions include distributions in excess of the Savings
Bank's current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the Savings Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
be considered to result in a distribution from the Savings Bank's tax bad
debt reserves.
The amount of additional taxable income created from an Excess
Distribution is an amount that when reduced by the tax attributable to the
income is equal to the amount of the distribution. Thus, if certain portions
of the Savings Bank's accumulated tax bad debt reserve are used for any
purpose other than to absorb qualified tax bad debt loans, such as for the
payment of dividends or other distributions with respect to the Savings
Bank's capital stock (including distributions upon redemption or
liquidation), approximately one and one-half times the amount so used would
be includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state taxes). In accordance with
GAAP, deferred taxes have not been provided for with respect to tax bad debt
reserves of the Savings Bank at December 31, 1987, which amounted to
approximately $752,000 at September 30, 1996; accordingly, any such taxes
incurred under the condition set forth above would represent a charge to
earnings. At September 30, 1996, the Savings Bank's accumulated tax bad debt
reserve totalled approximately $752,000. See "Regulation and Supervision"
and "Dividend Policy" for limits on the payment of dividends of the Savings
Bank.
State and Local Taxation
The Company files a Missouri corporation tax return. In addition, as a
Delaware business corporation, the Company is required to file annual returns
and pay annual fees and an annual franchise tax to the States of Delaware and
Missouri. These taxes and fees are not expected to be material.
Missouri-based thrift institutions, such as the Savings Bank, are subject
to a special financial institutions tax, based on net income, without regard
to net operating loss carryforwards, at a rate of 7% of net income. State
taxable income includes interest on U.S. Government, state, and mutual
obligations. This tax is in lieu of all other state taxes on thrift
institutions, on their property, capital or income, except taxes on tangible
personal property owned by the Savings Bank and held for lease or rental to
others and on real estate, contributions paid pursuant to the Unemployment
Compensation Law of Missouri, social security taxes, sales taxes, and use
taxes. In addition, the Savings Bank is entitled to credit against this tax,
all taxes paid to the state of Missouri or any political subdivision except
taxes on tangible personal property owned by the Savings Bank and held for
lease or rental to others and on real estate, contributions paid pursuant to
the Unemployment Compensation Law of Missouri, social security taxes, sales
and use taxes, and taxes imposed by the Missouri Financial Institutions Tax
Law. Missouri thrift institutions are not subject to the regular state
corporate income tax.
Taxable income under the Missouri corporate income tax is generally
similar to taxable income under the federal corporate income tax, except
that, under the Missouri tax, no deduction is allowed for Missouri income tax
payments; interest from non-Missouri state and municipal obligations is
included in income; interest from U.S. obligations is excluded from income;
and 50% of federal corporate income tax payments are allowed as a deduction.
The Missouri corporate income tax is 6.25%, effective September 1, 1993.
The Savings Bank has not had an audit by the Internal Revenue Service or
the Missouri Department of Revenue within the past five years. See Note 10
of the Notes to Consolidated Financial Statements for additional information
regarding income taxes of the Savings Bank.
23
<PAGE>
REGULATION AND SUPERVISION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS, and the FDIC as the deposit insurer. The Savings
Bank is a member of the FHLB System and its deposit accounts are insured up
to applicable limits by the SAIF, which is managed by the FDIC. The Savings
Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior
to entering into certain transactions such as mergers with, or acquisitions
of, other financial institutions. There are periodic examinations by the OTS
and the FDIC to test the Savings Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities
and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS,
the FDIC or Congress, could have a material adverse impact on the Company,
the Savings Bank and their operations. The Company, as a savings and loan
holding company, is also required to file certain reports with, and otherwise
comply with the rules and regulations of the OTS. Certain of the regulatory
requirements applicable to the Savings Bank and to the Company are referred
to below or elsewhere herein.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FEDERAL DEPOSIT INSURANCE
CORPORATION Act"). The federal banking statutes, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the
Federal Deposit Insurance Corporation Improvement Act ("FDICIA") (1) restrict
the solicitation of brokered deposits by savings institutions that are
troubled or not well-capitalized, (2) prohibit the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings
and loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire
healthy savings institutions.
Loans To One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of the Savings Bank's
unimpaired capital and surplus. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by readily
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate. At September 30, 1996,
the Savings Bank had one borrower (totalling $960,000 and originated prior to
the enactment of FIRREA) that exceeded the loans to one borrower limitation.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets,
(ii) intangibles, including goodwill, and (iii) the value of property used to
conduct business) in certain "qualified thrift investments," primarily
residential mortgages and related investments, including certain
mortgage-backed and related securities on a monthly basis in 9 out of every
12 months. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of September 30,
1996, the Savings Bank maintained 86.8% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments
to
24
<PAGE>
stockholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level.
An institution that exceeds all fully phased-in capital requirements before
and after a proposed capital distribution ("Tier 1 Association") and has not
been advised by the OTS that it is in need of more than normal supervision,
could, after prior notice but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year;
or (ii) 75% of its net earnings for the previous four quarters; provided that
the institution would not be undercapitalized, as that term is defined in the
OTS Prompt Corrective Action regulations, following the capital distribution.
As of September 30, 1996, the Savings Bank had $2.3 million of capital that
could be paid as dividends under such regulations. Any additional capital
distributions would require prior regulatory approval. In the event the
Savings Bank's capital fell below its fully-phased in requirement or the OTS
notified it that it was in need of more than normal supervision, the Savings
Bank's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. The Savings Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified U.S. Government, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of
its net withdrawable deposit accounts plus short-term borrowings. This
liquidity requirement which is currently 5%, may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon
economic conditions and the savings flow of member institutions. The Savings
Bank's liquidity ratio averaged 18.3% during the month of September 1996.
OTS regulations also require each savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of its net withdrawable deposit accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. During the month of September
1996, the Savings Bank's short-term liquidity ratio averaged 4.8%. The
Savings Bank has never been subject to monetary penalties for failure to meet
its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported
in the institution's latest quarterly thrift financial report. The Savings
Bank paid assessments of $13,258, $11,888 and $11,627 for the fiscal years
ended September 30, 1996, 1995, and 1994, respectively.
Community Reinvestment. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings institution 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 that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, 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
CRA rating system identifies four levels of performance that may describe an
institution's record of meeting community needs: outstanding, satisfactory,
needs to improve and substantial non-compliance. The CRA also requires all
institutions to make public disclosure of their CRA ratings. The CRA
regulations were recently revised. Effective July 1, 1997, the OTS will
assess the CRA performance of a savings institution under lending, service
and investment tests, and based on such assessment, will assign an
institution in one of the four above-referenced ratings. The Savings Bank
received a "satisfactory" CRA rating under the current CRA regulations in its
most recent federal examination by the OTS.
Transactions with Related Parties. The Savings Bank's authority to
engage in transactions with related parties or "affiliates" (I.E., any
company that controls or is under common control with an institution,
including the Company
25
<PAGE>
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that
are substantially the same or at least as favorable to the institution as
those prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to
any affiliate that is engaged in activities that are not permissible for bank
holding companies, and no savings institution may purchase the securities of
any affiliate other than a subsidiary. At September 30, 1996, the Savings
Bank was in compliance with the transactions with affiliates rules governed
by Sections 23A and 23B.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the FRA, and
Regulation O thereunder. Among other things, these regulations require such
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and do not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Savings Bank may make to such persons based, in part, on
the Savings Bank's capital position, and requires certain approval procedures
to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of
officers and/or directors of the institutions, receivership, conservatorship
or the termination of deposit insurance. Civil penalties cover a wide range
of violations and actions, and range up to $25,000 per day, unless a finding
of reckless disregard is made, in which case penalties may be as high as $1
million per day. Criminal penalties for most financial institution crimes
include fines of up to $1 million and imprisonment for up to 30 years. Under
the FDI Act, the FDIC has the authority to recommend to the Director of the
OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority
to take such action under certain circumstances.
The federal banking agencies recently adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation,
fees and benefits. The agencies also adopted a proposed rule which proposes
asset quality and earnings standards which, if adopted, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the
agency may require the institution to submit to the agency an acceptable plan
to achieve compliance with the standard, as required by the FDI Act. The
final regulations establish deadlines for the submission and review of such
safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital
standard, a 3.0% leverage ratio (or core capital ratio) and an 8.0%
risk-based capital standard. Core capital is defined as common stockholders'
equity (including retained earnings), certain non-cumulative perpetual
preferred stock and related surplus, minority interests in equity accounts of
consolidated subsidiaries less intangibles other than certain qualifying
supervisory goodwill and certain purchased mortgage servicing rights
("PMSRs"). The OTS regulations also require that, in meeting the tangible
ratio, leverage and risk-
26
<PAGE>
based capital standards, institutions must deduct investments in and loans to
subsidiaries engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core
capital and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, as assigned by the OTS capital regulation based on the risks
the OTS believes are inherent in the type of asset. The components of Tier 1
(core) capital are equivalent to those discussed earlier under the 3.0%
leverage ratio standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate
preferred stock and allowance for loan and lease losses. Allowance for loan
and lease losses includable in supplementary capital is limited to a maximum
of 1.25%. Overall, the amount of supplementary capital included as part of
total capital cannot exceed 100% of core capital.
OTS regulatory capital rules also incorporate an interest rate risk
component. Savings associations with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings association's
interest rate risk is measured by the decline in the net portfolio value of
its assets (I.E., the difference between incoming and outgoing discounted
cash flows from assets, liabilities and off-balance sheet contracts) that
would result from a hypothetical 200-basis point increase or decrease in
market interest rates, divided by the estimated economic value of the
association's assets. In calculating its total capital under the risk-based
rule, a savings association whose measured interest rate risk exposure
exceeds 2%, must deduct an interest rate component equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the institution's assets. The
OTS has deferred for the present time, the date on which the interest rate
component is to be deducted from total capital. A savings association with
assets of less than $300 million and risk-based capital ratios in excess of
12% is not subject to the interest rate risk component, unless the OTS
determines otherwise. The rule also provides that the Director of the OTS
may waive or defer an institution's interest rate risk component on a
case-by-case basis.
At September 30, 1996, the Savings Bank met each of its capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Savings Bank's compliance with OTS regulatory capital requirements.
SEPTEMBER 30, 1996
--------------------------
PERCENT OF
AMOUNT ASSETS (1)
---------- -----------
Tangible capital:
Capital level $5,321,445 16.95%
Requirement 471,043 1.50
---------- -----
Excess $4,850,402 15.45%
========== =====
Core capital:
Capital level $5,321,445 16.95%
Requirement (2) 942,087 3.00
---------- -----
Excess $4,379,358 13.95%
========== =====
Risk-based capital:
Capital level $5,499,063 38.77%
Requirement 1,134,681 8.00
---------- -----
Excess $4,364,382 30.77%
========== =====
- ------------
(1) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) The current OTS core capital requirement for savings banks is 3% of total
adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
savings banks that receive the highest supervisory rating for safety and
soundness, and a 4% to 5% core capital ratio requirement for all other
savings banks.
27
<PAGE>
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions,
the severity of which depends upon the institution's degree of
capitalization. Generally, a savings institution that has total risk-based
capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio
that is less than 4.0% is considered to be undercapitalized. A savings
institution that has a total risk-based capital ratio of less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio
that is less than 3.0% is considered to be "significantly undercapitalized"
and a savings institution that has a tangible capital to assets ratio equal
to or less than 2.0% is deemed to be "critically undercapitalized." Subject
to a narrow exception, the banking regulator is required to appoint a
receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration
plan must be filed with the OTS within 45 days of the date an institution
receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth,
investment activities, capital distributions, and affiliate transactions.
The OTS could also take any one of a number of discretionary supervisory
actions, including the issuance of a capital directive and the replacement of
senior executive officers and directors.
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
The Savings Bank's deposits are currently insured by the Savings
Association Insurance Fund (the "SAIF"), which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance
is backed by the full faith and credit of the U.S. Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It
also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the
FDIC. The FDIC also has the authority to initiate enforcement actions
against savings and loan associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation.
Under the system, institutions classified as well capitalized (I.E., a core
capital ratio of at least 5%, a ratio of core capital to risk-weighted assets
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy would pay the lowest premium while institutions that are less than
adequately capitalized (I.E., a core capital or core capital to risk-
based capital ratios of less than 4% or a risk-based capital ratio of less
than 8%) and considered of substantial supervisory concern would pay the
highest premium. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio
to that designated reserve level, or such higher reserve ratio as established
by the FDIC. The FDIC may also 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.
In September 1996, Congress enacted legislation to recapitalize the SAIF
by a one-time assessment on all SAIF-insured deposits held as of March 31,
1995. The assessment was 65.7 basis points per $100 in deposits, payable on
November 30, 1996. For the Savings Bank, the assessment was $215,500 (or
$142,230 when adjusted for taxes), based on the Savings Bank's deposits on
March 31, 1995 of $32.8 million. In addition, beginning January 1, 1997,
pursuant to the legislation, interest payments on FICO bonds issued in the
late 1980's by the Financing Corporation to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation will be paid jointly by
BIF-insured
28
<PAGE>
institutions and SAIF-insured institutions. The FICO assessment
will be 1.29 basis points per $100 in BIF deposits and 6.44 basis points per
$100 in SAIF deposits. Beginning January 1, 2000, the FICO interest payments
will be paid pro-rata by banks and thrifts based on deposits (approximately
2.4 basis points per $100 in deposits). The BIF and SAIF will be merged on
January 1, 1999, provided the bank and saving association charters are merged
by that date. In that event, pro-rata FICO sharing will begin on January 1,
1999. Under the legislation, the Bank anticipates that its annual FICO
assessment for 1997 will be approximately $16,000.
FEDERAL HOME LOAN BANK SYSTEM
The Savings Bank is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Savings Bank, as a member of the FHLB, is required
to acquire and hold shares of capital stock in that FHLB in an amount at
least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20
of its advances (borrowings) from the FHLB, whichever is greater. The
Savings Bank was in compliance with this requirement with an investment in
FHLB stock, at September 30, 1996, of $336,000.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the fiscal year ended September 30, 1996,
dividends from the FHLB to the Savings Bank amounted to $24,252. If
dividends were reduced, or interest on future FHLB advances increased, the
Savings Bank's net interest income would likely also be reduced.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or
less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $54.0 million, the reserve
requirement is $1.6 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $54.0 million. The first $4.2 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Savings Bank is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS.
HOLDING COMPANY REGULATION
The Company is a non-diversified savings and loan holding company within
the meaning of the HOLA, as amended. As such, the Company is registered with
the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over
the Company and its non-savings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings
institution. The Savings Bank is required to notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Savings Bank continues to be a QTL.
Upon any nonsupervisory acquisition by the Company of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings institution by the OTS, the Company would become a multiple savings
and loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities
of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for
29
<PAGE>
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act,
subject to the prior approval of the OTS, and activities authorized by OTS
regulation. The OTS is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the
approval of interstate supervisory acquisitions by savings and loan holding
companies, and (ii) the acquisition of a savings institution in another state
if the laws of the state of the target savings institution specifically
permit such acquisitions.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another
savings institution or holding company thereof, without prior written
approval of the OTS. It also prohibits the acquisition or retention of, with
certain exceptions, more than 5% of a non-subsidiary savings institution, a
non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by the HOLA; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the OTS
must consider the financial and managerial resources, future prospects of the
company and institution involved, the effect of the acquisition on the risk
to the insurance fund, the convenience and needs of the community and
competitive factors.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may
acquire "control," as that term is defined in OTS regulations, of a federally
insured savings institution without giving at least 60 days written notice to
the OTS and providing the OTS an opportunity to disapprove of the proposed
acquisition. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person
might jeopardize the financial stability of the savings institution or
prejudice the interests of its depositors; or (iii) the competency,
experience or integrity of the acquiring person or the proposed management
personnel indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
FEDERAL SECURITIES LAWS
At the time of the Conversion, the Company filed with the Securities and
Exchange Commission (the "SEC") a registration statement under the Securities
Act for the registration of the Common Stock to be issued pursuant to the
Conversion. Upon completion of the Conversion, the Company's Common Stock
was registered with the SEC under the Exchange Act. The Company is subject
to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
that were issued in the Conversion did not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate
of the Company are subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain
other persons) is able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks.
Provision may be made in the future by the Company to permit affiliates to
have their shares registered for sale under the Securities Act under certain
circumstances.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is information, as of September 30, 1996, concerning the
Company's executive officers. Such executive officers also serve in the same
positions with the Savings Bank There are no arrangements or understandings
between the Company and any of persons named below with respect to which he
or she was or is to be selected as an officer.
30
<PAGE>
The following individuals hold positions as executive officers of the
Company as is set forth below opposite their names.
NAME POSITION WITH THE COMPANY
---- -------------------------
John E. Bowman . . . . . . . President and Chief Executive Officer
Jeannette Larson . . . . . . Executive Vice President and Secretary
William Schliebe . . . . . . Senior Vice President
Adolph G. Kraus . . . . . . Treasurer
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
ITEM 2. PROPERTIES
The Savings Bank conducts its business through its one full service
office located in St. Louis, Missouri. The following table sets forth
certain information concerning this office at September 30, 1996. The
Savings Bank believes that its current facilities are adequate to meet the
present and immediately foreseeable needs of the Savings Bank.
NET BOOK
VALUE OF
PROPERTY
LEASED OR YEAR ORIGINALLY AT SEPTEMBER 30,
LOCATION OWNED ACQUIRED 1996
- -------- --------- --------------- ----------------
FULL SERVICE OFFICE
8930 Gravois Avenue
St. Louis, Missouri Owned 1956 $410,284
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
proceedings in the aggregate are believed by management to be immaterial to
the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended September 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Annual Meeting of Stockholders will be held at the office of the
Company, 8930 Gravois Avenue, St. Louis, Missouri.
31
<PAGE>
The Company's common stock is traded over the counter through the
National Daily Quotation System "Pink Sheet" published by the National
Quotation Bureau, Inc., under the Symbol "RLFN." There are no uniformly
quoted prices for the Company's common stock, so it is not possible to
provide price ranges for the common stock for the quarters since the
Company's common stock began trading on April 7, 1995. Stockholders can
access recent price ranges using information contained in the National Daily
Quotation System "Pink Sheet."
The Company began paying a quarterly cash dividend on its common stock
on September 29, 1995, when the Company paid a cash dividend of $.15 per
share. As of December 13, 1996, the Company had 168 stockholders of record
and 425,700 outstanding shares of common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Assets $32,663 32,844 32,259 33,351 36,549
Cash and cash equivalents $ 1,211 2,036 1,481 1,852 6,006
Certificates of deposit and securities $ 4,084 4,365 3,842 4,031 4,032
Mortgage-backed securities $ 5,501 5,650 6,299 3,197 187
Loans receivable, net $21,144 20,031 19,839 22,438 24,553
Deposits $24,234 25,253 28,687 30,415 34,009
Stockholders' equity (1) $ 6,807 7,099 3,131 2,498 2,051
Full service offices open 1 1 1 1 1
</TABLE>
OPERATING DATA:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest Income $ 2,496 2,344 2,304 2,549 3,135
Interest expense (1,136) (1,084) (1,146) (1,357) (1,984)
------ ------ ------ ------ ------
Net interest income 1,360 1,260 1,158 1,192 1,151
(Provision) credit for loan losses 108 87 115 78 (204)
------ ------ ------ ------ ------
Net interest income after provision for loan losses 1,468 1,347 1,273 1,270 947
Noninterest income 53 71 75 111 279
Noninterest expense (1,170) (830) (675) (824) (917)
------ ------ ------ ------ ------
Earnings (loss) before income taxes and
cumulative effect of change in accounting principle 351 588 673 557 309
------ ------ ------ ------ ------
Income taxes (193) (222) (215) (109) (105)
Earnings (loss) before cuulative effect of
change in accounting principle 158 366 458 448 204
Cumulative effect of change in accounting -- -- (201) -- --
------ ------ ------ ------ ------
Net earnings (loss) $ 158 366 659 448 204
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Earnings per share (2) $ .40 .97 -- -- --
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Dividends per share $ .60 .15 -- -- --
------ ------ ------ ------ ------
------ ------ ------ ------ ------
(1) Stockholders' equity at September 30, 1996 and 1995 includes $3.6 million from the net proceeds of
the sale of common stock in connection with converting from mutual to stock form and formation of
a holding company.
(2) Earnings per share are based upon the weighted-average shares outstanding during the period.
Earnings for the period October 1, 1994 to March 31, 1995 have been excluded from the calculation
of earnings per share for the year ended September 30, 1995. Earnings for the period April 1, 1995
to April 7, 1995 (conversion date) were not significant.
</TABLE>
32
<PAGE>
KEY FINANCIAL RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Stockholders' equity to total assets............. 20.84% 21.61% 9.70%
Net interest spread.............................. 3.30 3.47 3.31
Net interest margin.............................. 4.22 4.02 3.57
Return on average assets......................... 0.48 1.13 1.97
Return on average stockholders' equity........... 2.22 7.35 22.87
Stockholders' equity to average assets ratio..... 20.57 21.84 9.34
Noninterest income to average assets ratio....... 0.16 0.22 0.22
Noninterest expense to average assets ratio...... 3.54 2.55 2.01
Nonperforming loans to total loans, net.......... 0.32 0.21 1.44
Nonperforming assets to total assets............. 0.21 1.06 1.88
Average interest-earning assets to
average interest-bearing liabilities........... 126.13 115.90 107.47
Allowance for loan losses to
nonperforming loans............................ 304.48 709.30 135.66
Allowance for loan losses to
nonperforming assets........................... 304.48 87.64 64.03
Allowance for loan losses to total gross loans... 0.93 1.49 1.90
Net interest income to noninterest expense....... 116.25 151.89 171.74
Net interest income after provision for
loan losses to noninterest expense............. 125.50 162.33 188.69
Regulatory capital ratios:
Tangible....................................... 16.95 16.21 9.29
Core........................................... 16.95 16.21 9.29
Risk-based..................................... 38.77 39.29 22.38
Number of full service offices................... 1 1 1
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
The business of the Association is that of a financial intermediary
consisting primarily of attracting deposits from the general public and using
such deposits to originate loans secured by one to four family residences
and, to a lesser extent, multi-family and commercial real estate loans, and
consumer loans. The Association's revenues are derived principally from
interest earned on loans and, to a lesser extent, from interest earned on
mortgage-backed securities (MBS), other interest-earning assets and
securities. The operations of the Association are influenced significantly
by general economic conditions and by policies of financial institution
regulatory agencies, including the Office of Thrift Supervision (OTS) and the
Federal Deposit Insurance Corporation (FDIC). The Association's cost of
funds is influenced by interest rates on competing investments and general
market interest rates. Lending activities are affected by the demand for
financing of real estate and other types of loans, which in turn is affected
by the interest rates at which such financing may be offered.
Net interest income is dependent primarily upon the difference or spread
between the average yield earned on loans, MBS, other interest-earning assets
and securities and the average rate paid on deposits and advances from the
Federal Home Loan Bank of Des Moines, as well as the relative amounts of such
assets and liabilities. Reliance Federal Savings and Loan Association of St.
Louis County, as other financial institutions, is subject to interest rate
33
<PAGE>
risk to the degree that its interest-bearing liabilities mature or reprice at
different times, or on a different basis, than its interest-earning assets.
Certain statements in this report which relate to the Company's plans,
objectives or future performance may be deemed to be forward-looking
statements within the meaning of Private Securities Litigation Act of 1995.
Such statements are based on management's current expectations. Actual
strategies and results in future periods may differ materially from those
currently expected because of various risks and uncertainties. Additional
discussion of factors affecting the Company's business and prospects is
contained in periodic filings with the Securities and Exchange Commission.
ASSET/LIABILITY MANAGEMENT
Key components of a successful asset/liability management strategy are
the monitoring and managing of interest rate sensitivity of both the
interest-earning asset and interest-bearing liability portfolios.
The Association has employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations by providing a
better match between the interest rate sensitivity of its assets and
liabilities. In particular, the Association's strategies are intended to
stabilize net interest income for the long-term by protecting its interest
rate spread against increases in interest rates. Such strategies include the
origination for portfolio of one-year, adjustable-rate loans (AMLs) and the
origination of other types of adjustable-rate and short-term loans with
greater interest rate sensitivities than long-term, fixed-rate loans.
Asset/liability management in the form of structuring cash instruments
provides greater flexibility to adjust exposure to interest rates. During
periods of high interest rates, management believes it is prudent to offer
competitive rates on short-term deposits and less competitive rates for
long-term liabilities. This posture allows the Association to benefit
quickly from declines in interest rates. Likewise, offering more competitive
rates on long-term deposits during the low interest rate periods allows the
Association to extend the repricing and/or maturity of its liabilities thus
reducing its exposure to rising interest rates.
34
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. All average balances are
monthly average balances. Nonaccruing loans have been included in the table
as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- ------- --------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable $ 21,143 1,819 8.60% 19,904 1,661 8.35% 20,795 1,744 8.38%
Mortgage-backed securities 5,571 341 6.11% 5,936 346 5.83% 5,136 268 5.22%
Securities and FHLB stock 1,987 125 6.30% 1,381 90 6.55% 1,060 67 6.33%
Other interest-earning assets 3,553 211 5.94% 4,106 247 6.01% 5,469 225 4.11%
------ ------ ------ ------ ------ -----
Total interest-earning assets 32,254 2,496 7.74% 31,327 2,344 7.48% 32,460 2,304 7.10%
------ ------ ------ ------ ------ -----
Interest-bearing liabilities:
NOW, super NOW, passbook
and money market deposits 9,232 246 2.67% 11,091 290 2.62% 11,973 322 2.69%
Certificate accounts 15,542 843 5.42% 15,939 794 4.98% 18,232 824 4.52%
Advances from FHLB 799 46 5.81% - - - - - -
------ ------ ------ ------ ------ -----
Total interest-bearing
liabilities $ 25,573 1,135 4.44% 27,030 1,084 4.01% 30,205 1,146 3.79%
------ ------ ------ ------ ------ -----
Net interest income before
provision for loan losses $ 1,360 1,260 1,158
------ ------ -----
------ ------ -----
Interest rate spread 3.30% 3.47% 3.31%
---- ---- ----
---- ---- ----
Net earning assets $ 6,681 4,297 2,255
------ ------ ------
------ ------ ------
Net yield on average
interest-earning assets 4.22% 4.02% 3.57%
---- ---- ----
---- ---- ----
Ratio of average interest-earning
assets to average interest-
bearing liabilities 126.13% 115.90% 107.47%
------ ------ ------
------ ------ ------
</TABLE>
35
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes in volume (changes in volume
multiplied by prior year's rate), rates (changes in rate multiplied by prior
year's volume) and rate/volume (changes in rate multiplied by the changes in
volume).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
--------------------------------- ----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------- ----------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------ ---- ------ ----- ------ ---- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 104 51 3 158 (76) (7) -- (83)
Mortgage-backed securities (21) 17 (1) (5) 42 31 5 78
Securities and FHLB stock 40 (3) (2) 35 20 2 1 23
Other interest-earning assets (34) (3) -- (37) (56) 104 (26) 22
------ ---- ------ ----- ------ ---- ------ -----
Total interest-
earning assets 89 62 -- 151 (70) 130 (20) 40
------ ---- ------ ----- ------ ---- ------ -----
Interest expense:
Deposits (90) 104 (9) 5 (121) 66 (7) (62)
Advances from FHLB -- -- 46 46 -- -- -- --
------ ---- ------ ----- ------ ---- ------ -----
Total interest-
bearing liabilities (90) 104 37 51 (121) 66 (7) (62)
------ ---- ------ ----- ------ ---- ------ -----
Net interest income $ 100 102
----- -----
----- -----
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Association's principal sources of funds are cash receipts from
deposits, loan repayments by borrowers, advances from the Federal Home Loan
Bank and net earnings. The Association has an agreement with the FHLB of Des
Moines to provide cash advances, should the need for additional funds be
required.
For regulatory purposes, liquidity is measured as a ratio of cash and
certain investments to withdrawable deposits and short-term borrowings. The
minimum level of liquidity required by regulation is presently 5%. The
Association's liquidity ratio at September 30, 1996, was approximately 18.3%.
The Association maintains a higher level of liquidity than required by
regulation as a matter of management philosophy in order to more closely
match interest-sensitive assets with interest-sensitive liabilities. The
Association has $9.7 million in certificates due within one year and $9.1
million in other deposits without specific maturity at September 30, 1996.
Management estimates that most of the deposits will be retained or replaced
by new deposits.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) requires that savings institutions maintain "core capital" of at
least 3% of adjusted total assets. Under proposals currently being evaluated
by the OTS, a savings institution's core capital requirement could be
increased to between 4% and 5% of adjusted total assets. Core capital is
defined to include stockholders' equity among other components. Savings
institutions also must maintain "tangible capital" of not less than 1.5% of
the association's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets." All of the
Association's capital is tangible.
36
<PAGE>
In addition to requiring compliance with the core and tangible capital
standards, FIRREA and the OTS regulations also require that savings
institutions satisfy a risk-based capital standard. The minimum level of
such capital is based on a credit risk component and calculated by
multiplying the value of each asset (including off-balance sheet commitments)
by one of four risk factors. The four risk categories range from zero for
cash to 100% for certain delinquent loans and repossessed property. Savings
institutions must maintain an 8.0% risk-based capital level.
Other laws and OTS regulations affect the computation of regulatory
capital. As of September 30, 1996, the Association met all capital
requirements.
The following table presents the Association's capital position relative
to its regulatory capital requirements under FIRREA at September 30, 1996:
<TABLE>
<CAPTION>
Regulatory Capital
------------------------------------------
Tangible Core Risk-Based
----------- --------- ----------
<S> <C> <C> <C>
Stockholders' equity per consolidated
financial statements $ 6,807,129 6,807,129 6,807,129
Stockholders' equity of the Company not available
for regulatory capital purposes (1,409,684) (1,409,684) (1,409,684)
----------- --------- ----------
GAAP capital, as adjusted 5,397,445 5,397,445 5,397,445
Deferred tax asset (76,000) (76,000) (76,000)
General valuation allowances - limited -- -- 177,618
Regulatory capital 5,321,445 5,321,445 5,499,063
Regulatory capital requirement (471,043) (942,087) (1,134,681)
----------- --------- ----------
Regulatory capital - excess $4,850,402 4,379,358 4,364,382
----------- --------- ----------
----------- --------- ----------
Regulatory capital ratio 16.95% 16.95% 38.77%
Regulatory capital requirement (1.50) (3.00) (8.00)
----------- --------- ----------
Regulatory capital ratio - excess 15.45% 13.95% 30.77%
----------- --------- ----------
----------- --------- ----------
</TABLE>
FINANCIAL CONDITION
Total assets decreased from $32.8 million at September 30, 1995 to $32.7
million at September 30, 1996. Loans receivable, net, increased by $1.1
million from $20.0 million at September 30, 1995 to $21.1 million at
September 30, 1996 due to loan originations and purchased loans of $2.9
million and $3.4 million, respectively. Stockholders' equity decreased from
$7.1 million at September 30, 1995 to $6.8 million at September 30, 1996 due
primarily to the Company repurchasing 21,500 shares of its common stock.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED SEPTEMBER 30, 1996 TO THE YEAR ENDED
- -----------------------------------------------------------------
SEPTEMBER 30, 1995
- ------------------
NET EARNINGS
Net earnings decreased from $366,000 for the fiscal year ended September
30, 1995 (1995) to $158,000 for the fiscal year ended September 30, 1996
(1996). The year ended September 30, 1996 includes several sources of
non-recurring income and expense, including a charge for special assessment
to recapitalize the SAIF of $216,000, and credit to the provision for loan
losses of $108,000, a provision for recapture of excess bad debt reserves of
$74,000, credit for loss on foreclosed real estate and repossessed assets of
$17,000. The year ended September 30, 1995 included a credit of $87,000 to
the provision for loan losses. Noninterest expense, excluding non-recurring
income and expense increased due to higher compensation and benefits. Net
interest income increased from $1,260,000 for 1995 to $1,360,000 for 1996.
37
<PAGE>
INTEREST INCOME
Average interest earning assets increased from $31.3 million in 1995 to
$32.3 million in 1996. The average yield increased from 7.48% in 1995 to 7.74%
in 1996. Average loans receivable increased from $20.0 million in 1995 to $21.1
million in 1996. Components of interest-earning assets change from time to time
based on interest rates and availability of loans, securities, and
mortgage-backed securities.
INTEREST EXPENSE
Interest expense increased due to higher interest rates, offset by a
decrease in average interest bearing liabilities. The average balance of
interest bearing liabilities decreased from $27.0 million in 1995 to $25.6
million in 1996. The Association continues to experience deposit outflow as
customers invest in other financial instruments, such as money market funds,
mutual funds, and the stock market.
NET INTEREST INCOME
Net interest income increased from $1,260,000 for 1995 to $1,360,000 for
1996. Net interest income reflects an increase in average interest-earning
assets and a decrease in average interest-bearing liabilities in 1996. The
conversion to capital stock form in April, 1995 affected both averages. The
interest rate spread (difference between the average yield on interest-earning
assets and average cost of interest-bearing liabilities) decreased from 3.47%
for 1995 to 3.30% for 1996. The Company's net yield on average
interest-earning assets (net interest income before provision for loan losses as
a percentage of average interest earning assets) increased from 4.02% for 1995
to 4.22% for 1996. The increase in net interest income and net interest yield
resulted primarily from the full year effect in 1996 of the conversion to stock
form compared to a half year effect in 1995. The decrease in the interest rate
spread was due to higher interest on deposits and FHLB advances.
PROVISION (CREDIT) FOR LOAN LOSSES
The credit for loan losses was $87,000 for 1995 and $108,000 for 1996.
These credits were based on management's assessment of its loan portfolio in
consideration of the condition of the local and national economies, trends in
the real estate market in the Association's primary lending area and trends in
the level of the Association's nonperforming loans and assets. The allowance
for loan losses at September 30, 1992 reflected the effects of economic
conditions, as well as deterioration of the quality of the loan portfolio.
During the year ended September 30, 1993, a commercial real estate loan which
had been written down to estimated fair market value was repaid in full. The
loan balance at the date of payoff was $708,000 and the related allowance was
$177,000. Economic conditions improved during the year ended September 30, 1993
and the Association's asset quality stabilized. Accordingly, a portion of the
allowance was credited to income in 1996 and 1995 to adjust the allowance to the
level deemed adequate based on present economic conditions and asset quality.
At September 30, 1996 loans delinquent 90 days or more amounted to $67,000 (.32%
of net loans receivable) compared to $43,000 (.21% of net loans receivable) at
September 30, 1995.
NONINTEREST INCOME
Noninterest income decreased from $71,000 for 1995 to $53,000 for 1996.
Loan service charges decreased from $18,000 in 1995 to $12,000 in 1996 due to
lower prepayment penalties. Prepayment penalties are expected to decline in the
future since only older fixed rate loans contain prepayment agreements. Other
noninterest income for 1995 includes a non-recurring patronage dividend of
$19,000 from the Association's data processing service bureau, while 1996
includes a gain on sale of the Association's share of the data processor's
assets of $15,000.
38
<PAGE>
NONINTEREST EXPENSE
Noninterest expense increased from $829,000 in 1995 to $1,170,000 in 1996
due to several factors. The SAIF special assessment amounted to $215,500 in
1996. Compensation and benefits increased due to allocation of shares under the
ESOP established in connection with the sale of common stock. The Association
also implemented, with stockholder approval, a management recognition plan
similar to plans of other publicly traded thrift institutions. ESOP expense
increased from $50,000 for 1995 to $109,000 for 1996, since 1995 reflects a
partial year of expense. ESOP expense is also affected by changes in the market
price of the Company's stock, which increased during 1996. Supervisory and
professional fees, as well as other expenses, increased as a result of operating
as a public company. Management expects that recurring supervisory fees,
professional fees as well as other noninterest expenses for Delaware franchise
fees, annual report printing and registration fees will stabilize in the future.
INCOME TAXES
Income taxes decreased due to lower earnings which was substantially offset
by a $74,000 provision for income taxes for the recapture of excess tax bad debt
reserves. See note 10 Notes to Consolidated Financial Statements for additional
information.
COMPARISON OF THE YEAR ENDED SEPTEMBER 30, 1995 TO THE YEAR ENDED SEPTEMBER 30,
1994
NET EARNINGS
Net earnings decreased from $659,000 for the fiscal year ended September
30, 1994 (1994) to $366,000 for the fiscal year ended September 30, 1995 (1995).
The year ended September 30, 1994 included several sources of non-recurring
income including cumulative effect of change in accounting principle for income
taxes of $201,000, credit to the provision for loan losses of $115,000, credit
for loss on foreclosed real estate and repossessed assets of $54,000, and rental
income from foreclosed real estate of $37,000. The year ended September 30,
1995 included a credit of $87,000 for such items. Noninterest expense,
excluding non-recurring income items, increased due to higher compensation and
benefits. Net interest income increased from $1,158,000 for 1994 to $1,260,000
for 1995.
INTEREST INCOME
Average interest earning assets decreased from $32.5 million in 1994 to
$31.3 million in 1995. The average yield increased from 7.10% in 1994 to 7.48%
in 1995. Average loans receivable decreased from $20.8 million in 1994 to $19.9
million in 1995. Prepayments of loans were substantially lower in 1995 than in
prior years as rising interest rates reduced borrower refinances. Components of
interest-earning assets change from time to time based on interest rates and
availability of loans, securities, and mortgage-backed securities.
INTEREST EXPENSE
Interest expense decreased due to a lower average balance of deposits,
offset by an increase in average rate. The average balance of deposits
decreased from $30.2 million in 1994 to $27.0 million in 1995 due, in part, to
withdrawals by depositors to purchase common stock. The average interest rate
in deposits increased from 3.79% in 1994 to 4.01% in 1995.
NET INTEREST INCOME
Net interest income increased from $1,158,000 for 1994 to $1,260,000 for
1995. The increase in net interest income reflects the increase in the
Association's interest rate spread from 3.31% for 1994 to 3.47% for 1995. In
addition, the net interest yield increased from 3.57% for 1994 to 4.02% for
1995. The increase in net interest income, interest rate spread and net
interest yield resulted primarily from the Association's interest-
earning assets repricing upward more rapidly than its interest-bearing deposit
liabilities during 1995.
39
<PAGE>
PROVISION (CREDIT) FOR LOAN LOSSES
The credit for loan losses was $115,000 for 1994 and $87,000 for 1995.
These credits were based on management's assessment of its loan portfolio in
consideration of the condition of the local and national economies, trends in
the real estate market in the Association's primary lending area and trends in
the level of the Association's nonperforming loans and assets. The allowance
for loan losses at September 30, 1992 reflected the effects of economic
conditions, as well as deterioration of the quality of the loan portfolio.
During the year ended September 30, 1993, a commercial real estate loan which
had been written down to estimated fair market value was repaid in full. The
loan balance at the date of payoff was $708,000 and the related allowance was
$177,000. Economic conditions improved during the year ended September 30, 1993
and the Association's asset quality stabilized. Accordingly, a portion of the
allowance was credited to income in 1995 and 1994 to adjust the allowance to the
level deemed adequate based on present economic conditions and asset quality.
At September 30, 1995, loans delinquent 90 days or more amounted to $43,000
(.21% of net loans receivable) compared to $286,000 (1.44% of net loans
receivable) at September 30, 1994.
NONINTEREST INCOME
Noninterest income decreased from $75,000 for 1994 to $71,000 for 1995.
Loan service charges decreased from $24,000 in 1994 to $18,000 in 1995 due to
lower prepayment penalties. The Association experienced significant loan
prepayments in 1994 due to the relatively low interest rate environment in the
early part of the year. Prepayment penalties are expected to decline in the
future since only fixed rate loans contain prepayment agreements. Refund of
intangible tax was $14,000 for 1994 and zero for 1995 as the Association
received the balance of refunds due. See note 13 of notes to consolidated
financial statements. Other noninterest income increased due to a $19,000
patronage dividend recognized by the Association from its investment in a data
processing service bureau. While the Association received nominal patronage
dividends in the past, the 1995 dividend reflects non-recurring income of the
service bureau.
NONINTEREST EXPENSE
Noninterest expense increased from $675,000 in 1994 to $830,000 in 1995 due
to several factors. Compensation and benefits increased due to allocation of
shares under the ESOP established in connection with the sale of common stock.
ESOP expense for 1995 was $49,917. The Association expects, subject to
stockholder approval, to implement a management recognition plan and stock
option plan similar to plans of other publicly traded thrift institutions.
Management expects that compensation and benefits expense will increase in the
future for stock benefit plans. ESOP expense is affected by changes in the
market price of the Company's stock, which increased substantially during the
year. Rental income from foreclosed real estate decreased as a result of sales
of foreclosed real estate. Supervisory and professional fees, as well as other
expenses, increased as a result of operating as a public company during 1995.
Management expects that supervisory fees, professional fees as well as other
noninterest expenses for Delaware franchise fees and annual report printing and
registration fees will increase in the future as a result of operating as a
public company.
INCOME TAXES
Income taxes increased due to a higher effective tax rate. The effective
tax rate increased from 31.0% for 1994 to 37.7% for 1995 due to the reduction in
the valuation allowance of deferred tax assets during 1994.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective October 1, 1993, the Association adopted SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. The cumulative effect of
the change in accounting principle on years prior to October 1, 1993, of
$200,691 is included as a credit in net earnings for 1994.
40
<PAGE>
IMPACT OF INFLATION
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require 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 primary impact of inflation on the
operations of the Association is reflected in increased operating costs. Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates,
generally, have a more significant impact on a financial institution's
performance than does inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services. In
the current interest rate environment, liquidity and the maturity structure of
the Association's assets and liabilities are critical to the maintenance of
acceptable performance levels.
INTEREST RATE SENSITIVITY ANALYSIS
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 institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to positively affect net
interest income. Similarly, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income.
The Savings Bank's policy in recent years has been to reduce its exposure
to interest rate risk by better matching the maturities and interest rates of
its interest rate sensitive assets and liabilities by emphasizing the
origination of balloon mortgage loans with three-, five- and seven-year terms,
the origination of ARM loans and the origination of construction loans and
intermediate-term fixed-rate one- to four-family loans. In addition, the
Savings Bank offers competitive rates on deposit accounts and prices
certificates of deposit to provide customers with incentives to choose
certificates of deposit with longer terms.
The Savings Bank supplements its origination of mortgage loans by
purchasing intermediate-term and adjustable-rate mortgage-backed securities, as
well as short-term interest-earning deposits at other financial institutions.
At September 30, 1996, the Savings Bank's mortgage-backed securities portfolio
included $3.5 million of adjustable-rate collateralized mortgage obligations
("CMOs"), $1.8 million of five-year balloon mortgage-backed securities and
$210,000 in long-term, fixed-rate mortgage-backed securities. Long-term,
fixed-rate mortgage-backed securities carry significant interest rate risk, but
constitute a relatively small part (3.8%) of the Savings Bank's mortgage-backed
securities portfolio. The Savings Bank's five-year balloon mortgage-backed
securities, which have an average remaining contractual life of approximately
three years, bear less interest rate risk than the Savings Bank's long-term,
fixed-rate mortgage-backed securities. The Savings Bank's portfolio of CMOs
adjusts monthly based on the Eleventh District Cost of Funds Index. Since this
index generally adjusts more slowly than general market interest rates, the
Savings Bank's CMOs can be expected to adversely affect the Savings Bank's
interest rate spread during periods of rapidly rising market interest rates.
The Savings Bank's mortgage-backed securities portfolio presents prepayment
risks in a declining interest rate environment, as borrowers refinance the loans
underlying such instruments. While management has attempted to limit this risk
by purchasing mortgage-backed securities that have no significant premiums over
par value, there can be no assurance that the Savings Bank will be successful
and the Savings Bank may be unable to reinvest the cash proceeds in prepaid
mortgage-backed securities into comparably yielding investments.
41
<PAGE>
At September 30, 1996, total interest-earning assets maturing or repricing
within one year exceeded total interest-bearing liabilities maturing or
repricing in the same period by $6.3 million, representing a cumulative one-year
gap ratio of 19.2%. In a rising interest rate environment, the Savings Bank's
net interest income could be adversely affected as liabilities would reprice to
higher market rates more quickly than assets. Management reports quarterly to
the Board of Directors on interest rate risks and trends.
NET PORTFOLIO VALUE. The OTS adopted a final rule in August of 1993
incorporating an interest rate risk ("IRR") component into the risk-based
capital rules. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of a hypothetical 200 basis point change in market interest
rates. A resulting change in NPV of more than 2% of the estimated market value
of its assets will require the institution to deduct from its capital 50% of
that excess change.
The following table presents the Savings Bank's NPV as of September 30,
1996, based on information provided to the Bank by the FHLB of Des Moines and
based on calculations set forth in the final rule referred to above.
<TABLE>
<CAPTION>
CHANGE IN
INTEREST RATES NET PORTFOLIO VALUE
IN BASIS POINTS ------------------------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE
--------------- ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
400 $6,497 $(269) (4.0)%
300 6,595 (171) (2.5)
200 6,686 (80) (1.2)
100 6,758 (8) (0.1)
Static 6,766 -- --
(100) 6,686 (80) (1.2)
(200) 6,542 (224) (3.3)
(300) 6,364 (402) (5.9)
(400) 6,186 (580) (8.6)
</TABLE>
As indicated in the table above, management has structured its assets and
liabilities to limit its exposure to interest rate risk. In the event of a 200
basis point change in interest rates, the Savings Bank would experience a 3.3%
decrease in NPV in a declining rate environment and a 1.2% decrease in a rising
rate environment.
In evaluating the Savings Bank's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. 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. Also, 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. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
As a result, the actual effect of changing interest rates may differ from that
presented in the foregoing table.
42
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, securities, and, to a
lesser extent, advances from the FHLB. While maturities and scheduled
amortization of loans and mortgage-backed securities and maturities of
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, competition and most recently the restructuring of the thrift
industry.
The Savings Bank is required to maintain an average daily balance of liquid
assets (cash, certain time deposits, bankers' acceptances, specified United
States Government securities, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial paper)
equal to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 5%. OTS regulations also require each
member savings institution to maintain an average daily balance of short-term
liquid assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Savings Bank's monthly average liquidity ratios at
September 30, 1996, 1995 and 1994 were 18.3%, 17.1% and 17.8%, respectively.
The Savings Bank's high liquidity ratio as of September 30, 1996 reflects the
Savings Bank's investment in intermediate term assets (Freddie Mac Gold)
considered by the OTS to be liquid assets, and management's determination to
refrain from investing excess liquidity in assets with longer terms in the
current interest rate environment. Shorter term investments generally have
lower yields than longer term investments and, consequently, such strategy has
resulted in reduced interest income.
The Savings Bank's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The level of
these assets is dependent on the Savings Bank's operating, financing, lending
and investing activities during any given period. The Savings Bank has an
agreement with the Federal Home Loan Bank of Des Moines to draw advances should
it require additional liquidity. At September 30, 1996, cash and cash
equivalents totalled $1.2 million. Until proceeds from the Offering are fully
deployed in accordance with management's business strategy, management
anticipates maintaining a higher liquidity ratio.
The primary investing activity of the Savings Bank is the origination and
purchase of mortgage loans. The Savings Bank's mortgage loan originations
totalled $2.9 million, $1.3 million, and $1.9 million for fiscal 1996, 1995, and
1994, respectively. Purchases of mortgage-backed securities totalled $0, $0 ,
and $3.9 million for fiscal 1996, 1995, and 1994, respectively. The Savings
Bank also purchased mortgage loans amounting to $3.4 million, $3.2 million, and
$1.4 million in fiscal 1996, 1995, and 1994, respectively. These activities
were funded primarily by principal payments of loans and mortgage-backed
securities totalling $4.9 million, $5.1 million, and $6.8 million in fiscal
1996, 1995 and 1994, respectively, and maturities of securities and certificates
of deposit totalling $3.1 million, $2.2 million, and $2.7 million in fiscal
1996, 1995 and 1994, respectively.
Deposits are a primary source of funds supporting the Savings Bank's
lending and investing activities. Deposit balances decreased by $1.0 million,
or 4.0%, from fiscal 1995 to fiscal 1996, by $3.4 million, or 12.0%, from fiscal
1994 to fiscal 1995, and by $1.7 million, or 5.7%, from fiscal 1993 to fiscal
1994. Notwithstanding the decreases in deposit balances, the Savings Bank
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. At September 30, 1996, the Savings Bank had
$93,000 in commitments for one-to-four-family loans and $560,000 in loans in
process for one-to-four-family construction loans. Certificates of deposit which
are scheduled to mature in one year or less as of September 30, 1996 totalled
$9.7 million. Based on historical experience and the long-term relationship
between the Savings Bank and holders of the certificates of deposit accounts,
management believes that a significant portion of such deposits will remain with
the Savings Bank.
43
<PAGE>
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 requires mortgage banking enterprises to
recognize the rights to service mortgage loans for others as a separate asset
regardless of whether such rights were purchased or originated. SFAS No. 122 is
effective prospectively for transactions entered into in fiscal years that begin
after December 15, 1995. SFAS No. 122 is not expected to have a significant
effect on the Company's financial position or results of operations. SFAS No.
122 will be superseded by SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," described below,
effective January 1, 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 suggests that compensation cost for stock-based
employee compensation plans be measured at the grant date based on the fair
value of the award and recognized over the service period, which is usually the
vesting period. However, SFAS No. 123 also allows an institution to use the
intrinsic value based method under APB Opinion No. 25. Stock-
based employee compensation plans include stock purchase plans, stock options,
restricted stock and stock appreciation rights. Employee stock ownership plans
are not covered by this Statement. SFAS No. 123 is effective for transactions
entered into in fiscal years which begin after December 15, 1995, with earlier
application permitted. SFAS No. 123 is not expected to affect the Company
financial position or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
statement focuses on the issues of accounting for transfers and servicing of
financial assets, extinguishments of liabilities and financial assets subject to
prepayment. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments 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.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
MICHAEL TROKEY & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
10411 CLAYTON ROAD
ST. LOUIS, MISSOURI 63131
(314) 432-0996
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Reliance Financial Inc.
St. Louis, Missouri
We have audited the accompanying consolidated balance sheets of
Reliance Financial Inc. and subsidiary (Company) as of September 30,
1996 and 1995, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 1996. These consolidated financial
statements are the responsibility of the Company'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 statements referred to above present
fairly, in all material respects, the financial position of Reliance
Financial Inc. and subsidiary as of September 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 10 to the consolidated financial
statements, the Company changed its method of accounting for income
taxes in 1994.
St. Louis, Missouri
November 1, 1996
45
<PAGE>
<TABLE>
<CAPTION>
RELIANCE FINANCIAL INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1996 and 1995
Assets 1996 1995
------------ ----------
<S> <C> <C>
Cash and cash equivalents $ 1,211,033 2,036,111
Certificates of deposit 1,586,000 3,066,000
Securities:
Available for sale, at market value
(amortized cost of $500,000 at September
30, 1996 and 1995) 473,399 483,038
Held to maturity, at amortized cost
(market value of $1,670,000 and $473,125
at September 30, 1996 and 1995, respectively) 1,689,069 486,460
Stock in Federal Home Loan Bank of Des Moines 336,000 329,400
Mortgage-backed securities held to maturity,
at amortized cost (market value of $5,314,126
and $5,518,077 at September 30, 1996 and 1995,
respectively) 5,500,595 5,649,890
Loans receivable, net 21,144,237 20,030,892
Premises and equipment, net 410,284 430,670
Foreclosed real estate held for sale, net - 6,300
Accrued interest receivable:
Securities and certificates of deposit 27,929 18,287
Mortgage-backed securities 26,930 28,624
Loans receivable 136,370 114,298
Other assets 39,956 57,252
Deferred tax asset 81,000 107,000
------------ ----------
Total assets $ 32,662,802 32,844,222
------------ ----------
------------ ----------
Liabilities and Stockholders' Equity
Deposits $ 24,233,959 25,252,854
Accrued interest on deposits 3,238 3,878
Advances from FHLB of Des Moines 1,000,000 --
Advances from borrowers for taxes
and insurance 237,093 265,508
Other liabilities 330,590 154,857
Accrued income taxes 50,793 68,100
------------ ----------
Total liabilities 25,855,673 25,745,197
------------ ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 250,000
shares authorized; shares issued and
outstanding - none -- --
Common stock, $.10 par value; 1,500,000
shares authorized; 446,993 and 430,000
shares issued and outstanding 44,699 43,000
Additional paid-in capital 4,190,038 3,913,004
Common stock acquired by ESOP (229,096) (304,849)
Common stock acquired by RRP (226,042) --
Unrealized loss on securities available
for sale, net (26,601) (16,962)
Retained earnings - substantially restricted 3,382,186 3,464,832
Treasury stock, at cost, 21,500 shares (328,055) --
------------ ----------
Total stockholders' equity 6,807,129 7,099,025
------------ ----------
Total liabilities and stockholders' equity $ 32,662,802 32,844,222
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
RELIANCE FINANCIAL INC. AND SUBSIDIARY
Consolidated Statements of Earnings
Years Ended September 30, 1996, 1995, and 1994
1996 1995 1994
------------ --------- --------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 1,819,024 1,661,126 1,743,394
Mortgage-backed securities 340,513 345,862 268,285
Securities 125,159 90,487 67,068
Other interest-earning assets 211,073 246,640 224,845
------------ --------- ---------
Total interest income 2,495,769 2,344,115 2,303,592
------------ --------- ---------
Interest expense:
Deposits 1,089,125 1,084,266 1,145,856
Advances from Federal Home Loan Bank 46,319 -- --
------------ --------- ---------
Total interest expense 1,135,444 1,084,266 1,145,856
------------ --------- ---------
Net interest income 1,360,325 1,259,849 1,157,736
Provision (credit) for loan losses (108,220) (86,604) (115,582)
------------ --------- ---------
Net interest income after provision
for loan losses 1,468,545 1,346,453 1,273,318
------------ --------- ---------
Noninterest income:
Loan service charges 12,100 17,736 23,959
Refund of intangible taxes -- -- 14,081
Other 40,554 53,553 37,113
------------ --------- ---------
Total noninterest income 52,654 71,289 75,153
------------ --------- ---------
Noninterest expense:
Compensation and benefits 574,471 470,199 413,915
Occupancy expense 53,575 51,511 51,864
Equipment and data processing expense 67,521 70,254 76,444
Provision (credit) for loss on
foreclosed real estate
and repossessed assets (16,979) 650 (54,069)
Rental (income) expense from forclosed
real estate, net 4,993 -- (37,277)
SAIF deposit insurance premium 57,926 70,675 79,652
SAIF special assessment 215,500 -- --
Supervisory and professional fees 91,701 51,143 42,041
Other 121,428 115,009 102,834
----------- --------- ---------
Total noninterest expense 1,170,136 829,441 675,404
----------- --------- ---------
Earnings before income taxes and
cumulative effect of change in
accounting principle 351,063 588,301 673,067
----------- --------- ---------
Income taxes:
Current 167,100 188,000 176,000
Deferred 26,000 34,000 39,000
----------- --------- ---------
Total income taxes 193,100 222,000 215,000
----------- --------- ---------
Earnings before cumulative effect
of change in accounting principle 157,963 366,301 458,067
Cumulative effect of change in
accounting principle for income taxes -- -- 200,691
------------ --------- ---------
Net earnings $ 157,963 366,301 658,758
------------ --------- ---------
------------ --------- ---------
Net earnings per common
share (see note 1) $ .40 .97 *
------------ --------- ---------
------------ --------- ---------
</TABLE>
* Not applicable
See accompanying notes to consolidated financial statements.
47
<PAGE>
<TABLE>
<CAPTION>
RELIANCE FINANCIAL INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1996, 1995 and 1994
Common Common
Additional Stock Stock Unrealized Total
Common Paid-in Acquired Acquired Gain(Loss) Retained Treasury Stockholders'
Stock Capital by ESOP by RRP on Securities Earnings stock Equity
------------------ ---------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September
30, 1993 $ -- -- -- -- (1,320) 2,499,113 -- 2,497,793
Unrealized loss
on securities
available for
sale, net -- -- -- -- (26,032) -- -- (26,032)
Net earnings -- -- -- -- -- 658,758 -- 658,758
Balance at
September 30,
1994 -- -- -- -- (27,352) 3,157,871 -- 3,130,519
Proceeds from
sale of common
stock 43,000 3,908,238 (344,000) -- -- -- -- 3,607,238
Unrealized gain
on securities
available for
sale, net -- -- -- -- 10,390 -- -- 10,390
Amortization of
ESOP awards -- 4,766 39,151 -- -- -- -- 43,917
Cash dividends
of $.15 per
share -- -- -- -- -- (59,340) (59,340)
Net earnings -- -- -- -- -- 366,301 --
------- --------- -------- --------- --------- ---------- ------- --------
Balance at
September 30,
1995 43,000 3,913,004 (304,849) -- (16,962) 3,464,832 -- 7,099,025
Purchase of
treasury stock -- -- -- -- -- -- (328,055)
Issuance of
common stock
for RRP 1,720 249,830 -- (251,550) -- -- -- --
Stock forfeited
under RRP (21) (3,007) -- 3,028 -- -- -- --
Unrealized loss
on securities
available for
sale, net -- -- -- -- (9,639) -- -- (9,639)
Amortization
of ESOP awards -- 30,211 75,753 -- -- -- -- 105,964
Amortization of
RRP awards -- -- -- 22,480 -- -- -- 22,480
Cash dividends
of $.60
per share -- -- -- -- -- (240,609) -- (240,609)
Net earnings -- -- -- -- -- 157,963 --
------- --------- -------- -------- --------- ----------- -------- ---------
Balance at
September
30, 1996 $44,699 4,190,038 (229,096) (226,042) (26,601) 3,382,186 (328,055)6,807,129
------- --------- -------- -------- --------- ----------- -------- ---------
------- --------- -------- -------- --------- ----------- -------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
<TABLE>
<CAPTION>
RELIANCE FINANCIAL INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994
------------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 157,963 366,301 658,758
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation 24,748 30,331 34,656
Provision (credit) for loan losses (108,220) (86,604) (115,582)
ESOP expense 108,964 49,917 --
RRP expense 22,480 -- --
FHLB stock dividends (6,600) -- --
Provision (credit) for loss on
foreclosed real estate and
repossessed assets (16,979) 650 (54,069)
Decrease (increase) in:
Accrued interest receivable (30,020) (17,048) 13,683
Other assets 17,296 (6,340) 23,850
Deferred tax asset 26,000 34,000 (147,000)
Increase (decrease) in:
Accrued interest on deposits (640) (1,317) 23
Accrued income taxes (20,307) (7,397) 75,497
Deferred tax liability -- -- (14,691)
Other liabilities 175,733 44,632 (40,761)
------------ -------- --------
Net cash provided by (used for)
operating activities 350,418 407,125 434,364
------------ -------- --------
Cash flows from investing activities:
Loans:
Purchased (3,386,690) (3,211,601)(1,371,776)
Originated (2,380,695) (1,311,054)(1,949,802)
Principal collections 4,734,466 4,411,913 6,043,651
Mortgage-backed securities held
to maturity or for investment:
Purchased -- -- (3,860,025)
Principal collections 149,295 648,981 758,224
Securities held to maturity
or for investment and certificates
of deposit:
Purchased (2,793,000) (2,678,000)(2,559,813)
Proceeds from maturity 3,070,391 2,165,498 2,722,761
Purchase of premises and equipment (4,362) (4,701) (27,501)
Proceeds from sale of (additions to)
foreclosed real estate, net 51,073 (1,545) 1,183,363
------------ ---------- ---------
Net cash provided by (used for)
investing activities $ (559,522) 19,491 939,082
------------ ---------- ---------
</TABLE>
(Continued)
49
<PAGE>
(Continued)
<TABLE>
<CAPTION>
RELIANCE FINANCIAL INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in:
Deposits $ (1,018,895) (3,433,990) (1,728,224)
Advances from borrowers
for taxes and insurance (28,415) 14,325 (16,351)
Proceeds from sale of common stock -- 3,607,238 --
Proceeds from advances from
FHLB of Des Moines 1,000,000 -- --
Purchase of treasury stock (328,055) -- --
Cash dividends (240,609) (59,340) --
------------ ---------- ----------
Net cash provided by (used for)
financing activities (615,974) 128,233 (1,744,575)
------------ ---------- ----------
Net increase (decrease) in cash and
cash equivalents (825,078) 554,849 (371,129)
Cash and cash equivalents
at beginning of year 2,036,111 1,481,262 1,852,391
------------ ---------- ----------
Cash and cash equivalents
at end of year $ 1,211,033 2,036,111 1,481,262
------------ ---------- ----------
------------ ---------- ----------
Supplemental disclosures of
cash flow information:
Cash paid (received)
during the year for:
Interest on deposits $ 1,089,765 1,085,583 1,145,833
Interest on advances from FHLB 46,319 -- --
Federal income taxes 168,681 163,188 70,143
State income taxes 24,002 32,209 (14,081)
Repossessed assets acquired in
settlement of loans -- -- 65,024
Foreclosed real estate acquired
in settlement of loans 40,894 5,405 --
Noncash investment activity -
transfer from held for
investment to available for sale $ -- -- 472,648
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
(1) Summary of Significant Accounting Policies
On April 7, 1995, Reliance Federal Savings and Loan Association of St.
Louis County (Association) completed its conversion from mutual to stock
form and became a wholly-owned subsidiary of a newly formed Delaware
holding company, Reliance Financial Inc. (Company). The following
comprise the significant accounting policies which the Company and
Association follow in preparing and presenting their consolidated
financial statements:
a. The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Reliance Federal Savings
and Loan Association of St. Louis County. The Company has no
significant assets other than common stock of the Association, and
the loan to the ESOP, and net proceeds retained by the Company
following the conversion. The Company's principal business is the
business of the Association. All significant intercompany accounts
and transactions have been eliminated.
b. For purposes of reporting cash flows, cash and cash equivalents include
cash and due from depository institutions and interest-bearing
deposits in other depository institutions with original maturities
of three months or less. Interest-bearing deposits in other
depository institutions were $959,946 and $1,589,759 at September 30,
1996 and 1995, respectively.
c. Certificates of deposit are carried at cost with original maturities of
more than three months.
d. Securities and mortgage-backed securities which the Association has the
positive intent and ability to hold to maturity are classified as
held to maturity securities and reported at cost, adjusted for
amortization of premiums and accretion of discounts over the life of
the security using the interest method. Securities and
mortgage-backed securities not classified as held to maturity
securities are classified as available for sale securities and
reported at fair value, with unrealized gains and losses excluded
from net earnings and reported in a separate component of
stockholders' equity. The Association does not purchase securities
and mortgage-backed securities for trading purposes. Prior to
September 30, 1994, debt and equity securities were considered held
for investment.
Collateralized mortgage obligations (CMOs) are mortgage derivatives.
The type owned by the Association are classified as "low-risk" under
regulatory guidelines. CMOs are subject to normal effects of
interest rate risk. The Association does not purchase CMOs at any
significant premium over par value to limit certain prepayments
risks, and purchases only CMOs issued by U.S. government agencies in
order to minimize credit risk.
e. Loans receivable, net are carried at unpaid principal balances, less
loans in process, net deferred loan fees, unearned discount on loans
and allowance for losses. Loan origination and commitment fees and
certain direct origination costs are deferred and amoritized to
interest income over the contractual life of the loan using the
interest method.
f. Effective June 30, 1995, the Association adopted the provisions of SFAS
No.114, "Accounting by Creditors for Impairment of a Loan" and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." Specific valuation allowances are
established for impaired loans for the difference between the loan
amount and either the present value of expected future cash flows
discounted at the loan's effective interestrate or the fair value of
collateral less estimated selling costs. The Association considers a
loan to be impaired when, based on current information and events,
it is probable that the Association will be unable to collect all
amounts due according to the contractual terms of the loan agreement
on a timely basis. The types of loans for which impairment is
measured under SFAS Nos. 114 and 118 include nonaccrual income
property loans (excluding those loans included in the homogeneous
portfolio which are collectively reviewed for impairment), large
nonaccrual residential real estate loans and troubled debt
restructurings. Such loans are placed on nonaccrual status at the
point deemed uncollectible. Impairment losses arerecognized through
an increase in the allowance for loan losses. There wereno impaired
loans under SFAS Nos. 114 and 118 at September 30, 1996 and 1995.
Certain loans were restructured in a troubled debt restructuring
involving amodification of terms before the effective date of SFAS
No. 114 and 118. Estimated future cash receipts in excess of the
carrying amount of
51
<PAGE>
the loans (unearned discounts) are being amortized over the remaining
life of the loans. During the year ended September 30, 1996 the
Association recognized $62,000 to interest income on such loans which
were paid off.
g. Allowances for losses are available to absorb losses incurred on loans
receivable and foreclosed real estate held for sale and represent
additions charged to expense, less net charge-offs. In determining
the allowances for losses to be maintained, management evaluates
current economic conditions, past loss and collection experience,
fair value of the underlying collateral and risk characteristics of
the loan portfolio and foreclosed real estate held for sale.
Management believes that allowances for losses on loans receivable
and foreclosed real estate are adequate.
h. Premises and equipment, net are carried at cost, less accumulated
depreciation. Depreciation of premises and equipment is computed
using the straight-line and the accelerated cost recovery methods
based on the estimated useful lives of the related assets. Estimated
lives are generally ten to forty-five years for buildings and
improvements, and three to seven years for furniture and equipment.
i. Foreclosed real estate held for sale, net is carried at the lower of
cost or fair value less estimated selling costs. Costs related to
holding and maintaining the property are charged to expense and costs
related to improvements of the property are capitalized.
j. Interest on securities, certificates of deposits, mortgage-backed
securities and loans receivable is accrued as earned. Interest on
loans receivable contractually delinquent and impaired loans is
excluded from income when deemed uncollectible.
k. The Association files its income tax returns using the modified cash
basis of accounting. Effective October 1, 1993, the Association
changed its method of accounting for income taxes to conform with
SFAS No. 109. See note 10.
l. Earnings per share are based upon the weighted-average shares
outstanding during the period. ESOP shares which have been commited
to be released are considered outstanding. Earnings for the period
October 1, 1994 to March 31, 1995 have been excluded from the
calculation of earnings per share for the year ended September 30,
1995. Earnings for the period April 1, 1995 to April 7, 1995
(conversion date) were not significant. The weighted average shares
outstanding during the year ended September 30, 1996 and 1995 were
398,562 and 191,699, respectively.
m. The following paragraphs summarize the impact of new accounting
pronouncements:
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 requires mortgage banking
enterprises to recognize the rights to service mortgage loans for
others as a separate asset regardless of whether such rights were
purchased or originated. SFAS No. 122 is effective prospectively for
transactions entered into in fiscal years that begin after December
15, 1995. SFAS No. 122 is not expected to have a significant effect
on the Company's financial position or results of operations. SFAS
No. 122 will be superseded by SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities," described below, effective January 1, 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 suggests that compensation
cost for stock-based employee compensation plans be measured at the
grant date based on the fair value of the award and recognized over
the service period, which is usually the vesting period. However,
SFAS No. 123 also allows an institution to use the intrinsic value
based method under APB Opinion No. 25. Stock-based employee
compensation plans include stock purchase plans, stock options,
restricted stock and stock appreciation rights. Employee stock
ownership plans are not covered by this Statement. SFAS No. 123 is
effective for transactions entered into in fiscal years which begin
after December 15, 1995, with earlier application permitted. SFAS
No. 123 is not expected to affect the Company's financial position
or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities." The statement focuses on the issues of accounting for
transfers and servicing of financial assets, extinguishments of
liabilities and financial assets subject to prepayment. SFAS No. 125
is effective for transfers and are effective for financial assets
held
52
<PAGE>
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.
(2) Risks and Uncertainties
The Association is a community oriented financial institution which
provides traditional financial services within the areas it serves. The
Association is engaged primarily in the business of attracting deposits
from the general public and using these funds to originate one- to
four-family residential mortgage and other loans located in St. Louis
County and the City of St. Louis, Missouri.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions which affect the reported amounts of assets
and liabilities as of the balance sheet dates and income and expenses
for the periods covered. Actual results could differ significantly from
these estimates and assumptions.
The Association's operations are affected by interest rate risk, credit
risk, market risk and regulations by the Office of Thrift Supervision
(OTS). The Association is subject to interest rate risk to the degree
that its interest-bearing liabilities mature or reprice more rapidly, or
on a different basis, than its interest-earning assets. To better
control the impact of changes in interest rates, the Association has
sought to improve the match between asset and liability maturities or
repricing periods and rates by emphasizing the origination of
adjustable-rate mortgage loans, balloon mortgage loans with three, five
and seven year terms, offering certificates of deposit with terms of up
to five years and maintaining a securities portfolio with maturities of
up to five years. The Association uses a net market value methodology
provided by the OTS to measure its interest rate risk exposure. This
exposure is a measure of the potential decline in the net portfolio
value of the Association based upon the effect of an assumed 200 basis
point increase or decrease in interest rates. Net portfolio is the
expected discounted cash flows from the institution's assets,
liabilities and off-balance-sheet contracts. Credit risk is the risk of
default on the Association's loan portfolio that results from the
borrowers' inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of collateral
underlying loans receivable and the valuation of real estate held by
the Association. The Association is subject to periodic examination by
regulatory agencies which may require the Association to record
increases in the allowances based on their evaluation of available
information. There can be no assurance that the Association's regulators
will not require further increases to the allowances.
(3) Securities
Securities are summarized as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale-
equity securities:
Asset Management
Funds, Inc.:
Short U.S. Government
securities $ 250,000 -- (11,601) 238,399
Intermediate mortgage
securities 250,000 -- (15,000) 235,000
------------ ------ --------- ---------
$ 500,000 -- (26,601) 473,399
------------ ------ --------- ---------
------------ ------ --------- ---------
Weighted-average rate 6.36%
------------
------------
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held to maturity-
debt securities:
Federal agency
obligations due after
one through five years $ 1,689,069 656 (19,725) 1,670,000
------------ ------ -------- ---------
------------ ------ -------- ---------
Weighted-average rate 6.25%
------------
------------
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Available for sale
equity securities:
Asset Management
Funds, Inc.:
Short U.S. Government
securities $ 250,000 -- (7,962) 242,038
Intermediate mortgage
securities 250,000 -- (9,000) 241,000
------------ ------ --------- --------
$ 500,000 - (16,962) 483,038
------------ ------ --------- --------
------------ ------ --------- --------
Weighted-average rate 6.33%
------------
-----------
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Held to maturity-
debt securities:
Federal agency
obligations due after
one through five years $ 486,460 -- (13,335) 473,125
------------ ------ -------- --------
------------ ------ -------- --------
Weighted-average rate 5.66%
------------
------------
</TABLE>
The short U.S. Government securities fund consists primarily of U.S.
Government and investment grade debt securities with remaining
maturities of five years or less. The intermediate mortgage securities
fund consists primarily of collateralized mortgage obligations and
mortgage-backed securities with an expected average life of less than
ten years.
(4) Mortgage-backed Securities
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 210,314 5,082 (754) 214,642
FHLMC 1,749,955 -- (67,515) 1,682,440
Collateralized
mortgage obligations-
FHLMC and FNMA 3,540,326 -- (123,282) 3,417,044
------------ ------- --------- ----------
$ 5,500,595 5,082 (191,551) 5,314,126
------------ ------- --------- ----------
------------ ------- --------- ----------
Weighted-average rate 6.00%
------------
------------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 232,696 8,802 -- 241,498
FHLMC 1,879,763 -- (40,026) 1,839,737
Collateralized mortgage
obligations- FHLMC
and FNMA 3,537,431 -- (100,589) 3,436,842
------------ ------ -------- ----------
$ 5,649,890 8,802 (140,615) 5,518,077
------------ ------ -------- ----------
------------ ------ -------- ----------
Weighted-average rate 6.21%
------------
------------
</TABLE>
Adjustable-rate mortgage-backed securities included in the portfolio at
September 30, 1996 and 1995 amounted to $3,540,326 and $3,537,431,
respectively.
(5) Loans Receivable, Net
Loans receivable, net are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Real estate loans:
Single-family, 1-4 units $ 18,545,694 18,082,836
Multi-family, 5 or more units 983,726 1,213,616
Construction 1,526,500 --
Commercial 784,820 831,736
Consumer loans:
Boat loans 87,471 260,127
Loans secured by deposits -- 19,352
------------ -----------
21,928,211 20,407,667
Loans in process (560,261) --
Deferred loan fees, net (11,918) (6,989)
Unearned discount on loans (8,280) (64,726)
Allowance for losses (203,515) (305,060)
------------ -----------
$ 21,144,237 20,030,892
------------ -----------
------------ -----------
Weighted-average rate 8.23% 8.24%
------------ -----------
------------ -----------
</TABLE>
Adjustable-rate loans included in the portfolio amounted to $12,601,297
and $13,231,909 at September 30, 1996 and 1995, respectively.
55
<PAGE>
Following is a summary of activity in allowance for losses:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------- ------
<S> <C> <C> <C>
Balance, beginning of year $ 305,060 387,573 434,193
Recoveries:
Real estate 5,062 18,745 30,323
Boats 1,613 6,151 38,639
Charge-offs:
Real estate -- (20,135) --
Boats -- (670) --
Provision charged (credited) to expense (108,220) (86,604) (115,582)
------------ -------- --------
Balance, end of year $ 203,515 305,060 387,573
------------ -------- --------
------------ -------- --------
</TABLE>
Commercial real estate loans
consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ---------
<S> <C> <C>
Office buildings $ 79,353 98,143
Retail stores 626,894 645,283
Other 78,573 88,310
------------ --------
$ 784,820 831,736
------------ --------
------------ --------
</TABLE>
Following is a summary of loans to
directors, executive officers and
employees for the year ended
September 30, 1996:
<TABLE>
<S> <C>
Balance, beginning of year $ 215,535
Additions 96,851
Repayments (117,531)
------------
Balance, end of year $ 194,855
------------
------------
</TABLE>
These loans were made on substantially the same terms as those prevailing
at the time for comparable transactions with unaffiliated persons, except
for reduced interest rates for loans originated prior to enactment of FIRREA.
(6) Premises and Equipment, Net
Premises and equipment, net are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ---------
<S> <C> <C>
Land $ 112,024 112,024
Office building 575,934 571,984
Furniture and equipment 252,610 254,304
Automobile 34,020 34,020
------------ --------
974,588 972,332
Less accumulated depreciation 564,304 541,662
------------ ---------
$ 410,284 430,670
------------ ---------
------------ ---------
</TABLE>
56
<PAGE>
Depreciation expense for 1996, 1995 and 1994 was $24,748, $30,331, and
$34,656, respectively.
(7) Foreclosed Real Estate Held for Sale, Net
Foreclosed real estate held for sale, net is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Foreclosed real estate held for sale $ -- 7,000
Allowance for losses -- (700)
--------- ---------
$ -- 6,300
--------- ---------
--------- ---------
</TABLE>
Following is a summary of activity in allowance for losses:
<TABLE>
<CAPTION>
1996 1995 1994
----------- -------- -------
<S> <C> <C> <C>
Balance, beginning of year $ 700 -- 34,667
Recoveries:
Foreclosed real estate 16,279 -- 45,817
Boats -- 50 15,700
Charge-offs:
Foreclosed real estate -- -- (33,413)
Boats -- -- (8,702)
Provision charged
(credited) to expense (16,979) 650 (54,069)
---------- -------- -------
Balance, end of year $ -- 700 --
---------- -------- -------
---------- -------- -------
</TABLE>
(8) Deposits
Deposits are summarized as follows:
Description and interest rate
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
NOW accounts, 2.00% $ 1,533,669 1,459,820
Super NOW accounts, 2.25% 125,232 155,455
Passbook accounts, 2.75% 6,227,050 6,607,832
Money market deposit accounts,
3.10 and 2.86%, respectively 1,221,855 1,427,831
------------ ----------
Total transaction accounts 9,107,806 9,650,938
------------ ----------
Certificates:
3.00 - 3.99% 200,738 1,429,076
4.00 - 4.99% 2,733,312 3,527,685
5.00 - 5.99% 10,396,312 7,183,614
6.00 - 6.99% 1,503,566 2,000,802
7.00 - 7.99% 5,000 606,147
8.00 - 8.99% 3,453 319,153
9.00 - 9.99% 283,772 535,439
------------ -----------
Total certificates, 5.29% and
5.53%, respectively 15,126,153 15,601,916
------------ -----------
Total deposits $ 24,233,959 25,252,854
------------ -----------
------------ -----------
Weighted-average rate - deposits 4.31% 4.43%
------------ -----------
------------ -----------
</TABLE>
57
<PAGE>
Certificate maturities are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Due within one year $ 9,673,815 10,144,509
Second year 2,505,872 2,006,788
Third year 1,583,705 1,439,272
Fourth year 757,619 1,405,057
Fifth year 512,326 536,865
After fifth year 92,816 69,425
------------- -----------
$ 15,126,153 15,601,916
------------ -----------
------------ -----------
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- --------- ----------
<S> <C> <C> <C>
NOW, Super NOW, passbook and money
market deposit accounts $ 246,092 290,294 321,753
Certificates 843,033 793,972 824,103
------------ --------- ---------
$ 1,089,125 1,084,266 1,145,856
------------ --------- ---------
------------ --------- ---------
</TABLE>
(9) Advances from FHLB of Des Moines
Advances from the Federal Home Loan Bank of Des Moines at September 30, 1996
amounted to $1,000,000. The advance, which carries an interest rate of 5.81%
and matures December 18, 1996, is secured by FHLB stock and single-family
mortgage loans of $1,500,000.
(10) Income Taxes
In computing Federal income tax, savings institutions are allowed a statutory
bad debt deduction of otherwise taxable income of 8%, subject to limitations
based on aggregate loans and savings balances. Due to limitations based on
the level of loans and deposits outstanding and retained earnings, no bad
debt deduction was allowed under either the percentage of taxable income
method or experience method for 1996 and 1995. The percentage of taxable
income method was used for income tax purposes for 1994.
On August 20, 1996 the Small Business Job Protection Act of 1996 was signed
into law. Under the Act any tax bad debt reserves in excess of the 1987 tax
year level will be subject to recapture and payable in equal amounts over six
years in tax years beginning January 1, 1996 and thereafter. Since the
Association's loans outstanding at September 30, 1996 were less than their
loans outstanding at the end of the 1987 tax year (December 31, 1987) the tax
bad debt reserves at December 31, 1987 were reduced by the ratio of the
Association's loans outstanding at September 30, 1996 to the balance of the
loans outstanding at December 31, 1987. As a result of the excess tax bad debt
reserves, the Association recognized an additional tax liability of $74,000
as a charge to earnings. Savings institutions may defer the recapture of their
applicable excess tax bad debt reserves for two years if they meet a
residential loan requirement. For tax years beginning January 1, 1996 and
thereafter the recapture provision will eliminate the percentage of taxable
income method. Savings institutions with $500 million or less in assets will
be permitted to make additions to the tax bad debt reserve using the
experience method.
58
<PAGE>
Effective October 1, 1993, the Association adopted SFAS No. 109, "Accounting
for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities which will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount which will more likely than not be
realized. Income tax expense is the tax payable or refundable for the period
plus or minus the net change in the deferred tax assets and liabilities. The
cumulative effect of the change in accounting principle on years prior to
October 1, 1993, of $200,691 is included as an addition to net earnings for the
year ended September 30, 1994.
The components of the net deferred tax asset are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued expense, net $ 95,122 24,616
Deferred loan fees, net 4,028 2,298
Imputed loss on loans -- 1,548
Deferred gain on real estate 1,993 --
Book over tax ESOP expense 3,956 1,536
Book over tax RRP expense 7,598 --
Excess of base year over
current tax bad debt reserve -- 24,984
Allowance for losses on loans
and foreclosed real estate 68,788 100,524
------------- ------------
Gross deferred tax assets 181,485 155,506
Valuation allowance - (24,984)
------------- ------------
Total deferred tax assets 181,485 130,522
------------- ------------
Excess tax bad debt reserve (74,249) --
FHLB stock dividends (26,236) (23,522)
------------- ------------
Total deferred tax liabilities (100,485) (23,522)
------------- ------------
Net deferred tax asset $ 81,000 107,000
------------ ------------
------------ ------------
</TABLE>
The valuation allowance on deferred tax assets was reduced by $24,984 and
$1,462 during 1996 and 1995, respectively. The provisions of SFAS No. 109
require the Association to establish a deferred tax asset or liability for
the tax effect of the tax bad debt reserves under or over the December 31,
1987 amounts. The Association's tax bad debt reserves are approximately
$752,000. The estimated deferred tax liability on such amount is
approximately $256,000, which has not been recorded in the accompanying
consolidated financial statements. If these tax bad debt reserves are used
for other than loan losses, the amount used will be subject to Federal income
taxes at the then prevailing corporate rate.
59
<PAGE>
Income taxes are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Current:
Federal $ 144,100 166,000 145,000
State 23,000 22,000 31,000
------------ ---------- -------------
167,100 188,000 176,000
------------ ---------- -------------
Deferred:
Federal 29,000 29,000 36,000
State (3,000) 5,000 3,000
------------ ---------- -------------
26,000 34,000 39,000
------------ ---------- -------------
$ 193,100 222,000 215,000
------------ ---------- -------------
------------ ---------- -------------
</TABLE>
The Association is subject to state taxes based on 7% of state taxable
income. See note 13.
Deferred income tax expense represents the tax effects of reporting income
and expense in different periods for financial reporting purposes than tax
purposes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------- ----------
<S> <C> <C> <C>
Allowance for losses
on loans and foreclosed
real estate $ 115,991 28,052 27,152
Accrual to modified cash
basis for tax purposes (78,641) 4,956 4,711
Imputed loss on loans 1,727 1,010 986
Book over tax ESOP expense (2,699) (1,536) --
Book over tax RRP expense (8,475) -- --
FHLB stock dividends 3,027 -- --
Deferred loan fees, net (1,930) 2,518 3,151
Deferred state income taxes (3,000) 5,000 3,000
Other -- (6,000) --
------------ ------------ -----------
$ 26,000 34,000 39,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The provision for income taxes differs from the Federal statutory corporate
tax rate as follows:
<TABLE>
<CAPTION>
Percentage of earnings before income
taxes and cumulative effect of change
in accounting principle
---------------------------------------
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Tax at Federal statutory rate 34.0 % 34.0 % 34.0 %
Increases (decreases) in taxes:
Change in valuation allowance
on deferred tax assets (2.8) (.2) (6.2)
State taxes, net of Federal
income tax benefit 3.8 3.2 3.4
Excess tax bad debt reserve
recapture 21.1 -- --
Average fair value versus
cost of ESOP shares 3.2 .6 --
Surtax exemption (2.9) -- --
Other, net (1.4) .1 .7
------- -------- --------
Effective tax rate 55.0 % 37.7 % 31.9 %
------- -------- --------
------- -------- --------
</TABLE>
60
<PAGE>
(11) Employee Benefits
The Association participates in an industry-wide retirement plan which covers
substantially all employees. Prior service costs have been fully funded.
Since this is a multiemployer plan, the plan's administrators are unable to
determine the actuarial present value of benefits attributable to the
Association's participants in the plan. The plan's administrators have
indicated that the fund's assets exceed the actuarially computed value of
vested benefits at June 30, 1996, the most recent actuarial report available,
and at June 30, 1995 and 1994. No contributions or pension expense were
required for 1996, 1995, or 1994.
In connection with the conversion from mutual to stock form, the Association
established an employee stock ownership plan (ESOP) for the benefit of
participating employees. Employees are eligible to participate upon
attaining age twenty-one and completing one year of service.
The ESOP borrowed $344,000 from the Company to fund the purchase of 34,400
shares of the Company's common stock. The purchase of shares of the ESOP
was recorded in the consolidated financial statements through a credit to
common stock and additional paid-in capital with a corresponding charge to a
contra equity account for the unreleased shares. The loan is secured solely
by the common stock and is to be repaid in equal quarterly installments of
principal payable through March, 2000 at an 8% interest rate. The
intercompany ESOP note and related interest were eliminated in consolidation.
The Association makes quarterly contributions to the ESOP which are equal to
the ESOP's debt service less dividends on unallocated ESOP shares used to
repay the loan. Dividends on allocated shares will be paid to participants
of the ESOP. The ESOP shares are pledged as collateral on the ESOP loan.
Shares are released from collateral and allocated to participating employees,
based on the proportion of loan principal and interest repaid and
compensation of the participants. Forfeitures will be reallocated to
participants on the same basis as other contributions in the plan year.
Benefits are payable upon a participant's retirement, death, disablity or
separation from service.
Effective with the reorganization date the Association adopted SOP 93-6.
As shares are committed to be released from collateral, the Association
reports compensation expense equal to the average fair value of the ESOP
shares committed to be released. Dividends on allocated ESOP shares are
charged to stockholders' equity. Dividends on unallocated ESOP shares are
recorded as a reduction to the ESOP loan. ESOP expense for 1996 and 1995
was $108,964 and $49,917, respectively. The fair value of unreleased
ESOP shares based on market price of the Company's stock was $343,650 at
September 30, 1996.
The number of ESOP shares at September 30, 1996 were as follows:
<TABLE>
<S> <C>
Allocated shares 3,915
Shares released for allocation 7,575
Unreleased shares 22,910
------
Total ESOP shares 34,400
------
------
</TABLE>
61
<PAGE>
On April 18, 1996, the stockholders of the Company ratified the 1996
Recognition and Retention Plan (RRP). All 17,200 shares under the RRP were
awarded in April, 1996 to directors, executive officers and employees. During
June, 1996, 207 shares under the RRP were forfeited. The 207 shares will be
available for future grants. The shares granted are in the form of
restricted stock payable over a five-year period at the rate of 20% per year
following the date of grant of the award.
Compensation expense equal to the market value of the shares at the date of
grant will be recognized on a pro rata basis over five years from the date of
grant. RRP expense for 1996 was $22,480.
On April 18, 1996, the stockholders of the Company also ratified the Stock
Option Plan. All 43,000 shares under the Plan were awarded in April, 1996
to directors, executive officers and employees. During June, 1996, 619 shares
under the Plan were forfeited. The stock options were awarded at $14.625 per
share which was equal to the market value of the Company's common stock
at the date of grant. Stock options granted under the Plan vest at the rate
of 20% per year following the date of the award. At September 30, 1996 there
were no shares exercisable.
(12) Stockholders' Equity and Regulatory Capital
The Company issued 430,000 shares of common stock at $10 per share in
conjunction with an initial public offering completed on April 7, 1995.
Net proceeds from the sale of common stock in the offering were $3,607,238,
after deduction of conversion costs of $348,762, and unearned compensation
related to shares issued to the Employee Stock Ownership Plan. The Company
retained 50% of the net conversion proceeds, less the funds used to originate
a loan to the ESOP for the purchase of shares of common stock, and used the
balance of the net proceeds to purchase all of the stock of the Association
in the conversion.
During 1996 the Company initiated a stock repurchase program upon approval by
the OTS of up to 21,500 shares, or 5% of common stock issued in the Company's
initial common stock offering. During May and July, 1996 the Company
repurchased 6,700 and 14,800 shares of common stock at a price of $15 and
$15.375 per share, respectively.
Deposit account holders and borrowers do not have voting rights in the
Association. Voting rights were vested exclusively with the stockholders of
the holding company. Deposit account holders continue to be insured by the
SAIF. A liquidation account was established at the time of conversion in an
amount equal to the capital of the Association as of the date of the latest
balance sheet contained in the final prospectus. Each eligible account
holder or supplemental eligible account holder is entitled to a proportionate
share of this account in the event of a complete liquidation of the
Association, and only in such event. This share will be reduced if the
account holder's or supplemental eligble account holder's deposit balance
falls below the amounts on the date of record and will cease to exist if the
account is closed. The liquidation account will never be increased despite
any increae in the related deposit balance.
62
<PAGE>
An OTS regulation restricts the Association's ability to make capital
distributions, including paying dividends. The regulation provides that
an institution meeting its capital requirements, both before and after its
proposed capital distribution, may generally distribute the greater of (1)75%
of its net earnings for the prior four quarters or (2) 100% of its net
earnings to date during the calendar year, plus the amount that would reduce
by one-half its surplus capital ratio (defined as the percentage by which the
institution's capital-to-asset ratio exceeds the ratio of its capital
requirements to its assets) at the begining of the calendar year without prior
supervisory approval. The regulation provides more significant restrictions
on payment of dividends in the event that the capital requirements are not
met.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) requires that savings institutions maintain "core capital" of
at least 3% of adjusted total assets. Under proposals currently being
evaluated by the OTS, a savings institution's core capital requirement could
be increased to between 4% and 5% of adjusted total assets. Core capital is
defined to include stockholders' equity among other components. Savings
institutions also must maintain "tangible capital" of not less than 1.5% of
the Association's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets." All of the
Association's capital is tangible.
In addition to requiring compliance with the core and tangible capital
standards, FIRREA and the OTS regulations also require that savings
institutions satisfy a risk-based capital standard. The minimum level of
such capital is based on a credit risk component and calculated by
multiplying the value of each asset (including off-balance sheet commitments)
by one of four risk factors. The four risk categories range from zero for
cash to 100% for certain delinquent loans and repossessed property. Savings
institutions must maintain an 8.0% risk-based capital level.
The following table presents the Association's capital position relative to
its regulatory capital requirements under FIRREA at September 30, 1996:
<TABLE>
<CAPTION>
Regulatory Capital
------------------------------------------
Tangible Core Risk-Based
------------ --------- -----------
<S> <C> <C> <C>
Stockholders' equity per
consolidated financial
statements $ 6,807,129 6,807,129 6,807,129
Stockholders' equity of
the Company not available
for regulatory capital
purposes (1,409,684) (1,409,684) (1,409,684)
----------------- ----------- -----------
Association's GAAP capital 5,397,445 5,397,445 5,397,445
Deferred tax asset (76,000) (76,000) (76,000)
General valuation
allowances - limited -- -- 177,618
----------------- ----------- ------------
Regulatory capital 5,321,445 5,321,445 5,499,063
Regulatory capital
requirement (471,043) (942,087) (1,134,681)
----------------- ------------- ------------
Regulatory capital
- excess $ 4,850,402 4,379,358 4,364,382
----------------- ------------ ------------
----------------- ------------ ------------
Regulatory capital ratio 16.95% 16.95% 38.77%
Regulatory capital
requirement (1.50) (3.00) (8.00)
----------------- ------------ -------------
Regulatory capital
ratio - excess 15.45% 13.95% 30.77%
----------------- ------------ -------------
----------------- ------------ -------------
</TABLE>
63
<PAGE>
(13) Intangible Tax Settlement
The Supreme court of the State of Missouri declared the intangible tax applied
to savings institutions unconstitutional in February, 1982. Legislation was
enacted May 25, 1982 to tax institutions based on 7% of state taxable income.
As a result of a court ruling, the Association was allowed a credit against
the state income taxes due for calendar years 1982 through 1988. The
Association also received a refund of $14,081 in 1994. At September 30, 1994,
the Association had fully utilized the intangible taxcredit.
(14) Financial Instruments with Off-Balance-Sheet Risk
The Association is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments generally include commitments to
originate mortgage loans. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized
in the balance sheet. The Association's maximum exposure to credit loss in
the event of nonperformance by the borrower is represented by the contractual
amount and related accrued interest receivable of those instruments. The
Association minimizes this risk by evaluating each of a first or second
mortgage on the borrower's property. The amount of collateral obtained is
based upon an appraisal of the property.
Commitments at September 30, 1996 to originate fixed-rate mortgage loans
(including related loans in process) were $653,000, expiring in generally
180 days or less.
(15) Condensed Parent Company Only Financial Statements
The following condensed balance sheets and condensed statements of earnings
and cash flows for Reliance Financial Inc. should be read in conjunction with
the consolidated financial statements and the notes thereto.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1996 1995
------------- ----------
Assets
<S> <C> <C>
Cash and cash equivalents $ 180,870 365,859
Certificates of deposit 695,000 1,288,000
ESOP note receivable 240,800 309,600
Accrued interest receivable 2,635 4,966
Securities held to maturity 300,000 --
Investment in subsidiary 5,397,445 5,157,402
Other assets 5,408 5,746
Deferred tax asset 5,000 5,000
------------ ----------
Total assets $ 6,827,158 7,136,573
------------ ----------
------------ ----------
Liabilities and
Stockholders' Equity
Other liabilities $ 14,004 16,548
Accrued income taxes 6,025 21,000
------------ -----------
Total liabilities 20,029 37,548
Stockholders' equity 6,807,129 7,099,025
------------ ------------
Total liabilities and
stockholders' equity $ 6,827,158 7,136,573
------------ ------------
------------ ------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
Period from
Year Ended April 7, 1995 to
September 30, September 30,
1996 1995
--------------- -----------------
<S> <C> <C>
Equity in earnings of the Association $ 121,238 340,948
Interest income 114,447 64,105
Other expenses (68,222) (22,752)
Income taxes (9,500) (16,000)
------------ --------------
Total assets $ 157,963 366,301
------------ -------------
------------ -------------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Year Ended April 7, 1995 to
September 30, September 30,
1996 1995
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 157,963 366,301
Adjustments to reconcile net earnings
to net cash provided by (used for)
operating activities:
Equity in earnings of the Association (121,238) (340,948)
Decrease (increase) in:
Accrued interest receivable 2,331 (4,966)
Other assets 338 (5,746)
Deferred tax asset -- (5,000)
Increase (decrease) in:
Other liabilities (2,544) 16,548
Accrued income taxes (14,975) 21,000
------------- ----------------
Net cash provided by (used for)
operating activities 21,875 47,189
------------- ---------------
Cash flows from investing activities:
Loan to ESOP -- (344,000)
Principal collected on loan to ESOP 68,800 34,400
Purchase of common stock of Association -- (1,975,628)
Purchase of certificates of deposit (497,000) (1,288,000)
Proceeds from maturity of
certificates of deposit 1,090,000 --
-------------- -----------------
Net cash provided by (used for)
investing activities 361,800 (3,573,228)
-------------- ------------------
Cash flows from financing activities:
Proceeds from sale of common stock -- 3,951,238
Purchase of treasury stock (328,055) --
Cash dividends (240,609) (59,340)
--------------- ------------------
Net cash provided by (used for)
financing activities (568,664) 3,891,898
-------------- ------------------
Net increase (decrease) in cash and
cash equivalents (184,989) 365,859
Cash and cash equivalents at
beginning of period 365,859 --
-------------- ------------------
Cash and cash equivalents at
end of period $ 180,870 365,859
------------ ------------------
------------ ------------------
</TABLE>
(16) Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments at
September 30, 1996, are summarized as follows:
<TABLE>
<CAPTION>
Carrying Fair
<S> <C> <C>
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Amount Value
---------- ----------
<S> <C> <C>
Non-trading instruments
and nonderivatives:
Cash and cash equivalents $ 1,211,033 1,211,033
Certificates of deposit 1,586,000 1,586,000
Securities available for sale 473,399 473,399
Securities held to maturity 1,689,069 1,670,000
Stock in FHLB of Des Moines 336,000 336,000
Mortgage-backed securities
held to maturity 5,500,595 5,314,126
Loans receivable, net 21,144,237 21,454,072
Deposits 24,233,959 24,146,227
Advances from FHLB of Des Moines $ 1,000,000 1,000,000
</TABLE>
The following methods and assumptions were used in estimating the fair values:
Cash and cash equivalents and certificates of deposit are valued at their
carrying amounts due to the relatively short period to maturity of the
instruments.
Fair values of securities and mortgage-backed securities are based on quoted
market prices or, if unavailable, quoted market prices of similar securities.
Stock in FHLB of Des Moines is valued at cost, which represents redemption
value and approximates fair value.
Fair values are computed for each loan category using market spreads to
treasury securities for similar existing loans in the portfolio and
management's estimates of prepayments.
Deposits with no defined maturities, such as NOW and Super NOW accounts,
passbook accounts and money market deposit accounts, are valued at the amount
payable on demand at the reporting date.
The fair values of certificates of deposit and advances from FHLB of
DesMoines are computed at fixed spreads to treasury securities with similar
maturities.
(17) SAIF Special Assessment
On September 30, 1996 the Deposit Insurance Funds Act of 1996 was signed into
law. Under the Act, the FDIC will collect from savings institutions in
November, 1996 a special assessment of 65.7 basis points of SAIF assessable
deposits at March 31, 1995. The SAIF special assessment of $215,500 was
charged to earnings during the year ended September 30, 1996.
The statute provides that the assessment is deductible for tax purposes in
the year when paid. Accordingly, the SAIF special assessment will be
deductible for tax return purposes during the year ended September 30, 1997.
The FDIC has issued a proposed rule on revised risk-based assessment
schedules for SAIF members. Under this rule, the Association anticipates for
the fiscal year ended September 30, 1997, a regular SAIF premium of 4.5 basis
points of SAIF assessable deposits for the period October 1, 1996 through
December 31, 1996 and an annualized 6.4 basis points thereafter.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
66
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the Board of
Directors and executive officers of the Company.
<TABLE>
<CAPTION>
POSITION HELD
WITH THE DIRECTOR TERM
NAME AGE (1) COMPANY SINCE (2) EXPIRES
- ---- ------- -------------------------- --------- -------
<S> <C> <C> <C> <C>
Gerhard F. Lubbes 74 Chairman of the Board 1948 1998
John E. Bowman 64 President, Chief Executive 1990 1999
Officer and Director
Jeannette Larson 41 Executive Vice President, 1990 1999
Secretary and Director
William Schliebe 84 Senior Vice President 1951 1998
and Director
Michael Svoboda 48 Director 1995 1997
Adolph G. Kraus 59 Treasurer and Director 1990 1997
</TABLE>
- ------------------
(1) As of December 31, 1996.
(2) With the exception of Mr. Svoboda, who was appointed by the Board of
Directors on September 21, 1995 to fill the unexpired term of retiring
director Rudolph M. Steib, the year of initial appointment refers to
appointment to the Board of Directors of Reliance Federal Savings and Loan
Association of St. Louis County, the Company's mutual predecessor.
GERHARD F. LUBBES is retired. He has been associated with the Savings
Bank in various capacities for over 45 years, and has been Chairman of the
Board since 1980.
JOHN E. BOWMAN has been President and Chief Executive Officer of the
Savings Bank since 1990. Prior to that, Mr. Bowman served as Executive Vice
President of another financial institution.
JEANNETTE LARSON has been Executive Vice President and Secretary of the
Savings Bank since 1990. Ms. Larson joined the Savings Bank in 1973 and has
been an officer of the Savings Bank since 1980.
WILLIAM SCHLIEBE is part owner, President of Forder-Schliebe Realty, a
general real estate agency in St. Louis, Missouri.
MICHAEL SVOBODA was appointed to the Board of Directors on September 21,
1995. Mr. Svoboda is the owner and operator of Valcour Printing, Inc., in St.
Louis County, Missouri.
ADOLPH G. KRAUS is Senior Vice President of Land Title Insurance of St.
Louis, a real estate title insurance company.
67
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION. The following table sets forth the cash compensation
paid by the Savings Bank for services during the fiscal years ended September
30, 1996, 1995 and 1994 to the Chief Executive Officer of the Savings Bank.
Other than Mr. Bowman, no executive officer of the Savings Bank received
compensation during such years in excess of $100,000.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE (1)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
- ------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
RESTRICTED STOCK OPTIONS/ ALL OTHER
NAME AND PRINCIPAL SALARY BONUS AWARD(S) SARS COMPENSATION
POSITION YEAR ($) ($) ($)(3) (#) ($)(2)
- -------------------- ---- ------- ------- ---------------- -------- ------------
John E. Bowman 1996 $83,333 $32,675 75,465 12,900 $53,522
President and Chief 1995 $79,367 $37,393 -0- -0- $26,200
Executive Officer 1994 $75,587 $30,890 -0- -0- $12,164
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------
(1) The Savings Bank also provides its Chief Executive Officer with
membership dues to certain organizations and an auto allowance, which
dues and allowance are not included in the cash compensation table.
The aggregate amount of such benefits for any individual executive
officer did not exceed the lesser of $50,000 or 10% of such officers'
cash compensation.
(2) Includes Board of Director fees of $8,075, $7,050 and $6,200, and
payments for health and disability insurance of $4,960, $5,610, and
$5,964, made on behalf of the Chief Executive Officer for the years
ended September 30, 1996, 1995 and 1994, respectively. Also includes
the contributions or allocations pursuant to the Savings Bank's
Employee Stock Ownership Plan.
(3) Represents awards made on April 18, 1996 pursuant to the Company's
1996 Recognition and Retention Plan, which awards vest at the rate of
20% of the amount initially awarded commencing one year from the date
of the award. Dividends on such shares accrue and are paid to the
recipient. The value of such shares was determined by multiplying the
number of shares awarded by the market price of the Company's common
stock on April 18, 1996, the date of the award. At September 30, 1996,
Mr. Bowman held 5,160 shares of common stock that remained subject to
restrictions under the Plan. The fair market value of such restricted
stock on September 30, 1996 (based on the market price of the common
stock on such date) was $77,400.
68
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZED VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION FOR OPTION TERM
UNDERLYING OPTIONS GRANTED EXERCISE ----------------------------------
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE/SHARE EXPIRATION DATE 5% 10%
- -------------- --------------- -------------- ----------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John E. Bowman 12,900 30% $14.625 4/19/06 9,449.25 18,898.50
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED
SHARES OPTIONS AT VALUE OF UNEXERCISED IN-THE-
ACQUIRED FISCAL YEAR-END MONEY OPTIONS AT FISCAL YEAR-END
UPON VALUE ----------------------------- ----------------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John E. Bowman -- -- 0/12,900 0/4,838
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
Persons and groups owning in excess of five percent of the common stock
of the Company are required to file certain reports with the Securities and
Exchange Commission ("SEC") regarding such ownership pursuant to the
Securities Exchange Act of 1934. The following table sets forth, as of
December 13, 1996, the shares of common stock beneficially owned by all
directors and executive officers as a group and by each person who was the
beneficial owner of more than five percent of the Company's outstanding
shares of common stock. This information is based solely upon information
supplied to the Company and the filings required pursuant to the Securities
Exchange Act of 1934.
AMOUNT OF SHARES
OWNED AND NATURE PERCENT OF SHARES
NAME AND ADDRESS OF OF BENEFICIAL OF COMMON STOCK
BENEFICIAL OWNERS OWNERSHIP(1) OUTSTANDING
- ------------------------------------ ---------------- -----------------
Tidal Insurance Limited 39,502 9.28%
Kramer Spellman L.P. 39,426 9.26%
Reliance Employee Stock 22,910 5.38%
Ownership Plan
All Directors and Executive Officers 54,840 12.88%
as a Group (6 persons)
- ---------------------
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table, of
any shares of Common Stock if he has shared voting or investment power with
respect to such security, or has a right to acquire beneficial ownership at
any time within 60 days from the Record Date. As used herein, "voting
power" is the power to vote or direct the voting of shares, and "investment
power" is the power to dispose or direct the disposition of shares.
Includes all shares held directly as well as by spouses and minor children,
in trust and other indirect ownership, over which shares the named
individuals effectively exercise sole or shared voting and investment
power.
69
<PAGE>
ITEM 13. CERTAIN TRANSACTIONS
FIRREA amended federal law by requiring that all loans or extensions of
credit to executive officers and directors of a savings institution be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the general public and
must not involve more than the normal risk of repayment or present other
unfavorable features. In addition, loans made to a director or executive
officer in excess of the greater of $500,000, or 15%, of the Savings Bank's
capital and surplus (up to a maximum of $500,000) must be approved in advance by
a majority of the disinterested members of the Board of Directors.
The Savings Bank's policy is that all loans made by the Savings Bank
to its directors and executive officers be made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility or
present other unfavorable features. Prior to the enactment of FIRREA officers,
directors and employees who received loans from the Savings Bank were eligible
for certain reductions in loan interest rates. This practice was eliminated in
1989 as to directors and executive officers in accordance with the provisions of
FIRREA.
The aggregate principal balance of loans made by the Savings Bank to
directors, executive officers (and associated persons) as of September 30, 1996,
equalled 3.6% of stockholders' equity of the Savings Bank.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The Company's consolidated financial statements for the year ended
September 30, 1996 are filed herewith at Item 8.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits
<TABLE>
<CAPTION>
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-K Report
- -------------- --------------------------- ------------------ -------------------
<S> <C> <C> <C>
2 Plan of Reorganization None Not Applicable
3 Certificate of Incorporation (1) Not Applicable
3 Bylaws (2) Not Applicable
</TABLE>
__________________
(1) Incorporated by reference to Exhibit 3.1 of the Registrant's
Registration Statement on Form S-1, filed with the Commission on
December 23, 1994 (File No. 33-87894), as amended.
(2) Incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form S-1, filed with the Commission on
December 23, 1994 (File No. 33-87894), as amended.
70
<PAGE>
<TABLE>
<CAPTION>
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-K Report
-------------- ---------------------------- ----------------- -------------------
<S> <C> <C> <C>
4 Instruments defining the (1) Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
10 Material contracts None Not Applicable
11 Statement re: computation Not Not Applicable
of per share earnings Required
12 Statement re: computation Not Not Applicable
of ratios Required
13 Annual Report to Stockholders None Not Applicable
16 Letter re: change in None Not Applicable
certifying
accountants
18 Letter re: change in
accounting principles None Not Applicable
19 Previously unfiled
documents None Not Applicable
21 Subsidiaries of Registrant None Not Applicable
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
23 Consent of Experts and Not Not Applicable
Counsel Required
24 Power of Attorney None Not Applicable
Financial Data
Schedule Exhibit 27 Not Applicable
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None Not Applicable
</TABLE>
(b) Reports on Form 8-K:
The Registrant has not filed a Current Report on Form 8-K during the
Quarter ended September 30, 1996.
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RELIANCE FINANCIAL, INC.
Date: December __, 1996 By: /s/ John E. Bowman
--------------------------------------
John E. Bowman, President
Chief Executive Officer and Director
Pursuant to the requirements of 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.
By: /s/ Gerhard F. Lubbes, By: /s/ Jeannette Larson
------------------------------------------ --------------------------
Gerhard F. Lubbes, Chairman of the Board Jeannette Larson,
Executive Vice President, Secretary, and Director
and Director
Date: December __, 1996 Date: December __, 1996
By: /s/ William Schliebe By:
------------------------------------------ --------------------------
William Schliebe, Senior Vice President Michael Svoboda, Director
and Director
Date: December __, 1996 Date: December __, 1996
By: /s/ Adolph Kraus
------------------------------------------
Adolph Kraus, Director
Date: December __, 1996
72
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,211,033
<INT-BEARING-DEPOSITS> 1,586,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 473,399
<INVESTMENTS-CARRYING> 7,525,664
<INVESTMENTS-MARKET> 7,320,126
<LOANS> 21,144,237
<ALLOWANCE> 203,515
<TOTAL-ASSETS> 32,662,802
<DEPOSITS> 24,233,959
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 330,590
<LONG-TERM> 0
0
0
<COMMON> 44,699
<OTHER-SE> 6,762,430
<TOTAL-LIABILITIES-AND-EQUITY> 32,662,802
<INTEREST-LOAN> 1,831,124
<INTEREST-INVEST> 465,672
<INTEREST-OTHER> 211,073
<INTEREST-TOTAL> 2,495,769
<INTEREST-DEPOSIT> 1,089,125
<INTEREST-EXPENSE> 1,135,444
<INTEREST-INCOME-NET> 1,360,325
<LOAN-LOSSES> (108,220)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 121,428
<INCOME-PRETAX> 351,063
<INCOME-PRE-EXTRAORDINARY> 157,963
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157,963
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
<YIELD-ACTUAL> 7.738
<LOANS-NON> 67,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 67,000
<ALLOWANCE-OPEN> 305,060
<CHARGE-OFFS> 0
<RECOVERIES> 6,675
<ALLOWANCE-CLOSE> 203,515
<ALLOWANCE-DOMESTIC> 54,499
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 149,016
</TABLE>
