<PAGE> 1
RELIANCE BANCSHARES, INC.
December 11, 1998
Dear Fellow Shareholder:
The Special Meeting of Shareholders (the "Special Meeting") of Reliance
Bancshares, Inc. ("Reliance"), a Wisconsin corporation and the holding company
for Reliance Savings Bank ("Reliance Savings Bank"), will be held on January 20,
1999, at 2:00 p.m., Milwaukee, Wisconsin time, at the Clarion Hotel & Conference
Center, 5311 South Howell Avenue, Milwaukee, Wisconsin 53207.
AT THE SPECIAL MEETING, YOU WILL BE ASKED TO CONSIDER AND VOTE UPON A
PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION, DATED JUNE 30, 1998
(THE "MERGER AGREEMENT"), AND THE RELATED AGREEMENT AND PLAN OF MERGER, DATED
SEPTEMBER 22, 1998 (THE "PLAN OF MERGER"), BY AND BETWEEN RELIANCE AND ST.
FRANCIS CAPITAL CORPORATION ("ST. FRANCIS"), A WISCONSIN CORPORATION AND THE
HOLDING COMPANY FOR ST. FRANCIS BANK, F.S.B., A FEDERALLY CHARTERED SAVINGS BANK
("ST. FRANCIS BANK"), PROVIDING FOR THE MERGER OF RELIANCE WITH AND INTO ST.
FRANCIS (THE "MERGER"). As described in the accompanying proxy statement, in the
Merger, each of your shares of Reliance common stock will be converted into the
right to elect the consideration due you in cash, shares of St. Francis common
stock, or a combination thereof, but such right is subject to the requirements
that (i) the aggregate consideration to be paid to shareholders of Reliance must
be equal to at least 60% in St. Francis common stock and no greater than 40% in
cash, and (ii) the Merger must qualify as a tax-free reorganization. Thus, no
guarantee can be given that an election by any given shareholder will be
honored, or that Reliance shareholders will receive their elected form of
consideration. AS DESCRIBED FURTHER HEREIN, THE ACTUAL AMOUNT OF CASH AND/OR
SHARES OF ST. FRANCIS COMMON STOCK TO BE RECEIVED BY SHAREHOLDERS OF RELIANCE
WILL BE DEPENDANT UPON THE AVERAGE OF THE LAST SALE PRICE OF THE DAY OF ONE
SHARE OF ST. FRANCIS COMMON STOCK OVER A TEN-DAY PRICING PERIOD ENDING SHORTLY
BEFORE THE EFFECTIVE TIME OF THE MERGER. AN ELECTION FORM AND LETTER OF
TRANSMITTAL IS ENCLOSED HEREWITH, WHICH YOU SHOULD READ CAREFULLY IN ORDER TO
UNDERSTAND YOUR RIGHTS IN ELECTING THE MERGER CONSIDERATION.
RELIANCE'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE
MERGER AGREEMENT AND PLAN OF MERGER, BELIEVES THE MERGER AGREEMENT IS IN THE
BEST INTERESTS OF RELIANCE SHAREHOLDERS, AND RECOMMENDS THAT SHAREHOLDERS OF
RELIANCE VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND
PLAN OF MERGER.
The attached Notice of Special Meeting and Proxy Statement/Prospectus
describe the formal business to be conducted at the Special Meeting, including
details concerning the Merger Agreement, Plan of Merger and the Merger.
Directors and officers of Reliance will be present at the Special Meeting to
respond to any questions that our shareholders may have.
The affirmative vote of the holders of a majority of the issued and
outstanding shares of common stock of Reliance will be required to approve the
Merger. An abstention or failure to vote will have the same effect as a vote
against the Merger. Accordingly, please complete, date, sign and promptly return
your proxy card in the enclosed envelope. Returning your proxy card will not
prevent you from voting in person at the Special Meeting, but will assure that
your vote is counted if you are unable to attend.
You should not send in certificates for your shares of Reliance common
stock with your proxy card. Please carefully read and follow the instructions
set forth in the election form and letter of transmittal delivered to you under
separate cover regarding the making of your election and the surrender of your
Reliance stock certificates.
On behalf of the Board of Directors
/s/ Allan T. Bach
Allan T. Bach
President and Chief
Executive Officer
<PAGE> 2
RELIANCE BANCSHARES, INC.
3140 SOUTH 27TH STREET
MILWAUKEE, WISCONSIN 53215
(414) 671-2222
-----------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 20, 1999
-----------------------------------------
TO THE HOLDERS OF COMMON STOCK OF RELIANCE BANCSHARES, INC.:
NOTICE IS HEREBY GIVEN that the Special Meeting of Shareholders (the
"Special Meeting") of Reliance Bancshares, Inc. ("Reliance") will be held on
January 20, 1999, at 2:00 p.m., Milwaukee, Wisconsin time, at the Clarion Hotel
& Conference Center, 5311 South Howell Avenue, Milwaukee, Wisconsin. The Special
Meeting is for the purpose of considering and voting upon the following matters,
all of which are set forth more completely in the accompanying Proxy
Statement/Prospectus:
1. To consider and vote upon the approval and adoption of the
Agreement and Plan of Reorganization, dated as of June 30, 1998 (the
"Merger Agreement"), and the related Agreement and Plan of Merger, dated as
of September 22, 1998 (the "Plan of Merger"), between St. Francis Capital
Corporation, a Wisconsin corporation ("St. Francis"), and Reliance. Copies
of the Merger Agreement and Plan of Merger are attached as Exhibits A and
B, respectively, to the accompanying Proxy Statement/Prospectus, providing,
among other things, for the merger of Reliance with and into St. Francis
(the "Merger"), and the issuance of shares of common stock of St. Francis
and the payment of cash to the shareholders of Reliance in connection
therewith. Pursuant to the Merger Agreement, shareholders of Reliance may
elect, subject to certain election and allocation procedures, to exchange
their shares of Reliance common stock for either cash in an amount ranging
from $10.00 per Reliance share up to an amount equal to .2295 multiplied by
the average market price of St. Francis' common stock over a ten-day
pricing period ending shortly before the effective time of the Merger (the
"St. Francis Average Stock Price") (the exact per share cash amount to be
dependant upon the St. Francis Average Stock Price), between .2295 and
.3085 fractional shares of St. Francis common stock (the exact fractional
share amount to be dependant upon the St. Francis Average Stock Price), or
an overall combination thereof, for each Reliance common share. However,
the aggregate consideration to be paid to shareholders of Reliance must be
equal to at least 60% in St. Francis common stock and no greater than 40%
in cash and the Merger must qualify as a tax-free reorganization. Thus, no
guarantee can be given that an election by any given shareholder will be
honored, or that Reliance shareholders will receive their elected form of
consideration.
2. To adjourn the Special Meeting to solicit additional votes in favor
of the Merger Agreement and Plan of Merger in the event that the required
vote for approval and adoption of the Merger Agreement and Plan of Merger
has not been obtained by the date of the Special Meeting.
3. To consider and act upon such other matters as may properly come
before the Special Meeting or any adjournments or postponements thereof.
The Board of Directors is not aware of any such other business.
<PAGE> 3
The Board of Directors has established December 4, 1998 as the record
date for the determination of shareholders entitled to notice of and to vote at
the Special Meeting and any adjournments or postponements thereof. Only
shareholders of record as of the close of business on that date will be entitled
to vote at the Special Meeting or any adjournments or postponements thereof. In
the event there are not sufficient votes for a quorum or to approve or ratify
any of the foregoing proposals at the time of the Special Meeting, the Special
Meeting may be postponed or adjourned in order to permit further solicitation of
proxies by Reliance.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Carol A. Barnharst
Carol A. Barnharst
Vice President, Chief Financial Officer,
Secretary and Treasurer
December 11, 1998
Milwaukee, Wisconsin
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER OR
NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND PROMPTLY
RETURN THE ACCOMPANYING PROXY CARD USING THE ENCLOSED POSTAGE-PAID ENVELOPE.
PLEASE DO NOT SEND IN CERTIFICATES FOR YOUR SHARES OF RELIANCE COMMON STOCK WITH
YOUR PROXY CARD. PLEASE CAREFULLY READ AND FOLLOW THE INSTRUCTIONS SET FORTH IN
THE ELECTION FORM AND LETTER OF TRANSMITTAL REGARDING THE MAKING OF YOUR
ELECTION AND THE SURRENDER OF YOUR RELIANCE STOCK CERTIFICATES.
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<PAGE> 4
RELIANCE BANCSHARES, INC.
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 20, 1999
ST. FRANCIS CAPITAL CORPORATION
PROSPECTUS
UP TO 740,022 SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE
(AND ASSOCIATED PURCHASE RIGHTS)
This combined Proxy Statement and Prospectus ("Proxy
Statement/Prospectus") is being furnished to the holders of common stock, $1.00
par value per share ("Reliance Common Stock"), of Reliance Bancshares, Inc., a
Wisconsin corporation ("Reliance"), in connection with the solicitation of
proxies by the Reliance Board of Directors for use at the Special Meeting of
Shareholders of Reliance to be held on January 20, 1999, at 2:00 p.m.,
Milwaukee, Wisconsin time, at the Clarion Hotel & Conference Center, 5311 South
Howell Avenue, Milwaukee, Wisconsin, or at any adjournments or postponements
thereof (the "Special Meeting"). The primary purpose of the Special Meeting is
for shareholders to consider and vote upon the merger (the "Merger") of Reliance
with and into St. Francis Capital Corporation, a Wisconsin corporation ("St.
Francis"). The Merger will be effected in accordance with an Agreement and Plan
of Reorganization, dated as of June 30, 1998 (the "Merger Agreement"), and
related Agreement and Plan of Merger, dated as of September 22, 1998 ("Plan of
Merger"), by and between Reliance and St. Francis. At the Special Meeting,
shareholders of Reliance also will consider and vote upon the possible
adjournment of the Special Meeting, if necessary, to solicit additional votes in
favor of the Merger.
In the Merger, each outstanding share of Reliance Common Stock will be
converted into the right to receive either cash (the "Per Share Cash
Distribution") (to be computed as described herein) or a fractional share of St.
Francis common stock (the "Per Share Stock Distribution") (to be computed as
described herein). The value of the Per Share Cash Distribution and Per Share
Stock Distribution will be based on the average market price of St. Francis'
common stock over a ten-day pricing period ending shortly before the effective
time of the Merger (the "St. Francis Average Stock Price"). SEE PAGES 5-7, 13-15
AND 36-38 OF THE PROXY STATEMENT/PROSPECTUS FOR AN ILLUSTRATION OF THE
COMPUTATION OF THE VALUE OF THE PER SHARE CASH DISTRIBUTION AND PER SHARE STOCK
DISTRIBUTION.
Pursuant to the Merger Agreement, Reliance shareholders may elect,
subject to certain election and allocation procedures, to exchange all of their
shares of Reliance Common Stock for the Per Share Cash Distribution for each
share, the Per Share Stock Distribution for each share, or an overall
combination thereof. However, the aggregate consideration to be paid to
shareholders of Reliance must be equal to at least 60% in St. Francis common
stock and no greater than 40% in cash, and the Merger must qualify as a tax-free
organization. Thus, no guarantee can be given that an election by any given
shareholder will be honored, or that Reliance shareholders will receive their
elected form of consideration. For a more detailed description of the terms of
the Merger, see "Proposal to Approve the Merger."
This Proxy Statement/Prospectus also constitutes a prospectus of St.
Francis with respect to up to 740,022 shares of St. Francis common stock, $0.01
par value per share ("St. Francis Common Stock"), to be issued to the
shareholders of Reliance upon consummation of the proposed Merger pursuant to
the terms of the Merger Agreement. This Proxy Statement/Prospectus and
accompanying form of proxy ("Proxy") are first being mailed on or about December
11, 1998 to shareholders of Reliance as of December 4, 1998 (the "Voting Record
Date").
SEE "RISK FACTORS" BEGINNING ON PAGE 29 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH THE ACQUISITION OF ST.
FRANCIS COMMON STOCK.
All information contained in this Proxy Statement/Prospectus relating
to St. Francis has been supplied by St. Francis, and all information relating to
Reliance has been supplied by Reliance. Neither St. Francis nor Reliance
warrants the accuracy or completeness of information relating to the other.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF ST. FRANCIS COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS OR
SAVINGS ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS DECEMBER 8, 1998.
<PAGE> 5
As described above, this Proxy Statement/Prospectus incorporates by
reference documents that are not presented herein or delivered herewith. These
documents (other than exhibits to such documents that are specifically
incorporated by reference into the text of such documents) are available,
without charge, to each person, including any beneficial owner, to whom a copy
of this Proxy Statement/Prospectus is delivered, upon written or oral request to
William R. Hotz, 13400 Bishops Lane, Suite 350, Brookfield, Wisconsin
53005-6203. In order to ensure timely delivery of the documents, any request
should be made by January 11, 1999. See "Incorporation of Certain Information By
Reference."
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ST. FRANCIS, RELIANCE OR ANY OTHER PERSON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY A SECURITY, OR A SOLICITATION OF A PROXY, IN ANY JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES MADE PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF ST. FRANCIS OR RELIANCE OR IN THE INFORMATION SET FORTH
HEREIN OR IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE SINCE THE DATE OF
THIS PROXY STATEMENT/PROSPECTUS; HOWEVER, IF ANY MATERIAL CHANGE OCCURS IN SUCH
AFFAIRS OR INFORMATION DURING THE PERIOD THAT THIS PROXY STATEMENT/PROSPECTUS IS
REQUIRED TO BE DELIVERED, THIS PROXY STATEMENT/PROSPECTUS WILL BE AMENDED AND
SUPPLEMENTED ACCORDINGLY.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus, including the information incorporated
by reference herein, information included in, and incorporated by reference
from, future filings by St. Francis with the Securities and Exchange Commission
(the "SEC" or the "Commission"), and information contained in written material,
press releases and oral statements issued by or on behalf of St. Francis or
Reliance, contains, or may contain, certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other
than statements of historical facts, included in this Proxy Statement/Prospectus
that address activities, events or developments that St. Francis or Reliance
expect, believe or anticipate will or may occur in the future are
forward-looking statements. These statements are based on certain assumptions
and analyses made by St. Francis or Reliance in light of their experience and
perception of historical trends, current conditions, expected future
developments and other factors they believe are appropriate under the
circumstances. Such statements are subject to a number of assumptions, risks and
uncertainties and are based on managements' current expectations. Examples of
factors which could cause future results to differ from managements'
expectations include, but are not limited to, the following: general economic
and competitive conditions; legislative and regulatory initiatives; monetary and
fiscal policies of the federal government; general market rates of interest;
interest rates on competing investments; interest rates on funding sources;
consumer demand for deposit and loan products and services; changes in
accounting policies and guidelines; and changes in the quality or composition of
St. Francis' and/or Reliance's loan and investment portfolios. In the case of
St. Francis, some of these risks are described in more detail below under "Risk
Factors." Investors are cautioned that any such statements are not guarantees of
future performance and that actual results or developments may differ materially
from the expectations expressed in the forward-looking statements.
-2-
<PAGE> 6
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
FORWARD-LOOKING STATEMENTS........................................................................................2
QUESTIONS AND ANSWERS ABOUT THE MERGER............................................................................5
SUMMARY..........................................................................................................10
THE PARTIES TO THE MERGER...............................................................................10
THE RELIANCE SPECIAL MEETING............................................................................11
THE MERGER..............................................................................................13
COMPARATIVE PER SHARE INFORMATION.......................................................................22
COMPARATIVE MARKET AND STOCK PRICE INFORMATION..........................................................23
SELECTED HISTORICAL FINANCIAL INFORMATION...............................................................25
INTRODUCTION.....................................................................................................28
RISK FACTORS.....................................................................................................29
THE SPECIAL MEETING..............................................................................................32
PROPOSAL TO APPROVE THE MERGER
(Proposal No. 1).................................................................................................35
General.................................................................................................35
The Merger and the Bank Merger..........................................................................35
Effect of The Merger....................................................................................35
Effective Time..........................................................................................36
Merger Consideration....................................................................................36
Price-Based Termination.................................................................................38
Background of the Merger................................................................................38
Reasons For The Merger and Recommendation of the Reliance Board of Directors............................41
Opinion of Reliance Financial Advisor...................................................................44
Election and Allocation Procedures......................................................................48
Issuance of Stock and Payment of Cash...................................................................52
Representations and Warranties..........................................................................53
Certain Covenants.......................................................................................53
Conditions to Each Party's Obligations..................................................................54
Regulatory Approvals....................................................................................56
Conduct of Business Pending Merger......................................................................56
Amendment and Waiver....................................................................................59
Termination.............................................................................................59
Management After the Merger.............................................................................60
Interests of Certain Persons In The Merger..............................................................60
Effect On Reliance Employee Benefit Plans...............................................................63
Certain Federal Income Tax Consequences.................................................................64
Accounting Treatment....................................................................................67
NASDAQ Listing..........................................................................................67
Expenses................................................................................................67
Voting Agreements.......................................................................................67
Termination Fee Arrangements............................................................................67
Resales of St. Francis Common Stock.....................................................................68
No Appraisal or Dissenters' Rights......................................................................68
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C>
DESCRIPTION OF ST. FRANCIS CAPITAL STOCK.........................................................................69
General.................................................................................................69
St. Francis Common Stock................................................................................69
St. Francis Preferred Stock.............................................................................70
Rights Plan.............................................................................................70
Changes in Control......................................................................................70
COMPARISON OF SHAREHOLDERS' RIGHTS...............................................................................73
Vacancies on the Board of Directors.....................................................................73
Advance Notice of Nominations of Directors and Shareholder Proposals....................................73
Shareholder Rights Plan ................................................................................73
BUSINESS OF THE PARTIES TO THE MERGER............................................................................74
St. Francis.............................................................................................74
Reliance 74
Regulations............................................................................................101
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................................................................129
EXPERTS.........................................................................................................129
LEGAL MATTERS...................................................................................................130
SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING...............................................................130
PROPOSAL TO ADJOURN THE SPECIAL MEETING
(Proposal No. 2)................................................................................................131
OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE SPECIAL MEETING................................................132
AVAILABLE INFORMATION...........................................................................................132
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...............................................................133
FINANCIAL STATEMENTS OF RELIANCE................................................................................F-1
Interim Financial Statements (Unaudited)...............................................................F-2
Consolidated Statements of Financial Condition.........................................................F-2
Consolidated Statements of Income......................................................................F-3
Consolidated Statements of Stockholders' Equity........................................................F-4
Consolidated Statements of Cash Flows..................................................................F-5
Notes to Consolidated Financial Statements.............................................................F-7
Report of Independent Auditors....................................................................... F-9
Consolidated Statements of Financial Condition........................................................F-10
Consolidated Statements of Income.....................................................................F-11
Consolidated Statements of Stockholders' Equity.......................................................F-12
Consolidated Statements of Cash Flows.................................................................F-13
Notes to Consolidated Financial Statements............................................................F-15
EXHIBIT A: AGREEMENT AND PLAN OF REORGANIZATION................................................................A-1
EXHIBIT B: AGREEMENT AND PLAN OF MERGER........................................................................B-1
EXHIBIT C: OPINION OF ROBERT W. BAIRD & CO. INCORPORATED.......................................................C-1
</TABLE>
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<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q(1): WHY IS RELIANCE BEING ACQUIRED BY ST. FRANCIS?
A(1): The Reliance Board has approved the Merger with St. Francis based upon
its assessment of the financial condition and prospects of Reliance in
particular and the competitive and regulatory environment for financial
institutions generally. St. Francis is a Wisconsin-based thrift holding
company for St. Francis Bank, F.S.B., a federally-chartered savings
bank which operated 25 banking offices in Wisconsin as of September 30,
1998. Reliance's financial advisor has advised the Reliance Board that
the merger consideration provided for in the Merger Agreement is fair,
from a financial point of view, to the holders of Reliance Common
Stock. The Merger will enable Reliance shareholders who elect to
exchange their shares of Reliance Common Stock for St. Francis Common
Stock to hold stock in a larger and more diversified entity whose
shares are more widely held and more actively traded. Based upon these
and other factors, the Reliance Board believes that combining with St.
Francis is in the best interests of Reliance and Reliance shareholders.
To review the background and reasons for the Merger, see pages 38
through 43.
Q(2): AS A RELIANCE SHAREHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
A(2): Prior to the Special Meeting, you will elect to receive shares of St.
Francis Common Stock, cash, or a combination of the two, in exchange
for your shares of Reliance Common Stock. You also will receive cash
instead of fractional shares of St. Francis Common Stock. You will make
this election on an Election Form being mailed to you under separate
cover. See Question 5. See also Question 3 for a further discussion and
an illustrative example of how the amount of stock and/or cash you will
receive will be calculated under the Merger Agreement.
The extent to which elections by Reliance shareholders to receive cash,
stock or a combination thereof will be accommodated will depend upon
the election of all other Reliance shareholders. Pursuant to the Merger
Agreement and in order to ensure that the Merger qualifies as a
tax-free reorganization, at least 60% of the total consideration paid
in the Merger must be in the form of shares of St. Francis Common
Stock. For example:
(1) If all Reliance shareholders elect to receive cash
for their shares, then each Reliance shareholder
(other than the Reliance ESOP, which in all cases
will receive cash) would receive 60% of their Merger
consideration in shares of St. Francis Common Stock
and 40% in cash;
(2) If Reliance shareholders collectively elect to
receive at least 60% of their total Merger
consideration in shares of St. Francis Common Stock,
then all Reliance shareholders' elections with
respect to stock, cash or a combination thereof will
be honored; and
(3) If Reliance shareholders elect to receive 50% of the
total Merger consideration in shares of St. Francis
Common Stock and 50% in cash, then all Reliance
shareholders electing stock would receive stock and
all Reliance shareholders electing cash would
receive, on a pro-rata basis, stock such that at
least 60% of the total Merger consideration is in the
form of shares of St. Francis Common Stock.
However, in no event will a shareholder who elects to receive stock
receive cash instead (except cash which may be issued in lieu of
fractional shares).
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<PAGE> 9
Q(3): HOW WILL THE NUMBER OF SHARES OF ST. FRANCIS COMMON STOCK OR THE
AMOUNT OF CASH I RECEIVE BE DETERMINED?
A(3): Generally, the Merger has been designed to give you between $10.00 and
$10.50 in value for each share of Reliance Common Stock, assuming the
St. Francis Average Stock Price (as hereinafter defined) is $32.41 or
more but not greater than $45.74. However, the number of shares of St.
Francis Common Stock and/or the amount of cash you receive will depend
on the "St. Francis Average Stock Price," which is the average of the
last sale price per share of St. Francis Common Stock for the ten
consecutive trading days ending on the fifth business day prior to
completion of the Merger.
The following is a breakdown of the per share value (in stock and cash)
that you will receive based upon various ranges of the St. Francis
Average Stock Price:
(1) IF THE ST. FRANCIS AVERAGE STOCK PRICE IS LESS THAN
$32.41, St. Francis may elect not to complete the
Merger; however, if St. Francis elects to complete
the Merger, you will receive $10.00 per share in cash
or shares of St. Francis Common Stock having a value
of $10.00 per share;
(2) IF THE ST. FRANCIS AVERAGE STOCK PRICE IS BETWEEN
$32.41 AND $40.00, you will receive $10.00 per share
in cash or shares of St. Francis Common Stock having
a value of $10.00 per share;
(3) IF THE ST. FRANCIS AVERAGE STOCK PRICE IS BETWEEN
$40.01 AND $42.00, you will receive cash in an amount
equal to .25 multiplied by the St. Francis Average
Stock Price per share (i.e., between $10.00 and
$10.25 per share) or .25 shares of St. Francis Common
Stock per share;
(4) IF THE ST. FRANCIS AVERAGE STOCK PRICE IS BETWEEN
$42.01 AND $45.74, you will receive $10.50 per share
in cash or shares of St. Francis Common Stock having
a value of $10.50 per share; and
(5) IF THE ST. FRANCIS AVERAGE STOCK PRICE IS $45.75 OR
MORE, you will receive cash in an amount equal to
.2295 multiplied by the St. Francis Average Stock
Price per share or .2295 shares of St. Francis Common
Stock per share.
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<PAGE> 10
FOR ILLUSTRATIVE PURPOSES ONLY, WE HAVE PROVIDED
THE FOLLOWING EXAMPLE.
The average of the last sale price per share of St. Francis Common Stock for
the ten consecutive trading days ending on December 1, 1998 (the latest
practicable time period to obtain information prior to the printing of this
Proxy Statement/Prospectus) was $41.28. Assuming the St. Francis Average Stock
Price also is $41.28, then (as described above), the per share cash
consideration to be received by a Reliance shareholder would be $10.32 and the
per share value of St. Francis Common Stock to be received by a Reliance
shareholder would be $10.32 (based on a conversion ratio of .2500).
Assuming you own 1,000 shares of Reliance Common Stock, under the following
scenarios you would receive the following, based on the stated assumptions.
(1) Assuming that Reliance shareholders collectively elect to
receive at least 60% of the total Merger consideration in shares
of St. Francis Common Stock:
(a) if you elected to receive all stock, you would receive
250 shares of St. Francis Common Stock and no in cash;
(b) if you elected to receive one-half stock and one-half
cash, you would receive 125 shares of St. Francis
Common Stock and $5,160 in cash; and
(c) if you elected to receive all cash, you would receive
$10,320.
(2) Assuming that Reliance shareholders collectively elect to receive
50% of the total Merger consideration in shares of St. Francis
Common Stock and 50% in cash:
(a) if you elected to receive all stock, you would receive
250 shares of St. Francis Common Stock and no cash;
(b) if you elected to receive one-half stock and one-half
cash, you would receive 150 shares of St. Francis
Common Stock and $4,128 in cash; and
(c) if you elected to receive all cash, you would receive 50
shares of St. Francis Common Stock and $8,256 in cash.
THIS ILLUSTRATION SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL ALLOCATION
OF ST. FRANCIS COMMON STOCK AND CASH AS TO ANY INDIVIDUAL RELIANCE SHAREHOLDER.
RATHER, THIS ILLUSTRATION IS INTENDED TO DEMONSTRATE ONLY TWO OF MANY POSSIBLE
ALLOCATION SCENARIOS. THE FOREGOING EXAMPLE IS NOT INTENDED TO REFLECT WHAT THE
ACTUAL ST. FRANCIS AVERAGE STOCK PRICE WILL BE WHEN FINALLY DETERMINED IN
ACCORDANCE WITH THE MERGER AGREEMENT, NOR IS THE PER SHARE VALUE OF ST. FRANCIS
COMMON STOCK AND PER SHARE CASH DISTRIBUTION ILLUSTRATED INTENDED TO REFLECT
WHAT THE ACTUAL VALUE WILL BE WHEN FINALLY DETERMINED AND WHEN THE SHARES OF
ST. FRANCIS COMMON STOCK ARE DISTRIBUTED IN ACCORDANCE WITH THE MERGER
AGREEMENT.
For a more detailed listing of the consideration to be received by Reliance
shareholders in the Merger based upon various assumed St. Francis Average Stock
Prices, see pages 13-14 and 36-37.
-7-
<PAGE> 11
Q(4): WHAT HAPPENS AS THE MARKET PRICE OF ST. FRANCIS COMMON STOCK
FLUCTUATES?
A(4): As noted above in Q(2) and Q(3), the number of shares of St. Francis
Common Stock and the amount of cash to be distributed to you in
connection with the Merger is based upon an average of the market price
of St. Francis Common Stock over a ten-day trading period prior to
completion of the Merger. Because the market price of the shares of St.
Francis Common Stock is subject to fluctuation, the amount of cash you
receive and the number of shares of St. Francis Common Stock you
receive in the Merger may increase or decrease between the date of this
Proxy Statement/Prospectus and completion of the Merger. Furthermore,
once the St. Francis Common Stock is distributed to Reliance
shareholders upon completion of the Merger, the market price will be
subject to fluctuation. You are encouraged to obtain current market
quotations for St. Francis Common Stock prior to submitting your
Election Form. See Question 5.
Q(5): HOW DO I MAKE MY ELECTION TO RECEIVE CASH, SHARES OF ST. FRANCIS COMMON
STOCK, OR A COMBINATION THEREOF?
A(5): You will be required to submit an Election Form prior to the Special
Meeting, which will be held before the Merger is completed, and prior
to the calculation of the St. Francis Average Stock Price. Therefore,
at the time you make your election decision, you will not know the
exact per share value (in cash and stock) that will be distributed to
Reliance shareholders in the Merger. No assurance can be given as to
what the final St. Francis Average Stock Price will be during the
actual valuation period shortly before completion of the Merger or as
to what the market prices of St. Francis Common Stock will be at the
time the Merger is completed. You are encouraged to obtain current
market quotations for St. Francis Common Stock prior to submitting your
Election Form.
Follow the detailed instructions in the Election Form/Letter of
Transmittal which are being sent to you in a separate mailing
concurrently with the mailing of the Proxy Statement/Prospectus. YOUR
ELECTION FORM, TOGETHER WITH STOCK CERTIFICATES REPRESENTING ALL SHARES
OF RELIANCE COMMON STOCK REPRESENTED THEREBY (OR AFFIDAVITS AND
INDEMNIFICATION REGARDING THE LOSS OR DESTRUCTION OF SUCH CERTIFICATES
OR THE GUARANTEED DELIVERY OF SUCH CERTIFICATES), MUST BE RETURNED TO
FIRSTAR BANK MILWAUKEE, N.A., AS EXCHANGE AGENT, NO LATER THAN 4:00
P.M., MILWAUKEE TIME, ON JANUARY 15, 1999.
Q(6): WHAT RISKS SHOULD I CONSIDER?
A(6): You should review "Risk Factors" on pages 29-32. You also should review
the factors considered by Reliance's Board of Directors. See "Proposal
to Approve The Merger -- Background of for the Merger" and "--Reasons
for the Merger and Recommendation of the Reliance Board of Directors"
(pages 38-43). In addition, you should read this Proxy
Statement/Prospectus carefully and in its entirety.
Q(7): WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A(7): We hope to complete the Merger during January 1999. If the Merger has
not been completed by February 28, 1999 (subject to extension to May
31, 1999, in the case of a protest to the Merger under the Community
Reinvestment Act of 1977, as amended), St. Francis and Reliance each
have the right to terminate the Merger Agreement.
Q(8): WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A(8): We expect that for U.S. federal income tax purposes, your exchange of
shares of Reliance Common Stock solely for shares of St. Francis Common
Stock by virtue of the Merger generally will not cause you to recognize
any gain or loss. Reliance shareholders will, however, have to pay
taxes on recognized gains in connection with any cash received,
including cash received instead of fractional shares. To review the tax
consequences to Reliance shareholders in greater detail, see pages
64-66.
YOUR TAX CONSEQUENCES WILL DEPEND ON YOUR PERSONAL SITUATION. YOU
SHOULD CONSULT YOUR TAX ADVISOR FOR A FULL UNDERSTANDING OF THE TAX
CONSEQUENCES OF THE MERGER TO YOU.
Q(9): WILL RELIANCE SHAREHOLDERS HAVE DISSENTERS' RIGHTS?
A(9): No. Reliance shareholders will not have dissenters' rights as a result
of the Merger.
-8-
<PAGE> 12
Q(10): WHAT AM I BEING ASKED TO VOTE UPON?
A(10): You are being asked to approve and adopt the Merger Agreement and the
related Plan of Merger which provide for the acquisition of Reliance
through a merger of Reliance with and into St. Francis. Approval of the
proposal requires the affirmative vote of the holders of a majority of
the outstanding shares of Reliance Common Stock.
THE RELIANCE BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER
AGREEMENT AND THE PLAN OF MERGER AND RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
PLAN OF MERGER.
You also are being asked to approve a proposal to adjourn the Special
Meeting, if necessary, in order that management of Reliance may solicit
additional votes in favor of approval of the Merger Agreement and the
Plan of Merger.
THE RELIANCE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL TO
ADJOURN THE SPECIAL MEETING, IF NECESSARY, IN ORDER TO SOLICIT
ADDITIONAL VOTES IN FAVOR OF APPROVAL OF THE MERGER AGREEMENT AND THE
PLAN OF MERGER.
Q(11): WHAT SHOULD I DO NOW?
A(11): Just indicate on your proxy card how you want to vote, and sign and
mail the proxy card in the enclosed envelope as soon as possible so
that your shares will be represented at the Special Meeting. If you
sign and send in your proxy and do not indicate how you want to vote,
your proxy will be voted in favor of the proposal to approve and adopt
the Merger Agreement. If you do not sign and send in your proxy (or
vote by telephone) or you abstain, it will have the effect of a vote
against the Merger.
The Special Meeting will take place on January 20, 1999 at 2:00 p.m..
You are invited to attend the Special Meeting. If you do sign your
proxy card, you can cancel your proxy up to and including the date of
the Special Meeting and change your vote by signing a new proxy or you
may attend the Special Meeting and vote in person. We provide more
detailed instructions about voting on pages 32-34.
SEE QUESTION (5) FOR DIRECTIONS ON HOW TO MAKE YOUR ELECTION TO RECEIVE
SHARES OF ST. FRANCIS COMMON STOCK, CASH OR A COMBINATION THEREOF.
SEE QUESTION (13) FOR DIRECTIONS ON WHAT TO DO WITH YOUR CERTIFICATES
FOR RELIANCE COMMON STOCK.
Q(12): IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A(12): Your broker will vote your shares of Reliance Common Stock only if you
provide instruction on how to vote. You should instruct your broker how
to vote your shares, following the directions your broker provides. If
you do not provide instructions to your broker, your shares will not be
voted on the Merger proposal and this will have the effect of voting
against the Merger.
Q(13): WHEN AND WHERE SHOULD I SEND IN MY STOCK CERTIFICATES?
A(13): You should NOT send in your stock certificates representing shares of
Reliance Common Stock along with your proxy card. Instead, you should
send in your Reliance stock certificates along with your Election
Form/Letter of Transmittal which are being sent to you in a separate
mailing concurrently with the mailing of this Proxy
Statement/Prospectus.
Please follow the instructions carefully on the Election Form/Letter of
Transmittal in making your election and surrendering your Reliance
stock certificates. If for any reason the Merger is not completed, your
Reliance stock certificates will be returned to you.
Q(14): WHO CAN RELIANCE SHAREHOLDERS CALL WITH QUESTIONS?
A(14): Reliance shareholders who have questions about the Merger should
contact the person below:
MR. ALLAN T. BACH
RELIANCE BANCSHARES, INC.
3140 SOUTH 27TH STREET
MILWAUKEE, WISCONSIN
(414) 671-2222
-9-
<PAGE> 13
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus and is qualified in its entirety by reference
to, and should be read in conjunction with, the more detailed information
appearing elsewhere in this Proxy Statement/Prospectus, including the exhibits
and the documents incorporated by reference herein. As used in this Proxy
Statement/Prospectus, the terms "St. Francis" and "Reliance" refer to such
corporations, respectively, and where the context requires, such corporations
and their subsidiaries on a consolidated basis.
The information contained in this Proxy Statement/Prospectus with
respect to St. Francis has been supplied by St. Francis. The information
contained in this Proxy Statement/Prospectus with respect to Reliance has been
supplied by Reliance. Neither St. Francis nor Reliance warrants the accuracy or
completeness of information relating to the other.
THE PARTIES TO THE MERGER
ST. FRANCIS AND
ST. FRANCIS BANK,
F.S.B............ St. Francis, a Wisconsin corporation, was incorporated
on December 18, 1992 for the purpose of becoming the
holding company for St. Francis Bank, F.S.B.
("St. Francis Bank") upon St. Francis Bank's
conversion from a federally-chartered mutual savings
bank to a federally-chartered stock savings bank.
This transaction was completed in June 1993. In
November 1994, St. Francis consummated the acquisition
of the stock of Valley Bank East Central in Kewaskum,
Wisconsin as well as the acquisition of the deposits
and certain assets of the Hartford, Wisconsin branch
of Valley Bank Milwaukee. The acquired bank offices
were combined as a commercial bank named Bank
Wisconsin. In February 1997, St. Francis completed
the acquisition of Kilbourn State Bank in Milwaukee,
Wisconsin, which subsequently was merged into Bank
Wisconsin. In September 1997, Bank Wisconsin was
merged into St. Francis Bank, with St. Francis Bank
being the surviving entity.
At September 30, 1998, St. Francis had total assets of
$1.9 billion, total deposits of $1.2 billion and
shareholders' equity of $121.5 million. St. Francis has
not engaged in any significant activity other than
holding the stock of St. Francis Bank. St. Francis Bank
is regulated by the Office of Thrift Supervision ("OTS")
and its deposits are insured up to applicable limits
under the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation ("FDIC").
St. Francis Bank's principal business consists of
attracting retail deposits from the general public and
investing those deposits, together with funds generated
from other operations, in mortgage, consumer and other
loans within its primary market area and mortgage-backed
and relate securities, and to a lesser extent, debt and
equity securities. Primary areas of lending include
single-family and multi-family residential mortgages,
home equity lines of credit, second mortgages,
commercial real estate and commercial loans.
At September 30, 1998, St. Francis operated 25 banking
offices in Wisconsin. The principal executive offices of
St. Francis are located at 13400 Bishops Lane, Suite
350, Brookfield, Wisconsin 53005-6203, and its telephone
number is (414) 486-8700.
-10-
<PAGE> 14
RELIANCE AND
RELIANCE SAVINGS
BANK.............. Reliance, a Wisconsin corporation incorporated on
November 10, 1995, is the holding company for Reliance
Savings Bank, a Wisconsin state-chartered stock savings
bank ("Reliance Savings Bank"), which consummated its
conversion from mutual to stock form in April 1996. At
September 30, 1998, Reliance had total assets of $40.5
million, total deposits of $17.4 million and
shareholders' equity of $22.5 million. Reliance Savings
Bank is regulated by the FDIC and the Wisconsin
Department of Financial Institutions ("WDFI") and its
deposits are insured up to applicable limits by the SAIF
of the FDIC.
Reliance Savings Bank's principal business consists of
attracting funds in the form of deposits and investing
such funds in investment securities (including United
States government and other agency obligations and
mutual funds), mortgage-backed and related securities
and loans secured by real estate. The primary lending
activity of Reliance Savings Bank is on one- to
four-family owner-occupied homes. While Reliance Savings
Bank has in recent years had funds to lend, management
of Reliance Savings Bank believes there has been a
diminishing demand for one- to four-family mortgage
loans in its local market area (generally defined as an
area within a three-mile radius of its office). Since
fiscal 1997, Reliance Savings Bank has been, and intends
to continue, emphasizing one- to four-family mortgage
lending in its local market area, but also has been
originating and intends to continue to originate one- to
four-family, residential construction, commercial real
estate, commercial construction and land development and
multi-family loans both within and outside its local
market area in suburbs surrounding the City of
Milwaukee, which encompasses the Wisconsin counties of
Milwaukee, Waukesha, Ozaukee and Washington, in order to
generate adequate earnings, adequately leverage its
capital and make effective use of its liquid assets.
Reliance Savings Bank invests a significant portion of
its assets in investment securities and mortgage-backed
securities, including U.S. Government and federal agency
securities, short-term liquid assets and other
marketable securities.
At September 30, 1998, Reliance and Reliance Savings
Bank operated one banking office in Wisconsin. The
principal executive offices of Reliance are located at
3140 South 27th Street, Milwaukee, Wisconsin 53215, and
its telephone number is (414) 671-2222.
THE RELIANCE SPECIAL MEETING
PLACE, TIME AND DATE;
PURPOSE........... The Special Meeting of Shareholders of Reliance will
be held on January 20, 1999, at 2:00 p.m., Milwaukee,
Wisconsin time, at the Clarion Hotel & Conference
Center, 5311 South Howell Avenue, Milwaukee, Wisconsin.
The purpose of the Special Meeting is to consider and
vote upon proposals to approve the Merger Agreement,
attached hereto as Exhibit A, and the related Plan of
Merger, attached hereto as Exhibit B, and to adjourn the
Special Meeting, if necessary, in order that management
of Reliance may solicit additional proxies in favor of
the Merger.
-11-
<PAGE> 15
RECORD DATE; SHARES
ENTITLED TO
VOTE.............. The Board of Directors of Reliance (the "Reliance
Board") has fixed the close of business on December 4,
1998 as the record date (the "Voting Record Date") for
the determination of shareholders entitled to notice of
and to vote at the Special Meeting or any postponements
or adjournments thereof. Only holders of shares of
Reliance Common Stock of record on the Voting Record
Date will be entitled to notice of and to vote at the
Special Meeting. Each share of Reliance Common Stock
will be entitled to one vote. Shareholders who execute
proxies retain the right to revoke them at any time
prior to being voted at the Special Meeting or any
postponements or adjournments thereof. On the Voting
Record Date, there were 2,395,564 shares of Reliance
Common Stock outstanding and Reliance had no other class
of securities outstanding.
VOTES REQUIRED; VOTING
AGREEMENTS; SECURITY
OWNERSHIP OF
MANAGEMENT......... The affirmative vote of the holders of a majority of
the issued and outstanding shares of Reliance Common
Stock is required for approval and adoption of the
Merger Agreement and the related Plan of Merger. The
affirmative vote of a majority of the total votes cast
in person or by proxy is required to approve the
proposal to adjourn the Special Meeting, if necessary,
in order that management of Reliance may solicit
additional proxies in favor of the Merger Proposal.
Approval of the Merger by St. Francis shareholders is
not required.
As of October 31, 1998, the directors and executive
officers of Reliance and their affiliates beneficially
owned or had the right to acquire 485,956 shares, or
18.22% of the outstanding shares of Reliance Common
Stock, including 224,280 shares subject to unexercised
options held by such persons at that date which were not
exercised prior to the Voting Record Date, and thus
cannot be voted at the Special Meeting. As an inducement
to St. Francis to enter into the Merger Agreement, all
of the directors and executive officers of Reliance
entered into voting agreements ("Voting Agreements")
with St. Francis to vote the shares of Reliance Common
Stock beneficially owned by them in favor of the Merger.
As of October 31, 1998, with the exception of one
director of St. Francis who acquired shares of Reliance
Common Stock in 1996, St. Francis directors, executive
officers and their affiliates did not own any shares of
Reliance Common Stock.
Pursuant to the Voting Agreements, the directors and
executive officers of Reliance may not sell, assign,
transfer or otherwise dispose of, or permit to be sold,
assigned, transferred or otherwise disposed of, any
shares of Reliance Common Stock owned of record or
beneficially by such shareholder, whether such shares of
Reliance Common Stock are owned of record or
beneficially by such shareholder on the date of the
Voting Agreement or are subsequently acquired, whether
pursuant to the exercise of stock options or otherwise,
except (i) for transfers by will or by operation of law
(in which case the Voting Agreement would bind the
transferee), (ii) for sales, assignments, transfers or
other dispositions necessitated by hardship with the
prior written consent of St. Francis, or (iii) as St.
Francis may otherwise agree in writing.
-12-
<PAGE> 16
THE MERGER
EFFECT OF THE
MERGER................ Pursuant to the Merger Agreement, at the Effective Time
(as defined below), Reliance will merge with and into
St. Francis, which will be the surviving corporation.
See "Proposal to Approve the Merger--Effect of the
Merger." St. Francis also plans to merge Reliance
Savings Bank into St. Francis Bank immediately following
the Merger, or as soon as practicable after the
Effective Time (the "Bank Merger"), and St. Francis and
Reliance have agreed to take all action necessary and
appropriate to effectuate the Bank Merger.
MERGER
CONSIDERATION......... The Merger Agreement provides that, subject to the
election and allocation procedures provided for therein,
each issued and outstanding share of Reliance Common
Stock at the Effective Time will be converted into the
right to receive, at the election of each holder
thereof, either:
(a) A NUMBER OF SHARES OF ST. FRANCIS COMMON STOCK EQUAL
TO (i) a fractional share of St. Francis Common
Stock determined by dividing $10.00 by the St.
Francis Average Stock Price (as defined herein) if
the St. Francis Average Stock Price is between
$32.41 and $40.00; (ii) .25 shares of St. Francis
Common Stock, if the St. Francis Average Stock Price
is between $40.01 and $42.00; (iii) a fractional
share of St. Francis Common Stock determined by
dividing $10.50 by the St. Francis Average Stock
Price, if the St. Francis Average Stock Price is
between $42.01 and $45.74; and (iv) .2295 shares of
St. Francis Common Stock, if the St. Francis Average
Stock Price is $45.75 or more (the "Per Share Stock
Distribution"); or
(b) CASH EQUAL TO (i) $10.00, if the St. Francis Average
Stock Price is between $32.41 and $40.00; (ii) an
amount equal to .25 of the St. Francis Average Stock
Price, if the St. Francis Average Stock Price is
between $40.01 and $42.00; (iii) $10.50, if the St.
Francis Average Stock Price is between $42.01 and
$45.74; and (iv) an amount equal to .2295 of the St.
Francis Average Stock Price, if the St. Francis
Average Stock Price is $45.75 or more (the "Per
Share Cash Distribution").
If the St. Francis Average Stock Price is $32.40 or
less, then St. Francis has the option of completing the
Merger using a Per Share Cash Distribution of $10.00 and
a Per Share Stock Distribution equal to a fractional
share of St. Francis Common Stock determined by dividing
$10.00 by the St. Francis Average Stock Price, or
terminating the Merger Agreement.
THE "ST. FRANCIS AVERAGE STOCK PRICE" MEANS THE AVERAGE
(ROUNDED TO THE NEAREST WHOLE CENT) OF THE LAST SALE
PRICE OF THE DAY OF ONE SHARE OF ST. FRANCIS COMMON
STOCK AS REPORTED IN THE WALL STREET JOURNAL FOR THE TEN
CONSECUTIVE TRADING DAYS ENDING ON THE FIFTH BUSINESS
DAY PRECEDING THE EFFECTIVE TIME (THE "VALUATION
PERIOD").
The Merger Agreement also provides that the value of the
aggregate number of shares of St. Francis Common Stock
to be issued in the Merger must be equal to at least 60%
of the aggregate value of all of the consideration to be
paid in connection with the Merger, and the aggregate
amount of consideration paid to Reliance shareholders in
cash must be not more than 40% of the aggregate value of
all of the consideration to be paid in connection with
the Merger.
-13-
<PAGE> 17
Assuming that (i) there are 2,443,404 shares of Reliance
Common Stock outstanding, which represents the 2,395,564
shares of Reliance Common Stock issued and outstanding
as of the Voting Record Date, plus 47,840 shares of
Reliance Common Stock that will be issued and/or vested
in connection with the closing of the Merger under the
terms of the RRP; (ii) no exercise of options for
247,097 shares of Reliance Common Stock currently
outstanding under Reliance's stock option plan, (iii)
the St. Francis Average Stock Price is $41.28, and (iv)
the aggregate amount of consideration payable in cash is
equal to 40% of the aggregate value of all of the
consideration paid in connection with the Merger and the
aggregate amount of consideration payable in value of
whole shares of St. Francis Common Stock is equal to 60%
of the aggregate value of all of the consideration paid
in connection with the Merger, St. Francis will issue
approximately 366,510 shares of St. Francis Common Stock
and approximately $10.09 million in cash in the Merger.
St. Francis intends to fund the cash portion of the
purchase price with an existing line of credit
maintained by St. Francis Bank with a third party
financial institution.
Fractional shares of St. Francis Common Stock will not
be issued in the Merger. Reliance shareholders otherwise
entitled to a fractional share will be paid the value of
such fraction in cash determined as described herein
under "Proposal to Approve the Merger--Effect of the
Merger."
On December 1, 1998, the most recent date for which it was practicable
to obtain market price data prior to the printing of this Proxy
Statement/Prospectus, the closing sales price per share of St. Francis Common
Stock was $41.13.
The following table sets forth various assumed St. Francis Average
Stock Prices, the resulting conversion ratio, the value of St. Francis Common
Stock to be received per share of Reliance Common Stock based on such assumed
St. Francis Average Stock Price, and the Per Share Cash Consideration to be
received based on such assumed St. Francis Average Stock Price.
<TABLE>
<CAPTION>
PER SHARE VALUE
ASSUMED ST. FRANCIS OF ST. FRANCIS PER SHARE
AVERAGE CONVERSION COMMON STOCK CASH CONSIDERATION
STOCK PRICE RATIO TO BE RECEIVED TO BE RECEIVED
----------- ----- -------------- --------------
<S> <C> <C> <C>
30.00 .3333 $ 10.00 $ 10.00
31.00 .3226 10.00 10.00
32.00 .3125 10.00 10.00
32.40 .3086 10.00 10.00
33.00 .3030 10.00 10.00
34.00 .2941 10.00 10.00
35.00 .2857 10.00 10.00
36.00 .2778 10.00 10.00
37.00 .2703 10.00 10.00
38.00 .2632 10.00 10.00
39.00 .2564 10.00 10.00
40.00 .2500 10.00 10.00
41.00 .2500 10.25 10.25
42.00 .2500 10.50 10.50
43.00 .2442 10.50 10.50
44.00 .2386 10.50 10.50
45.00 .2333 10.50 10.50
45.75 .2295 10.50 10.50
46.00 .2295 10.56 10.56
47.00 .2295 10.79 10.79
48.00 .2295 11.02 11.02
</TABLE>
NONE OF THE ASSUMED ST. FRANCIS AVERAGE STOCK PRICES ARE INTENDED TO
REFLECT WHAT THE ACTUAL ST. FRANCIS AVERAGE STOCK PRICE WILL BE WHEN FINALLY
DETERMINED IN ACCORDANCE WITH THE MERGER AGREEMENT AND THE PLAN OF MERGER, NOR
IS THE PER SHARE VALUE OF ST. FRANCIS COMMON STOCK TO BE RECEIVED AND PER SHARE
CASH CONSIDERATION ILLUSTRATED AS TO BE RECEIVED INTENDED TO REFLECT WHAT THE
ACTUAL VALUE WILL BE WHEN FINALLY DETERMINED WHEN THE SHARES OF ST. FRANCIS
COMMON STOCK AND CASH ARE DISTRIBUTED IN ACCORDANCE WITH THE MERGER AGREEMENT
AND THE PLAN OF MERGER.
-14-
<PAGE> 18
Because under the Merger Agreement the number of shares
of St. Francis Common Stock and the total amount of cash
to be issued in the Merger are fixed in accordance with
certain parameters, in part to ensure that the Merger
will qualify as a tax-free reorganization under Section
368 of the Internal Revenue Code of 1986, as amended (the
"Code"), no guarantee can be given that an election by
any given shareholder will be honored. Rather, the
election by each holder will be subject to the election
and allocation procedures described herein and in the
Merger Agreement. Thus, holders may not receive their
chosen form of consideration. See "Proposal to Approve
the Merger--Election and Allocation Procedures."
Reliance shareholders who receive shares of St. Francis
Common Stock also will receive attached Purchase Rights.
See "Description of St. Francis Capital Stock--Rights
Plan."
ELECTION BY RELIANCE
SHAREHOLDERS....... Each shareholder of Reliance (except for the Reliance
ESOP which will receive the Per Share Cash Distribution
for shares held by it) will have the opportunity to
submit an election form and letter of transmittal
("Election Form") specifying the kind of consideration
sought to be received in exchange for his or her shares
of Reliance Common Stock. The Election Form will be
mailed (the "Mailing Date") concurrently with this Proxy
Statement/Prospectus to each holder of record of Reliance
Common Stock as of the Voting Record Date. An Election
Form and a copy of this Proxy Statement/Prospectus also
will be mailed to persons who become shareholders of
record of Reliance after the Voting Record Date up to one
business day prior to the Election Deadline (as defined
below). Election Forms also will be available at
Reliance's main office, St. Francis' main office and from
the Exchange Agent at all times through the Election
Deadline.
The Election Form will permit Reliance shareholders (i)
to indicate that they elect to receive in exchange for
their Reliance shares (a) St. Francis Common Stock
("Stock Election Shares"), (b) cash ("Cash Election
Shares"), or (c) a combination thereof, or (ii) to make
no election ("No Election Shares"). The No Election
Shares will be converted into Stock Election Shares, Cash
Election Shares or a combination thereof as necessary to
ensure that (i) the aggregate amount of consideration
payable in cash is not more than 40% of the aggregate
value of all of the consideration issued or paid in
connection with the Merger, and the total number of
shares of St. Francis Common Stock to be issued in
connection with the Merger shall be that number of whole
shares of St. Francis Common Stock that has an aggregate
value of at least 60% of the aggregate value of all of
the consideration issued or paid in connection with the
Merger, and (ii) the Merger will qualify as a tax-free
reorganization.
THE ELECTION FORM, TOGETHER WITH STOCK CERTIFICATES
REPRESENTING ALL SHARES OF RELIANCE COMMON STOCK COVERED
THEREBY (OR AFFIDAVITS AND INDEMNIFICATION REGARDING THE
LOSS OR DESTRUCTION OF SUCH CERTIFICATES OR THE
GUARANTEED DELIVERY OF SUCH CERTIFICATES), MUST BE
RETURNED TO FIRSTAR BANK MILWAUKEE, N.A. AS EXCHANGE
AGENT (THE "EXCHANGE AGENT"), NO LATER THAN 4:00 P.M.,
MILWAUKEE TIME, ON JANUARY 15, 1999 (THE "ELECTION
DEADLINE"). Shares of Reliance Common Stock for which a
properly completed Election Form has not been received by
the Exchange Agent by the Election Deadline will be
deemed No Election Shares. Accordingly, persons who
become shareholders of Reliance after the Election
Deadline will be deemed to hold No Election Shares,
because they could not have made an effective election
with respect to such shares. See "Proposal to Approve the
Merger--Election and Allocation Procedures."
-15-
<PAGE> 19
Because the number of shares of St. Francis Common Stock
to be issued and the total amount of cash to be paid in
the Merger will be fixed in accordance with certain
parameters pursuant to the Merger Agreement, and because
the Merger must qualify as a tax-free reorganization,
the extent to which individual elections will be
accommodated will depend upon the respective number of
Reliance shareholders who elect cash and stock and who
fail to make an election. Accordingly, a Reliance
shareholder who elects to receive cash may instead
receive a combination of cash and shares of St. Francis
Common Stock, and a Reliance shareholder who elects to
receive a combination of cash and shares of St. Francis
Common Stock may instead receive a different combination
of cash and shares of St. Francis Common Stock. However,
in no event will a shareholder who elects to receive
stock receive cash instead (except cash which may be
issued in lieu of fractional shares).
If the cash election is oversubscribed, Reliance
shareholders making no election will have their shares
of Reliance Common Stock randomly selected and converted
into St. Francis Common Stock to the extent necessary so
that the cash election is not oversubscribed. If the
cash election is still oversubscribed, Reliance
shareholders making a cash election shall have their
shares of Reliance Common Stock converted, on a pro rata
basis, into shares of St. Francis Common Stock, to the
extent necessary. However, the Merger Agreement also
provides that no particular holder who has elected to
receive cash or stock, as the case may be, will be
allocated, or selected to receive, St. Francis Common
Stock if such allocation or selection would threaten
satisfaction of the conditions to the consummation of
the Merger.
Because the tax consequences of receiving cash or St.
Francis Common Stock will differ, shareholders of
Reliance are urged to read carefully the information
under the caption "Proposal to Approve the
Merger--Certain Federal Income Tax Consequences" and
consult their own tax advisor to determine the
particular tax consequences to them of the Merger.
ALLOCATION
PROCEDURES............ The aggregate amount of consideration to be received by
Reliance shareholders in exchange for their shares of
Reliance Common Stock shall consist of cash and St.
Francis Common Stock, in such proportion as follows: (i)
the aggregate amount of consideration payable in cash
("Cash Amount") shall not be more than 40% of the
aggregate value of all of the consideration issued or
paid in connection with the Merger; and (ii) the total
number of shares of St. Francis Common Stock to be
issued in connection with the Merger ("Stock Amount")
shall be that number of whole shares of St. Francis
Common Stock that has an aggregate value of at least 60%
of the aggregate value of all of the consideration
issued or paid in connection with the Merger.
The Merger Agreement provides that the value of the
aggregate number of shares of St. Francis Common Stock
to be issued in the Merger must equal or exceed 60% of
the aggregate value of all of the consideration to be
paid in connection with the Merger. The relative
percentages that the Cash Amount (i.e., up to 40%) and
the Stock Amount (i.e., at least 60%) bear to the
aggregate amount of consideration to be issued or paid
in connection with the Merger will depend largely upon
the elections of the Reliance shareholders. To the
greatest extent possible, St. Francis will allocate cash
and stock in accordance with each Reliance shareholder's
election. However, if the cash portion is
oversubscribed, Reliance shareholder elections will be
adjusted in order to fall within the parameters set
forth above. See "Proposal to Approve the
Merger--Election and Allocation Procedures."
-16-
<PAGE> 20
EXCHANGE OF
CERTIFICATES;
DELIVERY OF ST.
FRANCIS COMMON
STOCK AND
CASH................ No holder of certificates formerly representing shares
of Reliance Common Stock will be entitled to receive
either cash or shares of St. Francis Common Stock until
the certificates are properly surrendered to the Exchange
Agent, and no interest will accrue in respect thereof.
Each share of St. Francis Common Stock for which shares
of Reliance Common Stock are exchanged in the Merger will
be deemed to have been issued at the Effective Time.
Accordingly, Reliance shareholders who receive St.
Francis Common Stock in the Merger will be entitled to
vote their shares and to receive any dividends or other
distributions, without interest, that may be payable to
holders of record of St. Francis Common Stock after the
Effective Time, except that no such dividend will be
remitted until the certificates representing Reliance
Common Stock have been properly surrendered to the
Exchange Agent.
Within five business days after the allocation described
above under "--Allocation Procedures," the Exchange
Agent will distribute St. Francis Common Stock and cash
with respect to shares of Reliance Common Stock which
have been properly surrendered to the Exchange Agent.
Stock certificates will not be delivered for fractional
shares resulting from the exchange of Reliance Common
Stock for St. Francis Common Stock. Instead, each holder
of shares of Reliance Common Stock who would otherwise be
entitled to a fractional share of St. Francis Common
Stock will receive in lieu thereof a check in an amount
equal to the value of such fractional share based upon
the St. Francis Average Stock Price.
DO NOT SEND IN YOUR CERTIFICATES FOR YOUR SHARES OF
RELIANCE COMMON STOCK WITH YOUR PROXY CARD. PLEASE
CAREFULLY READ AND FOLLOW THE INSTRUCTIONS SET FORTH IN
THE ELECTION FORM/LETTER OF TRANSMITTAL DELIVERED TO YOU
UNDER SEPARATE COVER REGARDING THE MAKING OF YOUR
ELECTION AND THE SURRENDER OF YOUR RELIANCE STOCK
CERTIFICATES.
RECOMMENDATION OF
RELIANCE'S
BOARD OF
DIRECTORS........... All members of the Reliance Board participated in the
meeting at which the Merger Agreement and the related
Plan of Merger were considered. The Reliance Board
unanimously approved the Merger Agreement and Plan of
Merger and recommends that Reliance shareholders vote in
favor of approval of the Merger Agreement and Plan of
Merger. The Reliance Board believes that the terms of the
Merger are fair to, and in the best interests of,
Reliance's shareholders. For a discussion of the factors
considered by Reliance's Board in reaching its decision,
see "Proposal to Approve the Merger--Reasons for the
Merger and Recommendation of the Reliance Board of
Directors" and "Proposed to Approve the Merger--Opinion
of Reliance Financial Advisor."
OPINION OF
RELIANCE
FINANCIAL
ADVISOR.............. One June 30, 1998, Robert W. Baird & Co. Incorporated
("Baird") rendered its opinion (subsequently confirmed as
of the date of this Proxy Statement/Prospectus) to the
effect that, as of such date, the consideration to be
received in the Merger by the holders of Reliance Common
Stock was fair, from a financial point of view, to such
holders (other than St. Francis and its affiliated
companies). The full text of Baird's written opinion,
dated December 8, 1998, which sets forth the assumptions
made, matters considered, the scope and limitations of
the review undertaken and procedures followed by Baird in
rendering its opinion, is attached hereto as Exhibit C.
HOLDERS OF RELIANCE COMMON STOCK ARE URGED TO AND SHOULD
CAREFULLY READ SUCH OPINION IN ITS ENTIRETY. See
"Proposal to Approve the Merger -- Opinion of Reliance
Financial Advisor."
-17-
<PAGE> 21
EFFECTIVE TIME OF
THE MERGER........... The Merger will become effective on the date articles
of merger are filed with the WDFI in accordance with the
Wisconsin Business Corporation Law (the "WBCL"), or on
such later date as the Articles of Merger may specify
(the "Effective Time"). The Articles of Merger will be
filed upon satisfaction or waiver of all of the
conditions to the Merger provided in the Merger Agreement
but in no event later than the last business day of the
month in which all conditions to the Merger set forth in
the Merger Agreement have been satisfied or waived.
Assuming receipt of Reliance shareholder approval of the
Merger and that certain other conditions precedent to
closing have been met (as described herein), the parties
expect that the Effective Time of Merger will occur in
the end of January 1999. See "Proposal to Approve the
Merger--Conditions to Each Party's Obligations."
CONDITIONS TO THE
MERGER; REGULATORY
APPROVAL............. The obligations of St. Francis and Reliance to
consummate the Merger are subject to the satisfaction of
certain conditions, including (i) obtaining requisite
shareholder approval and requisite regulatory approvals
for the Merger (as defined in the Merger Agreement), (ii)
the receipt of an opinion of counsel with respect to
certain tax aspects of the Merger, (iii) the absence of
an adverse change with respect to Reliance; (iv) the
absence of any Environmental Conditions (as defined in
the Merger Agreement) with respect to any Real Property
of Reliance (as defined therein) which is likely to have
a material adverse effect (as defined therein) on St.
Francis; (v) verification that Reliance's net worth (to
be computed as described further therein) is not less
than Reliance's net worth as of March 31, 1998; and (vi)
the satisfaction of other customary closing conditions.
Prior to the Effective Date of the Merger, any condition
of the Merger Agreement may be waived by the party in
whose favor the provision runs or may be amended or
modified by an agreement in writing approved by both
parties; provided, however, that after Reliance
shareholder approval is obtained, no such extension,
waiver, amendment or modification may adversely affect
the amount of consideration to be received in the Merger
by the Reliance shareholders. See "Proposal to Approve
the Merger--Certain Federal Income Tax Consequences" and
"Proposal to Approve the Merger--Conditions to Each
Party's Obligations."
St. Francis and Reliance intend that Reliance Savings
Bank will merge with and into St. Francis Bank
immediately following the Merger or as soon as
practicable after the Merger (the "Bank Merger"), and St.
Francis and Reliance have agreed to take all action
necessary and appropriate to effectuate the Bank Merger.
See "Proposal to Approve the Merger--Regulatory
Approvals."
The Merger and Bank Merger require the review and/or
approval of the appropriate federal and state regulatory
agencies, including the OTS and WDFI, all of which have
been obtained prior to the mailing of this Proxy
Statement/Prospectus. See "Proposal to Approve the
Merger--Regulatory Approvals."
-18-
<PAGE> 22
TERMINATION OF THE
REORGANIZATION
AGREEMENT........... The Merger Agreement may be terminated, and the Merger
abandoned, before the Effective Time, either before or
after its approval by the shareholders of Reliance, (a)
by the mutual consent of St. Francis and Reliance, or (b)
by either of them individually under certain specified
circumstances, including (i) if the Merger has not become
effective by February 28, 1999 (subject to extension to
May 31, 1999, in the case of a protest to the Merger
under the Community Reinvestment Act of 1977, as
amended), or (ii) in the event of a breach by the other
party of certain representations, warranties, covenants
or agreements contained in the Merger Agreement. In
addition to other customary termination provisions,
pursuant to the Merger Agreement, Reliance may terminate
the Merger Agreement, if the Board of Directors of
Reliance determines in good faith and in the exercise of
reasonable judgment (based on the advice of independent
financial advisors and counsel) that a bona fide, written
and unsolicited proposal or offer made by a corporation
(excluding St. Francis or any of its subsidiaries or
affiliates), partnership, person, other entity or group
(as defined in Section 13(d)(3) of the Exchange Act),
with respect to an Acquisition Proposal (as defined
therein) is more favorable to Reliance and its
shareholders than the transactions contemplated hereby.
See "Proposal to Approve the Merger--Termination."
In addition, the Merger Agreement contains a price-based
termination provision. Under this provision, the Merger
Agreement may be terminated by St. Francis if the St.
Francis Average Stock Price is $32.40 or less. Before
making any decision to terminate the transaction, the St.
Francis Board would consult with its financial and other
advisors and would consider all financial and other
information it deemed relevant to its decision. The
matter would not, however, be resubmitted to
shareholders. See "Proposal to Approve the
Merger--Price-Based Termination."
INTERESTS OF
CERTAIN PERSONS
IN THE MERGER........ Certain members of Reliance's management and the
Reliance Board may be deemed to have interests in the
Merger in addition to their interests, if any, as
shareholders of Reliance generally. These include,
among other things, provisions in the Merger Agreement
relating to accelerated vesting of awards under the RRP,
the grant of additional RRP awards contingent upon
completion of the Merger, with recipients of awards under
the RRP entitled to elect to receive either cash or
stock in the same manner as other Reliance
shareholders, accelerated vesting of outstanding
options and cash payments under outstanding stock
options or, in certain circumstances, the conversion of
such outstanding options into options for shares of St.
Francis Common Stock, the grant of additional stock
options contingent upon completion of the Merger,
service as a member of an advisory board of St. Francis
and appointment of one director to St. Francis Bank's
Board, benefits under the Reliance ESOP and Reliance
Savings Bank Financial Institutions Retirement Fund
("Reliance Pension Plan"), assumption by St. Francis of
Reliance's obligations under the Reliance Savings Bank
Non-Qualified Deferred Retirement Plan for Directors
("Directors' Retirement Plan") and immediate vesting of
benefits thereunder, maintenance of post-retirement
medical and health coverage no less favorable than that
maintained by Reliance with respect to eligible former
and current officers and employees and current
non-employee directors of Reliance and Reliance Savings
Bank, and certain other benefits.
-19-
<PAGE> 23
In addition, Mr. Allan T. Bach, President and Chief
Executive Officer of Reliance and Reliance Savings Bank,
will receive severance benefits, as described further
herein, including severance salary payments over three
years pursuant to the terms of his current employment
agreement with Reliance and Reliance Savings Bank in the
aggregate amount of $497,697 and other severance
benefits. Ms. Carol A. Barnharst, Vice President, Chief
Financial Officer, Secretary and Treasurer of Reliance,
will enter into a three-year employment agreement with
St. Francis Bank, which will provide for a base salary of
$65,600, as well as coverage under other St. Francis
incentive compensation plans and other benefits.
In addition, as noted above, in April 1998, Mr. Allan T.
Bach, Ms. Carol A. Barnharst, Mr. O. William Held, Mr.
John T. Lynch and Ms. Marjorie A. Spicuzza each were
granted options to purchase Reliance Common Stock with
respect to 5,000 shares, which option grants are
contingent upon completion of the Merger ("Contingent
Option Grants"), and Mr. Bach and Ms. Barnharst each were
granted RRP awards with respect to 10,257 shares, which
RRP awards are contingent upon completion of the Merger
("Contingent RRP Awards"). If the Merger is not
consummated, the Contingent Option Grants and Contingent
RRP Awards will be forfeited by the recipients.
In addition, as noted above, holders of options granted
under Reliance's stock option plan may elect to surrender
their options for cash, or in certain circumstances may
be eligible to participate in the option plans
established by St. Francis. In connection with the Merger
and assuming the St. Francis Average Stock Price is
$41.28, the executive officers and directors of Reliance
could receive, if they choose to surrender their vested
options (including the Contingent Option Grants) for
cash, the following amounts: Mr. Allan T. Bach -
$105,000; Ms. Carol A. Barnharst - $105,000; Mr. John T.
Lynch - $105,000; Mr. O. William Held - $105,000; and Ms.
Marjorie A. Spicuzza - $105,000. In addition, assuming
the St. Francis Average Stock Price is $41.28, the value
of the aggregate RRP awards (including the Contingent RRP
Awards) to executive officers and directors of Reliance
would be as follows: Mr. Allan T. Bach - $275,000 and Ms.
Carol A. Barnharst - $219,000. See "Proposal to Approve
the Merger--Interests of Certain Persons in the Merger"
and "Proposal to Approve the Merger--Effect on Reliance
Employee Benefit Plans."
TERMINATION FEE
ARRANGEMENTS......... Pursuant to the Merger Agreement, Reliance has agreed
to pay St. Francis a fee of $875,000 in the event of the
occurrence of a "Company Purchase Event." The term
"Company Purchase Event" means any of the following
events, or Reliance agreeing to enter into an agreement
relating to any of the following events, occurring before
the Effective Time or within 12 months of the date of
termination of the Merger Agreement: (i) the acquisition
by any person, other than St. Francis, of beneficial
ownership of 25% or more of the shares of Reliance Common
Stock; (ii) a merger, consolidation, share exchange,
business combination or any other similar transaction
involving Reliance or Reliance Savings Bank, other than a
transaction involving St. Francis or any of its
subsidiaries; (iii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of 50% or more of
the assets of Reliance or Reliance Savings Bank, in a
single transaction or series of transactions; or (iv) the
Reliance Board does not recommend approval of the Merger
to the Reliance shareholders.
-20-
<PAGE> 24
CERTAIN FEDERAL
INCOME TAX
CONSEQUENCES......... The Merger is intended to be a reorganization within
the meaning of Section 368 of the Code; accordingly, a
gain or loss generally will not be recognized by Reliance
shareholders who receive solely St. Francis Common Stock
in exchange for their Reliance Common Stock. Receipt of
cash in the Merger will be a taxable event. The Merger
Agreement provides that consummation of the Merger is
conditioned upon receipt by St. Francis and Reliance of
an opinion of Michael Best & Friedrich LLP, legal counsel
to St. Francis, to the effect that the Merger will
constitute a reorganization within the meaning of Section
368 of the Code. For a further discussion of the federal
income tax consequences of the Merger, see "Proposal to
Approve the Merger--Certain Federal Income Tax
Consequences" and "Proposal to Approve the
Merger--Conditions to Each Party's Obligations."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY
DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH
SHAREHOLDER AND OTHER FACTORS, EACH HOLDER OF RELIANCE
COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO
SUCH HOLDER OF THE MERGER (INCLUDING THE APPLICATION AND
EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS).
ACCOUNTING
TREATMENT............ It is intended that the Merger will be accounted for
as a purchase under generally accepted accounting
principles ("GAAP").
COMPARISON OF
SHAREHOLDERS'
RIGHTS............... See "Comparison of Shareholders' Rights" for a summary
of the material differences between the rights of holders
of shares of St. Francis Common Stock and holders of
shares of Reliance Common Stock.
DISSENTERS'
RIGHTS............... Under the WBCL, holders of shares of a Wisconsin
corporation quoted on the NASDAQ Small-Cap Market on the
record date for a meeting at which shareholders are to
vote on a merger are not entitled to appraisal or
dissenters' rights. Shares of Reliance Common Stock were
quoted on the NASDAQ Small-Cap Market on the Voting
Record Date. Therefore, holders of Reliance Common Stock
are not entitled to dissenters' rights in connection with
the Merger. See "Proposal to Approve the Merger--No
Appraisal or Dissenters' Rights."
-21-
<PAGE> 25
COMPARATIVE PER SHARE INFORMATION
The following table sets forth unaudited comparative per share data of
St. Francis on both a historical and pro forma combined basis and per share data
of Reliance on both a historical and pro forma equivalent combined basis. The
table should be read in conjunction with the consolidated financial statements
and notes thereto of St. Francis contained in the St. Francis Form 10-K for the
fiscal years ended September 30, 1998, incorporated by reference herein, and the
consolidated financial statements and notes thereto of Reliance for the fiscal
year ended June 30, 1998, and the quarter ended September 30, 1998 (unaudited)
which are included herein. See "Incorporation of Certain Information by
Reference." Pro forma combined and pro forma equivalent per share data have been
prepared giving effect to the Merger under the purchase method of accounting.
The following information is not necessarily indicative of the results of
operations or combined financial position that would have resulted had the
Merger been consummated at the beginning of the periods indicated, nor is it
necessarily indicative of the results of operations of future periods or future
combined financial position. As discussed under "Proposal to Approve the
Merger--Merger Consideration," the conversion ratio is subject to adjustment as
a result of changes in the market price of shares of St. Francis Common Stock.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
SEPTEMBER 30, 1998
-------------------
<S> <C>
BOOK VALUE PER SHARE (1)
Historical:
St. Francis.......................................... $25.52
Reliance............................................. 9.41
Pro forma:
St. Francis and Reliance combined.................... 26.96
Reliance equivalent (2).............................. 6.74
CASH DIVIDENDS PER SHARE (3)
Historical:
St. Francis.......................................... 0.56
Reliance............................................. --
Pro forma:
St. Francis and Reliance combined.................... 0.56
Reliance equivalent (2).............................. 0.14
DILUTED NET INCOME PER SHARE
Historical:
St. Francis ......................................... 2.85
Reliance............................................. 0.21
Pro forma: (4)(5)
St. Francis and Reliance combined.................... 2.68
Reliance equivalent (2).............................. 0.67
</TABLE>
[FN]
-------------------------
(1) Book value per share has been computed assuming 5,242,000 diluted
shares of St. Francis Common Stock outstanding at September 30, 1998.
Included in the share amount are 480,000 shares assumed to have been
issued by St. Francis in connection with the acquisition of Reliance.
See "Proposal to Approve the Merger--Merger Consideration."
(2) The pro forma equivalent per share data for Reliance has been computed
by multiplying the pro forma combined per share information by .2500,
which represents the number of shares of St. Francis Common Stock into
which each share of Reliance Common Stock may be converted if the St.
Francis Average Stock Price is $41.28. The per share stock
distribution and per share cash distribution are subject to adjustment
pursuant to the Merger Agreement, depending upon the St. Francis
Average Stock Price. See "Proposal to Approve the Merger--Merger
Consideration."
(3) Based on historical dividends of St. Francis and Reliance.
(4) Pro forma diluted net income per share has been computed assuming
5,671,000 diluted shares of St. Francis Common Stock outstanding for
the year ended September 30, 1998. Included in the share amount are
480,000 shares assumed to have been issued by St. Francis in
connection with the acquisition of Reliance. See "Proposal to Approve
the Merger--Merger Consideration."
(5) Net income per share assumes goodwill amortization. Goodwill
approximates $2.2 million and will be amortized over 25 years.
</FN>
-22-
<PAGE> 26
COMPARATIVE MARKET AND STOCK PRICE INFORMATION
St. Francis Common Stock is quoted on the NASDAQ National Market System
under the symbol "STFR." Reliance Common Stock is quoted on the NASDAQ
"Small-Cap" Market under the symbol "RELI." The table below sets forth, for the
calendar quarters indicated, (i) the high and low sales prices for St. Francis
Common Stock as reported on the NASDAQ National Market System, (ii) the high
and low sales prices as reported on the NASDAQ "Small-Cap" Market for Reliance
Common Stock, and (iii) the dividends per share declared on St. Francis Common
Stock and Reliance Common Stock in each quarter. No assurance can be given as
to the market price of St. Francis Common Stock or Reliance Common Stock at, or
in the case of St. Francis Common Stock, after, the Effective Time.
<TABLE>
<CAPTION>
ST. FRANCIS RELIANCE
-------------------------------- -------------------------------
SALES PRICE CASH SALES PRICE CASH
--------------- DIVIDENDS --------------- DIVIDENDS
HIGH LOW PAID HIGH LOW PAID
---- --- ---- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
1995
----
Quarter Ended March 31................ $ 18.50 $13.75 -- -- -- --
Quarter Ended June 30................. 20.25 17.75 -- -- -- --
Quarter Ended September 30............ 22.75 20.00 -- -- -- --
Quarter Ended December 31............. 25.50 22.25 $ 0.10 -- -- --
1996
----
Quarter Ended March 31................ 28.00 22.25 0.10 -- -- --
Quarter Ended June 30................. 28.00 24.00 0.10 $ 8.75 $ 7.50 --
Quarter Ended September 30............ 26.25 24.75 0.10 8.75 7.63 --
Quarter Ended December 31............. 27.00 25.00 0.12 10.25 6.13 $ 3.00
1997
----
Quarter Ended March 31................ 32.25 26.00 0.12 7.75 6.38 --
Quarter Ended June 30................. 38.75 29.00 0.12 8.50 7.00 --
Quarter Ended September 30............ 38.00 33.88 0.12 9.00 7.75 --
Quarter Ended December 31............. 53.25 36.50 0.14 9.75 8.25 --
1998
----
Quarter Ended March 31................ 51.00 41.25 0.14 10.13 8.75 --
Quarter Ended June 30................. 45.50 34.38 0.14 9.31 8.06 --
Quarter Ended September 30............ 43.50 35.00 0.14 9.88 9.00 --
Quarter Ended December 31
(through December 3, 1998).......... 42.00 34.50 0.16 9.63 8.63 --
</TABLE>
-23-
<PAGE> 27
On June 29, 1998, the last trading day before the public announcement of
the Merger Agreement, the reported closing sale prices of St. Francis Common
Stock and Reliance Common Stock were $37.50 and $8.50, respectively. On December
1, 1998, the most recent date for which it was practicable to obtain market
price data prior to the printing of this Proxy Statement/Prospectus, the closing
sale prices per share of St. Francis Common Stock and Reliance Common Stock were
$41.13 and $9.50, respectively. The Per Share Stock Distribution will be
determined based on a formula set forth in the Merger Agreement that takes into
consideration the average of the last sale price of the day of one share of St.
Francis Common Stock as reported in the Wall Street Journal for the ten
consecutive trading days ending on the fifth business day prior to the Effective
Time of the Merger (the "Valuation Period"). If the Effective Time had been
December 8, 1998, the St. Francis Average Stock Price would have been $41.28,
based on a Valuation Period of November 17, 1998 through December 1, 1998,
resulting in a Per Share Stock Distribution of $10.32 and a Per Share Cash
Distribution of $10.32.
The following table sets forth (i) the closing price per share of St.
Francis Common Stock and the closing price per share of Reliance Common Stock on
each of (a) June 29, 1998, the last full trading day before the public
announcement of the signing of the Merger Agreement, and (b) December 1, 1998,
the most recent date for which it was practicable to obtain market price data
prior to the printing of this Proxy Statement/Prospectus, (ii) the St. Francis
Average Stock Price determined as if the last day of the Valuation Period were
such date, and (iii) the pro forma equivalent price per share of Reliance Common
Stock determined as if the Effective Time were five business days after such
date. The pro forma equivalent price per share of Reliance Common Stock at each
specified date represents the closing price of a share of St. Francis Common
Stock at such date multiplied by a fraction equal to the Per Share Stock
Distribution that would have existed if the Effective Time had been five
business days after such date.
<TABLE>
<CAPTION>
ST. FRANCIS RELIANCE ST. FRANCIS
COMMON COMMON AVERAGE STOCK PRO FORMA EQUIVALENT
STOCK STOCK PRICE FOR PRICE PER SHARE OF
CLOSING PRICE CLOSING PRICE PERIOD THEN ENDED RELIANCE COMMON STOCK
------------- ------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
June 29, 1998.............. $ 37.50 $ 8.50 $ 36.89 $ 10.00
December 1, 1998........... $ 41.13 $ 9.50 $ 41.28 $ 10.32
</TABLE>
No assurance can be given as to what the St. Francis Average Stock Price
will be during the actual Valuation Period or as to what the market price of the
shares of St. Francis Common Stock will be at the time the Merger is
consummated. Because the market price of the shares of St. Francis Common Stock
is subject to fluctuation, the Per Share Stock Distribution and the Per Share
Cash Distribution may change before the Merger. See "Proposal to Approve the
Merger--Merger Consideration" and "Proposal to Approve the Merger--Price-Based
Termination." Reliance shareholders are encouraged to obtain current market
quotations for St. Francis Common Stock and Reliance Common Stock. No assurance
can be given as to the market price of St. Francis Common Stock or Reliance
Common Stock at, or in the case of St. Francis Common Stock, after, the
Effective Time.
-24-
<PAGE> 28
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables set forth, for the periods indicated, certain selected
historical financial information for St. Francis and Reliance. This information
should be read in conjunction with the consolidated financial statements of St.
Francis and Reliance, and the related notes thereto, included herein or in
documents incorporated herein by reference. See "Incorporation of Certain
Information by Reference."
The historical balance sheet and income statement information included in
the selected financial information for St. Francis for the five years ended
September 30, 1998, and for Reliance for the five years ended June 30, 1998, are
derived from audited financial statements as of, and for, such years. The
results of Reliance for the three months ended September 30, 1997 and 1998 are
unaudited but reflect, in the opinion of the management of Reliance, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for such periods. Results for the
three months ended September 30, 1998 for Reliance are not necessarily
indicative of results that may be expected for any other interim period or for
the year as a whole.
-25-
<PAGE> 29
<TABLE>
<CAPTION>
ST. FRANCIS CAPITAL CORPORATION
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest and dividend income.................. $ 117,909 $ 108,146 $ 92,097 $ 83,787 $ 60,133
Interest expense.............................. 76,063 69,363 56,413 50,223 31,633
----------- ----------- ----------- ---------- -----------
Net interest income........................ 41,846 38,783 35,684 33,564 28,500
Provision for loan losses..................... 2,300 1,280 1,300 240 240
----------- ----------- ----------- ---------- -----------
Net interest income after provision
for loan losses......................... 39,546 37,503 34,384 33,324 28,260
Other operating income (expense), net:
Loan servicing and loan related fees....... 2,125 1,813 1,258 1,276 1,116
Impairment loss on mortgage
backed securities....................... -- (3,400) -- -- --
Securities gains (loss).................... 1,243 2,015 3,420 3,674 (88)
Gain on sales of mortgage
loans held for sale, net................ 4,367 1,562 1,057 261 137
Other operating income..................... 11,173 6,672 4,879 3,120 2,329
----------- ----------- ----------- ---------- -----------
Total other operating income, net............. 18,908 8,662 10,614 8,331 3,494
----------- ----------- ----------- ---------- -----------
General and administrative expenses(1)........ 41,831 32,903 31,622 22,679 19,381
----------- ----------- ----------- ---------- -----------
Income before income tax expense ............. 16,623 13,262 13,376 18,976 12,373
Income tax expense............................ 1,826 1,544 2,911 6,277 4,336
----------- ----------- ----------- ---------- -----------
Net Income.................................... $ 14,797 $ 11,718 $ 10,465 $ 12,699 $ 8,037
=========== =========== =========== ========== ===========
PER SHARE DATA:
Net income (basic)............................ $ 3.03 $ 2.33 $ 1.91 $ 2.18 $ 1.20
Net income (diluted).......................... 2.85 2.20 1.82 2.10 1.16
Dividends paid................................ 0.56 0.48 0.40 n/a n/a
Book value at end of period................... 25.52 24.54 23.12 22.66 18.40
BALANCE SHEET DATA:
Total assets.................................. $ 1,864,176 $ 1,660,649 $ 1,404,116 $1,189,215 $ 1,026,806
Cash and cash equivalents..................... 30,746 42,858 22,459 20,780 15,951
Loans receivable, net......................... 855,132 712,875 610,699 513,308 427,753
Mortgage loans held for sale.................. 23,864 24,630 20,582 1,138 2,978
Debt securities held to maturity.............. 1,817 3,833 6,215 49,928 23,804
Debt and equity securities available
for sale................................... 109,061 56,247 60,001 4,142 2,374
Mortgage-backed and related
securities held to maturity................ 63,087 66,849 68,392 157,495 159,178
Mortgage-backed and related
securities available for sale.............. 634,003 620,716 519,766 360,077 336,772
Deposits...................................... 1,216,874 1,087,136 877,684 688,348 569,892
Real estate held for investment............... 29,997 51,476 38,865 24,264 9,818
Real estate held for sale..................... 20,772 -- -- -- --
Advances from the FHLB and
other borrowings........................... 504,677 420,228 375,034 345,681 317,317
Shareholders' Equity.......................... 121,545 128,530 125,179 135,228 122,701
SELECTED RATIOS (UNAUDITED):
Return on average assets...................... 0.87% 0.77% 0.82% 1.10% 0.87%
Return on average equity...................... 11.29 9.17 7.81 10.02 6.44
Average equity to average assets.............. 7.71 8.37 10.48 10.95 13.52
Net interest rate spread...................... 2.47 2.45 2.56 2.56 2.61
Net interest margin........................... 2.68 2.73 2.97 3.04 3.17
General and administrative
expenses to average assets................. 2.46 2.16 2.47 1.96 2.10
Allowance for loan losses to/
non-performing assets...................... 257.52 181.82 131.41 65.06 44.89
</TABLE>
[FN]
- -------------------------
(1) General and administrative expenses for the year ended September 30, 1996
included a one-time special SAIF assessment of $4.2 million.
</FN>
-26-
<PAGE> 30
<TABLE>
<CAPTION>
RELIANCE BANCSHARES, INC.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE
THREE MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED JUNE 30,
------------------ -----------------------------------------------
1998 1997 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest and dividend income............... $ 786 $ 856 $ 3,360 $ 3,472 $ 2,724 $ 2,453
Interest expense........................... 259 315 1,189 1,072 1,153 1,083
-------- -------- ----------- ---------- ----------- ---------
Net interest income..................... 527 541 2,171 2,400 1,571 1,370
Provision for loan losses.................. 5 5 22 22 22 22
-------- -------- ----------- ---------- ----------- ---------
Net interest income after provision
for loan losses...................... 522 536 2,149 2,378 1,549 1,348
-------- -------- ----------- ---------- ----------- ---------
Gain (loss) on sale of investments ........ -- (4) 28 2 (3) (11)
Other income............................... -- - 13 23 9 10
Loan fees and service charges........... 3 2 10 11 11 9
-------- -------- ----------- ---------- ----------- ---------
Total non-interest income............... 3 (2) 51 36 17 8
-------- -------- ----------- ---------- ----------- ---------
Operating income........................... 525 534 2,198 2,414 1,566 1,356
Total non-interest expense................. 333 253 1,262 1,431 721 680
-------- -------- ----------- ---------- ----------- ---------
Income before income taxes................. 192 281 938 983 845 676
-------- -------- ----------- ---------- ----------- ---------
Income tax expense......................... 89 118 366 367 331 271
-------- -------- ----------- ---------- ----------- ---------
Net income.............................. 103 163 $ 572 $ 616 $ 514 $ 405
======== ======== =========== ========== ========= =========
PER SHARE DATA:
Net income (basic)......................... $ 0.04 $ 0.07 $ 0.24 $ 0.25 $ 0.21 N/A
Net income (diluted)....................... 0.04 0.07 0.24 0.25 0.21 N/A
Dividends paid............................. -- -- -- 3.00 -- N/A
Book value at end of period................ 9.41 9.08 9.34 8.99 11.45 N/A
BALANCE SHEET DATA:
Total assets............................... $ 40,454 $ 46,987 $ 42,289 $ 47,009 $ 47,752 $ 32,260
Investments:
Certificates of deposit-at cost......... 294 583 493 294 294 479
Investment securities available for
sale, at fair value.................. 8,037 13,549 10,949 11,481 7,882 6,193
Investment securities held to maturity.. -- 1,993 -- 3,189 11,178 2,196
Mortgage-backed and related securities..... 411 520 456 685 800 1,020
Federal Home Loan Bank stock-at cost....... 200 200 200 200 157 152
Loans receivable, net...................... 27,004 27,035 25,798 27,601 22,931 21,034
Accrued interest receivable................ 104 194 87 182 173 95
Office properties and equipment............ 71 82 75 86 84 107
Deposit accounts........................... 17,380 17,702 17,330 17,596 18,200 22,312
Borrowed Funds............................. -- 6,043 2,000 6,008 -- --
Shareholders' equity....................... 22,535 22,698 22,372 22,966 29,348 9,616
SELECTED RATIOS (UNAUDITED)(2):
Return on average assets................... 0.96% 1.36% 1.24% 1.32% 1.40% 1.23%
Return on average equity................... 1.72 2.72 2.43 2.44 3.45 4.32
Average equity to average assets........... 53.93 49.86 50.88 54.08 40.71 28.49
Average interest rate spread............... 2.31 2.11 2.23 2.55 2.25 2.96
Average net interest margin................ 5.16 4.71 4.91 5.29 4.42 4.24
Allowance for loan losses to total loans
held for investment at end of period.... 0.55 0.55 0.55 0.49 0.47 0.47
Non-interest expense to average assets..... 3.09 2.10 2.73 3.07 1.97 2.06
</TABLE>
- -------------------------
[FN]
(1) Certain terminology used in the presentation of Reliance's historical
data has been changed to conform with terminology used in St. Francis'
presentation. Reliance Savings Bank consummated its conversion from
mutual to stock form on April 18, 1996; on that date, Reliance issued
shares of common stock to complete the conversion. Therefore, selected
consolidated historical financial information prior to fiscal 1995 is
not applicable.
(2) Annualized for the three-month periods ended September 30, 1997 and
1998.
</FN>
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<PAGE> 31
INTRODUCTION
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of
common stock, par value $1.00 per share ("Reliance Common Stock"), of Reliance
Bancshares, Inc., a Wisconsin corporation ("Reliance"), in connection with the
solicitation of proxies by the Board of Directors of Reliance (the "Reliance
Board"), for use at the Special Meeting of Shareholders of Reliance to be held
on January 20, 1999, at 2:00 p.m., Milwaukee, Wisconsin time, at the Clarion
Hotel & Conference Center, 5311 South Howell Avenue, Milwaukee, Wisconsin, or
at any adjournments or postponements thereof (the "Special Meeting"). This
Proxy Statement/Prospectus also constitutes the Prospectus of St. Francis filed
as part of its Registration Statement on Form S-4 ("Registration Statement")
with respect to up to 740,022 shares of St. Francis Common Stock (and
associated Purchase Rights) to be issued upon consummation of the Merger
pursuant to the Merger Agreement.
At the Special Meeting, holders of record of Reliance Common Stock as of
the close of business on December 4, 1998 (the "Voting Record Date") will
consider and vote upon a proposal to approve the Agreement and Plan of
Reorganization, dated as of June 30, 1998 (the "Merger Agreement"), and related
Agreement and Plan of Merger, dated as of September 22, 1998 (the "Plan of
Merger"), by and between Reliance and St. Francis Capital Corporation, a
Wisconsin corporation ("St. Francis"), pursuant to which Reliance will be
merged with and into St. Francis (the "Merger"). Pursuant to the Merger
Agreement and the Plan of Merger, shareholders of Reliance may elect, subject
to certain election and allocation procedures, to exchange their shares of
Reliance Common Stock for either cash in an amount ranging from $10.00 per
Reliance share up to an amount equal to .2295 multiplied by the average market
price of St. Francis' Common Stock over a ten-day pricing period ending shortly
before the Effective Time (the "St. Francis Average Stock Price") (the exact
per share cash amount to be dependant upon the St. Francis Average Stock
Price), between .2295 and .3085 fractional shares of St. Francis common stock
(the exact fractional share amount to be dependant upon the St. Francis Average
Stock Price), or an overall combination thereof, for each Reliance common
share. The aggregate consideration to be paid to shareholders of Reliance will
be at least equal to 60% in St. Francis Common Stock and not more than 40% in
cash. The Reliance Board has unanimously approved the terms of the Merger
Agreement and the Plan of Merger and recommends that shareholders of Reliance
vote FOR the proposal to approve and adopt the Merger Agreement and the Plan of
Merger.
PARTIES TO THE MERGER
St. Francis, a Wisconsin corporation, was incorporated on December 18,
1992 for the purpose of becoming the holding company for St. Francis Bank,
F.S.B. ("St. Francis Bank") upon St. Francis Bank's conversion from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank. This transaction was completed in June 1993. In November 1994, St.
Francis consummated the acquisition of the stock of Valley Bank East Central in
Kewaskum, Wisconsin as well as the acquisition of the deposits and certain
assets of the Hartford, Wisconsin branch of Valley Bank Milwaukee. The
acquired bank offices were combined as a commercial bank named Bank Wisconsin.
In February 1997, St. Francis completed the acquisition of Kilbourn State Bank
in Milwaukee, Wisconsin, which subsequently was merged into Bank Wisconsin. In
September 1997, Bank Wisconsin was merged into St. Francis Bank, with St.
Francis Bank being the surviving entity. At September 30, 1998, St. Francis
had total assets of $1.9 billion, total deposits of $1.2 billion and
shareholders' equity of $121.5 million. St. Francis has not engaged in any
significant activity other than holding the stock of St. Francis Bank. St.
Francis Bank is regulated by the Office of Thrift Supervision ("OTS") and its
deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
St. Francis Bank's principal business consists of attracting retail deposits
from the general public and borrowings from the FHLB and investing those
deposits, together with funds generated from other operations, in mortgage,
consumer and other loans within its primary market area and mortgage-backed and
related securities, and to a lesser extent, debt and equity securities.
Primary areas of lending include single-family and multi-family residential
mortgages, home equity lines of credit, second mortgages, commercial real
estate and commercial loans. At September 30, 1998, St. Francis operated 25
banking offices in Wisconsin. The principal executive offices of St. Francis
are located at 13400 Bishops Lane, Suite 350, Brookfield, Wisconsin 53005-6203,
and its telephone number is (414) 486-8700.
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<PAGE> 32
Reliance, a Wisconsin corporation incorporated on November 10, 1995, is
the holding company for Reliance Savings Bank, a Wisconsin state-chartered
stock savings bank ("Reliance Savings Bank"), which consummated its conversion
from mutual to stock form in April 1996. At September 30, 1998, Reliance had
total assets of $40.5 million, total deposits of $17.4 million and
shareholders' equity of $22.5 million. Reliance Savings Bank is regulated by
the FDIC and the Wisconsin Department of Financial Institutions ("WDFI"), and
its deposits are insured up to applicable limits by the SAIF of the FDIC.
Reliance's principal business consists of attracting funds in the form of
deposits and investing such funds in investment securities (including United
States government and other agency obligations and mutual funds),
mortgage-backed and related securities and loans secured by real estate.
Reliance Savings Bank originates loans primarily on one- to-four-family
owner-occupied homes. While Reliance Savings Bank has in recent years had
funds to lend, management of Reliance Savings Bank believes there has been a
diminishing demand for one- to four-family mortgage loans in its local market
area (generally defined as an area within a three-mile radius of its office).
Since fiscal 1997, Reliance Savings Bank has been, and intends to continue to
emphasize one- to four-family mortgage lending in its local market area, but
also has been originating and intends to continue to originate one- to
four-family, residential construction, commercial real estate, commercial
construction and land development and multi-family loans both within and
outside its local market area in suburbs surrounding the City of Milwaukee,
which encompasses the Wisconsin counties of Milwaukee, Waukesha, Ozaukee and
Washington, in order to generate adequate earnings, adequately leverage its
capital and make effective use of its liquid assets. Reliance Savings Bank
invests a significant portion of its assets in investment securities and
mortgage-backed securities, including U.S. Government and federal agency
securities, short-term liquid assets and other marketable securities. At
September 30, 1998, Reliance and Reliance Savings Bank operated one banking
office in Wisconsin. The principal executive offices of Reliance are located
at 3140 South 27th Street, Milwaukee, Wisconsin 53215, and its telephone number
is (414) 671-2222.
RISK FACTORS
IN ADDITION TO OTHER INFORMATION CONTAINED IN AND INCORPORATED BY
REFERENCE IN THE PROXY STATEMENT/PROSPECTUS, RELIANCE SHAREHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED BELOW IN DETERMINING WHETHER TO
APPROVE THE MERGER AGREEMENT AND THE PLAN OF MERGER AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
UNCERTAIN LEGISLATIVE AND REGULATORY ENVIRONMENT
The banking and financial services businesses in which St. Francis and
Reliance engage are highly regulated. The laws and regulations affecting such
businesses can be changed dramatically by the adoption of federal legislation.
For example, on May 13, 1998, the U.S. House of Representatives (the "House")
passed a sweeping financial modernization bill, H.R. 10, "The Financial
Services Act of 1998," by a vote of 214 to 213. The bill was first proposed by
the Clinton Administration on May 21, 1997 and the final House version differed
from it in many respects. The House bill was sent to the U.S. Senate, where
opposition from a variety of sources prevented it from being presented for a
vote by that body.
Financial industry reform legislation may be introduced in the next
legislative session. It is impossible to predict whether such legislation
would be as broad in scope as H.R. 10, what its exact form or content might be,
or whether it would have any realistic chance of adoption. Accordingly,
neither St. Francis nor Reliance can predict what changes will occur or the
effect any such change would have on the ability of the combined entity to
compete effectively or to take advantages of new opportunities after the
Merger.
-29-
<PAGE> 33
EFFECT OF INTEREST RATES
The operations of St. Francis are, like those of financial institutions in
general, significantly influenced by general economic conditions and the
related monetary and fiscal policies of the federal government. Deposit flows
and costs of funds are influenced by interest rates of competing investments
and general market rates of interest. Lending activities are affected by the
demand for commercial loans, mortgage financing and for consumer and other
types of loans, which in turn are affected by the interest rates at which
financing may be offered and by other factors affecting the availability of
funds. St. Francis' profitability, like that of most financial institutions,
is dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings. As a financial institution, St.
Francis' vulnerability to changes in interest rates depends upon the effective
maturing and repricing characteristics of its interest-earning assets and
interest-bearing liabilities and the direction of market interest rate
movements. Further information concerning the effect of interest rates on the
business and financial condition of St. Francis is provided in St. Francis'
periodic reports filed with the SEC under the Exchange Act which are
incorporated by reference herein. See "Incorporation of Certain Information by
Reference."
COMPETITION
The markets in which St. Francis and Reliance operate are highly
competitive. Competition in such markets is likely to increase in light of the
changing legislative and regulatory environment in which St. Francis and
Reliance operate. In addition, consolidation and mergers in the banking
industry are expected to continue, resulting in stronger and more effective
competitors. Neither St. Francis nor Reliance can predict the degree to which
competition in the industry will increase in the future or the effect any such
increased competition will have on the combined entity.
RAPID TECHNOLOGICAL CHANGES
Evolving technology will play a major role in the processing and delivery
of financial services. The effective use of new technology will enable banking
and financial service businesses to improve information concerning their
customers and markets. It also will enable them to reduce overhead expenses
while improving the quality of service to customers. Communications technology
will substantially improve the ability of financial institutions to exchange
information with their customers and employees. Banks and financial
institutions that are unwilling or unable to access this evolving new
technology could experience lower earnings and a loss of competitiveness.
UNCERTAIN ECONOMIC ENVIRONMENT
Until recently, banks and financial service companies in the Midwest have
experienced a relatively long period of price stability and a growing economy.
Price stability enables banks to better protect themselves against interest
rate risks. A strong economy enhances the opportunity of the commercial sector
of the economy to improve earnings and performance. It also provides an
environment for financial institutions to experience positive and profitable
growth. Any changes in the global economy may affect the regional or national
economic market, which, in turn, presents risks for all banks and financial
service companies.
SHARE PRICE FLUCTUATION
The share price of St. Francis Common Stock on the NASDAQ National Market
System is by nature subject to the general price fluctuations in the market for
publicly-traded equity securities. Such fluctuations are not necessarily
related to a change in the financial performance or condition of St. Francis.
-30-
<PAGE> 34
YEAR 2000
Advances and changes in available technology can significantly impact the
business and operations of St. Francis. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of St. Francis' programs or programs of third-party
providers that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected, Year 2000 issues
could result in a major system failure or miscalculations and material costs to
St. Francis.
St. Francis is adhering to the Federal Financial Institution's Examination
Council ("FFIEC") Year 2000 directives that have been published since 1996,
which established policy guidelines and time frames to guide Year 2000
compliance. All management activities and plans have incorporated the FFIEC
guidelines published to date.
St. Francis' Year 2000 compliance efforts have included completing an
inventory of all products and services that may be affected by Year 2000 date
related issues. Each item has been categorized as either mission critical,
moderate or low priority depending on its importance to the operation of St.
Francis' business activities. St. Francis is adhering to FFIEC guidelines for
completing the remediation, testing and implementation for all mission critical
activities by June 30, 1999. St. Francis is on schedule to complete Year 2000
compliance activities within its designated time frame. The project is being
overseen by a steering committee composed of representatives from all areas of
St. Francis and being directed by St. Francis' Information Services division.
Moderate and low priority issues are scheduled to be reviewed, tested and, if
necessary remediated, by the end of 1999.
St. Francis utilizes a national third party provider for the bulk of its
data processing needs. As a result, a large part of St. Francis' missions
critical Year 2000 testing is for products and services processed by that
service provider. The service provider has completed the remediation and
testing of its systems and has had its Year 2000 compliant systems in
production since June 30, 1998. St. Francis is in the process of independently
testing its activities on that system to verify that the service provider's
system function in the Year 2000 for those services used by St. Francis. In
October 1998, St. Francis successfully completed the first phase of that
testing and is scheduled to complete testing by the spring of 1999. St.
Francis has no custom developed system code. Therefore, the remediation phase
of St. Francis' Year 2000 plan does not include code renovation.
In addressing the Year 2000 issue, St. Francis has also taken into
consideration technology issues beyond its data processing activities.
Non-data processing systems include equipment in use which is not defined as
computer hardware or software. Such equipment could result in service or
product breakdown if not Year 2000 compliant. As part of its Year 2000 plan,
St. Francis has addressed such items as alarm systems, elevators, keyless entry
systems, telephone and data systems and others. The impact and status of these
items are being reviewed in the same manner as St. Francis' data processing
systems.
The Year 2000 issue also may affect St. Francis' customers who may
experience a disruption in business that could potentially result in financial
difficulties and eventually result in an inability to repay their loans. St.
Francis includes as part of its normal underwriting standards consideration of
the Year 2000 credit risk. The assessment is made through personal contact and
a questionnaire, which allows St. Francis to review the customer's Year 2000
awareness and compliance efforts. This process results in an overview of the
customer's preparedness but does not give absolute assurance that the customer
will not have problems with Year 2000 issues. The potential impact of Year
2000 on the customer's ability to repay loans cannot be determined at this
time.
The estimated costs of the Year 2000 issue are not expected to have a
significant impact on St. Francis' results of operations, liquidity or capital
resources. Direct costs of the Year 2000 issue have been estimated to not
exceed $500,000 per year for the fiscal years ending September 30, 1998, 1999
and 2000. The primary direct costs include compensation and benefits paid to
staff dedicated solely to the Year 2000 issue, direct costs paid to vendors or
others related to Year 2000 preparedness and the income statement effect of
hardware and software purchased to replace items not Year 2000 compliant. The
figure does not include costs considered by St. Francis to be indirect costs.
The primary indirect cost includes the time and effort of many of St. Francis'
employees to prepare for the Year 2000 in addition to performing their normal
work routines. The costs of the Year 2000 project are based on St. Francis'
best estimates, which include numerous assumptions about future events. Actual
costs may differ due to actual events being different than those assumed at the
time the cost estimates were prepared.
-31-
<PAGE> 35
St. Francis presently believes that the compliance effort can and will be
completed prior to the Year 2000. However, if required product or service
upgrades are not complete by that time, the Year 2000 issues could disrupt
normal business operations. Although not expected at this time, the most
likely worst case scenario includes St. Francis being unable to process some or
all of its transactions on a temporary basis. Because of the nature of this
scenario, St. Francis is in the process of establishing contingency plans for
all mission critical services. Those contingency plans will also be tested as
part of St. Francis' Year 2000 preparedness. Additionally, a business
resumption plan is being developed to mitigate risks associated with the
failure of mission critical systems. The Year 2000 business resumption
contingency plan will be designed to ensure that mission critical core banking
processes will continue if one or more supporting systems fail and to allow for
limited transaction processing until the Year 2000 problems are fixed.
Reliance has developed a Year 2000 Compliance Plan and has conducted a
review of its computer systems and its third-party systems, and has identified
those that could be affected by the Year 2000 issue. Reliance believes that,
with modifications to existing software used by Reliance and by its third-party
providers, the Year 2000 problem will not pose significant operational issues
for Reliance. Reliance does not anticipate costs to remedy the Year 2000
problem will have a material impact on the financial condition of Reliance.
THE SPECIAL MEETING
PLACE, TIME AND DATE
The Special Meeting of Shareholders of Reliance will be held on January
20, 1999, at 2:00 p.m., Milwaukee, Wisconsin time, at the Clarion Hotel &
Conference Center, 5311 South Howell Avenue, Milwaukee, Wisconsin. This Proxy
Statement/Prospectus is being sent to holders of shares of Reliance Common
Stock and is accompanied by an appointment form of proxy ("Proxy") which is
being solicited by the Reliance Board for use at the Special Meeting or any
adjournments or postponements thereof.
PURPOSE
The purpose of the Special Meeting is to: (i) consider and vote upon the
approval and adoption of the Merger Agreement and Plan of Merger described
herein, providing for, among other things, the merger of Reliance with and into
St. Francis, with St. Francis surviving the Merger, and the conversion of
Reliance Common Stock into shares of St. Francis Common Stock or cash, or a
combination thereof; (ii) adjourn the Special Meeting to solicit additional
proxies in favor of the Merger Agreement and Plan of Merger in the event the
required vote for approval and adoption of the Merger Agreement and Plan of
Merger has not been obtained by the date of the Special Meeting; and (iii)
consider and act upon such other matters as may properly come before the
Special Meeting or any adjournments or postponements thereof.
RECORD DATE; SHARES ENTITLED TO VOTE
The Reliance Board has fixed the close of business on December 4, 1998
(the "Voting Record Date") as the record date for the determination of Reliance
shareholders entitled to notice of and to vote at the Special Meeting. Only
those holders of Reliance Common Stock of record on the Voting Record Date will
be entitled to notice of and to vote in person or by properly executed proxy at
the Special Meeting or any adjournments or postponements thereof. Each share
of Reliance Common Stock will be entitled to one vote on each matter presented
for action at the Special Meeting. As of the Voting Record Date, 2,395,564
shares of Reliance Common Stock were issued and outstanding, and Reliance had
no other class of securities issued and outstanding.
RELIANCE SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES FOR RELIANCE
COMMON STOCK WITH THEIR PROXY CARDS. AS DESCRIBED UNDER "PROPOSAL TO APPROVE
THE MERGER--ELECTION AND ALLOCATION PROCEDURES," EACH RELIANCE SHAREHOLDER WILL
BE PROVIDED WITH AN ELECTION FORM/LETTER OF TRANSMITTAL FOR EXCHANGING SHARES
OF RELIANCE COMMON STOCK, AND SHOULD FOLLOW THE INSTRUCTIONS SET FORTH THEREIN.
-32-
<PAGE> 36
VOTES REQUIRED
A majority of the shares of Reliance Common Stock entitled to vote,
represented in person or by proxy, will constitute a quorum for the transaction
of business at the Special Meeting. Abstentions and broker non-votes
(referring to where a broker or nominee physically indicates on the proxy that
it does not have discretionary authority as to certain shares of Reliance
Common Stock to vote on a particular matter) will be considered present for
purposes of determining whether a quorum exists. The following votes are
required for various actions to be taken at the Special Meeting:
o The affirmative vote of the holders of a majority of
the issued and outstanding shares of Reliance Common Stock
entitled to vote on the Merger Agreement and the Plan of Merger
at the Special Meeting is required for approval and adoption of
the Merger Agreement and the Plan of Merger. Abstentions and
broker non-votes will have the same effect as votes cast against
approval of the Merger Agreement and the Plan of Merger.
o The affirmative vote of a majority of the total votes
cast in person or by proxy is necessary to approve the proposal
to adjourn the Special Meeting, if necessary, to solicit
additional proxies in favor of the Merger proposal. Any shares
not voted will have no effect on the proposal to adjourn the
Special Meeting provided that a quorum is present at the Special
Meeting.
THE REQUIRED VOTE OF RELIANCE SHAREHOLDERS ON THE MERGER AGREEMENT AND
PLAN OF MERGER IS BASED UPON THE NUMBER OF OUTSTANDING SHARES OF RELIANCE
COMMON STOCK, AND NOT THE NUMBER OF THOSE SHARES WHICH ARE ACTUALLY VOTED.
ACCORDINGLY, THE FAILURE TO SUBMIT A PROXY CARD OR TO VOTE IN PERSON AT THE
SPECIAL MEETING, OR THE ABSTENTION FROM VOTING BY A RELIANCE SHAREHOLDER, WILL
HAVE THE SAME EFFECT AS A "NO" VOTE WITH RESPECT TO THE MERGER AGREEMENT AND
PLAN OF MERGER. BROKER NON-VOTES WILL NOT BE COUNTED AS HAVING BEEN VOTED IN
PERSON OR BY PROXY AT THE SPECIAL MEETING WITH RESPECT TO THE MERGER PROPOSAL
AND WILL HAVE THE SAME EFFECT AS A "NO" VOTE WITH RESPECT TO THE MERGER
AGREEMENT AND PLAN OF MERGER.
DISSENTERS' RIGHTS
Holders of shares of Reliance Common Stock have no appraisal or
dissenters' rights in connection with the Merger. See "Proposal to Approve the
Merger--No Appraisal or Dissenters' Rights."
PROXIES
Holders of shares of Reliance Common Stock may vote either in person or by
properly executed Proxy. Shares of Reliance Common Stock represented by a
properly executed Proxy received prior to or at the Special Meeting or any
postponements or adjournments thereof will, unless such Proxy is revoked, be
voted in accordance with the instructions indicated on such Proxy. If no
instructions are indicated on a properly executed Proxy, the shares covered
thereby will be voted FOR the proposal to approve the Merger Agreement and Plan
of Merger, and FOR the proposal to adjourn the Special Meeting, if necessary,
to solicit additional proxies in favor of the Merger. If any other matters are
properly presented at the Special Meeting for consideration, the persons named
in the Proxy and acting thereunder will have discretion to vote on such matters
in accordance with their best judgment; provided, however, that no Proxy which
is voted against the proposal to approve the Merger Agreement and Plan of
Merger will be voted in favor of any adjournment. As of the date hereof,
Reliance knows of no such other matters.
Any Proxy given pursuant to this solicitation or otherwise may be revoked
by the person giving it at any time before it is voted by (i) filing with the
Secretary of Reliance written notice thereof (Carol A. Barnharst, Secretary,
Reliance Bancshares, Inc., 3140 South 27th Street, Milwaukee, Wisconsin
53215); (ii) submitting a duly-executed Proxy bearing a later date; or (iii)
appearing at the Special Meeting and giving the Secretary notice of his or her
intention to vote in person. If you are a shareholder whose shares are not
registered in your own name, you will need additional documentation from your
record holder to vote personally at the Special Meeting so that the inspector
of election can ensure that votes associated with the shares beneficially owned
by you are counted only once.
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If a quorum is not obtained, or if fewer shares of Reliance Common Stock
are voted in favor of approval of the Merger Agreement and Plan of Merger than
the number required for approval, it is expected that the Special Meeting will
be postponed or adjourned for the purpose of allowing additional time for
obtaining additional Proxies or votes, and at any subsequent reconvening of the
Special Meeting, all Proxies will be voted in the same manner as such Proxies
would have been voted at the original convening of the Special Meeting (except
for any Proxies which have theretofore effectively been revoked or withdrawn).
The cost of solicitation of Proxies on behalf of the Reliance Board will
be borne by Reliance. The expense of printing this Proxy Statement/Prospectus,
the cost of filing the Registration Statement on Form S-4 with the SEC
registering the shares of St. Francis Common Stock to be issued in connection
with the Merger (excluding the legal fees of the parties to the Merger incurred
in connection therewith), and the cost of listing such shares of St. Francis
Common Stock on the NASDAQ National Market System will be shared equally
between Reliance and St. Francis. Proxies will be solicited principally by
mail, but also may be solicited by personal interview, telephone, facsimile or
other means of communication by directors, officers and other employees of
Reliance. Such directors, officers and employees will receive no compensation,
but may be reimbursed for out-of-pocket expenses in connection with such
solicitation. Reliance also has made arrangements with brokerage firms, banks,
nominees and other fiduciaries to forward proxy solicitation materials for
shares of Reliance Common Stock held of record by the beneficial owners of such
shares. Reliance will reimburse such holders for their reasonable
out-of-pocket expenses.
RECOMMENDATION OF RELIANCE'S BOARD OF DIRECTORS REGARDING THE MERGER
The Reliance Board has unanimously determined that the terms of the Merger
Agreement and Plan of Merger are fair to, and in the best interests of,
Reliance and the Reliance shareholders, has unanimously approved and adopted
the Merger Agreement and the Plan of Merger and the transactions contemplated
thereby, and recommends that shareholders of Reliance vote FOR approval and
adoption of the Merger Agreement and Plan of Merger and the transactions
contemplated thereby. See "Proposal to Approve the Merger--Background of the
Merger,"--Reasons for the Merger and Recommendation of the Reliance Board of
Directors," and "--Opinion of Reliance Financial Advisor."
SECURITY OWNERSHIP OF MANAGEMENT; VOTING AGREEMENTS
As an inducement to St. Francis to enter into the Merger Agreement, the
directors and executive officers of Reliance entered into voting agreements
("Voting Agreements") with St. Francis to vote the shares of Reliance Common
Stock beneficially owned by them in favor of the Merger. As of October 31,
1998, the directors and executive officers of Reliance who signed the Voting
Agreements beneficially owned or had the right to acquire 485,956 shares of
Reliance Common Stock (or approximately 18.22% of the outstanding shares of
Reliance Common Stock), including 224,280 shares subject to unexercised options
held by such persons at that date which were not exercised prior to the Voting
Record Date, and thus cannot be voted at the Special Meeting. As October 31,
1998, with the exception of one director of St. Francis who acquired shares of
Reliance Common Stock in 1996, the directors and executive officers of St.
Francis and their affiliates did not own any shares of Reliance Common Stock.
Pursuant to the Voting Agreements, the directors and executive officers of
Reliance may not sell, assign, transfer or otherwise dispose of, or permit to
be sold, assigned, transferred or otherwise disposed of, any shares of Reliance
Common Stock owned of record or beneficially by such shareholder, whether such
shares of Reliance Common Stock are owned of record or beneficially by such
shareholder on the date of the Voting Agreement or are subsequently acquired,
whether pursuant to the exercise of stock options or otherwise, except (i) for
transfers by will or by operation of law (in which case the Voting Agreement
would bind the transferee), (ii) for sales, assignments, transfers or other
dispositions necessitated by hardship with the prior written consent of St.
Francis, or (iii) as St. Francis may otherwise agree in writing.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Reliance Board does
not intend to bring any other business before the Special Meeting other than as
set forth in the Notice of Special Meeting of Shareholders and, so far as is
known to the Reliance Board, no matters are to be brought before the Special
Meeting except as specified in the Notice of Special Meeting of Shareholders.
As to any other business that may properly come before the meeting, however,
the proxy holders intend to vote the proxies in respect thereof in accordance
with their best judgment and discretion.
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<PAGE> 38
PROPOSAL TO APPROVE THE MERGER
(PROPOSAL NO. 1)
GENERAL
The following information, insofar as it relates to matters contained in
the Merger Agreement and Plan of Merger between St. Francis and Reliance, is
qualified in its entirety by reference to the Merger Agreement and Plan of
Merger which are incorporated herein by reference and attached hereto as
Exhibits A and B, respectively. RELIANCE SHAREHOLDERS ARE URGED TO READ THE
MERGER AGREEMENT AND PLAN OF MERGER IN THEIR ENTIRETY.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE ISSUED AND
OUTSTANDING SHARES OF RELIANCE COMMON STOCK ENTITLED TO VOTE ON THE MERGER
AGREEMENT AND PLAN OF MERGER IS REQUIRED TO APPROVE THE MERGER AGREEMENT AND
PLAN OF MERGER. UNLESS OTHERWISE SPECIFIED, THE SHARES OF RELIANCE COMMON
STOCK REPRESENTED BY THE PROXIES SOLICITED HEREBY WILL BE VOTED IN FAVOR OF THE
APPROVAL OF THE MERGER AGREEMENT AND PLAN OF MERGER. THE RELIANCE BOARD
RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT AND PLAN OF
MERGER.
THE MERGER AND THE BANK MERGER
The Merger Agreement provides that St. Francis will acquire Reliance
through a merger of Reliance with and into St. Francis with St. Francis being
the surviving entity. Upon consummation of the Merger, all shares of Reliance
Common Stock will no longer be outstanding and will automatically be cancelled
and retired and will cease to exist, and each holder of a certificate
representing any shares of Reliance Common Stock will cease to have any rights
with respect thereto, except the right to receive cash and/or shares of St.
Francis Common Stock to be paid or issued upon the surrender of such
certificate, without interest, as described below. St. Francis also plans to
merge Reliance Savings Bank with and into St. Francis Bank immediately
following the Merger, or as soon as practicable thereafter (the "Bank Merger"),
and St. Francis and Reliance have agreed to take all action necessary and
appropriate to effectuate the Bank Merger. There can be no assurance that the
structure of the Bank Merger will not change from that presently contemplated
by St. Francis and Reliance in order to obtain all necessary regulatory
approvals.
EFFECT OF THE MERGER
At the Effective Time, as defined below, Reliance will merge with and into
St. Francis. The Reliance Common Stock will be exchanged for shares of St.
Francis Common Stock or cash, or a combination of both stock and cash, as
described under "--Merger Consideration." Each share of St. Francis Common
Stock outstanding immediately prior to the Effective Time will remain
outstanding and unchanged as a result of the Merger.
No fractional shares of St. Francis Common Stock will be issued in
connection with the Merger. In lieu of issuing fractional shares, St. Francis
will make a cash payment equal to the fractional interest which a Reliance
shareholder would otherwise receive multiplied by the St. Francis Average Stock
Price.
The amount and form of the consideration to be received by holders of
Reliance Common Stock were arrived at through arm's length negotiations between
St. Francis and Reliance. See "--Background of the Merger." For certain
information concerning the historical range of sales prices of Reliance Common
Stock, see "Summary--Comparative Market and Stock Price Information." For
information regarding certain Purchase Rights attached to each share of St.
Francis Common Stock, including, when issued, to each of the shares of St.
Francis Common Stock to be issued in the Merger, see "Description of St.
Francis Capital Stock--Rights Plan."
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<PAGE> 39
EFFECTIVE TIME
The Merger will become effective on the date Articles of Merger are filed
with the WDFI in accordance with the WBCL or such later date as the Articles of
Merger may specify (the "Effective Time"). The Articles of Merger will be
filed upon satisfaction or waiver of all of the conditions to the Merger
provided in the Merger Agreement but in no event later than the last business
day of the month in which all conditions to the Merger set forth in the Merger
Agreement have been satisfied or waived. The parties expect that the Effective
Time of the Merger will occur in the end of January, 1999.
MERGER CONSIDERATION
The Merger Agreement provides that, subject to the election and allocation
procedures provided for therein, each issued and outstanding share of Reliance
Common Stock will be converted into the right to receive, at the election of
each holder thereof, either:
(a) A NUMBER OF SHARES OF ST. FRANCIS COMMON STOCK EQUAL TO (i) a
fractional share of St. Francis Common Stock determined by dividing
$10.00 by the St. Francis Average Stock Price (as defined herein) if
the St. Francis Average Stock Price is between $32.41 and $40.00; (ii)
.25 shares of St. Francis Common Stock, if the St. Francis Average
Stock Price is between $40.01 and $42.00; (iii) a fractional share of
St. Francis Common Stock determined by dividing $10.50 by the St.
Francis Average Stock Price, if the St. Francis Average Stock Price is
between $42.01 and $45.74; and (iv) .2295 shares of St. Francis Common
Stock, if the St. Francis Average Stock Price is $45.75 or more (the
"Per Share Stock Distribution"); or
(b) CASH EQUAL TO (i) $10.00, if the St. Francis Average Stock Price is
between $32.41 and $40.00; (ii) an amount equal to .25 of the St.
Francis Average Stock Price, if the St. Francis Average Stock Price is
between $40.01 and $42.00; (iii) $10.50, if the St. Francis Average
Stock Price is between $42.01 and $45.74; and (iv) an amount equal to
.2295 of the St. Francis Average Stock Price, if the St. Francis
Average Stock Price is $45.75 or more (the "Per Share Cash
Distribution").
If the St. Francis Average Stock Price is $32.40 or less, then St. Francis
has the option of completing the Merger using a Per Share Cash Distribution of
$10.00 and a Per Share Stock Distribution equal to a fractional share of St.
Francis Common Stock determined by dividing $10.00 by the St. Francis Average
Stock Price, or terminating the Merger Agreement.
The "St. Francis Average Stock Price" means the average (rounded to the
nearest whole cent) of the last sale price of the day of one share of St.
Francis Common Stock as reported in the Wall Street Journal for the ten
consecutive trading days ending on the fifth business day preceding the
Effective Time (the "Valuation Period").
The Merger Agreement also provides that the value of the aggregate number
of shares of St. Francis Common Stock to be issued in the Merger must be equal
to at least 60% of the aggregate value of all of the consideration to be paid
in connection with the Merger, and the aggregate amount of consideration paid
to Reliance shareholders in cash must not be more than 40% of the aggregate
value of all of the consideration to be paid in connection with the Merger.
Assuming that: (i) there are 2,443,404 shares of Reliance Common Stock
outstanding, which represents the 2,395,564 hares of Reliance Common Stock
issued and outstanding as of the Voting Record Date, plus 47,840 shares of
Reliance Common Stock that will be issued and/or vested in connection with the
closing of the Merger under the terms of the RRP; (ii) no exercise of options
for 247,097 shares of Reliance Common Stock currently outstanding under
Reliance's stock option plan; (iii) the St. Francis Average Stock Price is
$41.28; and (iv) the aggregate amount of consideration payable in cash is equal
to 40% of the aggregate value of all of the consideration paid in connection
with the Merger and the aggregate amount of consideration payable in value of
whole shares of St. Francis Common Stock is equal to 60% of the aggregate value
of all of the consideration paid in connection with the Merger, St.
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<PAGE> 40
Francis will issue approximately 366,510 shares of St. Francis Common Stock and
approximately $10.09 million in cash in the Merger. St. Francis intends to
fund the cash portion of the purchase price with an existing line of credit
maintained by St. Francis Bank with a third party financial institution.
Fractional shares of St. Francis Common Stock will not be issued in the
Merger. Reliance shareholders otherwise entitled to a fractional share will be
paid the value of such fraction in cash determined as described herein under
"Proposal to Approve the Merger--Effect of the Merger."
On December 1, 1998, the most recent date for which it was practicable to
obtain market price data prior to the printing of this Proxy
Statement/Prospectus, the closing sales price per share of St. Francis Common
Stock was $41.13.
The following table sets forth various assumed St. Francis Average Stock
Prices, the resulting conversion ratio, the value of St. Francis Common Stock
to be received per share of Reliance Common Stock based on such assumed St.
Francis Average Stock Price, and the per share cash consideration to be
received based on such assumed St. Francis Average Stock Price.
<TABLE>
<CAPTION>
PER SHARE VALUE
ASSUMED ST. FRANCIS OF ST. FRANCIS PER SHARE
AVERAGE CONVERSION COMMON STOCK CASH CONSIDERATION
STOCK PRICE RATIO TO BE RECEIVED TO BE RECEIVED
------------------- ---------- --------------- ------------------
<S> <C> <C> <C>
30.00 .3333 $10.00 $10.00
31.00 .3226 10.00 10.00
32.00 .3125 10.00 10.00
32.40 .3086 10.00 10.00
33.00 .3030 10.00 10.00
34.00 .2941 10.00 10.00
35.00 .2857 10.00 10.00
36.00 .2778 10.00 10.00
37.00 .2703 10.00 10.00
38.00 .2632 10.00 10.00
39.00 .2564 10.00 10.00
40.00 .2500 10.00 10.00
41.00 .2500 10.25 10.25
42.00 .2500 10.50 10.50
43.00 .2442 10.50 10.50
44.00 .2386 10.50 10.50
45.00 .2333 10.50 10.50
45.75 .2295 10.50 10.50
46.00 .2295 10.56 10.56
47.00 .2295 10.79 10.79
48.00 .2295 11.02 11.02
</TABLE>
NONE OF THE ASSUMED ST. FRANCIS AVERAGE STOCK PRICES ARE INTENDED TO
REFLECT WHAT THE ACTUAL ST. FRANCIS AVERAGE STOCK PRICE WILL BE WHEN FINALLY
DETERMINED IN ACCORDANCE WITH THE MERGER AGREEMENT AND PLAN OF MERGER, NOR IS
THE PER SHARE VALUE OF ST. FRANCIS COMMON STOCK AND PER SHARE CASH
CONSIDERATION ILLUSTRATED AS TO BE RECEIVED INTENDED TO REFLECT WHAT THE ACTUAL
VALUE WILL BE WHEN FINALLY DETERMINED WHEN THE SHARES OF ST. FRANCIS COMMON
STOCK AND CASH ARE DISTRIBUTED IN ACCORDANCE WITH THE MERGER AGREEMENT AND PLAN
OF MERGER.
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<PAGE> 41
From November 17 through December 1, 1998, the most recent Valuation
Period for which it was practicable to obtain information prior to the printing
of this Prospectus/Proxy Statement, the average of the last sale price per
share of St. Francis Common Stock, as reported on the NASDAQ National Market
System, was $41.28. By way of example only, if the St. Francis Average Stock
Price also is $41.28, the conversion ratio would be equal to .2500 which would
have a value, determined on the basis of the St. Francis Average Stock Price,
of $10.32 per share, and the per share cash consideration to be received would
be $10.32.
Reliance shareholders should note that the market price of the shares of
St. Francis Common Stock they receive will continue to be subject to market
fluctuations, as well as the future results of operations and financial
condition of St. Francis, and therefore may be worth less than, or more than,
the St. Francis Average Stock Price or the market price of St. Francis Common
Stock on the date they receive their St. Francis Common Stock certificates. See
"--Election and Allocation Procedures," and "--Issuance of Stock and Payment of
Cash." For a description of certain tax consequences that may result from
elections to receive stock or cash, or a combination thereof, as well as certain
limitations and qualifications relating thereto, see "--Certain Federal Income
Tax Consequences."
Because the number of shares of St. Francis Common Stock and the total
amount of cash to be issued in the Merger will be fixed in accordance with
certain parameters, no guarantee can be given that an election by any given
shareholder will be honored. Rather, the election by each holder will be
subject to the election and allocation procedures described herein. Thus,
holders may not receive their chosen form of consideration. See "--Election
and Allocation Procedures."
If St. Francis effects a reclassification, recapitalization, stock split,
consolidation or similar change in St. Francis Common Stock before the
Effective Time, the Per Share Stock Distribution will be appropriately
adjusted.
Although the St. Francis Average Stock Price, which will determine the
value of the Per Share Stock Distribution and Per Share Cash Distribution to be
received by Reliance shareholders, will be based on the average market price of
St. Francis Common Stock during the Valuation Period, the market price of St.
Francis Common Stock may fluctuate thereafter and, on the Effective Time, may
be more or less than the St. Francis Average Stock Price.
At the Effective Time, all rights with respect to Reliance Common Stock
pursuant to stock options granted by Reliance under Reliance's stock option
plan that are outstanding at such time, will be converted into the right to
receive, either an option to purchase shares of St. Francis Common Stock or
cash, as discussed below in "--Interests of Certain Persons in the Merger" and
"--Effect on Reliance Employee Benefit Plans."
As of the Effective Time, each share of Reliance Common Stock held
directly or indirectly by Reliance or Reliance Savings Bank, other than shares
held in a fiduciary capacity or in satisfaction of a debt previously
contracted, will be canceled and retired, and no exchange or payment will be
made with respect to such shares.
PRICE-BASED TERMINATION
The Merger Agreement contains a price-based termination provision. Under
this provision, the Merger Agreement may be terminated by St. Francis if the
St. Francis Average Stock Price is $32.40 or less.
BACKGROUND OF THE MERGERBACKGROUND OF THE MERGER
In April 1996, Reliance Savings Bank converted from mutual to stock form
and simultaneously formed Reliance as Reliance Savings Bank's parent holding
company (the "Conversion"). As part of the Conversion, Reliance raised $19
million in new capital through a public stock offering. Since the Conversion,
the Reliance Board has taken various steps to enhance shareholder value. One
of the most significant challenges the Reliance Board has faced has been
managing Reliance's unusually high capital-to-assets ratio, which was 49.96% at
March 31, 1998. To manage Reliance's capital, the Reliance Board paid a
special dividend of $3.00 per share to Reliance's shareholders of record on
November 8, 1996. The distribution reduced Reliance's shareholders' equity by
$7.3
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<PAGE> 42
million, representing more than 30% of Reliance's shareholders' equity at the
time. Reliance also has repurchased its shares through several share
repurchase programs, which has reduced the number of outstanding Reliance
shares by approximately 6.5%, net of shares applied to fund stock based benefit
programs.
Reliance has engaged in discussions from time to time with other financial
service companies interested in considering a possible business combination
with Reliance. One of these companies was St. Francis. Thomas R. Perz,
President and Chief Executive Officer of St. Francis, met with Allan T. Bach,
President and Chief Executive Officer of Reliance, on several occasions to
convey St. Francis' interest in negotiating a merger between the two companies.
At the beginning of the 1998 calendar year, Mr. Perz expressed to Mr. Bach St.
Francis' interest in acquiring Reliance whereby St. Francis would offer
Reliance $10.50 per share of Reliance Common Stock as merger consideration
payable in St. Francis Common Stock. Mr. Perz also asked Mr. Bach if he could
meet with the Reliance Board to discuss his proposal.
Mr. Bach, with the approval of the Reliance Board, invited Mr. Perz to a
Reliance Board meeting, held on March 24, 1998, to present St. Francis'
proposal. During the meeting, Mr. Perz expressed St. Francis' interest in
negotiating a transaction for $10.50 per share using St. Francis Common Stock
as merger consideration, and he outlined and explained the basic terms of the
proposed transaction. The Reliance Board convened a special board meeting on
March 31, 1998 to consider St. Francis' verbal expression of interest, and
discussed the proposal with a representative of Robert W. Baird & Co.
Incorporated ("Baird"), Reliance's financial advisor, who also was present
during the meeting.
Discussion of Mr. Perz's presentation continued during a special meeting
of the Reliance Board held on April 8, 1998. The consensus of the Reliance
Board was to ask St. Francis to provide Reliance with additional information
concerning its proposal. In anticipation of further discussions between St.
Francis and Reliance, at the April 8, 1998 meeting, the Reliance Board
authorized Mr. Bach to retain the law firm of Schiff Hardin & Waite as special
counsel to Reliance with respect to business combination discussions
("Reliance's Legal Counsel") and to retain Baird as Reliance's financial
adviser to assist Reliance in evaluating St. Francis' merger proposal. The
Board also authorized Mr. Bach to negotiate with St. Francis toward a
definitive business combination agreement. Following the April 8 meeting, Mr.
Bach contacted Mr. Perz to express the interest of the Reliance Board in
receiving more information concerning St. Francis and the terms of its
proposal.
On April 13, 1998, St. Francis forwarded a letter of intent to Reliance,
which proposed that St. Francis would acquire all of the outstanding shares of
Reliance through a merger transaction, and the Reliance shareholders would
receive, as merger consideration, .2295 shares of St. Francis Common Stock for
each share of Reliance common stock. The fixed exchange ratio set forth in the
letter of intent was determined by dividing the proposed acquisition price of
$10.50 per share by the trading price of St. Francis Common Stock as of the
close of trading on March 24, 1998, which price was $45.75. The Reliance Board
met during a regular board meeting on April 15, 1998 to consider the proposed
letter of intent. It was the consensus of the Reliance Board that Reliance not
accept the letter of intent. Rather, the Reliance Board directed Mr. Bach, to
be accompanied by Reliance's Legal Counsel and Baird, to meet with St. Francis
and its advisers to clarify certain terms of the transaction as expressed in
the letter and, assuming certain issues were clarified to Reliance's
satisfaction, to move directly toward a definitive business combination
agreement. St. Francis agreed to a meeting, but requested that prior to the
meeting Reliance enter into a confidentiality agreement that St. Francis had
prepared, which included an agreement that Reliance negotiate exclusively with
St. Francis for a period of 90 days.
On April 23, 1998, St. Francis and Reliance entered into the
confidentiality agreement that included the exclusive bargaining arrangement
and the parties also held a meeting in the offices of St. Francis' legal
counsel to discuss the terms of the transaction. Present during that meeting
were Mr. Bach, Carol Barnharst, Chief Financial Officer of Reliance, a
representative of Reliance's Legal Counsel, representatives of Baird, Mr. Perz
and a representative of St. Francis' legal counsel. A few days after that
meeting, Mr. Perz, Mr. Bach and Ms. Barnharst met to discuss certain social
issues relating to the transaction and St. Francis gathered additional due
diligence information concerning Reliance. After St. Francis had completed its
additional due diligence investigation, St. Francis directed its legal counsel
to begin preparing a first draft of the definitive Merger Agreement. Reliance
received a first draft of the definitive Merger Agreement on May 5, 1998.
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<PAGE> 43
The Reliance Board held a special meeting on May 8, 1998 to consider the
first draft of the definitive Merger Agreement. Reliance's Legal Counsel and
representatives of Baird were present at the May 8 meeting to review the Merger
Agreement with the Reliance Board. The first draft of the Merger Agreement
included a provision allowing shareholders the option of choosing either cash
or St. Francis common stock as merger consideration; however, the agreement
provided that in no event would the cash consideration exceed 40% of the total
consideration. While the draft included a $10.50 per share merger price, it
reflected a floating rather than fixed exchange ratio, meaning that the
exchange ratio would be established based on a measurement period immediately
prior to closing and the average price of St. Francis Common Stock during that
period. After receiving direction from the Reliance Board, Mr. Bach,
Reliance's Legal Counsel and representatives of Baird continued negotiations
with St. Francis concerning the terms of the definitive Merger Agreement. On
May 22, 1998, Reliance entered into an agreement with Baird retaining Baird as
its financial adviser for the proposed transaction with St. Francis.
A revised draft of the definitive Merger Agreement, reflecting further
negotiations between the parties, was presented to the Reliance Board at a
regular board meeting held on May 26, 1998. Mr. Perz and a representative of
St. Francis' legal counsel attended a portion of the May 26 meeting to answer
questions members of the Reliance Board had concerning the terms of the
transaction. St. Francis also gave the Reliance Board the option of choosing
between either a fixed exchange ratio of .2295 shares of St. Francis stock for
each share of Reliance stock or a floating exchange ratio derived by dividing
the per share merger price of $10.50 by the average price for St. Francis
Common Stock during a measurement period prior to closing of the transaction.
The draft continued to provide that Reliance shareholders would have the option
of choosing between cash and shares of St. Francis Common Stock, provided
however, that the cash consideration not exceed 40% of the total consideration.
The Reliance Board discussed the revised draft of the document with Reliance's
Legal Counsel and representatives of Baird outside the presence of Mr. Perz and
St. Francis' counsel and gave Mr. Bach, Reliance's Legal Counsel and
representatives of Baird further direction for continuing negotiations with St.
Francis regarding the terms of the definitive Merger Agreement.
On May 28, 1998, Mr. Bach, representatives of Baird and a representative
of Reliance's Legal Counsel conducted an on-site due diligence review of St.
Francis. Baird's representatives continued this due diligence examination on
May 29 and several days thereafter. On May 29, 1998, the Reliance Board held a
special meeting to discuss the preliminary results of the due diligence
examination with Mr. Bach and Baird, and to discuss with Baird the merger
consideration that St. Francis had offered in the latest draft of the
definitive Merger Agreement. On May 29, 1998, but subsequent to the Reliance
Board meeting, Reliance received another draft of the definitive Merger
Agreement reflecting further negotiations between the parties.
The Reliance Board met again at a special meeting on June 2, 1998 to
discuss the status of the transaction and the ongoing negotiations and to
consider the May 29, 1998 revisions to the draft definitive Merger Agreement;
the meeting was attended by representatives of Baird and Reliance's Legal
Counsel. On June 1, 1998, St. Francis' stock price had closed at $41.25 per
share. Baird reviewed with the Reliance Board the decrease in St. Francis'
stock price since the March 24 date used in the April 1998 letter of intent.
Based on that discussion, the Reliance Board directed Baird to propose an
increase in the fixed exchange ratio from that proposed in the letter of intent
to take into account the decline in the St. Francis stock price since March 24,
1998. The Reliance Board also directed Reliance's Legal Counsel to contact
legal counsel for St. Francis and to negotiate further on issues identified by
the Board, which issues included, among others, continuing the name of Reliance
Savings Bank after the Merger, the proposed condition to closing that Reliance
maintain a minimum amount of net worth, the terms of the service of the
advisory Board of Directors, due diligence issues, the termination fee and
certain social issues. On June 2 and June 3, 1998, the position of the
Reliance Board regarding the exchange ratio and other terms of the transaction
were communicated to St. Francis and its representatives. On June 3, 1998, St.
Francis rejected Reliance's proposal concerning an increase in the fixed
exchange ratio. Later on June 3, 1998, on behalf of Reliance, Baird proposed a
modification to the exchange ratio, which on June 4, 1998, St. Francis
rejected. On June 8, 1998, St. Francis proposed a revised exchange ratio to
Reliance, which also reflected a reduction in the purchase price to $10.00 per
share.
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The Reliance Board held a special meeting on June 11, 1998, to consider
the revised proposal from St. Francis. Representatives of Baird and a
representative of Reliance's Legal Counsel were present for the June 11, 1998
meeting. The Reliance Board gave directions to Mr. Bach, Baird and Reliance's
Legal Counsel regarding points in the draft definitive Merger Agreement it
wanted negotiated further, including the merger price and exchange ratio.
Baird and Reliance's Legal Counsel communicated these points to St. Francis and
its legal counsel. St. Francis considered these points, and in response
requested that Mr. Perz be permitted to meet again with the Reliance Board to
discuss the transaction, and specifically to explain St. Francis' latest
modification to the amount of the merger consideration.
On June 23, 1998, Mr. Perz met with the Reliance Board during a regular
board meeting. Also present during the meeting were representatives of Baird
and a representative of Reliance's Legal Counsel. The discussion at the
meeting focused in particular on the $10.00 per share merger price that St.
Francis had recently proposed and the proposed exchange ratio (because on June
22, 1998, the St. Francis stock price had closed at $36.00 per share), as well
as other open issues. The representatives of Baird reviewed with the Reliance
Board information concerning changes in the St. Francis stock price since
negotiations between the two companies had begun in March 1998. At the
conclusion of the meeting, there was a consensus that both parties would
continue to work toward a definitive Merger Agreement. In that regard,
discussions concerning the price, the exchange ratio and other terms of the
definitive agreement continued through June 30, 1998 when the Reliance Board
met to consider the definitive Merger Agreement.
At the Reliance Board meeting on June 30, 1998, representatives of Baird
were present along with a representative of Reliance's Legal Counsel. Prior to
the meeting, copies of the proposed definitive Merger Agreement were made
available to the directors. Baird provided a financial analysis of the offer
and expressed its verbal opinion (subsequently confirmed in writing) to the
effect that, as of such date, the merger consideration was fair, from a
financial point of view, to the holders of Reliance common stock (see "The
Merger--Opinion of Financial Advisor"). Reliance's Legal Counsel also reviewed
with the Reliance Board the definitive Merger Agreement and discussed the
Reliance Board's fiduciary duties in considering the Merger Agreement.
The Reliance Board asked questions of Mr. Bach, Ms. Barnharst, Reliance's
Legal Counsel and Baird regarding the Merger Agreement and Plan of Merger.
Following discussion on the proposed Merger Agreement and Plan of Merger and
the transactions related thereto, the opinion of Baird and numerous other
factors (described below in "The Merger--Reasons for the Merger; and
Recommendation of the Reliance Board of Directors"), the Reliance Board
unanimously authorized and approved the Merger Agreement and Plan of Merger and
the transactions contemplated thereby, determined that the Merger Agreement and
Plan of Merger be submitted to a vote of Reliance's shareholders and authorized
Mr. Bach to execute the Merger Agreement and Plan of Merger, subject to
satisfactory resolution of final contract terms. The Merger Agreement was
executed in the early evening of June 30, 1998, and the Merger was publicly
announced through a joint press release that night. Baird subsequently
delivered its fairness opinion that as of June 30, 1998, the merger
consideration was fair, from a financial point of view, to the holders of the
Reliance Common Stock.
REASONS FOR THE MERGER AND RECOMMENDATION OF THE RELIANCE BOARD OF DIRECTORS
St. Francis. The St. Francis Board authorized St. Francis management to
negotiate with Reliance and approved the Merger Agreement and Plan of Merger
and has determined that the Merger and the issuance of the shares of St.
Francis Common Stock pursuant thereto are in the best interests of St. Francis
and its shareholders. In doing so, the St. Francis Board considered a number
of factors. The material factors considered by the St. Francis Board were the
following:
(a) The St. Francis Board's review, based in part on the
presentations made and written material submitted by St. Francis
management, of the business, operations, earnings and financial
condition, including the capital levels and asset quality, of
Reliance on a historical, prospective and pro forma basis;
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(b) The demographic, economic and financial characteristics of
Reliance's market area, including existing competition and the
ability to increase service options for St. Francis customers, while
still recognizing savings in costs, because of the proximity of the
Reliance office to an existing St. Francis branch; and
(c) A variety of factors affecting and relating to the overall
strategic focus of St. Francis, including St. Francis' desire to
expand its operations in Reliance's market area and to improve its
presence in southern portion of Milwaukee, Wisconsin.
Reliance. The Reliance Board has concluded that the Merger would be in
the best interests of Reliance and its shareholders. In reaching that
determination, the Reliance Board consulted with Reliance's Legal Counsel with
respect to the legal duties of the Reliance Board, regulatory matters, tax
matters and the Merger Agreement and Plan of Merger and issues related thereto.
The Reliance Board also consulted with Baird with respect to the financial
aspects and fairness of the merger consideration. The Reliance Board
considered the following material factors:
(1) The prospects for enhancing shareholder value using strategic
alternatives other than a sale of Reliance. At March 31, 1998, Reliance
had shareholders' equity of $22.1 million, which represented 49.96% of
Reliance's total assets as of that date. Although Reliance has been
profitable, generating net income of $514,000 and $616,000 for the fiscal
years ended June 30, 1996 and 1997, respectively, its extremely high
capital-to-assets ratio has depressed its average return on equity, which
was 3.45% and 2.44% for the 1996 and 1997 fiscal years. Since the
Conversion, the Reliance Board has employed various strategies to improve
Reliance's financial condition, operating results and return on equity.
These strategies have included a one-time $3.00 distribution in late
calendar year 1996 and several stock repurchase programs. While these
methods have deployed some of Reliance's excess capital, they have had a
marginal effect on Reliance's return on equity. Reliance also has
considered expansion opportunities, including acquiring other financial
institutions or branches thereof and de novo branching. In the case of
acquisitions, Reliance has had difficulty finding acquisition candidates
that would enhance value to its shareholders, while de novo branching
would involve significant costs and business risks. Management and the
Reliance Board also recognized that the prospects for significant
internal growth of Reliance Savings Bank were limited because demand for
one- to four-family mortgage loans was diminishing in Reliance Savings
Bank's local market area (generally defined as an area within a
three-mile radius of Reliance Savings Bank's office). The Reliance Board
determined that a business combination with St. Francis was an attractive
alternative for enhancing shareholder value relative to remaining
independent.
(2) Management succession issues. In light of the diminishing
demand for one- to four-family mortgage loans within Reliance Savings
Bank's local market area and increasing competition relating to such
loans, Reliance Savings Bank has increasingly relied on a niche lending
strategy involving the origination of comparatively large balance
construction and land development loans, and commercial and multi-family
loans. Reliance Savings Bank has been able to originate most of these
"niche" loans in recent years because of the relationships and contacts
Reliance Savings Bank's President and Chief Executive Officer, Allan T.
Bach, has established with Milwaukee-area builders and developers. The
Reliance Board has concerns regarding (i) management succession, as Mr.
Bach has approached retirement age, and (ii) the difficulties of
eventually replacing the income Mr. Bach generates for Reliance through
his lending contacts. In addition, the small size of Reliance relative
to other local financial institutions would make it difficult to attract
high quality managers in the future should the need arise.
(3) The amounts paid in recent acquisitions for thrift holding
companies approximately the size of Reliance. The Reliance Board
considered information supplied by Baird concerning the amounts paid in
recent acquisitions for thrift holding companies approximately the size
of Reliance, taking into account Reliance's unusually high
capital-to-asset ratio. In consultation with Baird, the Reliance Board
considered the value it could derive for shareholders by remaining
independent compared to the value it could obtain for shareholders
through a sale of the company.
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(4) The lack of liquidity for Reliance's shares. Reliance's market
capitalization on June 29, 1998, the day before the Merger was announced,
was $19.8 million and Reliance had 2,403,701 shares of common stock
issued and outstanding. Since Reliance became a public company in April
1996, Reliance has experienced low liquidity for its shares. While
Reliance attempted to create more liquidity for its shares through stock
repurchase programs, the Reliance Board continued to remain concerned
about the absence of liquidity for the Reliance shares. The lack of
liquidity for Reliance shares caused investors difficulty in acquiring or
selling Reliance shares at predictable prices, and it also hindered
Reliance's ability to use its shares as merger consideration in
connection with expanding through the acquisition of other financial
institutions. By affiliating with St. Francis, a financial institution
holding company having a market capitalization of $198.0 million as of
June 30, 1998, the Reliance Board believes Reliance shareholders will
have significantly more liquidity for their shares, and the other
difficulties associated with liquidity would be significantly diminished.
(5) The lack of critical mass posed potential competitive problems
for Reliance in the years ahead. As a financial institution holding
company with assets of $42 million at June 30, 1998, the Reliance Board
determined that Reliance's smaller size relative to much larger
Milwaukee-area financial institutions, like St. Francis, would be a
disadvantage to Reliance in the years ahead. Critical mass and the
associated economies of scale allow larger banking organizations like St.
Francis to deliver products and services more cost effectively and
efficiently, and provide a much greater opportunity for cross-selling
other services and products.
(6) The Reliance Board took into consideration and relied upon the
advice of Baird, Reliance's financial adviser. At the Reliance Board
meeting held on June 30, 1998, Baird provided a financial analysis of the
St. Francis proposal and its verbal opinion that the merger consideration
was fair, from a financial point of view, to the holders of Reliance
Common Stock. Baird subsequently delivered its written opinion that as
of June 30, 1998, the merger consideration was fair, from a financial
point of view, to the holders of Reliance Common Stock. That opinion was
updated as of the date of this Proxy Statement/Prospectus and is attached
hereto as Exhibit C. The Reliance Board considered the presentation by
Baird concerning the financial aspects of the Merger Agreement and the
related transactions. For information regarding the presentation by
Baird, see "The Merger -- Opinion of Reliance's Financial Adviser."
The foregoing discussion of the information and factors considered by the
Reliance Board is not intended to be exhaustive but is believed to include all
material factors considered by the Reliance Board. Throughout its
deliberations, the Reliance Board received the advice of its outside legal
counsel. After deliberating with respect to the Merger and the other
transactions contemplated by the Merger Agreement and Plan of Merger,
considering, among other things, the information and factors described above
(including reliance on the opinion of Baird), the Reliance Board concluded that
the Merger is fair to, and in the best interests of, the Reliance shareholders.
In reaching this conclusion, the Reliance Board did not assign relative or
specific weights to the above information and factors or determine that any
information or factor was of particular importance relative to others. A
determination of various weighing would, in the view of the Reliance Board, be
impractical. Rather, the Reliance Board viewed its position and recommendation
as being based on the totality of the information and factors presented to and
considered by it. In addition, individual members of the Reliance Board may
have given different weight to different information and factors.
FOR THE REASONS SET FORTH ABOVE, THE RELIANCE BOARD HAS DETERMINED THAT
THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, RELIANCE
SHAREHOLDERS. ACCORDINGLY, THE RELIANCE BOARD UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS OF RELIANCE VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE PLAN
OF MERGER.
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OPINION OF RELIANCE FINANCIAL ADVISOROF RELIANCE FINANCIAL ADVISOR
The Reliance Board retained Baird to act as its financial advisor in
connection with the Merger and to assist it in its examination of the fairness,
from a financial point of view, of the merger consideration to the holders of
Reliance Common (other than St. Francis and its affiliates). On June 30, 1998,
Baird rendered its opinion to the Reliance Board (subsequently confirmed as of
the date of this Proxy Statement/Prospectus) to the effect that the merger
consideration was fair, from a financial point of view, to the holders of
Reliance Common Stock (other than St. Francis and its affiliates).
THE FULL TEXT OF BAIRD'S OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF
REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS OPINION, IS ATTACHED AS EXHIBIT C
TO THIS PROXY STATEMENT/PROSPECTUS. THE BAIRD OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE
HOLDERS OF RELIANCE COMMON STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY RELIANCE SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO
THE MERGER. THE SUMMARY OF THE BAIRD OPINION SET FORTH IN THIS
PROXY/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE OPINION ATTACHED AS EXHIBIT C HERETO, AND SHAREHOLDERS OF RELIANCE SHOULD
READ THE BAIRD OPINION CAREFULLY AND IN ITS ENTIRETY.
Baird's Analysis. In conducting its investigation and analysis and in
arriving at its opinion, Baird reviewed such information and took into account
such financial and economic factors as it deemed relevant. In doing so, Baird
among other things: (i) reviewed certain internal information, primarily
financial in nature, including projections, concerning the business and
operations of Reliance and St. Francis furnished to Baird for purposes of its
analysis, as well as publicly available information, including but not limited
to Reliance's and St. Francis' recent filings with the Commission and equity
analyst research reports prepared by various investment banking firms,
including Baird; (ii) reviewed the Merger Agreement; (iii) compared the
historical market prices and trading activity of Reliance Common Stock and St.
Francis Common Stock with those of certain other publicly traded companies
Baird deemed relevant; (iv) compared the financial position and operation
results of Reliance and St. Francis with those of other publicly traded
companies Baird deemed relevant; (v) compared the proposed financial terms of
the Merger with the financial terms of certain other business combinations
involving thrift institutions Baird deemed relevant; and (vi) reviewed certain
potential pro forma effects of the Merger on St. Francis. Baird held
discussions with certain members of Reliance's and St. Francis' senior
management concerning Reliance's and St. Francis' historical and current
financial condition and operating results, as well as the future prospects of
Reliance and St. Francis, respectively. Baird had not been requested to, and
did not, solicit third party indications of interest in acquiring all or any
part of Reliance. Baird also considered such other information, financial
studies, analysis and investigations and financial, economic and market
criteria as Baird deemed relevant for the preparation of its opinion. The
merger consideration was determined by Reliance and St. Francis in arm's-length
negotiations. Reliance did not place any limitation upon Baird with respect to
the procedures followed or factors considered by Baird in rendering its
opinion.
In arriving at its opinion, Baird assumed and relied upon the accuracy and
completeness of all of the financial and other information that was publicly
available or provided to it by or on behalf of Reliance and St. Francis, and
was not engaged to independently verify any such information. Baird assumed,
with Reliance's and St. Francis' consent, that (i) all material assets and
liabilities (contingent or otherwise, known or unknown) of Reliance and St.
Francis are set forth in their respective financial statements; (ii) the Merger
will be accounted for under the purchase method of accounting, (iii) the Merger
will be consummated in accordance with the terms of the Merger Agreement
without any amendment thereto and without any condition; (iv) the prospective
cost savings and revenue enhancements contemplated by management of both
companies following the Merger will be realized; and (v) all shareholder and
required regulatory approvals will be obtained in a timely manner. Baird also
assumed that the financial forecasts examined by it were reasonably prepared on
bases reflecting the best available estimates and good faith judgments of
Reliance's and St. Francis' respective senior managements, as to future
performance of their respective companies. Baird did not undertake or obtain
an independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of Reliance or St. Francis, nor did it make a
physical inspection of the properties or facilities of Reliance or St. Francis.
Baird's opinion necessarily was based upon economic, monetary
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and market conditions as they existed and could be evaluated on the date
thereof, and did not predict or take into account any changes which may occur,
or information which may become available, after the date thereof.
Furthermore, Baird expressed no opinion as to the price or trading range at
which shares of Reliance's or St. Francis' securities (including without
limitation, the Reliance Common Stock and St. Francis Common Stock) would trade
following the date of such opinion.
Analysis of Selected Comparable Transactions. Baird reviewed certain
information relating to two groups of transactions involving business
combinations involving thrifts: (i) a group of 16 selected business
combinations completed or pending, since August 1995 where the acquired entity
had an equity to assets ratio exceeding 20% ("Highly Capitalized Group"); (ii)
a group of 15 selected business combinations, completed or pending, since
January 1996 where the acquired entity had an equity to asset ratio less than
20% ("Adjusted Capital Group"). Baird noted that in each group ratios based
upon book value and tangible book value were identical.
For the Highly Capitalized Group, the median price to book ratio and price
to tangible book ratio for consideration paid was 116.82% and the mean was
120.30%. The transaction values ranged from a high of 150.73% to a low of
104.29% of book and tangible book. The median price to earnings multiple was
30.30X trailing 12 months earnings for the twelve months ended March 31, 1998
("LTM") and the mean was 30.88X LTM. The high price to earnings multiple was
65.50X LTM and the low was 15.05X LTM. As a tangible premium to core deposits,
the median premium was 7.75% and the mean was 9.08%. Tangible premium to core
deposit values ranged from a high of 20.64% to a low of 1.25%. The stock price
premium 1-day prior to the announcement reflects a median premium of 15.75% and
a mean premium of 17.35%. The high stock price premium was 42.40% and the low
stock price premium was (1.70%). The stock price premium 30-days prior to
announcement was 21.70% for the median and 24.34% for the mean. The stock
price premium ranged from 53.80% as a high to (3.40%) as the low. The stock
price premium at 90-days prior to announcement was 23.85% at the median and
24.89% at the mean. The stock price premium ranged from 58.10% for the high to
a low of (6.00%).
For the Adjusted Capital Group, the median price to book and price to
tangible book ratio for the consideration paid was 148.60% and the mean was
153.00%. The transaction values ranged from a high of 220.50% to a low of
114.90% of book and tangible book.
Analysis of Reliance Valuation Multiples. Baird calculated the "Implied
Equity Value Per Share" reflected by the terms of the Merger to be $10.00 for
each share of Reliance Common Stock, obtained by multiplying an Exchange Ratio
of 0.2685 by the closing price per share of St. Francis Common Stock of $37.25
on June 25, 1998. Baird then calculate the "Implied Total Equity Value" to be
$24.9 million, obtained by multiplying the Implied Equity Value Per Share by
the total number of outstanding shares of Reliance Common Stock, including
shares issuable upon exercise of such stock options, less net proceeds from the
exercise of such stock options. In performing its analysis, Baird used, among
other items, operating statistics for Reliance's latest twelve months through
March 31, 1998, as provided by Reliance management. Baird calculated multiples
of the Implied Total Equity Value to Reliance's LTM fully diluted earnings per
share, book value, tangible book value and tangible premium to core deposits.
The calculations resulted in ratios of the Implied total Equity Value to net
income ("P/E Ratios") of 40.27x based on LTM results, 112.94% of book value,
112.94% of tangible book value and a 13.96% tangible premium to core deposits.
By comparison, Baird calculated based on current price of $10.00 per share
for Reliance Common Stock as the consideration to be paid for Reliance in the
transaction presented. Based upon historical capital and related to the
"Highly Capitalized Group," this is a price to book and tangible book of
107.41% of Reliance book and tangible book at March 31, 1998, which compares to
a median of 116.82% and a mean of 120.30% for the comparable companies. The
range for the price to book and tangible book values of the comparable
companies was a high of 150.73% to a low of 104.29%. The price to LTM for
Reliance was 47.62X compared to a median of 30.30X and a mean of 30.88X for the
comparable companies. The range for the price to LTM of the comparable
companies was a high of 65.50X and a low of 15.05X. The tangible premium to
core deposits was 13.96% for Reliance compared to a median of 7.75% and a mean
of 9.08% for the comparable companies. The range for the price to tangible
premium to core deposits for the comparable companies was a high of 20.64% and
a low of 1.25%.
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In analyzing Reliance in the context of the Adjusted Capital Group, Baird
adjusted Reliance's data for excess capital consistent with the median equity
to assets ratio of the Adjusted Capital Group, in order to normalize Reliance's
capital level. When comparing the "Adjusted Capital Group" to Reliance, the
price to book and tangible group for Reliance was 185.79% compared to a median
of 148.60% and a mean of 153.00% for the comparable companies. The range for
the price to book and tangible book for the comparable companies was a high of
220.50% and a low of 153.00%.
As no comparative group or transaction from any comparative group is
identical to the Merger, Baird indicated to the Reliance Board that the
analyses described above are not mathematical, but rather involve complex
consideration and judgments concerning differences in operating and financial
characteristics including, among other things, differences in revenue
composition and earnings performance among Reliance and St. Francis and the
selected companies and transactions reviewed.
Analysis of Publicly Traded Companies Comparable to Reliance. Baird
reviewed certain publicly available financial and stock market information for
certain publicly traded companies which Baird deemed relevant. These companies
consisted of: CKF Bancorp, Inc., Crazy Woman Creek Bancorp, CSB Financial
Group, Inc., First Lancaster Bancshares, Mitchell Bancorp, Inc., Market
Financial Corp., Great Pee Dee Bancorp, S. Carolina Community Bancshares and
Scotland Bancorp Inc. (the "Comparable Companies"). The data described below
for such group is as of the most recently reported period and are compared to
Reliance's financial information, as reported, as of March 31, 1998.
Baird noted that the equity to assets for Reliance was 49.96% compared
with a median of 24.71% and a mean of 28.83% for the Comparable Companies. The
equity to assets for the Comparable Companies ranged from a high of 45.12% to a
low of 20.38%. Baird also noted the following operating performance statistics
for Reliance compared to the Comparable Companies: (i) the LTM net interest
margin for Reliance was 4.84% compared to a median of 4.00% and a mean of
4.03%. (The range for the latest 12 month net interest margin of the
Comparable Companies was a high of 4.87% to a low of 3.43%); (ii) the LTM
efficiency ratio for Reliance was 67.11% compared to a median of 55.56% and a
mean of 55.11% for the Comparable Companies. (The range for the latest 12
months efficiency ratio for the Comparable Companies was 70.93% to 42.35%);
(iii) the LTM return on average assets for Reliance was 1.02% compared to a
median of 1.20% and a mean of 1.22% for the Comparable Companies. (The range
of the 12 month return on average assets was 1.87% and 0.54% for the Comparable
Companies); (iv) the LTM return on average equity for Reliance was 2.06%
compared to a median of 3.85% and a mean of 4.38% for the Comparable Companies.
(The range for the latest 12 month return on average equity was 8.15% to 2.25%
for the Comparable Companies.)
Discounted Earnings Analysis. Baird performed a discounted earnings
analysis of Reliance on a stand-alone basis using Reliance management's
projections of future earnings for the five-year period ending June 30, 2002.
Baird estimated terminal values for Reliance using asset growth rates beginning
at 5.54% and increasing to 5.73% by 2002, return on average assets between
1.46% to 1.60%, no cash dividends, discount rates of 9% to 11%, and terminal
book value multiples of 100%, 110% and 120%. Based upon projections without
synergies, Baird calculated an implied per share price from $7.00 to $9.00 per
share of Reliance Common Stock. Using the same discount rates and terminal
book value multiples as above but including synergies (per Reliance management
estimates), an implied per share price of $9.00 to $11.00 per share of Reliance
Common Stock. Baird noted that the discounted earnings analysis was included
because it is a widely used valuation methodology, but noted that the results
of such methodology are highly dependent upon the numerous assumptions that
must be made, including earnings growth ratios, dividend payout rates, terminal
values and discount rates.
Analysis of St. Francis. In order to assess the relative public market
valuation of the St. Francis Common Stock to be issued in the Merger, Baird
reviewed certain publicly available financial information of the most recently
reported period as of March 31, 1998 for St. Francis and stock market
information and certain selected publicly traded companies which Baird deemed
relevant. Such comparable companies consist of: Alliance Bancorp, Anchor
BanCorp Wisconsin, CitFed Bancorp, Inc., D&N Financial Corp., First Indiana
Corp., Flagstar Bancorp, Inc., First Federal Capital Corp., Jefferson Savings
Bancorp, MAF Bancorp, Inc., and St. Paul Bancorp, Inc. (the "St. Francis
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Comparable Companies"). The data described below for such group is as of the
most recently reported period and are compared to St. Francis' financial
information, as reported, as of March 31, 1998. Baird noted the following
operating performance statistics for St. Francis compared to the St. Francis
Comparable Companies: (i) the LTM net interest margin, adjusted for the effect
of tax credits received, was 2.51% compared to a median of 2.93% and a mean of
2.89% for the St. Francis Comparable Companies. (The range for the LTM net
interest margin was 4.06% to 2.24% for the St. Francis Comparable Companies);
(ii) the LTM efficiency ratio for St. Francis, adjusted for the effect of tax
credits received, was 62.06% compared with a median of 54.85% and a mean of
55.68% for the St. Francis Comparable Companies. (The range for the LTM
efficiency ratio was 63.34% to 48.41% for the St. Francis Comparable
Companies); (iii) the LTM return on average assets for St. Francis was 0.80%
compared to a median of 1.05% and a mean of 1.03% for the St. Francis
Comparable Companies. (The range for the LTM return on average assets was
1.31% to 0.78% for the St. Francis Comparable Companies); (iv) the LTM return
on average equity for St. Francis was 9.93% compared to a median of 14.40% and
a mean of 14.42% for the St. Francis Comparable Companies. (The range for the
LTM return on average equity was 21.11% to 8.67% for the St. Francis Comparable
Companies); (v) the ratio of non-performing assets to total assets for St.
Francis was 0.20% compared with a median of 0.56% and a mean of 0.76% for the
St. Francis Comparable Companies. (The range for the non-performing assets to
total assets was 2.32% to 0.21% for the St. Francis Comparable Companies).
Pro Forma Merger Analysis. Baird prepared a pro forma analysis of the
financial impact of the Merger. Using financial forecasts for Reliance
(prepared by Reliance management) and St. Francis (prepared by St. Francis
management), Baird compared St. Francis' earnings per share and book value on a
stand-alone basis to earnings and book value of the combined companies on a pro
forma basis. Without any synergies, this analysis indicated that the Merger
would be dilutive to earnings per share and after synergies as provided by
Reliance's management less dilutive to earnings per share for each of the three
years following the Merger. However, this analysis shows that it is
immediately accretive to book value per share.
Stock Trading Analysis. Baird reviewed the historical trading prices and
volume of Reliance Common Stock and St. Francis Common Stock for the year
ending June 23, 1998.
Also, Baird compared the performance of the market value of Reliance
Common Stock with that of the Comparable Companies and the NASDAQ Bank Index.
During the year ended June 23, 1998, the market value of Reliance Common Stock
underperformed an index of the Comparable Companies and the NASDAQ Bank Index.
Additionally, since the conversion of Reliance from mutual to stock form on
April 19, 1996 to June 18, 1998, Reliance Common Stock outperformed the index
of Comparable Companies and underperformed the NASDAQ Bank Index.
Additionally, Baird compared the performance of the market value of St.
Francis Common Stock with that of the St. Francis Comparable Companies and the
NASDAQ Bank Index. During the year ended June 24, 1998, the market value of
St. Francis Common Stock underperformed an index of the St. Francis Comparable
Companies and the NASDAQ Bank Index. Since the conversion of St. Francis from
mutual to stock form on June 21, 1993 to June 1, 1998, St. Francis Common Stock
has underperformed the index of the St. Francis Comparable Companies and the
NASDAQ Bank Index.
Contribution Analysis. Baird analyzed the contribution of each of
Reliance and St. Francis to the pro forma company of assets, deposits, latest
12 months net income, estimated net income, tangible equity and ownership.
Baird calculated that: St. Francis would contribute 97.39% and Reliance 2.61%
of assets; St. Francis would contribute 98.42% and Reliance 1.58% of deposits;
St. Francis would contribute 96.49% and Reliance 3.51% of net income based upon
the historical latest 12 months; St. Francis would contribute 96.29% and
Reliance 3.71% of estimated net income; St. Francis would contribute 84.22% and
Reliance 15.78% of tangible equity; and St. Francis would represent 88.84% and
Reliance 11.16% based on prices for St. Francis Common Stock of $37.25 per
share and the issuance by St. Francis of approximately 655,948 shares out of a
pro forma total of 5,879,363 shares.
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In connection with its written opinion dated December 8, 1998, Baird
confirmed the appropriateness of its reliance on the analyses used to render
its opinion dated June 30, 1998, by performing procedures to update certain of
its analyses and by reviewing assumptions on which such analyses were based and
the factors considered therewith.
The summary of the opinion set forth above does not purport to be a
complete description of the presentation of Baird to the Reliance Board or the
analyses performed by Baird. The preparation of a fairness opinion is a
complex process and is not susceptible to partial analysis or summary
description. Baird believes that its analyses must be considered as a whole
and that selecting portions of its analyses, without considering all factors
and analyses would create an incomplete view of the processes underlying the
analyses conducted by Baird and its opinion. Baird did not attempt to assign
particular weights to particular analyses. Any estimates contained in Baird's
analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimates of
values of companies do not purport to be appraisals or necessarily to reflect
the prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, Baird does not assume responsibility for
their accuracy.
Baird, as part of its investment banking business, is engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. Reliance retained Baird
because of its experience and expertise in the valuation of businesses and
their securities in connection with mergers and acquisitions. In the ordinary
course of business, Baird may from time to time trade securities of Reliance
and St. Francis for its own account and the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Pursuant to an agreement, dated May 22, 1998, between Reliance and Baird,
Reliance has paid Baird a non-refundable retainer fee of $25,000, a fee of
$100,000 for rendering its opinion dated June 30, 1998 (against which the
retainer fee was credited), and a fee of $25,000 for rendering its opinion
dated December 8, 1998, payable upon delivery of such opinion. Reliance also
has agreed to reimburse Baird for certain of its out-of-pocket expenses
incurred in connection with its engagement. Additionally, Reliance has agreed
to indemnify Baird against certain liabilities, including liabilities under the
federal securities laws, incurred in connection with the engagement of Baird by
Reliance. In the past, Baird has provided investment banking and financial
advisory services to Reliance and St. Francis, including in connection with
both Reliance's and St. Francis' conversion from mutual to stock companies, for
which Baird has received its customary compensation.
ELECTION AND ALLOCATION PROCEDURES
Description of Elections. Each record holder of Reliance Common Stock
(except for the Reliance ESOP) will have the right to submit an election form
and letter of transmittal (the "Election Form") specifying the kind of
consideration sought to be received. The Election Form and other appropriate
transmittal materials will be mailed by the Exchange Agent, Firstar Bank
Milwaukee, N.A. on the Mailing Date, December 11, 1998, under separate cover,
to each holder of record of Reliance Common Stock as of the Voting Record Date.
Holders of record of shares of Reliance Common Stock who hold such shares as
nominees, trustees or in other representative capacities may submit multiple
Election Forms that cover all the shares of Reliance Common Stock held by such
record holder for each beneficial owner thereof. The Election Form will permit
Reliance shareholders (1) to indicate that they elect to receive in exchange
for their shares of Reliance Common Stock (i) the Per Share Cash Distribution
with respect to a specified number of shares of Reliance Common Stock (the
"Cash Election Shares"), (ii) the Per Share Stock Distribution with respect to
a specified number of shares of Reliance Common Stock (the "Stock Election
Shares"), or (iii) a combination thereof, or (2) to make no election with
respect to a specified number of shares of Reliance Common Stock (the "No
Election Shares").
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The No Election Shares will be converted into Stock Election Shares, Cash
Election Shares or a combination thereof as necessary to ensure that (i) the
aggregate amount of consideration payable in cash is not more than 40% of the
aggregate value of all of the consideration issued or paid in connection with
the Merger, and the total number of shares of St. Francis Common Stock to be
issued in connection with the Merger shall be that number of whole shares of
St. Francis Common Stock that has an aggregate value of at least 60% of the
aggregate value of all of the consideration issued or paid in connection with
the Merger, and (ii) the Merger will qualify as a tax-free reorganization.
Each holder of shares of Reliance Common Stock may elect to receive either
the Per Share Cash Distribution or the Per Share Stock Distribution for each
share of Reliance Common Stock held. However, each individual beneficial owner
of shares of Reliance Common Stock can only choose an overall combination of
the Per Share Cash Distribution and the Per Share Stock Distribution relating
to all of the shares of Reliance Common Stock beneficially owned by him, her or
it, if he, she or it chooses the Per Share Stock Distribution such that he, she
or it would receive at least 50 shares of St. Francis Common Stock in
connection with the Merger. If the Exchange Agent determines that this
50-share limit has not been complied with, the shares of Reliance Common Stock
to which the improper election has been made shall be deemed No Election
Shares.
The Election Form, together with stock certificates representing all
shares of Reliance Common Stock covered thereby (or affidavits and
indemnification regarding the loss or destruction of such certificates or the
guaranteed delivery of such certificates), must be completed, signed and
returned to the Exchange Agent no later than the Election Deadline, 4:00 p.m.,
Milwaukee time, on January 15, 1999. If a certificate for Reliance Common
Stock has been lost, stolen or destroyed, an Election Form will be properly
completed only if accompanied by appropriate evidence as to such loss, theft,
or destruction, appropriate evidence as to the ownership of such certificate by
such Reliance shareholder and appropriate and customary indemnification.
SHARES OF RELIANCE COMMON STOCK FOR WHICH AN ELECTION FORM HAS NOT BEEN
PROPERLY COMPLETED AND RECEIVED BY THE EXCHANGE AGENT BY THE ELECTION DEADLINE
WILL BE DEEMED NO ELECTION SHARES. The Election Forms will be accompanied by
instructions specifying other details of the exchange.
RELIANCE SHAREHOLDERS SHOULD SEND THEIR CERTIFICATES ALONG WITH A
COMPLETED ELECTION FORM IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED THEREIN.
TO MAKE AN EFFECTIVE ELECTION, A RELIANCE SHAREHOLDER WILL BE REQUIRED TO
RETURN A PROPERLY COMPLETED ELECTION FORM SUFFICIENTLY IN ADVANCE OF THE
ELECTION DEADLINE SO THAT IT IS ACTUALLY RECEIVED BY THE EXCHANGE AGENT AT OR
PRIOR TO THE ELECTION DEADLINE. AN ELECTION FORM WILL NOT BE CONSIDERED
PROPERLY COMPLETED IF IT IS NOT ACCOMPANIED BY CERTIFICATES REPRESENTING ALL
SHARES OF RELIANCE COMMON STOCK COVERED THEREBY (OR AFFIDAVITS AND
INDEMNIFICATION REGARDING THE LOSS OR DESTRUCTION OF SUCH CERTIFICATES OR THE
GUARANTEED DELIVERY OF SUCH CERTIFICATES). THE ELECTION DEADLINE IS 4:00 P.M.,
MILWAUKEE TIME, ON JANUARY 15, 1999.
In the Merger, the aggregate number of shares of St. Francis Common Stock
to be issued and the total amount of cash payable will be fixed in accordance
with certain parameters. Accordingly, there can be no assurance that each
Reliance shareholder will receive the form of consideration that such holder
elects. In the event that the elections result in an oversubscription of cash,
certain procedures for allocating St. Francis Common Stock and cash will be
followed by the Exchange Agent.
Any Election Form may be revoked or changed by written notice from the
person submitting such Election Form to the Exchange Agent, but to be effective
such notice must actually be received by the Exchange Agent on or before the
Election Deadline. The Exchange Agent will have discretion to determine when
any election, modification or revocation has been properly made, and such
determination shall be final.
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Persons who become shareholders of record of Reliance after the Voting
Record Date and up to one business day prior to the Election Deadline will be
mailed an Election Form and a copy of this Proxy Statement/Prospectus. Any
shareholder who needs an Election Form may obtain copies of the Election Form
upon request from (i) St. Francis, either in writing at St. Francis, 13400
Bishops Lane, Suite 350, Brookfield, Wisconsin 53005-6203, Attention: William
R. Hotz, or by telephone at (414) 486-8700, (ii) Reliance, either in writing at
Reliance, 3140 South 27th Street, Milwaukee, WI 53215, Attention: Ms. Carol A.
Barnharst, Secretary, or by telephone at (414) 671-2222, or (iii) the Exchange
Agent, either in writing at Firstar Bank Milwaukee, N.A., 1555 N. RiverCenter
Drive, Suite 301, Milwaukee, Wisconsin 53212 or by telephone at (414) 276-3737
or 1-800-637-7549 (toll free). Election Forms also will be available to all
persons who become holders of Reliance Common Stock up until the close of
business on the day prior to the Election Deadline at the principal offices of
St. Francis and Reliance. Any shares of Reliance Common Stock with respect to
which the holder thereof shall not, as of the Election Deadline, have made an
effective election, shall be deemed No Election Shares. Accordingly, persons
who become shareholders of Reliance after the Election Deadline will be deemed
to hold No Election Shares, because they could not have made an effective
election with respect to such shares.
Because the Election Deadline likely will occur prior to the end of the
Valuation Period during which the St. Francis Average Stock Price will be
determined for purposes of fixing the conversion ratio, the St. Francis Average
Stock Price and the conversion ratio, and thus the market value of the shares
of St. Francis Common Stock to be received, will not be known by the time
Reliance shareholders are required to submit their Election Forms.
In the event the Merger Agreement is terminated prior to completion of the
Merger, the Exchange Agent will promptly return all certificates representing
shares of Reliance Common Stock submitted with Election Forms. In such event,
shares of Reliance Common Stock held through the Depository Trust Company, the
nominee for shares held in brokerage accounts, are expected to be available for
sale or transfer promptly following termination of the Merger Agreement;
however, Reliance stock certificates held directly by Reliance shareholders
will be returned by registered mail. The Exchange Agent and St. Francis will
use their commercially reasonable efforts to cooperate with Reliance and
Reliance shareholders to facilitate return of Reliance stock certificates in
the event of such termination, but return other than by registered mail will
only be made at the expense, written direction and risk of Reliance
shareholders, accompanied by a pre-paid, pre-addressed return envelope sent to
the Exchange Agent.
Allocation Procedures. Within five business days after the Effective
Time, the Exchange Agent will allocate among holders of shares of Reliance
Common Stock the right to receive shares of St. Francis Common Stock or cash as
follows.
(1) The aggregate amount of consideration that shall be payable to
Reliance shareholders, including the ESOP, in cash (the "Cash
Amount") shall be not greater than 40% of the aggregate value
of all of the consideration to be issued or paid in connection
with the Merger.
(2) The total number of shares of St. Francis Common Stock to be
issued in connection with the Merger (the "Stock Amount") shall
be that number of whole shares of St. Francis Common Stock that
has an aggregate value, valuing such stock at the St. Francis
Average Stock Price for this purpose, equal to or greater than
60% of the aggregate value of all of the consideration to be
issued or paid in connection with the Merger.
(3) The calculation of the aggregate amount of consideration, the
Cash Amount and the Stock Amount shall be made by St. Francis.
The relative percentages that the Cash Amount (i.e., up to 40%)
and the Stock Amount (i.e., equal to or greater than 60%) bear
to the aggregate amount of consideration to be issued or paid
in connection with the Merger shall be determined as follows.
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(i) If the aggregate value of the Stock Election Shares,
valuing each such Stock Election Share as the product of
the St. Francis Average Stock Price multiplied by the Per
Share Stock Distribution, is equal to or greater than 60%,
the Stock Amount shall be equal to the product of the Stock
Election Shares multiplied by the Per Share Stock
Distribution (or such greater amount as determined by St.
Francis in order that the Merger qualify as a
reorganization within the meaning of Section 368 of the
Code, as set forth above); and
(ii) If the aggregate value of the Stock Election Shares,
valuing each such Stock Election Share as the product of
the St. Francis Average Stock Price multiplied by the Per
Share Stock Distribution, is less than 60% of the aggregate
value of all of the consideration to be issued or paid in
connection with the Merger, the Stock Amount shall be equal
to that number of whole shares of St. Francis Common Stock
that has an aggregate value, valuing such stock at the St.
Francis Average Stock Price for this purpose, equal to or
greater than 60%, of the aggregate value of all of the
consideration to be issued or paid in connection with the
Merger.
(4) Within five business days after the Effective Time, the
Exchange Agent shall effectuate the allocation among holders of
the shares of Reliance Common Stock of the right to receive the
Cash Election Shares and/or the Stock Election Shares in the
Merger as follows,
(i) If the number of shares of St. Francis Common Stock that
would be issued upon conversion in the Merger of the Stock
Election Shares is less than the Stock Amount, then
(A) all shares of Reliance Common Stock electing Stock
Election Shares will be converted into the right to
receive the Per Share Stock Distribution,
(B) the No Election Shares will be converted, in a random
method, mutually agreed by St. Francis and Reliance to
be reasonable, unbiased and fair (the "Random
Selection Basis"), by the Exchange Agent into the
right to receive the Per Share Stock Distribution
("Stock Designee Shares"), and then (if necessary)
Cash Election Shares will be converted on a Pro Rata
Basis (as described below) by the Exchange Agent into
Stock Designee Shares (in each case, subject to the
requirement for issuance of at least 50 shares of St.
Francis Common Stock to each recipient thereof) until
such number of Stock Designee Shares will, when added
to the number of Stock Election Shares, equal the
Stock Amount (provided, however, that no particular
holder of Cash Election Shares will be required to
designate a portion of his, her or its Cash Election
Shares as Stock Designee Shares if such designation
would threaten satisfaction of any of the conditions
to the consummation of the Merger set forth in the
Merger Agreement), and
(C) the Cash Election Shares and the No Election Shares
not converted into Stock Designee Shares will be
converted into the right to receive the Per Share Cash
Distribution.
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(ii) If, however, the number of shares of St. Francis
Common Stock that would be issued upon conversion of
the Stock Election Shares is equal to or greater than
the Stock Amount, then all shares of Reliance Common
Stock electing Stock Election Shares will be converted
into the right to receive the Per Share Stock
Distribution and all Cash Election Shares and No
Election Shares will be converted into the right to
receive the Per Share Cash Distribution.
The Pro Rata Basis shall be calculated for each record holder of Reliance
Common Stock as a fraction, the numerator of which equals the number of shares
of Reliance Common Stock held of record by such Reliance shareholder which were
designated as Cash Election Shares and the denominator of which equals the
total number of shares of Reliance Common Stock designated as Cash Election
Shares multiplied by the number of shares necessary to be converted into Stock
Designee Shares so that the Stock Election Shares plus the Stock Designee
Shares equals the Stock Amount. The number of shares of Reliance Common Stock
converted on the Pro Rata Basis for each shareholder shall be rounded up to the
next higher whole share.
The extent to which elections by holders of shares of Reliance Common
Stock will be accommodated will depend upon the respective number of shares of
Reliance Common Stock electing cash or stock (or making no election).
Accordingly, a holder of shares of Reliance Common Stock who elects cash may
instead receive a combination of cash and shares of St. Francis Common Stock,
and a holder of shares of Reliance Common Stock who elects to receive a
combination of cash and shares of St. Francis Common Stock may instead receive
a different combination of cash and shares of St. Francis Common Stock. In
addition, if so directed by St. Francis, the Exchange Agent may alter the
selection and allocation procedures in order to ensure that all of the
conditions to consummation of the Merger set forth in the Merger Agreement may
be complied with. Because the tax consequences of receiving cash, St. Francis
Common Stock or a combination of cash and St. Francis Common Stock will differ,
shareholders of Reliance are urged to read carefully the information under
"--Certain Federal Income Tax Consequences," and to consult with their own tax
advisors before returning the Election Form.
Notwithstanding the selection and allocation procedures described above,
the Merger Agreement provides that no particular Cash Election Shares will be
selected to receive or will be allocated St. Francis Common Stock if such
selection or allocation would threaten satisfaction of any of the conditions to
consummation of the Merger.
ISSUANCE OF STOCK AND PAYMENT OF CASH
General. On or shortly after the Effective Time, St. Francis will deliver
to the Exchange Agent certificates representing the number of shares of St.
Francis Common Stock issuable and the amount of cash payable in the Merger.
The Exchange Agent will not be entitled to vote or exercise any rights of
ownership with respect to the shares of St. Francis Common Stock held by it
pursuant to the Merger Agreement, except that it will receive and hold all
dividends or other distributions paid or distributed with respect to such
shares for the account of the persons entitled thereto.
Exchange of Certificates; Delivery of St. Francis Common Stock and Cash.
At the Effective Time, holders of certificates representing shares of Reliance
Common Stock will cease to have any rights as shareholders of Reliance and will
have only the right to receive the cash or shares of St. Francis Common Stock
into which their shares of Reliance Common Stock are to be converted. No
holder of certificates formerly representing shares of Reliance Common Stock
will be entitled to receive either cash or shares of St. Francis Common Stock
until the certificates are properly surrendered and delivered to the Exchange
Agent, and no interest will accrue in respect thereof. Each share of St.
Francis Common Stock for which shares of Reliance Common Stock are exchanged in
the Merger will be deemed to have been issued at the Effective Time.
Accordingly, Reliance shareholders who receive St. Francis Common Stock in the
Merger will be entitled to vote their shares and to receive any dividends or
other distributions, without interest, that may be payable to holders of record
of St. Francis Common Stock after the Effective Date, except that no such
dividend will be remitted until the certificates representing Reliance Common
Stock have been properly surrendered and delivered to the Exchange Agent.
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Until so surrendered, each certificate that before the Effective Time
represented outstanding shares of Reliance Common Stock will, except as
otherwise provided in the Merger Agreement, be deemed to evidence ownership of
the number of shares of St. Francis Common Stock or the right to receive the
amount of cash into which the same has been converted in the Merger. After the
Effective Time, there will be no further transfers on the records of Reliance
of certificates theretofore representing Reliance Common Stock and, if such
certificates are presented to Reliance for transfer, they will be canceled
against delivery of certificates for St. Francis Common Stock or cash, as the
case may be.
Within five business days after the allocation described above under
"--Election and Allocation Procedures," the Exchange Agent will distribute
shares of St. Francis Common Stock and cash with respect to shares of Reliance
Common Stock which have been properly surrendered and delivered to the Exchange
Agent. No dividends that have been declared on the shares of St. Francis
Common Stock will be remitted with respect to shares of Reliance Common Stock
that have been converted into shares of St. Francis Common Stock in the Merger
until the certificate or certificates previously representing shares of
Reliance Common Stock have been surrendered to the Exchange Agent, at which
time such dividends will be remitted to such person, without interest. Stock
certificates will not be delivered for fractional shares resulting from the
exchange of Reliance Common Stock for St. Francis Common Stock. Instead, each
holder of Reliance Common Stock who would otherwise be entitled to a fractional
share will receive in lieu thereof cash in an amount equal to the value of such
fractional share based upon the St. Francis Average Stock Price.
Neither St. Francis, Reliance nor the Exchange Agent will be liable to any
former holder of shares of Reliance Common Stock for any amount delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things: (a) each of St. Francis' and
Reliance's organization and similar corporate matters; (b) each of St. Francis'
and Reliance's capital structure; (c) authorization, execution, delivery,
performance and enforceability of the Merger Agreement and related matters; (d)
conflicts under charters or bylaws, required consents or approvals and
violations of any agreements, instruments or laws; (e) documents filed by each
of St. Francis and Reliance with the Commission and the accuracy of information
and financial statements contained therein; (f) absence of certain material
adverse events, changes or effects; (g) undisclosed liabilities; (h) the
accuracy of information supplied by each of St. Francis and Reliance in
connection with the Registration Statement and this Proxy Statement/Prospectus;
(i) retirement and other employee plans and matters relating to the Employee
Retirement Income Security Act of 1974, as amended; (j) regulatory filings; (k)
litigation; (l) compliance with law, including environmental law; (m) tax
returns and audits, and (n) asset quality, loan portfolio matters and
investment portfolio matters.
CERTAIN COVENANTS
Recognition of Reliance Contributions. St. Francis has agreed to install
a plaque in the branch office serving former Reliance Savings Bank customers to
memorialize Reliance's service to the community and to provide customer
continuity in the context of the Merger. Ms. Barnharst will manage the office
servicing the accounts of former Reliance Savings Bank customers for the
purpose of dealing at a local level with such marketing, competitive and other
issues as may be particular to Reliance Savings Bank's market area. Subsequent
to the Merger, St. Francis will consult with an Advisory Board comprised of
former directors of Reliance Savings Bank, to attempt to ensure the continuity
necessary to achieve the goal of uninterrupted, locally responsive service to
Reliance Savings Bank's customers and market area.
No Solicitation. The Merger Agreement provides that Reliance and its
subsidiaries will not: (a) initiate, solicit or encourage inquiries or
proposals with respect to the purchase of all or a substantial part of the
assets or equity of Reliance or any of its subsidiaries, except as contemplated
by the Merger Agreement; or (b) except to the extent required for the discharge
by the Reliance Board of its fiduciary duties as advised in writing by legal
counsel, furnish any information relating to, or participate in any
negotiations or discussions concerning, any such inquires or proposals. The
Merger Agreement provides that Reliance will notify St. Francis upon receipt of
any such inquires or proposals.
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Employee Benefit Plans. St. Francis has agreed that employees and
officers of Reliance and its subsidiaries who are employed by St. Francis or
its subsidiaries following the Merger will be immediately entitled to
participate in St. Francis' pension, welfare and employee benefit plans
(including without limitation, group hospitalization, medical, life and
disability insurance plans, severance plans, qualified retirement, ESOP and
savings plans, stock option plans and management recognition plans) on the same
terms as similarly situated employees and officers of St. Francis and its
subsidiaries, giving effect to years of service with Reliance and its
subsidiaries as if such service were with St. Francis for all purposes,
including without limitation, for purposes of vesting and eligibility (except
for St. Francis' retirement plan, in which case giving effect to years of
service shall be for eligibility and vesting purposes only and not for benefit
accrual purposes). Any expenses incurred by an employee of Reliance or its
subsidiaries under its welfare benefit plans (such as deductibles or
co-payments) will be counted for all purposes under the St. Francis plans. St.
Francis will waive any pre-existing condition exclusions for conditions
existing at the Effective Time, and actively at work requirements for periods
ending at the Effective Time, contained in the St. Francis plans as they apply
to employees of Reliance and its subsidiaries and former employees and their
dependents, provided that St. Francis' waiver of pre-existing conditions shall
not extend to any condition which has prevented an employee's coverage under
comparable benefit plans of Reliance or Reliance Savings Bank.
St. Francis has sole discretion with respect to the determination whether
to terminate, merge or continue any employee benefit plan or program of
Reliance or any of its subsidiaries (other than the Reliance ESOP, the Reliance
Pension Plan or the Reliance Directors' Retirement Plan); provided, however,
that St. Francis must continue to maintain Reliance plans other than
stock-based incentive plans and the tax-qualified plans of Reliance until
employees of Reliance are able to participate in similar plans of St. Francis.
In addition, St. Francis must maintain post-retirement medical and health
coverage no less favorable than that maintained by Reliance at the Effective
Time with respect to former and current officers, employees and non-employee
directors of Reliance and Reliance Savings Bank, and their dependents, who
satisfied the requirements for coverage under such program.
Employees and officers of Reliance and its subsidiaries who become
employees and officers of St. Francis also will receive compensation
arrangements and fringe benefits as are provided to St. Francis' employees and
officers, as described under "--Interests of Certain Persons in the Merger" and
"--Effect on Reliance Employee Benefit Plans." The treatment under the Merger
Agreement of the holders of Reliance stock options also is described therein.
Best Efforts to Consummate Merger. St. Francis and Reliance have each
agreed to use their best efforts in good faith to take or cause to be taken all
action necessary to consummate the Merger as promptly as practicable.
CONDITIONS TO EACH PARTY'S OBLIGATIONS
The respective obligations of St. Francis and Reliance to effect the
Merger are subject to certain conditions, including the following:
(a) approval of the Merger by holders of a majority of the issued
and outstanding shares of Reliance Common Stock;
(b) procurement of all regulatory approvals and consents required
for the Merger and the expiration of all waiting periods in
connection therewith;
(c) no discovery by St. Francis or Reliance of a material adverse
change with respect to the business of the other;
(d) verification that Reliance's net worth immediately preceding
the Effective Time (computed as described further herein) is not
less than Reliance's net worth as of March 31, 1998. For purposes
of this condition to closing, Reliance's net worth shall be computed
as the sum of its total shareholders' equity plus the allowance for
loan losses, but excluding any adjustments made as a result of the
application of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity
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Securities," any adjustments made pursuant to confirming and
conforming accounting and reserve policies, plus an allowance of up
to $210,000 for legal, accounting and investment advisor/fairness
opinion fees incurred in connection with the transactions
contemplated by the Merger Agreement. Reliance's net worth, computed
in accordance with the above-noted procedures of the Merger
Agreement, was $22.1 million at March 31, 1998;
(e) representations and warranties made by St. Francis in the
Merger Agreement shall be true and correct in all material respects
as of the Effective Time, except for those matters which in the
aggregate do not have a material adverse effect on the consolidated
financial condition and earnings of St. Francis, and St. Francis
shall have complied with all material covenants contained in the
Merger Agreement in all material respects;
(f) the absence of any unstayed or final injunction prohibiting
consummation of the Merger or of any litigation or governmental
proceeding seeking to restrain, prohibit or invalidate the Merger;
(g) receipt by St. Francis of "comfort letters" from Reliance's
independent accountants with respect to facts concerning the
financial condition of Reliance;
(h) receipt by each party of an acceptable legal opinion as is
customary in a transaction of this kind;
(i) the representations and warranties made by Reliance in the
Merger Agreement shall be true and correct in all material respects
as of the Effective Time, except for those matters which in the
aggregate do not have a material adverse effect on the consolidated
financial condition and earnings of Reliance and Reliance shall have
complied with all material covenants contained in the Merger
Agreement in all material respects;
(j) the effectiveness of the Registration Statement filed with
the Commission and compliance by St. Francis with all "Blue Sky"
requirements necessary to consummate the transactions contemplated
by the Merger;
(k) St. Francis' Board of Directors shall by appropriate
resolution have authorized and reserved the required number of
shares of St. Francis Common Stock to be issued pursuant to the
Merger and the shares of Common Stock to be issued upon consummation
of the Merger shall have been authorized for listing on the NASDAQ
National Market System subject to official notice of issuance;
(l) Reliance shall have received an opinion from Baird, dated as
of the date of the Proxy Statement/Prospectus, to the effect that,
subject to the terms, conditions and qualifications set forth
therein, the consideration to be paid by St. Francis to Reliance
shareholders pursuant to the Merger is fair to such shareholders
from a financial point of view;
(m) receipt by Reliance and St. Francis from legal counsel of an
opinion, dated the Effective Time, to the effect that for federal
income tax purposes:
(i) the Merger will constitute a reorganization within the meaning
of Section 368 of the Code; and
(ii) with respect to counsel's opinion to Reliance only (except for
cash in lieu of a fractional share, interest paid to holders of
Reliance Common Stock and cash paid to those holders of Reliance
Common Stock who receive the Per Share Cash Distribution):
(x) no gain or loss will be recognized by a holder of Reliance
Common Stock upon conversion in the Merger of such stock
into St. Francis Common Stock,
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(y) the basis of the shares of St. Francis Common Stock to be
received by a shareholder of Reliance will be the same as
such shareholder's basis in the Reliance Common Stock
exchanged therefor, and
(z) the holding period of the St. Francis Common Stock
received in the Merger by a holder of Reliance Common
Stock exchanged therefor will include the period during
which such holder held the Reliance Common Stock
therefor, provided that such Reliance Common Stock was
held as a capital asset immediately before the Effective
Date; and
(n) the absence of any Environmental Condition (as defined in the
Merger Agreement) with respect to any Real Property of Reliance (as
defined therein) which is likely to have a material adverse effect
(as defined therein) on St. Francis.
REGULATORY APPROVALS
The Merger and the Bank Merger are subject to the prior approval of the OTS
under the Home Owners' Loan Act of 1933, as amended (the "HOLA"), and the
regulations adopted under the HOLA, and to review by the WDFI under Chapter 214
and 221 of the Wisconsin Statutes and administrative rules and regulations
promulgated thereunder. An application for approval of the Merger and related
transactions was filed with the OTS on August 31, 1998. On November 23, 1998,
the OTS approved the application and the transactions contemplated by the Merger
Agreement and Plan of Merger.
A copy of the application was filed with the WDFI on August 31, 1998. On
November 17, 1998, the WDFI approved the application and the transactions
contemplated by the Merger Agreement and Plan of Merger.
Under the terms of the Merger Agreement, the obligation of each of St.
Francis and Reliance to consummate the Merger and related transactions were
conditioned upon the receipt of all requisite regulatory approvals (as defined
in the Merger Agreement), including the approval of the OTS and the WDFI. The
obligations of St. Francis and Reliance to consummate the Merger also were
conditioned upon waiver by the Board of Governors of the Federal Reserve System
("FRB") of their requirement for receipt of an application under the Bank
Holding Company Act of 1956, as amended (pursuant to the waiver authority under
12 C.F.R. Section 225.12), which waiver was granted by the FRB on September 11,
1998.
St. Francis and Reliance are not aware of any governmental approvals or
actions that may be required for consummation of the Merger except as described
above. Should any such further approval or action be required, it is presently
contemplated that such approval or action would be sought. There can be no
assurance, however, that any such approval or action, if needed, could be
obtained and would not be conditioned in a manner that would cause the parties
to abandon the Merger.
CONDUCT OF BUSINESS PENDING MERGER
The Merger Agreement contains certain restrictions regarding the conduct of
Reliance's and St. Francis' business pending consummation of the Merger. In
particular, Reliance has agreed that, before the Effective Time, except as
permitted by the Merger Agreement or as otherwise consented to by St. Francis,
it will (i) conduct its business and operate only in the usual ordinary course
of business in accordance with prudent and sound banking practices; (ii)
maintain an allowance for loan losses deemed to be adequate based on GAAP; (iii)
remain in good standing with all applicable federal and state regulatory
authorities and preserve its existing banking locations; (iv) use its best
efforts to retain the services of its present officers and employees; (v)
maintain insurance covering the performance of its and their duties by its and
their directors, officers and employees; (vi) take no action which would
adversely affect or delay the ability of Reliance or St. Francis to obtain any
necessary approvals, consents or waivers of any governmental authority required
for the transactions contemplated by the Merger Agreement and use its best
efforts to obtain all written consents and approvals from third parties
necessary in order to consummate the Merger; (vii) consult with St. Francis
prior to acquiring any interest in real property (except in the ordinary course
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of business) and before entering into any contract or agreement having a term
of more than one year; (viii) take no action which would cause the termination
or cancellation by the FDIC of insurance in respect of Reliance's deposits;
(ix) cooperate with St. Francis in providing timely notice to Reliance's data
processor to facilitate the continued customer account data processing; (x)
cause all materials and other internal, nonpublic financial and business
information obtained by it from St. Francis to be treated confidentially; and
(xi) consult with St. Francis about any proposed settlement or lack thereof,
or any disposition of, any litigation matter in which it is or becomes involved
and the amount involved exceeds $50,000; (xii) within five business days of the
Effective Time, consult with St. Francis regarding such accruals, reserves,
charges, and changes in accounting and reserve policies as may be necessary to
conform Reliance's practices in those areas with those of St. Francis and to
recognize for financial accounting purposes the expenses related to the Merger;
(xiii) provide St. Francis, its representatives and agents, with access to
books, records, and facilities at all times during normal business hours; (xiv)
cause its Board of Directors, subject to their fiduciary duties, to recommend
approval of the Merger to the Reliance shareholders; (xv) cause such severance
and termination benefits as may be payable in connection with the Merger not to
exceed the level of payments and benefits which would be deductible under
Section 280G of the Code, giving effect to any obligations of St. Francis and
its subsidiaries; (xvi) obtain and deliver to St. Francis signed Voting
Agreements obligating each of Reliance's executive officers and directors in
their individual capacities not to dispose of any shares of Reliance Common
Stock beneficially owned by them (subject to certain exceptions set forth in
the Voting Agreements) and to vote all such shares in favor of the Merger;
(xvii) advise St. Francis promptly and in writing of any fact or document which
if existing or known as of the date of execution of the Merger Agreement would
have been set forth, disclosed or made available to St. Francis or which would
have made any of Reliance's disclosures, representations or warranties in the
Merger Agreement materially untrue; and (xviii) use its best efforts to cause
the conditions to the Merger Agreement to be satisfied.
In addition, Reliance has agreed that it will not, directly or indirectly,
initiate, solicit or knowingly encourage or take any other action to facilitate
knowingly, any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Acquisition Proposal (as defined below),
or enter into or maintain or continue discussions or negotiate with any person
or entity in furtherance of such inquiries or to obtain an Acquisition Proposal
or agree to or endorse any Acquisition Proposal, or authorize or permit any of
its officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or other representative retained by it to take
any such action, and notify St. Francis orally and in writing of all relevant
details relating to all inquiries and proposals which it or any such officer,
director, employee, investment banker, financial advisor, attorney, accountant
or other representative may receive relating to any of such matters. However,
the Merger Agreement provides that this provision will not prohibit the
Reliance Board from taking any of the foregoing actions necessary to fulfill
their fiduciary obligations. "Acquisition Proposal" shall mean any of the
following involving Reliance (other than the transactions contemplated
hereunder): (a) any merger, consolidation, share exchange, business
combination or other similar transaction; (b) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the assets of
Reliance in a single transaction or series of transactions; (c) any tender
offer or exchange offer for 10% or more of the outstanding shares of capital
stock of Reliance or the filing of a registration statement under the
Securities in connection therewith; or (d) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
Furthermore, Reliance has agreed that, before the Effective Time, except
as permitted by the Merger Agreement or as otherwise consented to by St.
Francis, it will not: (i) amend its Articles of Incorporation, Charter or
Bylaws; (ii) except in connection with the exercise of options, issue, deliver
or sell, or authorize or propose the issuance, delivery or sale of, any shares
of its capital stock, or issue or grant any stock options, warrants, rights,
calls or commitments of any character calling for or permitting the issue or
sale of its capital stock; (iii) make payment of any form of cash or other
dividend, or institute any other form of dividend or distribution, with respect
to Reliance's capital stock; (iv) increase or reduce the number of shares of
its capital stock issued or outstanding by repurchase, split-up, reverse split,
reclassification, distribution of stock dividends, or change of par or stated
value; (v) make or grant any general or individual wage or salary increase or
fringe benefit increase except for general salary and wage adjustments now in
progress, or, as part of the conduct of a normal salary administration program
consistent with past practices, increase in any manner the compensation or
fringe benefits of any of its directors, officers or employees, or pay any
bonus, pension or retirement allowance to any such directors, officers or
employees, or become a party to, adopt, amend or otherwise modify or make any
contribution outside the ordinary
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course of business to any compensation and benefit plan, any bonus, pension,
profit sharing, retirement or other compensation plan or enter into any
contract of employment with any officer which is not terminable at will without
cost or other liability, or enter into, modify, or renew (for a term longer
than the prior term) any contract, agreement, commitment or arrangement
providing for the payment to any director, officer or employee of such party of
compensation or benefits contingent, or the terms of which are materially
altered, upon the occurrence of any of the transactions contemplated by the
Merger Agreement; provided however, that (x) the annual compensation of
officers employed by Reliance and Reliance Savings Bank as of July 1, 1998 may
be increased effective as of such date in a manner consistent with prior
practice of Reliance and Reliance Savings Bank, provided that the combined
amount of the annual increase put into effect for all such officers shall not
exceed, in the aggregate, 5% of the total amount paid to such officers for the
year ended June 30, 1998, and (y) Reliance and Reliance Savings Bank may pay to
their employees year-end bonuses for the 1998 fiscal year in a manner and
amount consistent with prior practices of Reliance and Reliance Savings Bank;
(vi) incur any obligations or liabilities or make any capital expenditures
except in the ordinary course of business or make any equity investment or
commitment to make such an investment in real estate or in any real estate
development project; (vii) mortgage, pledge or subject to any material lien,
charge, permit a security interest on, or encumber any of its assets,
properties or other rights; (viii) transfer or lease any of its or their assets
or property except in the ordinary course of business, or close any banking
office, or file any application to relocate or terminate the operations of any
of its offices; (ix) transfer or grant any rights under any leases, licenses or
agreements, other than in the ordinary course of business; (x) other than with
respect to loan transactions (including, without limitation, letters of credit
and purchase of leases), and other than with respect to sales of real estate
owned for less than $25,000, make or enter into any transaction, contract or
agreement or incur any other commitment where the amount involved exceeds
$50,000 or the term exceeds one year; (xi) incur any indebtedness for borrowed
money, assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual, corporation or other
entity, except for deposit liabilities and except for indebtedness incurred for
liquidity purposes in the ordinary course of business; (xii) cancel or
compromise any debt or claim which has not previously been charged off other
than in the ordinary course of business; (xiii) enter into any transaction
other than in the ordinary course of business or enter into any new, or
materially alter or expand any present, line of business or change any of its
methods of accounting; (xiv) take any action which constitutes a breach or
default of its obligations under the Merger Agreement or cause any of the other
conditions set forth in the Merger Agreement to fail; (xv) make or commit to
any loan over $150,000; (xvi) purchase or commit to purchase any bulk loan
servicing portfolio; (xvii) make any payment to any director, officer, employee
or independent contractor in connection with or as a result of transactions
contemplated by the Merger Agreement, or otherwise, which is not deductible to
Reliance or is not an ordinary business expense for travel, meals or
entertainment in connection with Reliance's business (exclusive of payments of
the expenses of Reliance's professional advisors); (xviii) take or cause to be
taken any action which would disqualify the Merger as a tax-free reorganization
under Section 368 of the Code; or (ix) fail to comply in any material respect
with any laws, regulations or governmental actions applicable to it or to the
conduct of its business.
St. Francis has agreed that it will: (i) conduct its business and operate
in accordance with prudent and sound banking and business practices; (ii) use
its best efforts to remain in good standing with all applicable banking
regulatory authorities; (iii) take all actions necessary to have the shares of
St. Francis Common Stock to be delivered in exchange for Reliance Common Stock
qualified or registered for offering and sale, or to identify and perfect an
exemption therefrom, under the federal securities laws and the securities or
"Blue Sky" laws of each jurisdiction within the United States in which
shareholders of Reliance reside; (iv) use all reasonable efforts to cause the
shares of St. Francis Common Stock to be issued pursuant to the Merger
Agreement to be approved for listing on The NASDAQ National Market System,
subject to official notice of issuance; (v) generally cause all internal,
nonpublic financial and business information obtained by it from Reliance which
is reasonably designated as confidential at the time of delivery to be treated
confidentially; (vi) file all necessary applications, notices or statements
with the appropriate regulatory agencies and governmental entities for approval
of the Merger and the transactions contemplated thereby; (vii) provide an
employment agreement for Ms. Carol A. Barnharst, which will retain her as
manager for the St. Francis office which is to serve customers formerly
maintaining accounts at Reliance; (viii) honor the present provisions of the
employment contract between Reliance and Mr. Allan T. Bach relating to the
termination of employment following a change in control (which shall be deemed
to have occurred upon consummation of the Merger); (ix) not take any action, or
agree to take any action which constitutes a material breach or default of St.
Francis' obligations under the Merger Agreement; (x) create an Advisory Board
comprised
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of members of the Board of Directors of Reliance to assist in the integration
of Reliance's customers and operations with those of St. Francis; (xi) not to
take or cause to be taken any action that would disqualify the Merger as a
tax-free reorganization under Section 368 of the Code; and (xii) in the event
of any threatened or actual claim, action, suit, proceeding or investigation,
civil, criminal or administrative, including any such claim, action, suit,
proceeding or investigation in which any individual who is now, or has been at
any time prior to the date of the Merger Agreement, or who becomes prior to the
Effective Time, a director or officer or employee of Reliance or its
Subsidiaries (the "Indemnified Parties"), is, or is threatened to be, made a
party based on, or arising out of, or pertaining to (A) the fact that he or she
is or was a director, officer or employee of the Reliance or its subsidiaries,
or (B) the Merger Agreement or any of the transactions contemplated thereby,
whether asserted or arising before or after the Effective Time, St. Francis
will cooperate and use reasonable efforts to defend against and respond
thereto, indemnifying and holding harmless, to the fullest extent permitted by
law, each such Indemnified Party against any losses, claims, damages,
liabilities, costs, expenses (including payment of reasonable attorney's fees
and expenses and other costs in advance of the final disposition of any claim,
suit, proceeding or investigation incurred by each Indemnified Party upon
receipt of any undertaking required by applicable law), judgments, fines and
amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation, and in the event of any such
threatened or actual claim, action, suit, proceeding or investigation (whether
asserted or arising before or after the Effective Time).
AMENDMENT AND WAIVER
Prior to the Effective Time of the Merger, any condition of the Merger
Agreement may be waived by the party in whose favor the provision runs or may
be amended or modified by an agreement in writing approved by both parties;
provided, however, that after Reliance shareholder approval is obtained, no
such extension, waiver, amendment or modification may adversely affect the
amount of consideration to be received in the Merger by the Reliance
shareholders.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any
time before the Effective Date, whether before or after approval by the
shareholders of Reliance: (a) by written agreement between St. Francis and
Reliance authorized by a majority of the entire board of directors of each; (b)
by either St. Francis or Reliance, if generally the other party has failed (i)
to perform and comply with, in all material respects, its agreements and
covenants under the Merger Agreement; and (ii) if such failure is not remedied
by the failing party within 30 days of receipt from the other of written notice
of such failure; (c) by either St. Francis or Reliance, if the Merger is not
consummated on or before February 28, 1999 (subject to extension to May 31,
1999, in the case of a protest to the Merger under the Community Reinvestment
Act), unless the delay is due to a breach by the party seeking to terminate;
(d) by either party, if the Merger Agreement is not approved by holders of
Reliance Common Stock; (e) by either party, if regulatory approvals are not
obtained, unless the failure to obtain approval is due to a breach by the party
seeking to terminate; (f) by St. Francis, if the St. Francis Average Stock
Price is less than $32.40; (g) by St. Francis or Reliance, upon receipt of
notice of changes to the other parties disclosure schedules as attached to the
Merger Agreement if the terminating party reasonably determines that such
changes would have a material adverse effect on the business of the other if
the Merger were consummated; (h) by Reliance if its Board of Directors
determines in good faith and in the exercise of reasonable judgment that a
competing acquisition proposal is more favorable to Reliance and Reliance
shareholders; (i) by St. Francis, if any person or group of persons other than
St. Francis or its subsidiaries acquires 25% or more of Reliance's Common
Stock, consummates a merger, consolidation, share exchange, business
combination, or any other similar transaction with Reliance, acquires more than
50% of the assets of Reliance through sale, lease, exchange, pledge, mortgage
or other form of transfer; or (j) by St. Francis, if the Reliance Board fails
to recommend approval of the transaction to Reliance shareholders for any
reason other than St. Francis' material breach of representations, warranties,
or covenants.
In the event of a valid termination of the Merger Agreement, the
obligations of the parties to the Merger Agreement shall terminate, and there
will be no liability on the part of either party except for (i) liability for
willful breach of the Merger Agreement, (ii) the termination fee, if
applicable, and (iii) certain expenses under various circumstances.
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MANAGEMENT AFTER THE MERGER
The directors and officers of St. Francis and St. Francis Bank immediately
prior to the Effective Time will continue as directors and officers of those
respective entities thereafter. Pursuant to the Merger Agreement, Ms. Carol A.
Barnharst will enter into a three-year employment agreement on the Effective
Time, whereby she will become a manager of the St. Francis Bank office that will
service the accounts of former Reliance Savings Bank customers. St. Francis also
has agreed to elect Mr. John T. Lynch to the Board of Directors of St. Francis
Bank. In addition, St. Francis will cause St. Francis Bank to create an advisory
board which will consist of all current members (other than Mr. Lynch) of the
Board of Directors of Reliance Savings Bank. See "--Interests of Certain Persons
In The Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Reliance Board, shareholders
should be aware that certain members of Reliance's Board and management may be
deemed to have interests in the Merger in addition to their interests, if any,
as holders of Reliance Common Stock.
Severance Arrangement with Mr. Allan T. Bach. Pursuant to the Merger
Agreement, St. Francis will honor the provisions of the employment agreement
between Reliance Savings Bank and Mr. Allan T. Bach, President and Chief
Executive Officer of Reliance, relating to a termination of employment following
a change in control of Reliance, which shall be deemed to have occurred upon
completion of the Merger. Pursuant to Mr. Bach's employment agreement, upon
completion of the Merger, Mr. Bach shall receive severance pay for a 36-month
period, based upon his highest rate of base salary within the three years
preceding termination, plus one-twelfth of his total bonus and incentive
compensation based on his most recently completed calendar year of employment.
In addition, Mr. Bach is entitled to all retirement and other benefits in which
he was vested at the time of termination. St. Francis will maintain and provide
to Mr. Bach, during the 36-month period following termination (or the earlier
date on which Mr. Bach obtains full-time employment with another employer that
provides benefits similar to those described in the employment agreement), at no
cost to Mr. Bach, his continued participation in all group insurance, life
insurance, health and other accident, disability and other employee benefit
plans, programs and agreements, in which he was entitled to participate
immediately prior to termination, other than certain specified retirement and
deferred compensation plans, individual insurance policies or stock compensation
plans described in the next sentence. Mr. Bach also is entitled to receive, as
additional severance benefits, a benefit determined under each retirement and
deferred compensation plan or individual insurance policy maintained by Reliance
and its subsidiaries, determined as if Mr. Bach were fully vested under the plan
and had accumulated the additional years of credit service under the applicable
plan that he would have received had he continued in employment of Reliance or
its subsidiaries during the period in which he is receiving severance payments.
If the aggregated severance payments to which Mr. Bach is entitled
following the change in control would constitute "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, the aggregate severance benefits
payable to Mr. Bach will be reduced to an amount equal to 2.99 times the average
annual compensation paid to Mr. Bach during the five calendar years immediately
preceding the year in which such change in control occurs. Under the terms of
his employment agreement, due to the operation of the limits of Section
280G(b)(2) of the Code, Mr. Bach will receive severance payments of $497,697.
Employment Agreement with Ms. Carol A. Barnharst. In connection with the
Merger, St. Francis Bank will enter into a three-year employment agreement with
Ms. Carol A. Barnharst. The employment agreement is intended to ensure that Ms.
Barnharst will remain with St. Francis Bank following the Merger and that she
will be available to assist in integrating of the former Reliance office into
St. Francis Bank's operations and then to oversee ongoing operations and
marketing in the area formerly served by Reliance.
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Under the employment agreement, which will become effective upon completion
of the Merger, the base salary for Ms. Barnharst will be $65,500, the same
amount as her current base salary from Reliance Savings Bank. Ms. Barnharst's
base salary may be increased by St. Francis Bank's Board of Directors, but may
not be reduced. In addition to base salary, the agreement provides for coverage
under other St. Francis Bank incentive compensation plans and for other
benefits, including participation in any group health, life, disability or
similar insurance program and in any pension, profit-sharing, employee stock
ownership plan, deferred compensation, 401(k) or other retirement plans
maintained by St. Francis Bank. The agreement may be terminated by St. Francis
Bank upon death, disability or retirement; for cause at any time; or in certain
events specified by rules and regulations of the OTS. In the event of
termination of Ms. Barnharst's employment by St. Francis Bank, she is entitled
to severance pay (based on her then applicable base salary and her bonus and
incentive compensation paid or vested for her most recently completed calendar
year of employment) for the remaining unexpired term of her employment
agreement, together with other compensation and benefits in which she was vested
at the termination date. However, if the employment of Ms. Barnharst, pursuant
to her employment agreement with St. Francis Bank, is terminated on or before
six months following the effective date of the agreement, which is expected to
be the closing date of the Merger, (i) by her for any reason other than
disability, retirement or death, or (ii) by St. Francis or any of its
subsidiaries for any reason other than cause, disability, retirement or death,
Ms. Barnharst will be entitled to receive amounts and benefits that are not less
than all amounts and benefits which she would have received under her prior
employment agreement with Reliance Savings Bank (less amounts received
previously under her employment agreement with St. Francis Bank).
The employment agreement also provides for severance payments if Ms.
Barnharst's employment terminates following a change in control. Under the
agreement, a "Change in Control" is generally defined to include any change in
control with respect to St. Francis Bank or St. Francis which is required to be
reported under the federal securities laws, as well as (i) the acquisition by
any person of 25% or more of St. Francis' outstanding voting securities, or (ii)
a change in a majority of the directors of St. Francis during any two-year
period without the approval of at least two-thirds of the persons who were
directors at the beginning of such period. In the event of termination following
a Change in Control, Ms. Barnharst shall receive severance pay (based upon her
average annual compensation for the three years preceding termination) for the
remaining term of the employment agreement. In addition, if the aggregate
severance benefits following a Change in Control would constitute "parachute
payments" within the meaning of Section 280G(b)(2) of the Code, the severance
benefits payable to Ms. Barnharst will be reduced to an amount equal to the
present value of 2.99 times the average annual compensation paid to the
executive during the five calendar years immediately preceding the year in which
such Change in Control occurs. If total payments following a Change in Control
were to constitute excess parachute payments under Section 280G of the Code, it
could result in the imposition of an excise tax on the recipient and denial of
an income tax deduction to St. Francis Bank and St. Francis for such excess
amounts.
Reliance Stock Options. Pursuant to the Merger Agreement, the holders of
all outstanding and unexercised options to purchase shares of Reliance Common
Stock granted by Reliance under the Reliance Bancshares, Inc. 1997 Stock Option
Plan (the "Reliance Option Plan"), whether or not the options are then
exercisable under the terms of the Reliance Option Plan, will receive in
replacement of their options to purchase Reliance Common Stock either:
(a) cash in an amount equal to the excess of the Per Share Cash
Distribution over the exercise price of the option, multiplied by the
number of shares subject to such option; or
(b) in the case of option holders who, by reason of their employment or
other status with St. Francis Savings Bank after consummation of the
Merger, would be eligible to participate in St. Francis' option plans,
may elect to have their Reliance options converted into options to
purchase shares of St. Francis Common Stock (rather than cash) in an
amount and at a price adjusted to reflect the per share consideration
received in the Merger by holders of Reliance Common Stock.
Subject to the foregoing, each option to buy shares of Reliance Common Stock
will terminate upon consummation of the Merger. The determination of whether a
Reliance option will be converted into the right to receive cash or a substitute
St. Francis option will be made by each eligible option holder.
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In April 1998, Mr. Allan T. Bach, Ms. Carol A. Barnharst, Mr. O. William
Held, Mr. John T. Lynch and Ms. Marjorie A. Spicuzza each were granted options
to purchase Reliance Common Stock with respect to 5,000 shares (at an exercise
price of $9.25 per share), which option grants are contingent upon completion of
the Merger ("Contingent Option Grants"). If the Merger is not consummated, the
recipients must forfeit the Contingent Option Grants.
As of October 31, 1998, directors and officers as a group held options
outstanding on 224,280 shares of Reliance Common Stock under the Reliance Option
Plan with exercise prices of $7.81 and $9.25. In connection with the Merger, and
assuming the St. Francis Average Stock Price is $41.28, the executive officers
and directors, consisting of Allan T. Bach, Carol A. Barnharst, John T. Lynch,
O. William Held and Marjorie A. Spicuzza could receive, if they choose to
exchange their vested options (including the Contingent Option Grants) for cash,
$105,000, $105,000, $105,000, $105,000 and $105,000, respectively. The Merger
Agreement does not restrict the exercisability, before the Merger, of options
for Reliance Common Stock, other than the Contingent Option Grants, that were
granted under existing Reliance benefit plans.
Shareholders of Reliance who have entered into the Voting Agreements may
not sell, assign, transfer or otherwise dispose of, or permit to be sold,
assigned, transferred or otherwise disposed of, any shares of Reliance Common
Stock owned of record or beneficially by such shareholder, whether such shares
of Reliance Common Stock are owned of record or beneficially by such shareholder
on the date of the Voting Agreement or are subsequently acquired, whether
pursuant to the exercise of stock options or otherwise, except (i) for transfers
by will or by operation of law (in which case the Voting Agreement would bind
the transferee), (ii) for sales, assignments, transfers or other dispositions
necessitated by hardship with the prior written consent of St. Francis, or (iii)
as St. Francis may otherwise agree in writing.
Retiree Medical Coverage. Following consummation of the Merger, St. Francis
will maintain post-retirement medical and health coverage no less favorable than
that maintained by Reliance prior to the Merger with respect to former and
current officers and employees, and current non-employee directors of Reliance
and Reliance Savings Bank, and their dependents, who satisfy the requirements
for coverage under the Reliance Post-Retirement Medical Plan (the "Reliance
Retiree Medical Coverage Program"), adopted by Reliance Savings Bank in October
1983. Pursuant to the Reliance Retiree Medical Coverage Program, eligible
participants and their dependents receive supplemental medical, hospital and
dental insurance for life, so long as they are not employed by another employer
after retirement. As of the date of this Proxy Statement/Prospectus, six
individuals are eligible to participate in the Reliance Retiree Medical Coverage
Program, including Directors Lynch, Held and Spicuzza, and Ms. Barnharst. Mr.
Bach is not eligible to participate in the Reliance Retiree Medical Coverage
Program.
Advisory Board. Pursuant to the Merger Agreement, St. Francis will create
an advisory board to assist in, and advise with respect to, the integration of
Reliance's operations and customer base with those of St. Francis. The advisory
board will consist of all current members of the Board of Directors of Reliance
Savings Bank, other than Director John T. Lynch, all of whom will receive an
annual retainer of $10,000. The Advisory Board is initially scheduled to meet
with the same frequency as the St. Francis Bank Board. In addition, St. Francis
intends to designate Ms. Carol A. Barnharst as the Advisory Board's liaison for
purposes of reporting to the Board of Directors of St. Francis Bank. The
Advisory Board will remain in existence for at least three years following the
Effective Date, and thereafter as may be determined by St. Francis. See
"Compensation of Executive Officers and Directors" for a description of the
compensation arrangements with members of the Board of Directors of Reliance
Savings Bank.
Appointment to St. Francis Bank Board of Directors. The Merger Agreement
provides that as soon as practicable following the Bank Merger, St. Francis will
appoint Mr. John T. Lynch to the Board of Directors of St. Francis Bank.
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EFFECT ON RELIANCE EMPLOYEE BENEFIT PLANS
General. Each person employed by Reliance prior to the Effective Date who
remains an employee of St. Francis following the Effective Date (each, a
"Continued Employee") shall be entitled to participate on the same basis as
similarly situated employees of St. Francis in whatever employee benefit plans
are in effect for employees of St. Francis (the "St. Francis Plans"). Such
participation shall be subject to the terms of the St. Francis Plans in effect
from time to time. Each St. Francis Plan, other than St. Francis' qualified
retirement plans, shall recognize credit for all purposes for each Continued
Employee's term of service with Reliance. Qualified retirement plans will
recognize service with Reliance for purposes of determination of participation
rights and vesting rights but not for purposes of benefit accrual.
RRP. Reliance Savings Bank maintains the RRP for certain executive officers
of Reliance. Unvested shares of Reliance Common Stock awarded pursuant to the
RRP will become vested upon the Effective Date of the Merger. Such shares of
Reliance Common Stock will be converted into the right to receive the Per Share
Cash Distribution or Per Share Stock Distribution in the same manner as all
other outstanding shares of Reliance Common Stock. In addition, in April 1998,
Mr. Bach and Ms. Barnharst each were granted RRP awards with respect to 10,257
shares, which awards are contingent upon completion of the Merger (the
"Contingent RRP Awards"). If the Merger is not consummated, Mr. Bach and Ms.
Barnharst must forfeit the Contingent RRP awards.
Of the 59,436 RRP shares granted to Mr. Bach, 32,786 have vested and
26,650 will vest as a result of the Merger (including the Contingent RRP
Awards). Of the 43,057 RRP shares granted to Ms. Barnharst, 21,867 have vested
and 21,190 will vest as a result of the Merger (including the Contingent RRP
Awards). Assuming the per share fair value of the RRP shares upon vesting is
$41.28 (the "St. Francis Average Stock Price" as of December 1, 1998), the
approximate economic effect of the accelerated vesting of the Reliance Common
Stock awarded to the certain executives of Reliance would be as follows: Mr.
Bach, $275,000 and Ms. Barnharst, $219,000. The RRP will be terminated as soon
as practicable after the Effective Time.
Reliance Option Plan. The Merger Agreement provides that St. Francis will
assume Reliance's obligations under the Reliance Option Plan. Holders of options
granted under the Reliance Option Plan to buy shares of Reliance Common Stock
that have not been exercised before the Effective Date, whether or not such
options are exercisable, will be entitled to receive, at the option holder's
election, (i) cash in an amount equal to the difference between the Per Share
Cash Distribution and the exercise price of such option, whereupon such option
shall terminate, or (ii) in replacement of their options to purchase Reliance
Common Stock, an option to purchase St. Francis Common Stock on the same terms
as the option to purchase shares of Reliance Common Stock, in an amount and at a
price appropriately adjusted to reflect the Per Share Stock Consideration
received in the Merger by holders of Reliance Common Stock.
As of October 31, 1998, directors and executive officers as a group held
options outstanding on 224,280 shares of Reliance Common Stock under the
Reliance Option Plan with exercise prices of $7.81 and $9.25. See "--Interests
of Certain Persons in the Merger" for a further discussion of the treatment of
Reliance optionees. The Merger Agreement does not restrict the exercisability,
before the Merger, of options for shares of Reliance Common Stock that were
granted under the Reliance Option Plan. Also, the Merger Agreement does not
restrict the ability of an option holder to sell, before the Merger, shares of
Reliance Common Stock obtained after exercise of an option (unless the
individual is a party to one of the Voting Agreements).
Reliance ESOP and Reliance Pension Plan. Reliance maintains two qualified
plans for eligible employees of Reliance, the Reliance Savings Bank Employee
Stock Ownership Plan (the "Reliance ESOP") and the Financial Institutions
Retirement Fund ("the Reliance Pension Plan"). As of the Effective Date, the
Reliance ESOP and the Reliance Pension Plan will be terminated. Participants in
the Reliance ESOP and the Reliance Pension Plan will begin participation in the
St. Francis qualified plans as of the Effective Date of the Merger. The
participation of Continued Employees in the St. Francis qualified plans will be
on the same basis as similarly situated employees of St. Francis. For purposes
of vesting and eligibility, St. Francis' qualified plans will recognize credit
for service with Reliance.
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When it was established, the Reliance ESOP obtained a loan from Reliance
for the purpose of acquiring shares of Reliance Common Stock. As of October 31
1998, the Reliance ESOP Trust held 89,125 shares of Reliance Common Stock. As of
that date, a total of 22,360 of such shares were allocated to the accounts of
participating employees and the remaining 66,765 shares were unallocated and
pledged as collateral security for the aforementioned loan obtained to finance
their purchase. On the Effective Date, all allocated and unallocated shares of
Reliance Common Stock held by the Reliance ESOP will be converted into the right
to receive the Per Share Cash Distribution. The Per Share Cash Distribution
received by the Reliance ESOP in the Merger with respect to unallocated shares
of Reliance Common Stock will be applied to prepay the remainder of the Reliance
ESOP's outstanding loan in the principal amount of $449,000. Thereafter, the
obligation of Reliance to make further contributions to the Reliance ESOP for
purposes of debt amortization would be extinguished, and any Per Share Cash
Distribution with respect to the unallocated shares remaining after the
prepayment would be allocated among the ESOP accounts of eligible Reliance ESOP
participants. All ESOP participants shall fully vest in their ESOP accounts as
of the Effective Time.
Non-Qualified Deferred Retirement Plan for Directors. St. Francis shall
assume the obligations of Reliance under the Reliance Savings Bank Non-Qualified
Deferred Retirement Plan for Directors (the "Directors' Retirement Plan") and
shall continue to perform and satisfy the terms and obligations thereof,
following the Effective Time of the Merger. Pursuant to the Directors'
Retirement Plan, directors can elect to defer receipt of all or any portion of
their directors' fees payable in each calendar year (the "Deferred Benefit"). In
addition, each director also is eligible to receive a "Service Credit Benefit"
upon retirement from active service on the Reliance Board. Each director
receives one service credit for each full year of service on the Reliance Board,
with a maximum of five service credits. The "Service Credit Benefit" for each
director equals $10,000 for each service credit received. Directors Bach, Held,
Lynch and Barnharst each have accumulated four years of service under the
Deferred Retirement Plan. Director Spicuzza does not participate in the Deferred
Retirement Plan. Pursuant to the Merger Agreement, the transactions contemplated
by the Merger Agreement constitute a change of control of Reliance under the
Directors' Retirement Plan, and therefore, the interests of Directors Bach,
Held, Lynch and Barnharst with respect to their four years of Service Credit
Benefits ($40,000 each) shall be vested in full as of the Effective Time of the
Merger. To date, none of the participants in the Directors' Retirement Plan have
elected to defer directors' fees and, accordingly, no Deferred Benefits have
been accrued thereunder. Reliance Savings Bank owns a life insurance policy on
each participating director representing his or her interest under the
Directors' Retirement Plan.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material federal income tax
consequences of the Merger and the Bank Merger. This summary is not a complete
description of all of the consequences of the Merger and the Bank Merger and, in
particular, does not address federal income tax considerations that may affect
the treatment of certain holders, such as financial institutions,
broker-dealers, life insurance companies, tax-exempt organizations, investment
companies, foreign taxpayers, holders which, at the Effective Time of the
Merger, already own St. Francis Common Stock, individuals who acquired Reliance
Common Stock pursuant to employee stock options or otherwise as compensation,
and other special status taxpayers. Holders should be aware that the federal
income tax rate for individuals on long-term capital gains may be significantly
lower than the rate imposed on ordinary income or short-term capital gain. No
information is provided herein with respect to the tax consequences of the
Merger to any holder or party under applicable foreign, state or local laws.
Consequently, each Reliance holder is advised to consult a tax advisor as to the
specific tax consequences of the Merger to that holder.
General. St. Francis has received an opinion from Michael Best & Friedrich
LLP to the effect that (i) the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and St. Francis and Reliance each will be a party to that reorganization within
the meaning of Section 368(b) of the Code, and (ii) the Bank Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code and Reliance Savings Bank and St. Francis Savings
Bank will each be a party to that reorganization within the meaning of Section
368(b) of the Code. The opinion of Michael Best & Friedrich LLP is based upon
the Code, regulations now in effect thereunder, current administrative practice
and judicial authority, and certain factual representations, and is subject to
various assumptions and qualifications. The opinion also is based on certain
factual representations made by St. Francis, Reliance, St. Francis Savings Bank
and Reliance Savings Bank (including representations concerning the satisfaction
of "continuity of shareholder interest" and "continuity of business enterprise"
requirements) which legal counsel does not intend to investigate or verify. A
ruling from the Internal Revenue Service (the "IRS") concerning the tax
consequences of the Merger and the Bank
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Merger will not be requested. Unlike a ruling from the IRS, an opinion of
counsel is not binding on the IRS and there can be no assurance, and none is
hereby given, that the IRS will not take a position contrary to counsel's
opinion or that the opinion will be upheld if challenged by the IRS.
The following discussion constitutes the opinion of Michael Best &
Friedrich LLP as to the material income tax consequences of the Merger and the
Bank Merger.
Tax Treatment to St. Francis, Reliance, St. Francis Savings Bank and
Reliance Savings Bank. No gain or loss will be recognized by St. Francis,
Reliance, St. Francis Savings Bank and Reliance Savings Bank solely as a result
of the Merger and the Bank Merger.
Receipt of St. Francis Common Stock for Reliance Common Stock. No gain or
loss will be recognized by a holder who receives solely shares of St. Francis
Common Stock (except for cash received in lieu of fractional shares, as
discussed below) in exchange for all of his or her shares of Reliance Common
Stock. The tax basis of the shares of St. Francis Common Stock received by a
holder in such exchange will be equal (except for the basis attributable to any
fractional shares of St. Francis Common Stock, as discussed below) to the basis
of the Reliance Common Stock surrendered in exchange therefor. The holding
period of the St. Francis Common Stock received will include the holding period
of shares of Reliance Common Stock surrendered in exchange therefor, provided
that such shares were held as capital assets at the Effective Time of the
Merger.
Receipt of St. Francis Common Stock and Cash in Exchange for Reliance
Common Stock. A holder who receives a combination of St. Francis Common Stock
and cash in exchange for his or her Reliance Common Stock will not be permitted
to recognize any loss for federal income tax purposes. Such a holder will
recognize gain, if any, equal to the lesser of (i) the amount of cash received,
or (ii) the amount of gain "realized" in the transaction. The amount of gain a
holder "realizes" will equal the amount by which (i) the cash plus the fair
market value at the Effective Time of the Merger of the St. Francis Common Stock
received exceeds (ii) the holders' basis in the Reliance Common Stock to be
surrendered in the exchange therefor. Any recognized gain could be taxed as a
capital gain or a dividend (or possibly a combination thereof), with the
determination made as described below in "-- Certain Federal Income Tax
Consequences -- Possible Dividend Treatment." The aggregate tax basis of the
shares of St. Francis Common Stock received by such holder will be the same as
the aggregate basis of the shares of Reliance Common Stock surrendered in
exchange therefor, adjusted as provided in Section 358(a) of the Code for the
cash received in exchange for such shares of Reliance Common Stock. The holding
period for shares of St. Francis Common Stock received in the Merger will be the
same as the holding period for Reliance Common Stock surrendered in exchange
therefor, provided that such shares were held as capital assets of the holder at
the Effective Time of the Merger.
A holder's federal income tax consequences also will depend on whether his
or her shares of Reliance Common Stock were purchased at different times at
different prices. If they were, the holder could realize gain with respect to
some of the shares of Reliance Common Stock and loss with respect to other
shares. Such holder would have to recognize such gain to the extent such holder
receives cash with respect to those shares in which the holder's adjusted tax
basis is less than the amount of cash plus the fair market value at the
Effective Time of the Merger of the St. Francis Common Stock received, but could
not recognize loss with respect to those shares in which the holder's adjusted
tax basis is greater than the amount of cash plus the fair market value at the
Effective Time of the Merger of the St. Francis Common Stock received. Any
disallowed loss would be included in the adjusted basis of the St. Francis
Common Stock. Any holder who purchased shares of Reliance Common Stock at
different times and different prices is urged to consult his or her own tax
advisor regarding the tax consequences of the Merger on that holder.
Possible Dividend Treatment. In certain circumstances, a holder who
receives cash or a combination of cash and St. Francis Common Stock in the
Merger may receive ordinary dividend, rather than capital gain, treatment on all
or a portion of the gain recognized by that holder. The determination of whether
a cash payment has the effect of a dividend distribution is made by treating a
Reliance shareholder as if such holder had received solely St. Francis Common
Stock in the Merger, and St. Francis immediately thereafter redeemed a number of
shares of St. Francis Common Stock equal in value to the cash consideration
received. This hypothetical redemption is then tested under the provisions and
limitations of Section 302 of the Code to determine whether the holder's change
in ownership in St. Francis results in a dividend distribution. For purposes of
this hypothetical Section 302 redemption analysis, shares of St. Francis Common
Stock held by certain members of the holder's family or certain entities in
which the
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holder has an ownership or beneficial interest and stock that may be acquired
pursuant to certain stock options must be aggregated with the holder's shares of
St. Francis Common Stock. The amount of the cash payment that may be treated as
a dividend is limited to the holder's ratable share of the accumulated earnings
and profits of Reliance (or possibly of the total earnings and profits of
Reliance and St. Francis) at the Effective Time of the Merger. Any gain that is
not treated as a dividend will be taxed as a capital gain, provided that the
holder's shares were held as capital assets on the Effective Date of the Merger.
If such distribution is taxable as a dividend to a corporate shareholder, it may
be subject to the "extraordinary dividend" provisions of Section 1059 of the
Code.
Because the determination of whether a cash payment will be treated as
having the effect of a dividend will depend in part upon the facts and
circumstances of each holder, all holders are advised to consult their own tax
advisors regarding the tax treatment of cash received in the Merger.
Receipt of Cash in Exchange for Reliance Common Stock. A holder who
receives solely cash in exchange for all of his or her shares of Reliance Common
Stock (and, unless such shares also are exchanged solely for cash, does not own
any Reliance Common Stock constructively under the circumstances referred to
above under "-- Certain Federal Income Tax Consequences -- Possible Dividend
Treatment") and owns no St. Francis Common Stock actually or constructively,
will recognize gain or loss for federal income tax purposes equal to the
difference between the cash received and such holder's tax basis in the Reliance
Common Stock surrendered in exchange therefor. Such gain or loss will be a
capital gain or loss, provided that such shares were held as capital assets of
the holder at the Effective Time of the Merger. Such gain or loss will be
long-term capital gain or loss if the holder's holding period is more than one
year at the Effective Time of the Merger. The Code contains limitations on the
extent to which a holder may deduct capital losses from ordinary income. A
holder who receives solely cash for his or her shares but who owns actually or
constructively shares of St. Francis Common Stock, or owns constructively shares
of Reliance Common Stock which are not exchanged solely for cash, is advised to
consult his or her own tax advisor regarding the tax consequences to the holder.
Cash in Lieu of Fractional Shares. A holder who holds Reliance Common Stock
as a capital asset and who receives in the Merger, in exchange for such stock,
solely St. Francis Common Stock and cash in lieu of a fractional share interest
in St. Francis Common Stock will be treated as having received such fraction of
a share of St. Francis Common Stock and then as having received cash in
redemption by St. Francis of the fractional share interest. Under the IRS's
present advance ruling position, since the cash is being distributed in lieu of
factional shares solely for the purpose of saving St. Francis the expense and
inconvenience of issuing and transferring fractional shares, and is not
separately bargained-for consideration, the cash received will be treated as
having been received in part or full payment in exchange for the fractional
share of stock redeemed, and as capital gain or loss, not as a dividend.
Backup Withholding; Information Reporting. The cash payments due a holder
upon the exchange of such Reliance Common Stock pursuant to the Merger (other
than certain exempt persons or entities) will be subject to "backup withholding"
for federal income tax purposes unless certain requirements are met. St. Francis
or a third party paying agent, as the case may be, must withhold 31% of the cash
payments to a holder, unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(ii) provides St. Francis or a third party paying agent, as the case may be,
with his or her taxpayer identification number and completes a form in which he
or she certifies that he or she has not been notified by the IRS that he or she
is subject to backup withholding as a result of a failure to report interest and
dividends. The taxpayer identification number of an individual is his or her
Social Security number. Any amount paid as backup withholding will be credited
against the holder's federal income tax liability. Holders who receive St.
Francis Common Stock also must comply with the information reporting
requirements of the Treasury regulations under Section 368 of the Code.
Appropriate documentation for the foregoing purposes will be provided to holders
with the Election Forms that will be sent to them by the Exchange Agent.
All of the foregoing are subject to change (which change could be
retroactive) and any such change could affect the continuing validity of this
discussion. Since the federal income tax consequences of the Merger to a holder
of Reliance Common Stock depend to a great extent on whether he or she receives
St. Francis Common Stock or cash, it is important that each holder of Reliance
Common Stock return the Election Form so that it is received before the Election
Deadline.
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ACCOUNTING TREATMENT
St. Francis intends to treat the Merger as a "purchase" under GAAP. Under
the purchase method of accounting, the assets and liabilities of Reliance will
be, as of the Effective Date, recorded at their respective fair values and added
to those of St. Francis. The expected excess of the consideration paid by St.
Francis over the fair value of Reliance's assets and liabilities will be
recorded as goodwill.
NASDAQ LISTING
The shares of St. Francis Common Stock are listed on the NASDAQ National
Market System. St. Francis has agreed in the Merger Agreement to use its best
efforts to assure that the shares of St. Francis Common Stock to be issued
pursuant to the Merger Agreement be authorized for listing on the NASDAQ
National Market System. An application has been filed by St. Francis for listing
the shares of St. Francis Common Stock issuable pursuant to the Merger Agreement
on the NASDAQ National Market System.
EXPENSES
Except as set forth below, whether or not the Merger is consummated, all
expenses incurred in connection with the Merger Agreement shall be paid by the
party incurring such expense. Expenses incurred in connection with the printing
of the Registration Statement and this Proxy Statement/Prospectus and the cost
of filing the Registration Statement with the SEC and the listing of additional
shares of St. Francis Common Stock with NASDAQ shall be shared equally by St.
Francis and Reliance. If the Merger Agreement is terminated by one party because
of another party's breach of a representation, warranty or covenant or because
of the discovery of an adverse condition with respect to the other party, then
the breaching party or the party with respect to which a material adverse
condition was discovered shall promptly pay its own transaction expenses and the
other party's transaction expenses; provided, however, that in no event will
Reliance be required to reimburse St. Francis for its fees and expenses in
excess of $80,000, nor will St. Francis be required to reimburse Reliance for
its fees and expenses in excess of $80,000.
VOTING AGREEMENTS
As an inducement to St. Francis to enter into the Merger Agreement, all of
the directors and executive officers of Reliance entered into voting agreements
(the "Voting Agreements") to vote the shares of Reliance Common Stock
beneficially owned by them in favor of the Merger. The directors and executive
officers who signed Voting Agreements owned or had the right to acquire, as of
October 31, 1998, 485,956 shares, including 224,280 shares subject to
unexercised options, representing 18.22% of the outstanding shares of Reliance
Common Stock.
The executive officers and directors of Reliance who have entered into the
Voting Agreements may not, pursuant to the Voting Agreements, sell, assign,
transfer or otherwise dispose of, or permit to be sold, assigned, transferred or
otherwise disposed of, any shares of Reliance Common Stock owned of record or
beneficially by such shareholder, whether such shares of Reliance Common Stock
are owned of record or beneficially by such shareholder on the date of the
Voting Agreement or are subsequently acquired, whether pursuant to the exercise
of stock options or otherwise, except (i) for transfers by will or by operation
of law (in which case the Voting Agreement would bind the transferee), (ii) for
sales, assignments, transfers or other dispositions necessitated by hardship
with the prior written consent of St. Francis, or (iii) as St. Francis may
otherwise agree in writing.
TERMINATION FEE ARRANGEMENTS
Pursuant to the Merger Agreement, Reliance has agreed to pay St. Francis a
fee of $875,000 (i) if Reliance terminates the Merger Agreement as the result of
a good faith determination by its Board of Directors that a different
acquisition proposal is more favorable to Reliance shareholders than the
transactions contemplated by the Merger Agreement, (ii) if St. Francis
terminates the Merger Agreement as the result of a "Company Purchase Event" (as
defined below), (iii) the Merger is not consummated as a result of a material
breach of Merger Agreement obligations by Reliance or Reliance Savings Bank, or
(iv) a "Company Purchase Event" occurs at any time within 12 months of
termination of the Merger Agreement where termination has occurred (A) by reason
of Reliance having failed to
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perform and comply in all material respects with its agreements and covenants
under the Merger Agreement and not having remedied such failure upon 30 days
notice from St. Francis, (B) following receipt of notice by St. Francis due to
changes to Reliance Disclosure Statements under the Merger Agreement, which
changes St. Francis reasonably determines would have a material adverse impact
on the business of Reliance, or (C) following a failure of the shareholders of
Reliance to have duly approved confirmed and ratified the Merger Agreement or a
termination by Reliance as a result of the parties having failed to obtain the
necessary regulatory approvals. The term "Company Purchase Event" means any of
the following events, or Reliance or Reliance Savings Bank entering into any
agreement relating to any of the following: (i) the acquisition by any person or
group of persons, as defined in Section 13(d) of the Exchange Act, other than
St. Francis and its affiliates, of beneficial ownership of 25% or more of
Reliance Common Stock; (ii) a merger, consolidation, share exchange, business
combination or similar transaction involving Reliance or Reliance Savings Bank,
other than with St. Francis and its affiliates; (iii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 50% or more of the assets of
Reliance or Reliance Savings Bank, other than to St. Francis or its affiliates;
or (iv) any failure by the Reliance Board to recommend approval of the Merger to
Reliance shareholders for any reason (including a failure based upon a good
faith determination by the Reliance Board that another person (as defined in
Section 13(d) of the Exchange Act) has made an acquisition proposal more
favorable to Reliance shareholders than the transaction contemplated under the
Merger Agreement) other than a material breach by St. Francis of its
representations, warranties or covenants under the Merger Agreement.
Payment of the termination fee by Reliance will relieve it of any claim for
damages or other remedy by St. Francis; provided that under certain
circumstances specified in the Merger Agreement, a party may be entitled to
reimbursement of up to $80,000 of transaction-related expenses if the other
party's actions result in termination of the Merger Agreement.
RESALES OF ST. FRANCIS COMMON STOCK
The shares of St. Francis Common Stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares issued to any Reliance shareholder who is an
"affiliate" of Reliance for purposes of Rule 145 under the Securities Act.
Affiliates may not sell their shares of St. Francis Common Stock acquired in
connection with the Merger except pursuant to an effective registration
statement under the Securities Act covering such shares or in compliance with
Rule 145 or another applicable exemption from the registration requirements of
the Securities Act. This Proxy Statement/Prospectus does not cover any resales
of shares of St. Francis Common Stock received by persons who may be deemed to
be affiliates of Reliance. Persons who may be deemed to be affiliates of
Reliance generally include individuals or entities that control, are controlled
by or are under common control with Reliance, and may include certain officers
and directors as well as principal shareholders of Reliance.
Reliance has agreed in the Merger Agreement to use its best efforts to
cause each person who is an affiliate (for purposes of Rule 145 of the
Securities Act) of such party to deliver to St. Francis a written agreement
intended to ensure compliance with the Securities Act. Certificates surrendered
for exchange by an "affiliate" of Reliance will not be exchanged for
certificates representing shares of St. Francis Common Stock until St. Francis
has received such an agreement from such person.
NO APPRAISAL OR DISSENTERS' RIGHTS
Under the WBCL, holders of shares of a Wisconsin corporation quoted on the
NASDAQ Small-Cap Market on the record date for a meeting at which shareholders
are to vote on a merger are not entitled to appraisal or dissenters' rights.
Shares of Reliance Common Stock were quoted on the NASDAQ Small-Cap Market on
the Voting Record Date. Therefore, holders of Reliance Common Stock are not
entitled to dissenters' rights in connection with the Merger.
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DESCRIPTION OF ST. FRANCIS CAPITAL STOCK
The following summary of certain provisions of the Articles of
Incorporation of St. Francis (the "St. Francis Articles") and the Bylaws of St.
Francis (the "St. Francis Bylaws") does not purport to be complete and is
qualified in its entirety by reference to such instruments, each of which is
incorporated by reference to the Registration Statement. See "Available
Information" and "Incorporation of Certain Information by Reference."
GENERAL
St. Francis is authorized to issue 12,000,000 shares of St. Francis
Common Stock and 6,000,000 shares of preferred stock, $0.01 par value per share
("St. Francis Preferred Stock"). As of December 1, 1998, there were 4,635,265
shares of St. Francis Common Stock outstanding. As of the date of this Proxy
Statement/Prospectus, no shares of St. Francis Preferred Stock or any class or
series thereof were issued and outstanding; however, 120,000 shares of St.
Francis Preferred Stock have been designated as St. Francis Series A Junior
Participating Preferred Stock pursuant to St. Francis' shareholder rights plan
(see "Rights Plan"). St. Francis Common Stock is listed for trading on the
NASDAQ National Market System under the symbol "STFR." Each share of St. Francis
Common Stock has the same relative rights and is identical in all respects with
each other share of St. Francis Common Stock. Upon the issuance of St. Francis
Common Stock in connection with the terms of the Merger, all such shares will be
duly authorized, fully paid and nonassessable, subject to a limitation contained
in Section 180.0622 of the WBCL, as judicially interpreted, which provides that
shareholders of corporations such as St. Francis may be personally liable for
all debts owing to employees of the corporation for services performed for such
corporation for up to six months' services in any one case, but not in an amount
greater than the consideration paid for such shares.
ST. FRANCIS COMMON STOCK
Dividends. Subject to the prior rights of holders of any class or
series of St. Francis Preferred Stock, the holders of shares of St. Francis
Common Stock are entitled to such dividends as the St. Francis Board may declare
out of funds legally available therefor. The payment of dividends by St. Francis
is subject to limitations which are imposed by law and applicable regulations.
Voting Rights. Each holder of shares of St. Francis Common Stock has
one vote for each share held on all matters voted upon by shareholders, and
there are no cumulative voting rights in elections of directors. For a
description of certain laws which may reduce a shareholder's voting rights under
certain circumstances, see "--Changes in Control."
Preemptive Rights. The holders of shares of St. Francis Common Stock
are not entitled to preemptive rights with respect to any securities which may
be issued by St. Francis in the future. Therefore, holders of shares of St.
Francis Common Stock may be subject to dilution in the event St. Francis issues
additional shares of St. Francis Common Stock.
Issuance of Stock. The St. Francis Articles authorize the St. Francis
Board to issue authorized shares of St. Francis Common Stock without shareholder
approval, except as otherwise provided by the WBCL or other law, rule or
regulation.
Liquidation Rights. In the event of liquidation, dissolution or winding
up of St. Francis, whether voluntary or involuntary, the holders of St. Francis
Common Stock will be entitled to share ratably in any of its assets or funds
that are available for distribution to its shareholders after the satisfaction
of its liabilities (or after adequate provision is made therefor). If shares of
St. Francis Preferred Stock are issued, the holders thereof may have a priority
over the holders of St. Francis Common Stock in the event of liquidation or
dissolution.
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ST. FRANCIS PREFERRED STOCK
Pursuant to the St. Francis Articles, the St. Francis Board may,
without further action of St. Francis shareholders, (i) issue one or more new
classes or series of the authorized shares of St. Francis Preferred Stock, (ii)
fix the number of shares constituting any such new classes or series, and (iii)
fix the preferences, limitations and any other relative rights of the St.
Francis Preferred Stock or any class or series thereof. If issued, the St.
Francis Preferred Stock may be convertible into St. Francis Common Stock and may
rank prior to St. Francis Common Stock as to dividend rights, liquidation
preferences, or both. Accordingly, the issuance of St. Francis Preferred Stock
could adversely affect the rights of holders of St. Francis Common Stock. Except
for the designation of 120,000 shares of St. Francis Series A Junior
Participating Preferred Stock, $0.01 par value per share ("Series A Preferred
Stock"), pursuant to St. Francis' Rights Plan described below, the St. Francis
Board has not acted to designate or issue any shares of St. Francis Preferred
Stock.
RIGHTS PLAN
On September 25, 1997, the St. Francis Board adopted a shareholders'
rights plan (the "Rights Plan"). Under the terms of the Rights Plan, the St.
Francis Board declared a dividend of one preferred share purchase-right (a
"Right") for each outstanding share of St. Francis Common Stock. Upon becoming
exercisable, each Right entitles shareholders to buy one one-hundredth of a
share of St. Francis' Series A Preferred Stock at an exercise price of $150 per
share. Rights do not become exercisable until eleven business days after any
person or group has acquired, commenced, or announced its intention to commence
a tender or exchange offer to acquire 15% or more of outstanding shares of St.
Francis Common Stock, or in the event a person or group owning 10% or more of
outstanding shares of St. Francis Common Stock is deemed to be "adverse" to St.
Francis. If the Rights become exercisable, holders of each Right, other than the
acquiror, upon payment of the exercise price, will have the right to purchase
shares of St. Francis Common Stock (in lieu of Series A Preferred Stock) having
a value equal to two times the exercise price. If St. Francis is acquired in a
merger, share exchange or other business combination or 50% or more of its
consolidated assets or earning power are sold, Rights holders, other than the
acquiring or adverse person or group, will be entitled to purchase the
acquiror's shares at a similar discount. If the rights become exercisable, St.
Francis may also exchange Rights, other than those held by the acquiring or
adverse person or group, in whole or in part, at an exchange ratio of one share
of St. Francis Common Stock per Right held. Rights are redeemable by St. Francis
at any time until they are exercisable at the exchange rate of $.01 per Right.
Issuance of the Rights has no immediate dilutive effect, does not currently
affect reported earnings per share, is not taxable to St. Francis or its
shareholders, and will not change the way in which St. Francis' shares are
traded. The Rights expire in ten years. See "Incorporation of Certain
Information by Reference."
CHANGES IN CONTROL
Acquisitions of control of St. Francis and St. Francis Bank are subject
to various federal and state statutory regulatory restrictions. In addition to
these restrictions, certain provisions of the St. Francis Articles and St.
Francis Bylaws and the Rights Plan may have the effect of preventing,
discouraging or delaying a change in control of St. Francis.
Regulatory Restrictions. Acquisitions of 10% or more of any class of
equity security of St. Francis generally shall be subject to prior approval of
the OTS under the Home Owners' Loan Act of 1933, as amended ("HOLA"), which
generally requires all persons seeking to obtain control of a savings bank
indirectly through its holding company to obtain regulatory approval prior to
obtaining control. "Control" for this purpose generally is defined as the power,
directly or indirectly, to direct the management or policies of the institution
or to vote 25% or more of any class of voting securities of the institution.
Under OTS regulations, persons who (i) acquire the power to vote 10% or more of
any class of voting securities (or more than 25% of any class of nonvoting
stock) of an institution, and (ii) are subject to any one of eight "control
factors," are presumed to be in control and must obtain OTS approval prior to
acquiring control unless the presumption is rebutted. Under OTS regulations, a
person also shall be deemed, subject to rebuttal, to have acquired control of a
savings bank if the acquiror, directly or indirectly, or acting in concert with
one or more persons, holds any combination of voting stock and revocable and/or
irrevocable proxies representing more than 25% of any class of voting stock of a
savings bank, excluding proxies held in connection with a solicitation by, or in
opposition to, a solicitation on behalf of management of a savings bank, but
including a solicitation in connection with any election of directors, and such
proxies would enable the acquiror to (i) elect one-third or more of a savings
bank's board of directors, (ii) cause the savings bank's shareholders to approve
the acquisition or corporate reorganization of the savings bank, or (iii) exert
a continuing influence on a material aspect
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of the business operations of a savings bank. The OTS is specifically empowered
to disapprove an acquisition of control if it finds, among other reasons, that
(i) the acquisition would substantially lessen competition (ii) the financial
condition of the acquiring persons might jeopardize the savings bank or
depositors or (iii) the competency, experience or integrity of the acquiring
person indicates that it would not be in the best interest of the depositors,
the institution or the public to permit the acquisition of control by such
person.
Authorized but Unissued Shares of Capital Stock. The St. Francis Board
has the authority to issue shares of St. Francis Preferred Stock, in any class
or series with such rights and privileges, including voting rights, and
additional shares of St. Francis Common Stock. Except as otherwise required to
approve the transaction in which the additional shares are issued, shareholder
approval generally would not be required for the issuance of these shares.
Depending on the circumstances, however, shareholder approval may be required
pursuant to the requirements for continued quotation of shares of St. Francis
Common Stock on the NASDAQ National Market System or the requirements of any
exchange on which shares of St. Francis Common Stock may be listed.
One of the effects of the existence of unissued and unreserved shares
of capital stock may be to enable the St. Francis Board to render more difficult
or to discourage an attempt to obtain control of St. Francis by means of a
merger, tender offer, proxy context or otherwise, and thereby to protect the
continuity of St. Francis' management. If, in the due exercise of its fiduciary
obligations, for example, the St. Francis Board were to determine that a
takeover proposal was not in St. Francis' best interests, such shares could be
issued by the St. Francis Board without shareholder approval in one or more
private placements or other transactions that might prevent or render more
difficult or costly the completion of the takeover transaction by diluting the
voting or other rights of the proposed acquiror or insurgent shareholder group,
by creating a substantial voting block in institutional or other hands that
might undertake to support the position of the incumbent St. Francis Board, by
effecting an acquisition that might complicate or preclude the takeover offer,
or otherwise.
Classification of Board of Directors. The St. Francis Board is divided
into three classes, each serving three-year terms, so that approximately
one-third of the number of directors of St. Francis are elected at each annual
meeting of the shareholders of St. Francis. The St. Francis Articles provide
that the number of directors is to consist of not less than seven nor more than
25 members as fixed by the St. Francis Bylaws. The St. Francis Bylaws provide
that any vacancy occurring in the St. Francis Board shall be filled by a
majority vote of the directors then in office, and directors so chosen shall
hold office until the expiration of the term of office of the class to which
they have been elected by the directors. The classified board is intended to
provide for continuity of the St. Francis Board and to make it more difficult
and more time consuming for a shareholder group to fully use its voting power to
gain control of the St. Francis Board without the consent of the incumbent
members of the St. Francis Board.
Removal of Directors. The St. Francis Articles provide that a director
of St. Francis may be removed only for cause and by (i) the affirmative vote of
the holders of 80% of the issued and outstanding shares of capital stock then
entitled to vote generally in an election of directors, or (ii) a majority of
the total number of directors.
Business Combinations. The St. Francis Articles provide for the
restriction on offers and acquisitions of St. Francis by the election to be
subject to the WBCL sections restricting business combinations, as described
herein.
Under Section 180.1150(2) of the WBCL, the voting power of shares of an
"issuing public corporation," such as St. Francis, which are held by any person
in excess of 20% of the voting power in the election of directors shall be
limited (in voting on any matter) to 10% of the full voting power of such excess
shares, unless full voting rights have been restored at a special meeting of the
shareholders called for that purpose. This statute is a "scaled voting
rights/control share acquisition" statute and is designed to protect
corporations against uninvited takeover bids by reducing to one-tenth of their
normal voting power all shares in excess of 20% owned by an acquiring person.
Shares held or acquired under certain circumstances are excluded from the
application of Section 180.1150(2), including (among others) shares acquired
directly from St. Francis and shares acquired in a merger or share exchange to
which St. Francis is a party. Article IV of the St. Francis Articles provides
that St. Francis elects to be subject to the provisions of Section 180.1150 of
the WBCL, regardless of whether or not it would be deemed to be an "issuing
public corporation" for these purposes.
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Sections 180.1130 to 180.1134 of the WBCL provide generally that in
addition to the vote otherwise required by law or the articles of incorporation
of an "issuing public corporation," such as St. Francis, certain business
combinations not meeting certain fair price standards specified in the statute
must be approved by the affirmative vote of at least (i) 80% of the votes
entitled to be cast by the outstanding voting shares of the corporation, and
(ii) two-thirds of the votes entitled to be cast by the holders of voting shares
other than voting shares beneficially owned by a "significant shareholder" or an
affiliate or associate thereof who is a party to the transaction. The term
"business combination" is defined to include, subject to certain exceptions, a
merger or share exchange of the issuing public corporation (or any subsidiary
thereof) with, or the sale or other disposition of substantially all of the
property and assets of the issuing public corporation to, any significant
shareholder or affiliate thereof. "Significant shareholder" is defined generally
to mean a person that is the beneficial owner of 10% or more of the voting power
of the outstanding voting shares of the issuing public corporation. The statute
also restricts the repurchase of shares and the sale of corporate assets by an
issuing public corporation in response to a takeover offer. Article X of the St.
Francis Articles provides that St. Francis elects to be subject to the
provisions of Section 180.1130 to 180.1134 of the WBCL, regardless of whether or
not it would be deemed an "issuing public corporation" for these purposes.
Sections 180.1140 to 180.1144 of the WBCL prohibit certain "business
combinations" between a "resident domestic corporation," such as St. Francis,
and a person beneficially owning 10% or more of the voting power of the
outstanding voting stock of such corporation (an "interested shareholder")
within three years after the date such person became a 10% beneficial owner,
unless the business combination or the acquisition of such stock has been
approved before the stock acquisition date by the corporation's board of
directors. After such three year period, a business combination with the
interested shareholder may be consummated only with the approval of the holders
of a majority of the voting stock not beneficially owned by the interested
shareholder at a meeting called for that purpose, unless the business
combination satisfies certain adequacy-of-price standards intended to provide a
fair price for shares held by disinterested shareholders. Article X of the St.
Francis Articles provides that St. Francis elects to be subject to the
provisions of Sections 180.1140 to 180.1144 of the WBCL, regardless of whether
or not it would be deemed an "issuing public corporation" for these purposes.
Under the WBCL, a director or officer of the corporation, in
discharging his or her duties to the corporation and in determining what he or
she believes to be in the best interests of the corporation, may, in addition to
considering the effects of any action on shareholders, consider the effects of
the action on employees, suppliers and customers of the corporation, the effects
of the action on communities in which the corporation operates and any other
factors which the director or officer considers pertinent.
Amendment of St. Francis' Articles. The affirmative vote of the holders
of at least 80% of the issued and outstanding capital stock of St. Francis
entitled to vote generally in an election of directors is required to amend,
alter, change or repeal any provisions of the St. Francis Articles; provided,
however, that provisions relating to the corporate name and purpose must only be
approved by a majority of the total votes eligible to be cast. Notwithstanding
the foregoing, the St. Francis Articles may not be amended, altered, changed or
repealed without the vote of the holders of any class or series of St. Francis
Preferred Stock as may be required by the provisions establishing such class or
series. This requirement exceeds the majority vote of the outstanding stock that
would otherwise be required by the WBCL for the amendment or repeal of such
provisions of the St. Francis Articles.
Rights Plan. The WBCL gives Wisconsin corporations the authority to
adopt shareholder rights or option plans which adjust upon a reorganization,
merger, share exchange, sale of assets or other occurrence. Such rights or
option plans may include conditions that prevent the holder of a specified
percentage of the outstanding shares of the corporation, including subsequent
transferees of the holder, from exercising such rights or options. Generally,
these so-called "poison pill" rights or option plans give a corporation's
shareholders increased shares or value in the corporation or the acquiring
corporation and thereby make an acquisition more expensive for a hostile
acquiror. St. Francis adopted a Rights Plan on September 25, 1997. The Rights
Plan generally provides that the Rights will become exercisable when a person or
group attempts to acquire St. Francis in certain circumstances. The Rights will
cause substantial dilution to such person or group, and accordingly, the
existence of the Rights may defer certain potential acquirors from making
certain takeover proposals or tender offers. The Rights should not interfere
with any merger or business combination approved by the St. Francis Board since
the Rights may be redeemed by St. Francis. For a description of St. Francis'
Rights Plan, see "--Rights Plan."
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COMPARISON OF SHAREHOLDERS' RIGHTS
THIS SUMMARY CONTAINS A LIST OF THE MATERIAL DIFFERENCES IN
SHAREHOLDERS' RIGHTS BUT IS NOT MEANT TO BE RELIED UPON AS AN EXHAUSTIVE LIST OR
A DETAILED DESCRIPTION OF THE PROVISIONS DISCUSSED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE ST. FRANCIS ARTICLES, THE ST. FRANCIS BYLAWS, THE
RELIANCE ARTICLES, THE RELIANCE BYLAWS, THE WBCL AND THE ST. FRANCIS RIGHTS
AGREEMENT INCORPORATED BY REFERENCE HEREIN.
Upon the consummation of the Merger, shareholders of Reliance may
become shareholders of St. Francis. Since both St. Francis and Reliance are
incorporated under the laws of the State of Wisconsin, Reliance shareholders who
receive St. Francis Common Stock will continue to be subject to the privileges
and restrictions provided in the WBCL. In addition, the rights presently enjoyed
by Reliance shareholders under the relevant provisions of the Articles of
Incorporation of Reliance (the "Reliance Articles") and the Bylaws of Reliance
(the "Reliance Bylaws") differ in some respects from the rights they would have
as shareholders of St. Francis under the relevant provisions of the St. Francis
Articles and the St. Francis Bylaws.
VACANCIES ON THE BOARD OF DIRECTORS
St. Francis. The St. Francis Bylaws provide that any vacancy occurring
on the St. Francis Board may be filled by the affirmative vote of a majority of
the remaining directors, even if the number of remaining directors does not
constitute a quorum of the St. Francis Board. A director elected to fill a
vacancy shall hold office until the next succeeding annual election of directors
by the shareholders.
Reliance. The Reliance Bylaws provide that any vacancy occurring on the
Reliance Board may be filled by the affirmative vote of a majority vote of all
remaining directors, even if the number of remaining directors does not
constitute a quorum of Reliance Board; provided, however, that any vacancy
created by the removal of a director by vote of the shareholders at a meeting
called for such purpose may be filled by the vote of such shareholders at the
same meeting.
ADVANCE NOTICE OF NOMINATIONS OF DIRECTORS AND SHAREHOLDER PROPOSALS.
St. Francis. Pursuant to Article VII of the St. Francis Articles, any
shareholder nomination of a director or proposal for any business to be
considered at any annual or special meeting of shareholders must be received by
the Secretary of St. Francis not later than the close of business on the tenth
day following the day on which notice of the meeting was mailed to shareholders.
Reliance. Pursuant to Article VII of the Reliance Articles and Article
II of the Reliance Bylaws, any shareholder nomination of a director or proposal
for any business to be considered at any annual or special meeting of
shareholders must be received by Reliance: (i) with respect to proposals to be
brought before an annual meeting, not less than 60 days nor more than 90 days
prior to the date of the previous year's annual meeting of shareholders, or in
the event no annual meeting was held in the previous year, no later than ten
days following the date notice of the annual meeting is mailed to shareholders;
and (ii) with respect to proposals to be brought before a special meeting, not
later than the close of business on the tenth day following the date notice of
such special meeting is mailed to shareholders.
SHAREHOLDER RIGHTS PLAN
St. Francis. On September 25, 1997, the St. Francis Board declared a
dividend of one Right for each outstanding share of St. Francis Common Stock to
shareholders of record at the close of business on October 10, 1997. For a
description of the Rights and the related Rights Plan, together with a
discussion of the effects of the Rights, see "Description of St. Francis Capital
Stock--Rights Plan."
Reliance. The Reliance Board has not adopted a shareholder rights plan.
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BUSINESS OF THE PARTIES TO THE MERGER
ST. FRANCIS
GENERAL
St. Francis, a Wisconsin corporation, was incorporated on December 18,
1992 for the purpose of becoming the holding company for St. Francis Bank upon
St. Francis Bank's conversion from a federally-chartered mutual savings bank to
a federally-chartered stock savings bank. This transaction was completed in June
1993. In November 1994, St. Francis consummated the acquisition of the stock of
Valley Bank East Central in Kewaskum, Wisconsin as well as the acquisition of
the deposits and certain assets of the Hartford, Wisconsin branch of Valley Bank
Milwaukee. The acquired bank offices were combined as a commercial bank named
Bank Wisconsin. In February 1997, St. Francis completed the acquisition of
Kilbourn State Bank in Milwaukee, Wisconsin, which subsequently was merged into
Bank Wisconsin. In September 1997, Bank Wisconsin was merged into St. Francis
Bank, with St. Francis Bank being the surviving entity. At September 30, 1998,
St. Francis had total assets of $1.9 billion, total deposits of $1.2 billion and
shareholders' equity of $121.5 million. St. Francis has not engaged in any
significant activity other than holding the stock of St. Francis Bank. St.
Francis Bank is regulated by the OTS and its deposits are insured up to
applicable limits under the SAIF of the FDIC. St. Francis Bank's principal
business consists of attracting retail deposits from the general public and
investing those deposits, together with funds generated from other operations,
primarily to originate mortgage, consumer and other loans within its primary
market area and to invest in mortgage-backed and related securities, and to a
lesser extent, debt and equity securities. Primary areas of lending include
single-family and multi-family residential mortgages, home equity lines of
credit, second mortgages, commercial real estate and commercial loans. At
September 30, 1998, St. Francis operated 25 banking offices in Wisconsin. The
principal executive offices of St. Francis are located at 13400 Bishops Lane,
Suite 350, Brookfield, Wisconsin 53005-6203, and its telephone number is (414)
486-8700.
Additional information concerning St. Francis is included in the St.
Francis 1998 Annual Report. See "Incorporation of Certain Information by
Reference."
RELIANCE
GENERAL
Reliance was formed for the purpose of owning all of the outstanding
stock of Reliance Savings Bank issued in the mutual to stock conversion of the
Bank (the "Conversion"). The Conversion was consummated on April 18, 1996;
Reliance issued 2,562,344 shares of Reliance Common Stock in exchange for
proceeds of $20.5 million, and Reliance purchased all of the issued and
outstanding shares of common stock of Reliance Savings Bank for $9.5 million.
Reliance Savings Bank is regulated by the WDFI and the FDIC. Reliance Savings
Bank's deposits are insured up to the applicable limits by the SAIF of the FDIC.
Reliance Savings Bank also is a member of the FHLB system. Reliance Savings Bank
was organized in 1922, and has one full service office located in Milwaukee
County, Wisconsin. Because Reliance's only significant business operations are
that of Reliance Savings Bank, the business of Reliance Savings Bank is
essentially the only business of Reliance.
Reliance Savings Bank is a community oriented financial institution
which emphasizes retail financial services to individuals and consumers within
its market areas. Reliance Savings Bank's principal business is attracting
retail deposits from the general public and investing those deposits, together
with funds generated from other operations, primarily to originate residential
mortgage loans within its primary market areas and invest in mortgage-backed
securities and investment securities. The principal lending is on one-to
four-family owner-occupied homes, including ARM loans, and to lesser extent,
Reliance Savings Bank also originates, multi-family, other consumer,
commercial/non-residential and residential construction loans. Reliance Savings
Bank invests a significant portion of its assets in investment securities and
mortgage-backed securities, including U.S. Government and federal agency
securities, short-term liquid assets and other marketable securities. Reliance
Savings Bank's revenues are derived principally from interest on its mortgage
loan portfolio, interest on mortgage-backed securities and interest and
dividends on its investment securities. Reliance Savings Bank's principal
sources of funds are received from deposits, repayments on loans and
mortgage-backed and related securities.
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MARKET AREA AND COMPETITION
Reliance Savings Bank offers a variety of loan and deposit products and
banking services primarily within the metropolitan Milwaukee area. Reliance
Savings Bank's office is located at 3140 South 27th Street, Milwaukee,
Wisconsin. The City of Milwaukee is located along the western shore of Lake
Michigan, and is the largest metropolitan statistical area ("MSA") within the
State of Wisconsin. The Milwaukee MSA includes Milwaukee, Waukesha, Ozaukee and
Washington counties. Reliance Savings Bank's primary market area consists of the
Milwaukee MSA, which in 1994 was the nation's 35th largest MSA. The Milwaukee
MSA includes a diverse economic base, including business, industry and
agriculture, and of the nation's 35 largest MSAs, Milwaukee ranked third in the
percentage of its work force in manufacturing. Major employers include Johnson
Controls, Inc., Harnischfeger Industries, Inc., Briggs & Stratton Corp.,
Harley-Davidson, Inc., A.O. Smith Corp., Allen-Bradley Co., GE Medical Systems,
Miller Brewing Co., Master Lock Co., W.H. Brady Co., Quad/Graphics, Inc.,
Northwestern Mutual Life Insurance Co., and the home offices of numerous other
insurance companies and financial institutions. The Milwaukee MSA has 11
colleges and universities each with enrollments exceeding 1,000 students,
including the Milwaukee campus of the University of Wisconsin and Marquette
University.
Many of Reliance Savings Bank's present customers and businesses are
centralized within Reliance Savings Bank's local market area. Reliance Savings
Bank's local market area, generally defined as an area within a three-mile
radius of Reliance Savings Bank's office, has experienced limited population
growth, reduced employment and recessionary economic conditions in recent years.
Reliance Savings Bank's local market area has experienced modest population
declines in the last five years and decreasing median household income levels in
the last five years, and both of these trends are expected to continue. The
median household and per capita income levels of Reliance Savings Bank's local
market area are below the Milwaukee MSA average, and may be a reflection of the
area's primarily blue collar labor force and the migration of a large portion of
the white collar residents to outlying suburban areas. Additionally, this local
market area has experienced a general weakening of real estate values and a
slow-down of home sales and construction. These factors, along with intensified
competition from other financial institutions and mortgage brokers, have
resulted in a diminishing demand for permanent one-to four-family mortgage loans
and for deposit products in Reliance Savings Bank's local market area.
Reliance Savings Bank's local market area has a high density of
financial institutions, most of which are significantly larger and have greater
financial resources than Reliance Savings Bank. Reliance Savings Bank has
significant competition in both its mortgage and consumer lending business, as
well as in attracting deposits. Reliance Savings Bank's competition for loans is
principally from other thrift institutions, savings banks, mortgage banking
companies, insurance companies and commercial banks. Its most direct competition
for deposits historically has come from other thrifts, savings banks, commercial
banks and credit unions. Because of the lower interest rate environment over the
past several years, Reliance Savings Bank has faced additional competition for
funds from a number of institutions, including the availability of short-term
money market funds and other corporate and government securities funds offered
by other financial service companies, such as brokerage firms and insurance
companies.
LENDING ACTIVITIES
General. The largest component of Reliance Savings Bank's gross loan
portfolio, which totaled $30.7 million at June 30, 1998, was first mortgage
loans secured by owner-occupied one-to four-family residences. At June 30, 1998,
one-to four-family mortgage loans totaled $9.3 million or 30.31% of gross loans.
Of the total one-to four-family mortgage loans, $2.7 million or 29.03% were
balloon loans or ARM loans. Of the non-one-to four- family held at June 30,
1998, 24.37% or $7.5 million were commercial real estate loans, 9.17% or $2.8
million were residential construction loans, 11.14% or $3.4 million were
multi-family mortgage loans, 24.42% or $7.5 million were commercial construction
and land development loans, and the balance were in consumer loans.
The aggregate amount of loans that Reliance Savings Bank is permitted
to make under applicable state regulations to any one borrower, including
related entities, is generally an amount up to 15% of Reliance Savings Bank's
capital plus an additional 10% for loans fully secured by readily marketable
collateral. At June 30, 1998, the maximum amount which Reliance Savings Bank
could lend under these limits to any one borrower and a borrower's related
entities was $3.3 million. At June 30, 1998, Reliance Savings Bank had loans or
groups of loans to related borrowers with outstanding balances of $4.3 million.
Reliance Savings Bank has effectuated a $4.0 million participation agreement
with St. Francis reduce the loans to below the limitation. At June 30, 1998,
Reliance Savings Bank had nine borrowers or groups of borrowers with outstanding
lending relationships in excess of $400,000, for a total of $11.5 million, all
of which loans are performing in accordance with their terms. Reliance Savings
Bank's single largest borrowing relationship at June 30, 1998 had multiple loans
aggregating $4.3 million. All of such loans are performing in accordance with
their terms.
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Composition of Loan Portfolio. The following tables sets forth the
composition of Reliance Savings Bank's loan portfolio in dollar amounts and in
percentages of the respective portfolios at the dates indicated
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------
1996 1997 1998
---- ---- ----
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family............. $ 10,745 40.46% $11,035 37.04% $ 9,315 30.31%
Multi-family.................... 4,585 17.26 4,604 15.45 3,423 11.14
Commercial real estate.......... 4,163 15.68 5,376 18.05 7,489 24.37
Residential construction........ 4,311 16.23 4,899 16.44 2,817 9.17
Commercial construction/
land development.............. 2,390 9.00 3,521 11.82 7,503 24.42
-------- ----- ------ ------ ------ ------
Total mortgage loans................ 26,194 98.63 29,435 98.80 30,547 99.41
CONSUMER LOANS:
Home equity 356 1.34 355 1.19 177 0.58
Other consumer 7 0.03 2 0.01 2 0.01
-------- ----- ------ ------ ------ ------
Total consumer loans 363 1.37 357 1.20 179 0.59
-------- ----- ------ ------ ------ ------
Gross loans receivable 26,557 100.00% 29,792 100.00% 30,726 100.00%
LESS: ====== ====== ======
Undisbursed loan proceeds 3,366 1,890 4,595
Allowance for loan losses 126 147 169
Deferred loan fees and
discounts 134 154 164
-------- ------ ------
Total additions/deductions 3,626 2,191 4,928
-------- ------ ------
Loans receivable, net $ 22,931 $27,061 $25,798
======== ======= =======
</TABLE>
Contractual Principal Repayments. The following table sets forth the
maturity or period to repricing of Reliance Savings Bank's loan portfolio at
June 30, 1998. Loans that have adjustable rates are shown as being due in the
period during which the interest rates are next subject to change. The table
does not include prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------------------------------------------------------
ONE- TO FAMILY/NON- CONSUMER
FOUR-FAMILY(1) RESIDENTIAL(1) LOANS TOTAL LOANS
-------------- -------------- ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AMOUNTS DUE(2):
Within one year....................... $ 2,563 $ 2,798 $ 17 $ 5,378
After one year:
Two to three years .......... 3,527 12,140 150 15,817
Three to five years ......... 216 74 -- 290
Five to ten years ........... 629 1,058 11 1,698
Ten to 20 years ............. 1,346 754 -- 2,100
Over 20 years ............... 4,129 1,314 -- 5,443
--------- --------- ------ --------
Total due or repricing
after one year........... 9,847 15,340 161 25,348
--------- --------- ------ --------
Total amounts due or
repricing ............... 12,410 18,138 178 30,726
LESS:
Deferred fees and discounts .......... (50) (114) -- (164)
Allowance for loan losses ............ (66) (102) (1) (169)
--------- --------- ------ --------
Gross loans receivable ...... $ 12,294 $ 17,922 $ 177 $ 30,393
========= ========= ====== ========
</TABLE>
- ---------------
[FN]
(1) Includes some construction loans.
(2) These amounts are net of loans in process.
[FN]
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The following table sets forth at June 30, 1998 the dollar amount of
all loans and mortgage-backed securities due or scheduled to reprice after one
year, and whether such loans have fixed or adjustable interest rates. Loans that
have adjustable rates are shown as being due in the period during which the
interest rates are subject to change.
<TABLE>
<CAPTION>
DUE OR REPRICING
AFTER JUNE 30, 1999
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family....................................... $ 8,872 $ 975 $ 9,847
Multi-family/non-residential(1)........................... 11,403 3,937 15,340
Consumer loans ............................................... 161 -- 161
-------- -------- ---------
Gross loans receivable ................................ 20,436 4,912 25,348
Mortgage-backed securities ................................... 420 -- 420
-------- -------- ---------
Gross loans receivable and mortgage-backed
securities............................................. $ 20,856 $ 4,912 $ 25,768
======== ======== =========
</TABLE>
- ---------------
[FN]
(1) Includes some construction loans.
(2) These amounts are net of loans in process.
</FN>
One-to Four-Family and Residential Construction Lending. Reliance
Savings Bank originates first mortgage loans secured by one-to four-family
owner-occupied residences and residential construction loans within Reliance
Savings Bank's primary lending area. All of Reliance Savings Bank's first
mortgage loans are originated for Reliance Savings Bank's own loan portfolio. At
June 30, 1998, $12.1 million, or 39.50%, of Reliance Savings Bank's gross loan
portfolio consisted of loans secured by one-to four-family residential
properties, which amount included residential construction loans. Of the one-to
four-family residential mortgage loans in Reliance Savings Bank's gross loan
portfolio, $2.8 million were in Reliance Savings Bank's residential construction
loan category. At June 30, 1998, $9.4 million, or 77.69% of Reliance Savings
Bank's one-to four-family residential mortgage loans consisted of fixed rate
loans and $2.7 million, or 22.31%, consisted of balloon loans and ARM loans. At
June 30, 1998, the average outstanding one-to four-family loan balance was
$75,000 and the largest outstanding one-to four-family loan balance was
$548,000.
Because of the highly competitive mortgage loan market in which
Reliance Savings Bank originates loans, a variety of mortgage products are
available from Reliance Savings Bank, with a variety of interest rates, fees and
other origination terms. Reliance Savings Bank offers conventional fixed rate
mortgage loans and ARM loans with maturity dates which typically range from 15
to 30 years. Residential mortgage loans generally are underwritten to Federal
Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FMNA"), and other agency guidelines. Reliance Savings Bank rarely originates
loans in excess of these agency limits; however, if Reliance Savings Bank does
originate jumbo loans, the loans are underwritten in accordance with Reliance
Savings Bank's underwriting guidelines and are retained in Reliance Savings
Bank's loan portfolio. Reliance Savings Bank charges origination fees ranging
from zero to two points on mortgage loans. The interest rates charged on
mortgage loans at any given date will vary, depending upon the amount of
origination points to be paid. The interest rate at which Reliance Savings Bank
offers to grant a mortgage loan also are determined by the secondary market
pricing for comparable mortgage-backed securities, local mortgage loan
competition and Reliance Savings Bank's yield requirements.
Mortgage loan originations are solicited from real estate brokers,
builders, developers, existing or past customers and residents of the local
communities located in Reliance Savings Bank's primary market area. Reliance
Savings Bank advertises its product offerings in newspapers and other media
circulating throughout its primary market area in addition to its officers
soliciting prospects. Upon receipt of a completed mortgage application from a
prospective borrower, a credit report is ordered, income and other information
is verified, and, as necessary, additional financial information is requested.
An appraisal of the real estate that is to secure the loans is required. It is
Reliance Savings Bank's policy to obtain title insurance on all real estate
first mortgage loans. Borrowers must
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present evidence of appropriate hazard insurance and flood insurance (if
applicable) prior to the closing. The lending policy of Reliance Savings Bank
restricts mortgage loans to 80% of the lesser of the appraised value or purchase
price of the real estate to be mortgaged by Reliance Savings Bank. Reliance
Savings Bank makes mortgage loans to 95% of the lesser of the appraised value or
purchase price, subject to the availability of private mortgage insurance
insuring the amount in excess of 75% of the loan. Reliance Savings Bank reviews
all the pertinent information and makes a credit decision for approval or denial
within established Reliance Savings Bank guidelines. Most recommendations to
deny applications based on underwriting considerations are reviewed by Reliance
Savings Bank's President prior to a final loan denial. All one-to four-family
mortgage loan applications are reviewed on a monthly basis by the Board of
Directors. Mortgage loans in Reliance Savings Bank's loan portfolio include
due-on-sale clauses, which provide Reliance Savings Bank with the contractual
right to deem the loan immediately due and payable in the event the borrower
transfers the ownership of the property without Reliance Savings Bank's consent.
Reliance Savings Bank enforces the due-on-sale clauses of its mortgage loans.
Reliance Savings Bank originates one and three year ARM loans. Reliance
Savings Bank's one-year ARM loans typically adjust to a maximum of 200 basis
points per year, with a lifetime cap of approximately 600 basis points above the
interest rate established at the origination date of the ARM loan. Monthly
payments of principal and interest are adjusted when the interest rate adjusts,
in order to maintain full amortization of the mortgage loan within a maximum
30-year term. Reliance Savings Bank does not offer ARM loans which provide for
negative amortization. Reliance Savings Banks three-year ARM loans adjust
annually after the initial three year term. The initial rate offered on ARM
loans fluctuates with general interest rate changes, and are predetermined by
secondary market pricing, competitive conditions and Reliance Savings Bank's
yield requirements. Currently, Reliance Savings Bank primarily utilizes the
Seventh District Cost of Funds Index, plus a margin, in order to determine the
interest rate payable upon the adjustment date of its ARM loans outstanding. In
order to minimize the risk associated with ARM loans, borrowers under ARM
programs are qualified at the higher of the initial offering rate or the
fully-indexed rate and with a specified minimum interest rate. None of the ARM
loans are granted with conversion options. As compared to fixed rate loans, ARM
loans generally pose different risks. In a rising interest rate environment, the
underlying loan payment rises, which increases the potential for default by the
borrower. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In a decreasing interest rate
environment, mortgagors tend to refinance into fixed rate loans.
Reliance Savings Bank also offers one-to four-family mortgage loans
with balloon features. Under these loans, the interest rate and monthly payment
are fixed for the initial term, which is usually one to five years, and
thereafter, provided certain conditions are met at maturity, the loan would be
paid off in full or renewed at the then-current rate.
Reliance Savings Bank also offers owner-occupied one-to four-family
residential construction loans. Residential construction loans are underwritten
in conjunction with the regular first mortgage loans and terminate upon
completion of the project. At June 30, 1998, Reliance Savings Bank had 17 one-to
four-family construction loans in its portfolio, aggregating $2.8 million, and
the average outstanding residential construction loan balance was $166,000; the
largest outstanding residential construction loan balance was $548,000. Because
most residential construction loans are ARM loans, residential construction
loans afford Reliance Savings Bank the opportunity to decrease the interest rate
sensitivity of its loan portfolio and to receive yields on fixed rate loans
higher than those obtainable on fixed rate loans secured by existing one-to
four-family residential properties. These higher yields, however, correspond to
the higher risks associated with residential construction loans. Loan proceeds
are disbursed in increments as construction of the residence progresses. Title
company disbursement agents are utilized to clear all lien waivers and ensure
Reliance Savings Bank's first lien position. These loans are structured to allow
borrowers to pay interest only on the funds advanced during the construction
period, which is generally six months. In most cases, Reliance Savings Bank
structures residential construction loans to automatically convert to a regular
first mortgage loan upon completion of the project and when certification of
occupancy has been obtained.
Upon completion of construction, residential construction loans
generally become either 30-year fixed rate loans or ARM loans with one- and
three-year interest rate adjustments. Residential construction loans made in
conjunction with the first mortgage have a loan-to-value ratio limit not to
exceed 95%. As with other one-to four-family residential mortgage loans, when
the loan to value exceeds 80%, private mortgage insurance is required. Coverage
is required to reduce Reliance Savings Bank's exposure to 75% of the value or
less.
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Reliance Savings Bank offers one-to four-family residential
construction loans to home builders for speculation and model homes. These
residential construction loans convert to one-year ARM loans and typically are
made at loan-to-value ratios of 80% or less. Payment terms are generally
interest only for 12 months. Thereafter, the borrower is required to begin
principal and interest payments to fully amortize the loan. Loan proceeds are
disbursed in increments as construction of the residence progresses.
Construction lending is generally considered to involve a higher degree
of credit risk than residential mortgage lending. Reliance Savings Bank's risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and the
estimated cost (including interest) of construction. If the estimate of the
value proves to be inaccurate, Reliance Savings Bank may be confronted with, at
or before maturity of the loan, loan security with a value that is insufficient
to assure full repayment. In addition, construction lending entails the risk
that the project may not be completed due to cost overruns or changes in market
conditions. These risks are compounded in Reliance Savings Bank's case because
it lends large amounts of money to several home builders that, in turn, use the
funds to finance the construction of homes for speculation and model homes. If a
builder experiences financial problems that affects its ability to complete
homes for which Reliance Savings Bank has advanced construction funds, Reliance
Savings Bank has more credit risk than if it had made one residential
construction loan to a single borrower because the credit is concentrated in
that single borrower. Moreover, a builder's ability to repay construction loans
will be dependent on the builder's ability to sell the newly constructed homes
upon completion, which can be adversely affected by changes in the economy, the
market for housing and the demand for, and the supply of, homes constructed by
that builder.
At June 30, 1998, the largest aggregate amount of loans outstanding to
any one borrower totaled $4.3 million, and consisted of three commercial
properties and four single family properties located in Waukesha County,
Wisconsin. At June 30, 1998, all of these loans were current and performing in
accordance with their terms. These loans did exceed the regulatory "loans to one
borrower" limitation at June 30, 1998. Reliance Savings Bank has effectuated a
$4.0 million participation agreement with St. Francis to reduce the loans to
below the limitation.
Multi-Family Lending. Reliance Savings Bank originates or participates
in fixed rate and ARM loans secured by multi-family properties. Reliance Savings
Bank holds in its loan portfolio 13 multi-family loans which at June 30, 1998
totaled $3.4 million, or 11.14% of Reliance Savings Bank's gross loans. The
average outstanding loan balance on each multi-family loans at June 30, 1998 was
$263,300. All payments under multi-family loans originated by Reliance Savings
Bank were current and performing in accordance with their terms at June 30,
1998. All of Reliance Savings Bank's multi-family loans are secured by
properties located in Reliance Savings Bank's primary market area. The rates
charged on Reliance Savings Bank's ARM multi-family loans are typically 25 to 50
basis points higher than on one-to four-family residential properties.
Multi-family ARM loans typically adjust in a manner similar to that of Reliance
Savings Bank's other ARM loans. An origination fee of 1% to 2% is usually
charged on such loans.
Multi-family loans generally are underwritten in amounts of up to 80%
of the lesser of the appraised value or purchase price of the underlying
property. The underlying properties typically are apartment buildings generally
with 24 or less units. Appraisals on properties which secure multi-family loans
are performed by an independent appraiser designated by Reliance Savings Bank at
the time the application is submitted. All appraisals on multi-family loans are
reviewed by Reliance Savings Bank management. In underwriting such loans,
Reliance Savings Bank primarily considers the net operating income generated by
the real estate to support the debt service, the financial resources and income
level of the borrower and Reliance Savings Bank's experience with the borrower.
To assess the ability of a property to adequately service debt, Reliance Savings
Bank uses debt service coverage ratios which will vary depending upon the size
of the loan, and the verification of the borrower's credit history, and analysis
of the borrower's income, personal financial statements and banking
relationships, a review of the property, including cash flow projections and
historical operating results, and an analysis of the borrower's experience in
owning or managing similar properties. Reliance Savings Bank evaluates all
aspects of multi-family lending in order to mitigate risk to the extent
possible. Reliance Savings Bank seeks to ensure that the property securing the
loans will generate sufficient cash flow to adequately cover operating expenses
and debt service payments. Typically, individuals guarantee all of the their
multi-family loans.
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<PAGE> 83
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to four-family mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loans may be impaired. Despite the risk inherent in
multi-family real estate lending, Reliance Savings Bank's delinquent
multi-family loans as a percentage of gross loans has been minimal.
The largest multi-family loan at June 30, 1998 had an outstanding
balance of $797,800 and was secured by a 16-unit apartment building located in
Pewaukee, Wisconsin. At June 30, 1998, this loan was current and performing in
accordance with its terms.
Commercial Real Estate Lending. Reliance Savings Bank originates or
participates in commercial real estate loans secured generally by small office
buildings, apartment buildings, hotels, and small industrial/manufacturing
buildings. At June 30, 1998, Reliance Savings Bank's commercial real estate loan
portfolio consisted of 23 loans totaling $7.5 million, or 24.37%, of Reliance
Savings Bank's gross loan portfolio. Reliance Savings Bank's underwriting
standards provide that commercial real estate loans generally may be made in
amounts up to 80% of the appraised value of the property, subject to Reliance
Savings Bank's current loans-to-one-borrower limit. These loans may be made with
terms ranging from three years to 25 years, fully amortized, and generally are
offered at interest rates which are fixed at prevailing market rates or which
adjust in accordance with the Seventh District Cost of Funds index. Some of
Reliance Savings Bank's commercial loans are balloon loans. Balloon loan
payments generally are amortized on a 15-year to 25-year basis with a typical
maturity of three to five years. Reliance Savings Bank generally has required
that the properties securing commercial real estate loans have debt service
coverage ratios of at least 1.0% to 1.5%.
The average outstanding loan balance on each commercial/non-residential
loan at June 30, 1998 was $325,600. The largest commercial real estate loan at
June 30, 1998 had an outstanding balance of $1,329,000 and was secured by an
office building located in Brookfield, Wisconsin. The concentration of
commercial real estate loans to one borrower totaled $1,526,700 at June 30, 1998
and consisted of two loans secured by an office building in Brookfield,
Wisconsin. All payments under Reliance Savings Bank's commercial real estate
loans were current at June 30, 1998.
The risks associated with commercial real estate lending are similar to
the risks associated with multi-family lending. To minimize these risks,
Reliance Savings Bank generally imposes similar underwriting standards in
connection with commercial real estate lending as it does with multi-family
lending. Commercial real estate loans generally are underwritten in amounts of
up to 80% of the lesser of the appraised value or purchase price of the
underlying property. Appraisals on properties which secure commercial real
estate loans are performed by an independent appraiser designated by Reliance
Savings Bank at the time the application is submitted. All appraisals on
commercial real estate loans are reviewed by Reliance Savings Bank management.
In addition, Reliance Savings Bank's underwriting procedures require
verification of the borrower's credit history, and analysis of the borrower's
income, financial statements and banking relationships, a review of the
borrower's property management experience and references and a review of the
property, including cash flow projections and historical operating results.
Reliance Savings Bank evaluates all aspects of commercial real estate lending in
order to mitigate risk to the extent possible. Reliance Savings Bank seeks to
ensure that the property securing the loans will generate sufficient cash flow
to adequately cover operating expenses and debt service payments. In addition,
Reliance Savings Bank obtains financial statements on an annual basis to monitor
cash flow and financial condition.
Commercial Construction and Land Development Lending. Reliance Savings
Bank also provides construction loans secured by multi-family projects and
commercial real estate land development loans. At June 30, 1998, Reliance
Savings Bank's commercial construction and land development loan portfolio
totaled $7.5 million. Reliance Savings Bank's commercial construction and land
development lending more than doubled between 1997 and 1998. The construction
loans secured by multi-family projects usually will involve the construction of
8-unit to 24-unit apartment complexes. The construction loans secured by
commercial real estate properties typically will involve hotels or motels and
office and warehouse buildings. Reliance Savings Bank will originate land
development
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loans to local developers for the purpose of developing the land (i.e., roads,
sewer and water). Construction loans secured by multi-family projects and
commercial real estate and land development loans generally are made to existing
customers of Reliance Savings Bank and developers and contractors with which
Reliance Savings Bank has had previous lending experience, or will involve the
purchase of a participation interest from another financial institution.
Multi-family and commercial real estate construction loans typically are
originated as a one-year ARM loan, while land development loans typically are
originated as a three-year ARM loan or a three-year fixed rate balloon loan.
Multi-family and commercial real estate construction loans and land development
loans typically are originated with interest only payments made during
construction with amortization beginning upon completion. Balloon loan payments,
however, are amortized on a 15-year to 25-year basis with a typical loan
maturity of three years. These loans are priced at 250 to 350 basis points above
the rate on U.S. Treasury securities for comparable maturities. Typically, these
loans are made in amounts not to exceed 80% of an independent appraisal for
multi-family or commercial real estate lending and 75% of appraisal on land
development loans. These appraisals are made to reflect absorption rates in the
marketplace for both loan types and discounted for carrying costs and cost of
sale regarding land development lending. Reliance Savings Bank monitors
individual draws with funds disbursed based on actual work in progress, a
contractor's affidavit and an acceptable on-site inspection report. All
multi-family and commercial real estate construction loans and all land
development loans require a Phase I environmental audit prior to commitment.
At June 30, 1998, Reliance Savings Bank had no multi-family
construction loans in its loan portfolio; several commercial real estate
construction loans in its loan portfolio, the largest consisting of a loan of
$1,965,000 secured by an office building construction project located in
Brookfield, Wisconsin; and two land development loans with an outstanding
balance of $3,200,000 in its loan portfolio, secured by residential subdivision
property located in Johnson Creek, Wisconsin. At June 30, 1998, all of these
loans were current and performing in accordance with their terms.
Commercial construction and land development lending generally is
considered to involve a higher degree of risk than one-to four-family mortgage
lending. Like residential construction loans to builders for speculation and
model homes, commercial construction and land development loans involve inherent
risks due to the extension of large amounts of credit to a single borrower. But
the risks associated with commercial construction and land development loans are
greater than those involved in residential construction because the individual
projects tend to be much larger. Accordingly, if the builder cannot complete the
commercial project or land development for which the loan is made, the risk of
default is high and the amount of credit advanced is large. Furthermore, even if
a commercial project is completed, repayment of the construction loan is
contingent on the builder's ability to sell the property, which in turn, is
often subject to the market prospects for leasing the property. Land development
loans are especially risky, since the credit is secured by raw land. If the
borrower were to default on the loan, Reliance Savings Bank would own the land,
which would not be as readily marketable as developed property and Reliance
Savings Bank may need to invest additional funds in the property to improve its
marketability. Reliance Savings Bank believes this lending activity affords
Reliance Savings Bank the opportunity to invest in relatively higher-yielding
assets with shorter terms to maturity and repricing than in the case with one-to
four-family mortgage lending. Therefore, Reliance Savings Bank is pursuing these
lending opportunities to increase its loan portfolio.
Other Consumer Lending. Reliance Savings Bank originates a variety of
other consumer loans, generally consisting of home improvement loans and loans
secured by savings accounts. At June 30, 1997 and 1998, Reliance Savings Bank's
consumer loans totaled $357,000 and $179,000, respectively, or 1.20% and 0.59%,
respectively, of gross loans at those dates. Home equity loans comprised 99.4%
and 98.9% of other consumer loans at June 30, 1997 and 1998, respectively.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more risk than mortgage loans because of
the type and nature of the collateral and, in certain cases, the absence of
collateral.
The underwriting standards generally employed by Reliance Savings Bank
for other consumer loans include a determination of the applicant's payment
history on other debts and assessment of the borrower's ability to meet payments
on the proposed loans along with existing obligations. In addition to the
credit-worthiness of the applicant, the underwriting process also includes a
comparison of the value of the security in relation to the proposed loan amount.
Upon receipt of completed consumer loan application from a prospective borrower,
a credit report is ordered, income and other information is verified and, if
necessary, additional financial information is required.
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<PAGE> 85
For all consumer loans, Reliance Savings Bank's underwriters review all
pertinent information prior to making a credit decision. Consumer loans may
entail greater risk than residential mortgage loans, particularly in the case of
consumer loans which are unsecured or secured by rapidly depreciating assets
such as automobiles. Although the level of delinquencies in Reliance Savings
Bank's consumer loan portfolio has been low, there can be no assurance the
delinquencies will not increase in the future.
LOAN ORIGINATIONS, SALES AND PURCHASES
The following table sets forth Reliance Savings Bank's loan
originations and principal repayments for the periods indicated. During the
periods, Reliance Savings Bank did not purchase or sell any loans.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS (GROSS):
At beginning of period...................... $ 21,936 $ 26,194 $ 29,435
Mortgage loans originated:
One- to four-family................... 3,236 233 1,992
Multi-family.......................... -- 332 --
Commercial real estate................ 1,965 200 1,352
Residential construction.............. 3,160 4,815 4,095
Commercial construction/
land development.................... 940 2,893 6,206
--------- --------- ---------
Total mortgage loans
originated....................... 9,301 8,473 13,645
Principal repayments..................... (5,043) (5,232) (12,533)
Sales of loans........................... -- -- --
Mortgage loans purchased(1)................. -- -- --
--------- --------- ---------
At end of period............................ $ 26,194 $ 29,435 $ 30,547
========= ========= =========
CONSUMER LOANS (GROSS):
At beginning of period...................... $ 12 $ 363 $ 357
Loans originated......................... 371 -- --
Principal repayments..................... (20) (6) (178)
--------- --------- ---------
At end of period............................ $ 363 $ 357 $ 179
========= ========= =========
</TABLE>
- -----------
[FN]
(1) Mortgage loan purchases consist of whole loans purchased by Reliance
Savings Bank from various other lending institutions. Mortgage loan
participation are included in the appropriate loan category.
</FN>
Sale of Mortgage Loans. Reliance Savings Bank has originated
substantially all of the loans in its portfolio and holds them to maturity.
Reliance Savings Bank generally does not engage in the sale of loans. However,
from time to time, Reliance Savings Bank may sell participation interests in
loans which it has originated in order to spread risk associated with the loan
because of the size of the loan relative to the size of Reliance Savings Bank's
loan portfolio. Loan participations are sold on a non-recourse basis, and
Reliance Savings Bank retains the servicing on all loans it originates and of
which it sells participation interests. In the last five fiscal years, Reliance
Savings Bank sold one participation interest in a commercial real estate loan.
At June 30, 1998, Reliance Savings Bank's retained interest in this commercial
real estate loan was $369,200 while the sold participation interest in this loan
totaled $121,900.
Purchase of Mortgage Loans. Reliance Savings Bank has purchased loans
or participation interests in a variety of loans originated by other lenders
from time to time. Reliance Savings Bank purchases participation interests with
servicing released. As a participant, Reliance Savings Bank acquires an
individual, non-recourse ownership interest in the loan, and thus does not have
recourse against the selling institution, but rather, has direct recourse
against the borrower. Prior to purchase, Reliance Savings Bank reviews each
purchase or participation to ensure that the underlying loan complies with
Reliance Savings Bank's lending policy and the loans-to-one borrower limit.
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At June 30, 1998, Reliance Savings Bank held five participation loans
in its loan portfolio totaling $2.5 million, or 8.04%, of Reliance Savings
Bank's gross loan portfolio, as follows: a multi-family loan of $704,000 (out of
an original entire loan amount of $2.6 million) secured by a 60-unit apartment
building and originated in 1992; a commercial real estate construction loan of
$474,700 (out of an original entire loan amount of $2.9 million) secured by a
hotel and originated in 1994; a land development loan of $750,000 (out of an
original entire loan amount of $1.5 million) and originated in 1998; a
multi-family loan of $407,200 (out of an original entire loan amount of
$900,000) secured by a 24-unit apartment building and originated in 1998 and a
commercial real estate loan of $135,000 (out of an entire loan amount of
$485,000) secured by a warehouse and office building and originated in 1990.
The purchase of participation loans involves the same risks as the
origination of the same types of loans as well as additional risks related to
the purchaser's lower level of control over the origination and subsequent
administration of the loan. While Reliance Savings Bank intends to purchase
additional participation loans in the future, management does not anticipate
such activity will be significant.
Mortgage Loan Brokering Fees. Because of its loans-to-one borrower
regulatory limit, Reliance Savings Bank has from time to time received a
brokering fee from other financial institutions in exchange for the opportunity
to originate various mortgage loans from borrowers with whom Reliance Savings
Bank already has a lending relationship. For the year ended June 30, 1997,
Reliance Savings Bank did not have any loan brokering opportunities and
therefore did not receive any loan brokering fees. For the year ended June 30,
1998, Reliance Savings Bank received real estate loan brokering fees of $11,000
for loan opportunities in the aggregate amount of $2.2 million.
LOAN APPROVAL AND MONITORING
The President of Reliance Savings Bank and at least one director have
the authority to approve any consumer loan, one-to four-family mortgage loan,
residential construction loan, multi-family loan, commercial real estate loan,
commercial construction loan or land development loan, up to $150,000, provided
the loan-to-value ratio does not exceed 80%. All loans exceeding this amount and
all loans upon which the loan-to-value ratio exceeds 80% are presented to the
Board of Directors for approval. Reliance Savings Bank's Board of Directors
reviews on a monthly basis all loans made, and ratifies all actions taken
relative to loan approvals.
LOAN ORIGINATION, SERVICING AND OTHER FEES
In addition to interest earned on loans, Reliance Savings Bank receives
income through fees in connection with loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period with the volume and type of loans
originated.
In connection with the origination of mortgage loans, Reliance Savings
Bank charges points for origination and commitment, and fees for processing and
closing, in addition to requiring borrower reimbursement for out-of-pocket costs
associated with obtaining independent appraisals, credit reports, title
insurance, private mortgage insurance and other items. Because of the highly
competitive mortgage market in which Reliance 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. Reliance Savings
Bank charges origination fees ranging from zero to two points on mortgage loan
origination, and such points usually vary inversely with the interest rate on
the loan. That is, the amount of the origination fee is typically higher with
lower interest rate and lower if a higher interest rate is established for the
loan. Fees are paid by the applicant at the time of loan commitment,whereas the
origination fees are paid at the time of closing.
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Accounting standards adopted under FASB 91 prescribe the accounting
treatment for origination and commitment fees. Loan origination and commitment
fees and certain direct loan origination costs are being deferred and the net
amounts amortized as an adjustment of the related loan's yield. These amounts
are amortized to interest income using the level yield method over the
contractual life of the related loans. Deferred loan fees totaled $134,000,
$153,000 and $164,000 at June 30, 1996, 1997 and 1998, respectively. Deferred
loan origination fees and costs associated with loans sold are recognized at the
time of sale as a component of gain or loss on the sale of loans.
DELINQUENCIES, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
At June 30, 1998, Reliance Savings Bank had two loans delinquent more
than 89 days for a total of $197,000 which were classified as non-performing.
Reliance Savings Bank had no classified assets at June 30, 1998. At June 30,
1997 and 1996, Reliance Savings Bank had no nonperforming assets, classified
assets or loans delinquent more than 89 days.
Delinquent Loans. Management and Reliance Savings Bank's Board of
Directors perform a monthly review of all delinquent loans. The procedures taken
by Reliance Savings Bank with respect to delinquencies vary depending on the
type of loan, delinquent amount and age of delinquency. Reliance Savings Bank
generally requires that delinquent loans be reviewed and a written late charge
be mailed not later than the 15th day of delinquency. Reliance Savings Bank's
policies provide that telephone contact will be attempted to ascertain the
reasons for delinquency and the prospects of prompt payment. When contact is
made with the borrower at any time prior to foreclosure, Reliance Savings Bank
will attempt to obtain full payment or work out a repayment schedule with the
borrower to avoid foreclosure. It is Reliance Savings Bank's general policy to
continue to accrue interest on all loans which are past due up to 90 days. When
a loan secured by a mortgage is delinquent for 90 or more days, Reliance Savings
Bank generally will initiate foreclosure proceedings. Property acquired by
Reliance Savings Bank as a result of foreclosure on a loan is classified as
"real estate owned" and is recorded at the lower of the unpaid principal balance
or fair value less costs to sell at the date of acquisition and thereafter. Upon
foreclosure, it is Reliance Savings Bank's policy generally to require an
appraisal of the property and, thereafter, appraisal of the property on an
annual basis and external inspections on at least a quarterly basis.
-84-
<PAGE> 88
At June 30, 1996, 1997 and 1998, delinquencies in Reliance Savings
Bank's loan portfolio were as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------------------------------------
90 DAYS OR
60-89 DAYS MORE(1)
----------------------- ---------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------- --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family........................... 0 $ -- 0 $ --
Multi-family.................................. 0 -- 0 --
Commercial real estate........................ 0 -- 0 --
Residential construction...................... 0 -- 0 --
Commercial construction/land development...... 0 -- 0 --
--- ------ --- ------
Total mortgage loans....................... 0 -- 0 --
CONSUMER LOANS:
Home equity................................... 0 -- 0 --
Other consumer................................ 0 -- 0 --
--- ------ --- ------
Total consumer loans........................ 0 -- 0 --
--- ------ --- ------
Total gross loans........................ 0 $ -- 0 $ --
=== ====== === ======
Delinquent loans to gross loans
(including loans held for sale)............... 0.00% 0.00%
==== ====
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------
90 DAYS OR
60-89 DAYS MORE(1)
-------------------- ----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
-------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family........................... 2 $ 195 0 $ --
Multi-family.................................. 0 -- 0 --
Commercial real estate........................ 0 -- 0 --
Residential construction...................... 0 -- 0 --
Commercial construction/land development...... 0 -- 0 --
--- ------ --- ------
Total mortgage loans....................... 2 195 0 --
CONSUMER LOANS:
Home equity................................... 0 -- 0 --
Other consumer................................ 0 -- 0 --
--- ------ --- ------
Total consumer loans........................ 0 -- 0 --
--- ------ --- ------
Total gross loans........................ 2 $ 195 0 $ --
=== ====== === ======
Delinquent loans to gross loans
(including loans held for sale)............... 0.65% 0.00%
==== ====
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-----------------------------------------------
90 DAYS OR
60-89 DAYS MORE(1)
-------------------- ----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
-------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family........................... 1 $ 31 2 $ 197
Multi-family.................................. -- -- -- --
Commercial real estate........................ -- -- -- --
Residential construction...................... -- -- -- --
Commercial construction/land development...... -- -- -- --
--- ------ --- -------
Total mortgage loans........................ 1 31 2 197
CONSUMER LOANS:
Home equity -- -- -- --
Other consumer -- -- -- --
--- ------ --- -------
Total consumer loans -- -- -- --
--- ------ --- -------
Total gross loans 1 $ 31 2 $ 197
=== ====== === =======
Delinquent loans to gross loans
(including loans held for sale) 0.10% 0.64%
==== ====
</TABLE>
- ---------------------
(1) Reliance Savings Bank discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest payment
by 90 days or more.
-85-
<PAGE> 89
Non-Performing Assets. Loans are placed on non-accrual status when, in
the judgment of Reliance Savings Bank management, the probability of collection
of principal or interest is deemed insufficient to warrant further accrual of
interest. Reliance Savings Bank discontinues the accrual of interest on loans
when the borrower is delinquent as to a contractually due principal or interest
payment by 90 days or more. When a loan is placed on non-accrual status, all of
the accrued interest on that loan is reversed by way of a charge to interest
income. Accrual of interest on a non-accrual loan is resumed when all
contractually past due payments are current and when management believes the
outstanding loan principal and contractually due interest is no longer doubtful
of collection.
Property acquired by Reliance Savings Bank as a result of a
foreclosure, property upon which a judgment of foreclosure has been entered but
prior to foreclosure sale and property which has been in substance foreclosed
are classified as foreclosed properties. Foreclosed properties are recorded at
the lower of the unpaid principal balance of the related loan or fair market
value. The amount by which the recorded loan balance exceeds the fair market
value at the time a property is classified as foreclosed property is charged
against the allowance for loan losses. Any subsequent reduction in the carrying
value of a foreclosed property, is charged against current earnings. At June 30,
1998, Reliance Savings Bank had no properties in foreclosed or in substance
foreclosed.
Non-performing loans include loans placed on non-accrual status and
troubled debt restructurings. Non-performing assets consist only of
non-performing loans, since there are no foreclosed properties for the periods
indicated below. The following table sets forth non-performing loans and assets:
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------
1996 1997 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual mortgage loans......................... $ -- $ -- $ 197
Nonaccrual consumer loans......................... -- -- --
Real estate in judgment........................... -- -- --
------- ------ ------
Total non-performing assets....................... $ -- $ -- $ 197
======= ====== ======
Total non-performing assets
to gross loans receivable...................... 0.00% 0.00% 0.64%
======= ====== ======
Total non-performing assets
to total assets................................ 0.00% 0.00% 0.46%
======= ====== ======
Interest on non-performing loans
on the accrual basis........................... $ -- $ -- $ 6
Actual interest received on
non-performing loans........................... -- -- --
------- ------ ------
Net reduction of interest income.................. $ -- $ -- $ 6
======= ====== ======
</TABLE>
There are no concentrations of loans exceeding 10% of loans which are
not otherwise disclosed as a category of loans.
As of June 30, 1998, there were no other loans not included in the
foregoing tables or discussed above where known information about the possible
credit problems of borrowers caused management to have serious doubts as to the
ability of the borrower to comply with present loan repayment terms and which
may result in disclosure of such loans in the future.
-86-
<PAGE> 90
As of June 30, 1998, Reliance Savings Bank had no real estate owned
("REO"). If Reliance Savings Bank were to acquire any REO, it would initially
record the REO at the lower of the recorded investment in the loan or the fair
market value of the assets securing the loan at the date of foreclosure, less
costs to sell. Thereafter, if there were a further deterioration in value,
Reliance Savings Bank would either further write down the REO directly or do so
indirectly by providing a valuation allowance and charge operations for the
reduction in value. The policy for loans secured by real estate, which comprise
the bulk of Reliance Savings Bank's portfolio, is to establish loss reserves in
accordance with Reliance Savings Bank's loan classification process, based on
GAAP. It is the policy of Reliance Savings Bank to obtain an appraisal on all
real estate acquired through foreclosure at the time of foreclosure.
Classification of Assets. Federal regulations require that each insured
financial institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions by regulatory authorities,
regulatory examiners have authority to identify problem assets as Substandard,
Doubtful or Loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that Reliance Savings Bank will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weakness of Substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable, and there is a high
possibility of loss. An asset classified as Loss is considered uncollectible and
of such little value that continuance as an asset of Reliance Savings Bank is
not warranted. Reliance Savings Bank has adopted an asset classification
methodology which parallels that required by federal regulations. Assets
classified as Substandard or Doubtful require Reliance Savings Bank to establish
prudent general allowances for loan losses. Assets classified as Loss must
either be charged off or must have a specific allowance established for 100% of
the asset classified as a Loss.
At June 30, 1998, based upon Reliance Savings Bank's asset
classification methodology, Reliance Savings Bank had no assets classified as
Substandard, Doubtful or Loss.
Allowance for Loan Losses. Under federal regulations, when an insured
institution classifies problem assets as Substandard or Doubtful, it is required
to establish general allowances for loan losses in an amount deemed prudent by
management. In addition to general valuation allowances, Reliance Savings Bank
may establish specific loss reserves against specific assets in which a loss may
be realized. General allowances represent loss allowances which have been
established to recognize the inherent risks associated with lending activities,
but which, unlike specific allowances, have not been allocated to recognize
probable losses on particular problem assets. Reliance Savings Bank's
determination as to its classification of assets and the amount of its specific
and general valuation allowances are subject to review by the WDFI and the FDIC,
either of which can order the establishment of additional general or specific
loss allowances.
The FDIC, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; management has analyzed
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While Reliance Savings Bank believes that it has established an adequate
allowance for loan losses, there can be no assurance that regulators, in
reviewing Reliance Savings Bank's loan portfolio, will not request Reliance
Savings Bank to materially increase its allowance for loan losses, thereby
negatively affecting Reliance Savings Bank's financial condition and earnings at
that time. Although management believes that adequate specific and general loan
loss allowances have been established, actual losses are dependent upon future
events and, as such, further additions to the level of specific and general loan
loss allowances may become necessary.
-87-
<PAGE> 91
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on Reliance Savings Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may effect the borrower's ability to repay, the estimated value of any
underlying collateral and current economic conditions. There can be no assurance
that the allowance for loan losses will be adequate to cover losses which may in
fact be realized in the future and that additional provisions for loan losses
will not be required. The amount of the provision for loan losses for the years
ended June 30, 1996, 1997 and 1998 reflected management's intention to continue
to make annual additions to Reliance Savings Bank's allowance for loan losses
until it is equal to approximately 1.0% of Reliance Savings Bank's gross loan
portfolio. However, Reliance Savings Bank will continue to monitor its loan loss
experience, the condition and composition of its loan portfolio and general
economic conditions, and may make further additions to its allowance for loan
losses to a greater or lesser extent than it has done historically, depending
upon changes in the aforementioned conditions.
The following table sets forth Reliance Savings Bank's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------
1996 1997 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period................................ $ 104 $ 126 $ 147
Provision for loan losses..................................... 22 21 22
Charge-offs net of recoveries:
Mortgage loans............................................ -- -- --
Consumer loans............................................ -- -- --
----- ------- ------
Total charge-offs (net)....................................... -- -- --
----- ------- ------
Balance at end of period...................................... $ 126 $ 147 $ 169
===== ======= ======
Ratio of allowance for loan losses to gross
loans receivable at the end of period..................... 0.47% 0.49% 0.55%
Ratio of allowance for loan losses to
non-performing loans at the end of period................. 0.00% 0.00% 85.67%
Ratio of allowance for loan losses to total
non-performing assets at the end of the period............ 0.00% 0.00% 85.67%
Ratio of net charge-offs to average gross
loans during period....................................... 0.00% 0.00% 0.00%
</TABLE>
-88-
<PAGE> 92
The following table shows Reliance Savings Bank's total allowance for
loan losses and the allocation to the various categories of loans held for
investment at the dates indicated. It is not anticipated that charge-offs during
the year ending June 30, 1998 will exceed the amount allocated to any individual
category of loans.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------------------------------------
1996 1997
------------------------------------- -------------------------------------
% OF % OF
% OF LOANS IN % OF LOANS IN
TOTAL CATEGORY TOTAL CATEGORY
LOANS TO TOTAL LOANS TO TOTAL
BY OUTSTANDING BY OUTSTANDING
BREAKDOWN OF ALLOWANCE AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS
------ -------- ----------- ------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............. $ 51 0.47% 40.46% $ 53 0.49% 36.26%
Multi-family.................... 20 0.47 15.68 27 0.49 18.32
Commercial real estate.......... 22 0.47 17.26 23 0.49 15.95
Residential construction........ 11 0.47 9.00 10 0.49 6.60
Commercial construction/
land development............... 20 0.47 16.23 32 0.49 21.67
----- ------ ----- ------
Total mortgage loans......... 124 98.63 145 98.80
Consumer loans...................... 2 -- 1.37 2 -- 1.20
----- ------ ----- ------
Total allowance for loan losses $ 126 100.00% $ 147 100.00%
===== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
1998
--------------------------------------
% OF
% OF LOANS IN
TOTAL CATEGORY
LOANS TO TOTAL
BREAKDOWN OF ALLOWANCE AMOUNT BY OUTSTANDING
------ ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family............. $ 51 0.55% 30.32%
Multi-family.................... 41 0.55 24.37
Commercial real estate.......... 19 0.55 11.14
Residential construction........ 42 0.55 24.42
Commercial construction/
land development............... 15 0.55 9.17
------ ------
Total mortgage loans......... 168 99.42
Consumer loans...................... 1 -- 0.58
------ ------
Total allowance for loan losses 100.00% $ 169 100.00%
====== ======
</TABLE>
-89-
<PAGE> 93
INVESTMENT ACTIVITIES
General. The investment policy of Reliance Savings Bank, which is
established by the Board of Directors and implemented by Reliance Savings Bank's
management, is designed primarily to provide and maintain required liquidity,
generate a favorable return on investments without incurring undue interest rate
and credit risk and complement Reliance Savings Bank's lending activities.
Reliance Savings Bank primarily invests in mortgage-backed and related
securities, United States treasury obligations and mutual funds (the assets of
which are comprised primarily of government guaranteed mortgage-backed and
related securities).
Reliance Savings Bank's investment policy permits investment in various
types of liquid assets authorized under FDIC and state regulations, which
include U.S. Treasury obligations, securities of various agencies, certain
certificates of deposit of insured banks and savings institutions, certain
banker's acceptances and deposits at the FHLB-Chicago. Reliance Savings Bank
also is permitted to invest in commercial paper, mutual funds, investment grade
corporate debt securities and mortgage-backed and related securities. Investment
and aggregate investment limitations and credit quality parameters of each class
of investment are prescribed in Reliance Savings Bank's investment policy.
Reliance Savings Bank performs analyses on mortgage related securities prior to
purchase and on an ongoing basis to determine the impact on earnings and market
value under various interest rate and prepayment conditions. Reliance Savings
Bank's investment policy prohibits Reliance Savings Bank from engaging in
hedging activities which involve the use of options, futures, interest rate
swaps or forward commitments, and from purchasing non-investment grade corporate
debt securities. During the years ended June 30, 1996, 1997 and 1998, Reliance
Savings Bank did not hold any derivative financial instruments in its investment
portfolio to which the provisions of SFAS No. 119 would apply.
Reliance Savings Bank categorizes the securities it purchases into a
"Held to Maturity" or "Available for Sale" portfolio as follows:
1. Securities Held to Maturity. Reliance Savings Bank has the ability and
intent to hold these assets to maturity. Upon acquisition, securities
are classified as to Reliance Savings Bank's intent and a sale would
only be effected due to deteriorating investment quality. The
investment portfolio is not used for speculative purposes and is
carried at amortized cost. in the event Reliance Savings Bank sells
securities from this portfolio for other than credit quality reasons,
all activities within the investment portfolio with matching
characteristics may be reclassified as assets held for sale.
2. Securities Available for Sale. Reliance Savings Bank does not intend
to hold these assets to maturity and thus are carried at an amount
which is the lower of aggregate cost or market value with unrealized
losses recognized as a component of stockholders' equity. This portion
of the securities portfolio is designated to meet anticipated loan
demand and deposit runoff or to take advantage of market opportunities.
During the year ended June 30, 1998, Reliance Savings Bank transferred
its investments from its held-to-maturity portfolio to its available-for-sale
portfolio. This was done as the result of a sale from its held-to-maturity
portfolio of a $200,000 REMIC, on which a $1,375 realized loss was incurred, in
which the nature and volatility was inconsistent with Reliance Savings Bank's
conservative investment objectives. The remaining investments in the
held-to-maturity portfolio transferred to the available-for-sale portfolio had
an amortized cost of $3.8 million and resulted in an unrealized gain of $48,000.
Mortgage-Backed Securities. At June 30, 1998, Reliance Savings Bank's
mortgage-backed securities portfolio totaled $420,000, and consisted of $406,000
of GNMA participation certificates and $14,000 of FHLMC participation
certificates.
-90-
<PAGE> 94
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgage loans, the principal and interest
payments on which are passed from the mortgage loan originators through
intermediaries (generally federal government-sponsored enterprises) that pool
and repackage the participation interest in the form of securities to investors
such as Reliance Savings Bank. Such federal government-sponsored enterprises,
which guarantee the payment of principal and interest to investors include
FHLMC, FNMA and GNMA. Mortgage-backed securities generally increase the quality
of Reliance Savings Bank's assets by virtue of the guarantees that back them,
are more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of Reliance Savings Bank.
The actual maturity of a mortgage-backed security varies, however,
depending on when the mortgagors prepay or repay the underlying mortgage loans.
Prepayments of the underlying mortgage loans may shorten the life of the
investment, thereby adversely affecting its yield to maturity and the related
market value of the mortgage-backed security. The yield is based upon the
interest income and the amortization of the premium or accretion of the
discount, related to the mortgage-backed security. Premiums and discounts on
mortgage-backed securities are amortized or accreted over the estimated term of
the securities using a level yield method. The prepayment assumptions used to
determine the amortization period for premiums and discounts can significantly
affect the yield of the mortgage-backed security and these assumptions are
reviewed periodically to reflect the actual prepayment. The actual prepayments
of the underlying mortgage loans depend on many factors, including type of
mortgage loans and general levels of market interest rates. The difference
between the interest rates on the underlying mortgage loans and the prevailing
mortgage interest rates is an important determinant in the rate of prepayments.
During periods of falling mortgage interest rates, prepayments generally
increase. If the coupon rate of the underlying mortgage loans significantly
exceeds the prevailing market interest rate offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgage loans. Prepayment experience is more difficult to estimate for
adjustable rate mortgage-backed securities. While mortgage-backed securities
carry a reduced credit risk as compared to whole loans (and generally yield less
than the loans that underlie such securities because of the cost payment
guarantees or credit enhancements that result in nominal credit risk), such
securities remain subject to the risk that a fluctuating interest rate
environment, along with other factors such as the geographic distribution of the
underlying mortgage loans, may alter the prepayment rate of such mortgage loans
and so affect both the prepayment speed and value of such securities.
Mortgage-Related Securities. At June 30, 1998, Reliance Savings Bank's
had no CMOs in its portfolio as compared to its portfolio of $100,000 as of June
30, 1997. The CMOs owned by Reliance Savings Bank at June 30, 1997 were issued
by the FHLMC.
-91-
<PAGE> 95
COMPOSITION OF RELIANCE SAVINGS BANK'S MORTGAGE-BACKED
AND RELATED SECURITIES PORTFOLIO
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of Reliance Savings Bank's
mortgage-backed and related securities held for sale at June 30, 1998. At June
30, 1998, Reliance Savings Bank did not have any mortgage-backed and related
securities held for investment.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
------------------------------------------------------------------------------------------
MORTGAGE-BACKED AND RELATED SECURITIES
------------------------------------------------------------------------------------------
ONE YEAR OVER ONE TO OVER FIVE TO
OR LESS FIVE YEARS TEN YEARS OVER TEN YEARS
----------------------- ---------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- --------- --------- -------- --------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
GNMA.................................. $ -- --% -- -- $147 8.57% $ 259 10.80%
FHLMC................................. -- -- $ 14 9.00% -- -- -- --
MORTGAGE-RELATED SECURITIES:
CMOs.................................. -- -- -- -- -- -- -- --
----- ---- ----- ---- ---- ---- ------- -----
Total mortgage-backed
and related securities......... $ -- --% $ 14 9.00% $147 8.57% $ 259 10.80%
===== ==== ===== ==== ==== ==== ======= =====
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
--------------------------------------------------
MORTGAGE-BACKED AND RELATED SECURITIES
--------------------------------------------------
TOTALS
--------------------------------------------------
AVERAGE
REMAINING APPROXIMATE WEIGHTED
YEARS TO CARRYING MARKET AVERAGE
MATURITY VALUE VALUE YIELD
----------- --------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
GNMA.................................. 13.20 $ 406 $ 442 9.99%
FHLMC................................. 2.92 14 14 9.00
MORTGAGE-RELATED SECURITIES:
CMOs.................................. -- -- -- --
------ ------- ------ -----
Total mortgage-backed
and related securities......... 12.75 $ 420 $ 456 9.40%
====== ======= ====== =====
</TABLE>
The following table sets forth certain information regarding carrying
and market values and percentage of total carrying values of Reliance Savings
Bank's mortgage-backed and related securities portfolio. The mortgage-backed and
related securities portfolio was classified as held for investment as of June
30, 1997 and previous years. The portfolio was transferred to available for sale
during the year ended June 30, 1997 as a result of the sale of a FHLMC CMO.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------------------------------
1996 1997 1998
-------------------------- ----------------------------- ------------------------------
CARRYING % OF MARKET CARRYING % OF MARKET CARRYING % OF MARKET
VALUE TOTAL VALUE VALUE TOTAL VALUE VALUE TOTAL VALUE
----- ----- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
GNMA $ 679 84.88% $ 735 568 82.92% 616 $ 406 96.67% $ 442
FHLMC 21 2.62 22 17 2.48 19 14 3.33 14
MORTGAGE-RELATED SECURITIES:
CMOs 100 12.50 95 100 14.60 97 -- -- --
----- ------ ----- ----- ------ ----- ----- ------ -----
Total mortgage-backed
and related securities $ 800 100.00% $ 852 $ 685 100.00% $ 732 $ 420 100.00% $ 456
===== ====== ===== ===== ====== ===== ===== ====== =====
</TABLE>
-92-
<PAGE> 96
The following table sets forth the activity in Reliance Savings Bank's
mortgage-backed and related securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1997 1998
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE-BACKED AND RELATED SECURITIES:
At beginning of period.................... $ 1,020 $ 800 $ 685
Purchases.............................. -- -- --
Sales.................................. -- -- (100)
Repayments............................. (221) (115) (165)
Adjustment to market value............. -- -- 36
Premium/discount amortization.......... 1 -- --
---------- ----------- ---------
End of period............................. $ 800 $ 685 $ 456
========== =========== =========
</TABLE>
Reliance Savings Bank may, in future periods, leverage its capital base
by using the proceeds of borrowings from the FHLB-Chicago to purchase
mortgage-backed and related securities or investment securities. Therefore, if
the leveraging strategy is implemented, the size of Reliance Savings Bank's
mortgage-backed and related securities portfolio may increase in future periods.
Investment Securities. Reliance Savings Bank invests in various types
of liquid assets that are permissible investments for state chartered savings
banks, including United States Treasury obligations, securities of various
federal agencies, certain certificates of deposits of federally insured banks
and savings institutions and federal funds. Subject to various restrictions,
Reliance Savings Bank also may invest its assets in commercial paper, mutual
funds, and investment grade corporate debt securities. Reliance Savings Bank's
current investment policy permits the purchase of only investment grade
securities (i.e., rated in one of the top four rating categories) by a
nationally recognized statistical rating corporation ("NRSRO") and does not
permit purchases of securities of non-investment grade quality. Investment
securities generally are carried at cost, as adjusted for amortization of
premiums and accretion of discounts, because it is management's intention to
hold such securities to maturity.
A portion of Reliance Savings Bank's investment securities portfolio
consists of U.S. government and other agency obligations and mutual fund
investments. At June 30, 1998, U.S. government and agency obligation investments
totaled $2.0 million, or 17.78% of Reliance Savings Bank's total investment
portfolio. The amount of these securities decreased significantly during the
year ended June 30, 1998 due to the repayment of borrowings. At June 30, 1998,
mutual funds investments, consisting of adjustable and floating rate mortgage
securities issued or guaranteed by the U.S. Government or its agencies, totaled
$4.7 million, or 40.81%, of Reliance Savings Bank's total investment securities
portfolio. All of Reliance Savings Bank's mutual fund investments are
permissible investments under Reliance Savings Bank's investment policy and all
other applicable regulations. Mutual fund investments are carried at market
value.
The following table sets forth investment securities issued by a single
entity with a total carrying value in excess of 10% of Reliance Savings Bank's
retained earnings at June 30, 1998 and all mutual fund investments contained in
Reliance Savings Bank's investment securities portfolio at June 30, 1998.
<TABLE>
<CAPTION>
CARRYING MARKET
VALUE AT VALUE AT
NAME OF ISSUER JUNE 30, 1998 JUNE 30, 1998
-------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Federated ARMS Fund, Institutional Shares,
251,004.016 shares............................................ $2,500 $2,430
Asset Management Fund, Inc., Adjustable Rate Mortgage
(ARM) Portfolio, 122,517.732 shares........................... 1,225 1,218
Federated Short-Term Income Fund (A Portfolio of
Private Income Securities Trust), Institutional Shares,
109,409.190 shares............................................ 1,000 956
FHLB Bond, due 06/23/2008......................................... 2,000 2,006
</TABLE>
-93-
<PAGE> 97
COMPOSITION OF RELIANCE SAVINGS BANK'S INVESTMENT SECURITIES PORTFOLIO
The following tables set forth certain information regarding the fair
market values and the amortized cost or market value of Reliance Savings Bank's
investment securities.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------
1996 1997
----------------------------------- -----------------------------------
AMORTIZED AMORTIZED AMORTIZED
CARRYING % OF COST OR CARRYING % OF COST OR
VALUE TOTAL MARKET VALUE VALUE TOTAL MARKET VALUE
------- ----- ------------ -------- ----- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Government and other agency obligations....... $ -- --% $ -- $ 2,592 22.58% $ 2,582
Equity securities-mutual funds..................... 5,350 67.88 5,525 5,403 47.06 5,525
Corporate debt securities.......................... 1,955 24.80 1,955 2,540 22.12 2,540
Equity securities-FHLMC stock...................... 577 7.32 28 946 8.24 28
-------- ------ --------- -------- ------ --------
Total investment securities available for sale... $ 7,882 100.00% $ 7,508 $ 11,481 100.00% $ 10,675
======== ====== ========= ======== ====== ========
SECURITIES HELD TO MATURITY:
U.S. Government and other agency obligations....... $ 11,178 96.12% $ 11,162 $ 3,189 86.59% $ 3,202
Certificates of deposit............................ 294 2.53 294 294 7.98 294
FHLB stock......................................... 157 1.35 157 200 5.43 200
-------- ------ --------- -------- ------ --------
Total securities held to maturity................ $ 11,629 100.00% $ 11,613 $ 3,683 100.00% $ 3,696
======== ====== ========= ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------
1998
---------------------------------------------------------
AMORTIZED
CARRYING % OF COST OR
VALUE TOTAL MARKET VALUE
--------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Government and other agency obligations.................. $ 2,006 17.94% $ 2,000
Equity securities-mutual funds................................ 4,604 41.18 4,725
Corporate debt securities..................................... 2,585 23.12 2,585
Certificates of Deposit....................................... 493 4.41 486
Equity securities - FHLB stock................................ 200 1.79 200
Equity securities-FHLMC stock................................. 1,293 11.56 28
-------- ------- --------
Total investment securities available for sale................ $ 11,181 100.00% $ 10,024
======== ======= ========
SECURITIES HELD TO MATURITY:
U.S. government and other agency obligations.................. -- -- --
Certificates of deposit....................................... -- -- --
FHLB stock.................................................... -- -- --
-------- ------- --------
Total securities held to maturity............................. -- -- --
======== ======= ========
</TABLE>
-94-
<PAGE> 98
The table below sets forth certain information regarding the carrying
value or amortized cost, weighted average yields and maturities of Reliance
Savings Bank's investment securities at June 30, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-------------------------------------------------------------------------------------------
OVER ONE TO FIVE OVER FIVE TO TEN
ONE YEAR OR LESS YEARS YEARS OVER TEN YEARS
--------------------- -------------------- -------------------- ---------------------
CARRYING CARRYING CARRYING CARRYING
VALUE OR WEIGHTED VALUE OR WEIGHTED VALUE OR WEIGHTED VALUE OR WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Government and other
agency obligations..... $ -- -- $-- -- $ 2,006 6.66% $ -- --
Equity securities-
mutual funds. -- -- -- -- -- -- -- --
Corporate debt securities -- -- -- -- -- -- 2,585 5.70%
Certificates of deposit.. 394 6.21% 99 5.60% -- -- -- --
FHLB stock............... -- -- -- -- -- -- -- --
Equity securities-FHLMC
stock................ -- -- -- -- -- -- -- --
----- ---- --- ---- ------- ---- ------- ----
Total securities
available for sale... $ 394 6.21% $99 5.60% $ 2,006 6.66% $ 2,585 5.70%
===== ==== === ==== ======= ==== ======= ====
</TABLE>
-95-
<PAGE> 99
SOURCES OF FUNDS
General. Reliance Savings Bank's primary sources of funds for use in
lending, investing and for other general purposes are deposits, proceeds from
principal and interest payments on loans, mortgage-backed and related securities
and investment securities. Contractual loan payments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general market interest rates and economic
conditions. Borrowings may be used on a short-term basis to compensate for
seasonal or other reductions in normal sources of funds or for deposit inflows
at less than projected levels. Reliance Savings Bank also has other lines of
credit available for borrowing purposes with other local financial institutions.
Deposits. Reliance Savings Bank offers a variety of deposit accounts
having a range of interest rates and terms. Reliance Savings Bank's deposits
principally consist of demand accounts (non-interest bearing checking, NOW,
MMDA, and passbook) and certificates of deposit. The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates and competition. Reliance Savings Bank's deposits are obtained
primarily from the area in which its office is located, and Reliance Savings
Bank relies principally on customer service, marketing programs and
long-standing relationships with customers to attract and retain these deposits.
Various types and limited amounts of advertising and promotion to attract and
retain deposit accounts also are used. Reliance Savings Bank does not currently
solicit or currently accept brokered deposits. Management monitors Reliance
Savings Bank's certificate accounts and, based on historical experience,
management believes it will retain a large portion of such accounts upon
maturity. Management considers Bank profitability, the matching of term lengths
with assets, the attractiveness to customers and rates offered by competitors in
deposit offerings and promotions. Reliance Savings Bank has been competitive in
the types of accounts and interest rates it has offered on its deposit products.
Reliance Savings Bank intends to continue its efforts to attract deposits as a
primary source of funds for supporting its lending and investing activities.
Reliance Savings Bank sets interest rates on its deposits on a weekly
basis, based upon a number of factors, including: (i) the previous week's
deposit flow; (ii) a current survey of a selected group of competitors' rates
for similar products; (iii) external data which may influence interest rates;
(iv) investment opportunities and loan demands; and (v) scheduled maturities.
The following table presents the deposit activity of Reliance Savings
Bank for the periods indicated. During the low interest rate environment over
the past three years, Reliance Savings Bank's deposits have declined, with
depositors shifting funds from lower interest certificates of deposit to mutual
funds and other investment alternatives offering higher yields. In addition,
although Reliance Savings Bank has been competitively pricing its deposit
products over the past two years, its core deposits have continued to decline.
Reliance Savings Bank believes its office location and the characteristics of
its local market area are primary contributors to this continued decline. See
"--Market Area and Competition."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits.................................................. $ 2,289 $ 4,518 $ 4,429
Withdrawals............................................... 7,334 5,926 5,508
----- ----- -----
Net deposits (withdrawals)................................ (5,045) (1,408) (1,079)
Interest credited on deposits............................. 933 804 814
----- ----- -----
Total increase (decrease) in deposits..................... $ (4,112) $ (604) $ (265)
======== ======== =======
</TABLE>
-96-
<PAGE> 100
At June 30, 1997 and 1998, Reliance Savings Bank had outstanding $1.40
million and $1.40 million, respectively, in certificates of deposit in amounts
of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Three months or less.................................................................. $ 100 $ --
Over three through six months......................................................... 112 --
Over six through twelve months........................................................ 843 1,196
Over twelve months.................................................................... 347 206
--- ---
Total............................................................................. $ 1,402 $1,402
======= ======
</TABLE>
-97-
<PAGE> 101
The following table sets forth the distribution of Reliance Savings
Bank's deposit accounts at the dates indicated and the weighted average nominal
rates on each category of deposits presented.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------------------------------
1996 1997
---------------------------------- ---------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------ -------- ---- ------ -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DEMAND ACCOUNTS:
Non-interest bearing.......................... $ 89 0.49% --% $ 35 0.20% --%
Interest-bearing (NOW)........................ 126 0.69 2.50 92 0.52 2.50
Money market.................................. 952 5.23 3.45 926 5.26 3.45
Passbook...................................... 2,775 15.25 2.78 2,660 15.12 2.78
----- ----- ----- -----
Total demand accounts....................... 3,942 21.66 2.87 3,713 21.10 2.91
CERTIFICATE OF DEPOSIT ACCOUNTS:
Six months and less........................... 7,230 39.73 5.59 6,410 36.43 5.59
Six to twelve months.......................... 3,533 19.41 5.49 4,326 24.58 5.49
Thirteen to 36 months......................... 2,813 15.46 5.84 2,807 15.95 5.84
37 to 60 months............................... 632 3.47 6.01 289 1.64 6.01
61 to 90 months............................... 50 0.27 8.00 51 0.29 8.00
Jumbo (over 90 months)........................ -- -- -- -- -- --
----- ----- ----- -----
Total certificates of deposit................. 14,258 78.34 5.64 13,883 78.90 5.63
----- ----- ----- -----
Total deposit accounts........................ $ 18,200 100.00% 5.04 $ 17,596 100.00% 5.05
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
1998
----------------------------------
WEIGHTED
PERCENT AVERAGE
OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE
------ -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DEMAND ACCOUNTS:
Non-interest bearing.......................... $ 68 0.39% --%
Interest-bearing (NOW)........................ 35 0.20 2.50
Money market.................................. 852 4.92 3.40
Passbook...................................... 2,350 13.56 2.77
----- -----
Total demand accounts....................... 3,305 19.07 2.87
CERTIFICATE OF DEPOSIT ACCOUNTS:
Six months and less........................... 6,452 37.23 5.62
Six to twelve months.......................... 3,972 22.91 5.66
Thirteen to 36 months......................... 3,221 18.59 5.91
37 to 60 months............................... 380 2.20 6.22
61 to 90 months............................... -- -- --
Jumbo (over 90 months)........................ -- -- --
----- -----
Total certificates of deposit................. 14,025 80.93 5.71
----- -----
Total deposit accounts........................ $ 17,330 100.00% 5.17
======== ======
</TABLE>
-98-
<PAGE> 102
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at June 30, 1996, 1997 and 1998 and the periods
to maturity of the certificate accounts outstanding at June 30, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 1998
---------------------------------------------
AT JUNE 30,
------------------------------ WITHIN ONE ONE TO THREE
1996 1997 1998 YEAR YEARS THEREAFTER TOTAL
---- ---- ---- ---- ----- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CERTIFICATE OF DEPOSIT ACCOUNTS:
3.99% and less.......................... $ 10 $ 11 $ 11 $ 11 $ -- $ -- $ 11
4.00% to 4.99%.......................... 95 -- -- -- -- -- --
5.00% to 5.99%.......................... 11,180 11,138 9,938 7,971 1,738 229 9,938
6.00% to 6.99%.......................... 2,402 2,467 3,797 2,380 1,319 98 3,797
7.00% to 7.99%.......................... 521 216 227 63 164 -- 227
8.00% to 8.99%.......................... 50 51 52 -- -- 52 52
9.00% to 9.99%.......................... -- -- -- -- -- -- --
-------- ------- -------- ------- -------- ------- -------
Total............................... $ 14,258 $13,883 $ 14,025 $10,425 $ 3,221 $ 379 $14,025
======== ======= ======== ======= ======== ======= =======
</TABLE>
-99-
<PAGE> 103
Borrowings and Other Financial Transactions. Reliance Savings Bank's
other available sources of funds include notes payable to the FHLB-Chicago and
collateralized borrowings. As a member of the FHLB-Chicago, Reliance Savings
Bank is required to own capital stock in and is authorized to apply for
borrowings from the FHLB-Chicago. Each FHLB credit program has its own interest
rate, which may be fixed or variable, and a range of maturities. The
FHLB-Chicago may prescribe the acceptable uses for these borrowings, as well as
limitations on the amount and repayment provisions. Reliance Savings Bank has
borrowed funds in the past, and will continue to monitor use of this source in
the future. At June 30, 1997 and 1998, Reliance Savings Bank had $4.0 million
and $2.0 million, respectively, outstanding from the FHLB-Chicago. Other sources
of funding are from correspondent banks on a short-term basis.
Reliance Savings Bank's borrowings from time to time include reverse
repurchase agreements and repurchase agreements. The form of reverse repurchase
agreements used by Reliance Savings Bank involves the sale of securities owned
by Reliance Savings Bank with a commitment to repurchase the same or
substantially the same securities at a predetermined price at a future date,
typically within 30 days to 12 months. The form of repurchase agreements used by
Reliance Savings Bank generally are entered into with local businesses and
institutions seeking to deposit funds in excess of insurable limits. Both of
these transactions are treated as borrowings on Reliance Savings Bank's
financial statements. These transactions are authorized by Reliance Savings
Bank's Investment policy and are governed by agreements with primary government
dealers under PSA Master Repurchase Agreements. At June 30, 1997, Reliance had
$2.0 million outstanding reverse repurchase agreements. At June 30, 1998,
Reliance had no outstanding reverse repurchase agreements.
The following table sets forth certain information regarding Reliance
Savings Bank's FHLB-Chicago advances, reverse repurchase agreements and
repurchase agreements at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED JUNE 30,
----------------------------------------------
1996 1997 1998
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
FHLB-CHICAGO ADVANCES:
Average balance outstanding................................ $ 134 $ 1,775 $ 3,812
Maximum amount outstanding at
any month-end during the period.......................... 650 4,000 4,000
Balance outstanding at end of period....................... -- 4,000 2,000
Weighted average interest rate
during the period(1)..................................... 5.82% 5.91% 6.06%
Weighted average interest rate
at end of period......................................... -- 5.97% 6.19%
REVERSE REPURCHASE AGREEMENTS:
No activity
REPURCHASE AGREEMENTS:
Average balance outstanding................................ $ -- $ 1,347 $ 532
Maximum amount outstanding at any
month-end during the period.............................. -- 3,000 2,000
Balance outstanding at end of period....................... -- 2,000 --
Weighted average interest rate during
the period.............................................. -- 5.72% 5.80%
Weighted average interest rate at end
of period................................................ -- 5.70% --
</TABLE>
- ---------------
[FN]
(1) Computed on the basis of average monthly balances.
</FN>
-100-
<PAGE> 104
REGULATIONS
Reliance Savings Bank consummated its conversion from a mutual to a
stock savings bank on April 18, 1996. The following discussion involves
regulations as they apply to stock savings banks and is intended to be a summary
of key regulatory issues and not a comprehensive description of all applicable
regulations.
Reliance Savings Bank is a Wisconsin-chartered stock savings bank and
its deposit accounts are insured up to applicable limits by the FDIC under the
SAIF. Reliance Savings Bank is subject to extensive regulation by the WDFI, as
its chartering agency, and by the FDIC, as its deposit insurer and principal
federal regulator. The lending and investment authority of Reliance Savings Bank
is prescribed by Wisconsin law and regulations, as well as applicable federal
law and regulations, and Reliance Savings Bank is prohibited from engaging in
any activities not permitted by such law and regulations. Reliance is a one-bank
holding company subject to regulatory oversight by the Board of Governors of the
Federal Reserve System ("FRB"), the WDFI and the SEC.
PENDING FINANCIAL MODERNIZATION LEGISLATION
On May 13, 1998, the U.S. House of Representatives passed a sweeping
financial modernization bill, H.R. 10, "The Financial Services Act of 1998," by
a vote of 214 to 213. The bill was first proposed by the Clinton Administration
on May 21, 1997. The final House version differed in many significant respects
from the Administration's proposal. The Senate began hearings on the legislation
in June 1998, and while significant progress was made in the Senate Banking
Committee, a series of procedural moves by a small group of Senators prevented
the bill from reaching the full Senate for a vote before the 105th Congress
adjourned.
It seems likely that financial industry reform legislation will be
introduced in the next legislative session. It is impossible to predict whether
such legislation would be as broad in scope as H.R. 10, what its form or
contents might be, or whether it would have any realistic chance of adoption.
WISCONSIN SAVINGS BANK REGULATIONS
Regulations administered by the Administrator of the WDFI-Division of
Savings Institutions ("Administrator") govern various aspects of the activities
and operations of Wisconsin-chartered savings banks.
Examinations and Assessments. Reliance Savings Bank is required to file
periodic reports with and is subject to examination at least once every 18-month
period by the Administrator. Savings banks are required to pay examination fees
and annual assessments to fund the supervisory operations of the Administrators.
Based on the assessment rates published by the Administrator and Reliance
Savings Bank's total assets of $43.4 million at December 31, 1997, Reliance
Savings Bank paid $1,822 in assessments for the period ended June 30, 1998.
Loans and Investments. Under Wisconsin law, Reliance Savings Bank is
authorized to make, invest in, sell, purchase, participate or otherwise deal in
mortgage loans or interests in mortgage loans without geographic restriction,
including loans made on the security of residential and commercial property.
Savings banks may lend funds, on a secured or unsecured basis, for commercial or
consumer purposes, provided that aggregate commercial loans do not exceed 10% of
the savings bank's total assets and aggregate consumer loans do not exceed 10%
of the savings bank's total assets. Subject to certain limited exceptions,
savings banks may not make a loan secured by a first lien mortgage in an amount
in excess of 90% of the fair value of the real estate security.
Subject to statutory and regulatory limitations, savings banks may also
invest funds in certain types of debt and equity securities, including
obligations of federal, state and local governments and agencies. Subject to
prior approval of the Administrator, compliance with capital requirements, and
certain other restrictions, savings banks may invest in residential housing
development projects. Savings banks may invest in service corporations or
subsidiaries with the prior approval of the Administrator, subject to certain
restrictions. Reliance Savings Bank does not have any subsidiary operations.
The lending and investment powers of Wisconsin savings banks also are
limited by FDIC regulation and other federal law and regulations. See
"Regulatory Legislation Affecting Deposit Insurance".
-101-
<PAGE> 105
Loans to One Borrower. Wisconsin-chartered savings banks may make loans
and extensions of credit, both direct and indirect, to one borrower in amounts
up to 15% of capital plus an additional 10% for loans fully secured by readily
marketable collateral. In addition, savings banks may make loans to one borrower
for any purpose in an amount not to exceed $500,000, or to develop domestic
residential housing units in an amount not to exceed the lesser of $30 million
or 30% of capital, provided certain conditions are satisfied. At June 30, 1998,
Reliance Savings Bank had loans or groups of loans totaling $4.3 million which
exceeded the loans-to-one borrower limitation of $3.3 million. Reliance Savings
Bank has effectuated a $4.0 million participation agreement with St. Francis to
reduce the loans below the limitation.
Qualified Thrift Lender. As a Wisconsin-chartered savings bank,
Reliance Savings Bank must qualify for and maintain a level of qualified thrift
investments equal to 60% of its assets as prescribed in Section 7701(a)(19) of
the Internal Revenue Code of 1986, as amended ("Internal Revenue Code"). At June
30, 1998, Reliance Savings Bank maintained over 80% of its assets in qualified
thrift investments and therefore met the qualified thrift-requirement.
Dividend Limitations. A savings bank which meets its regulatory capital
requirement may declare dividends on capital stock based upon net profits,
provided that its paid-in surplus equals its capital stock. If the paid-in
surplus of the savings bank does not equal its capital stock, the board of
directors may not declare a dividend unless at least 10% of the net profits of
the preceding half year in the case of quarterly or semi-annual dividends, or
10% of the net profits of the preceding year in the case of annual dividends,
has been transferred to paid-in surplus. In addition, prior approval of the
Administrator is required before dividends exceeding 50% of profits for any
calendar year may be declared and before a dividend may be declared out of
retained earnings. Under the Administrator's regulations, a savings bank which
has converted from mutual to stock form also is prohibited from paying a
dividend on its capital stock if the effect thereof would cause the regulatory
capital of the savings bank to be reduced below the amount required for its
liquidation account.
Liquidity. Savings banks are required to maintain an average daily
balance of liquid assets (including cash, certain time deposits, certain
banker's acceptances, certain corporate debt securities and highly rates
commercial paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations) of not less than 8% of its
average daily balance during the preceding calendar month of its net
withdrawable accounts plus its short-term borrowings. Also required is a
"primary liquid assets" ratio of at least 4% of average daily withdrawable
accounts and short-term borrowings. "Primary liquid assets" is defined as
primary short-term liquid assets and U.S. government and federal agency
securities. On June 30, 1998, Reliance Savings Bank's liquidity ratio was
78.56%.
CERTAIN FEDERAL REGULATIONS
Provisions of federal law address risk reduction and the promotion of
standards of safety and soundness for insured depository institutions.
Examinations and Audits. Federal regulations require: (i) annual
on-site examinations for all depository institutions except those
well-capitalized institutions with assets of less than $100 million; (ii) annual
audits by independent public accountants for all insured institutions with
assets in excess of $500 million; (iii) the formation of independent audit
committees of the boards of directors of insured depository institutions for
institutions with assets equal to or in excess of $500 million; and, (iv)
management of depository institutions to prepare certain financial reports
annually and to establish internal compliance procedures.
Prompt Corrective Regulatory Action. Federal bank regulators are
required to take certain supervisory actions with respect to undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization. Under the regulations, an institution shall be deemed to be: (i)
"well-capitalized" if it has a total risk-based capital ratio of 10.0% or more,
has Tier 1 risk-based capital of 6.0% or more, has a Tier 1 leverage capital
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well-capitalized"; (iii) "undercapitalized" if it has a total
risk-
-102-
<PAGE> 106
based capital ratio less than 8.0%, a Tier 1 risk-based capital ratio less than
4.0% or a Tier 1 leverage capital ratio less than 4.0% (or less than 3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio less than 6.0%, a Tier 1 risk-based capital ratio less
than 3.0% or a Tier 1 leverage ratio less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets equal to
or less than 2.0%.
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends, making any
other capital distribution or paying a management fee to a controlling person.
Undercapitalized and significantly undercapitalized institutions are subject to
certain mandatory supervisory actions and face more severe restrictions.
Reliance Savings Bank currently exceeds all applicable regulatory capital
requirements and therefore is not subject to prompt corrective action.
At June 30, 1998, Reliance Savings Bank was a "well-capitalized"
institution under the prompt corrective actions regulations.
Brokered Deposits; Interest Rate Limitations. FDIC regulations govern
the acceptance of brokered deposits by insured depository institutions. The
capital position of an institution determines whether and with what limitations
an institution may accept brokered deposits. A "well-capitalized" institution
(one that significantly exceeds specified capital ratios) may accept brokered
deposits without restriction. "Undercapitalized" institutions (those that fail
to meet minimum regulatory requirements) may not accept brokered deposits and
"adequately capitalized" institutions (those that are not "well-capitalized" or
"undercapitalized") may only accept such deposits with the consent of the FDIC.
"Adequately capitalized" institutions may apply for a waiver by letter to the
FDIC. An institution that is not "well-capitalized", even if meeting minimum
capital requirements, may not solicit brokered or other deposits by offering
interest rates that are significantly higher than the relevant local or national
rate as determined under the regulations. As a "well-capitalized" institution,
Reliance Savings Bank may accept brokered deposits without restrictions. At June
30, 1998, Reliance Savings Bank had no brokered deposits.
Uniform Lending Standards. Savings banks must adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit secured by liens or interests in real estate or made for the purpose
of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies adopted by federal bank
regulators. Reliance Savings Bank has adopted and maintains such policies.
Standards for Safety and Soundness. On July 10, 1995, federal bank
regulators adopted the Interagency Guidelines Establishing Standards for Safety
and Soundness (the "Guidelines") and also adopted a final rule establishing
deadlines for submission and review of safety and soundness compliance plans.
Federal bank regulators are authorized, but not required, to request a
compliance plan for failure to satisfy the safety and soundness standards set
out in the Guidelines. An institution must file a compliance plan within 30 days
of a request to do so from the institution's primary federal regulators.
Regulators expect to request a compliance plan from an institution whose failure
to meet one or more of the standards is of such severity that it could threaten
the safe and sound operation of the institution.
The Guidelines prescribe operational and managerial standards for all
insured depository institutions relating to internal controls, information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; and compensation fees and benefits. Reliance
Savings Bank believes that its operational and managerial standards
substantially comply with the standards set forth in the Guidelines and that
compliance with the Guidelines will therefore not impose a significant burden on
Bank operations.
Restrictions Upon State-Chartered Banks. FDIC regulations governing
equity investments of Reliance Savings Bank prohibit certain equity investments
and generally limit the activities and equity investments of FDIC-insured
state-chartered banks and their subsidiaries to those permissible for federally
chartered national banks and their subsidiaries. Reliance Savings Bank does not
hold any impermissible equity investments.
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Reliance Savings Bank must obtain the FDIC's prior approval before
directly, or indirectly through a majority-owned subsidiary, engaging "as
principal" in any activity that is not permissible for a national bank unless
certain exceptions apply. In order for a state bank to conduct an activity as
principal without the FDIC's consent, the activity must be conducted in the same
manner in which a national bank is authorized to conduct the activity. The
activity regulations provide that state banks which meet all regulatory capital
requirements may engage in certain activities that are not permissible for
national banks which are deemed not to present a significant risk to the
insurance fund, including guaranteeing certain obligations of others, activities
which the FRB has found to be closely related to banking and certain securities
activities conducted through subsidiaries. The FDIC will not approve an activity
it determines would present a significant risk to the FDIC insurance fund.
Reliance Savings Bank activities are of a type permissible under applicable
federal regulations.
CAPITAL MAINTENANCE
FDIC Regulation. FDIC-insured institutions are required to follow
certain capital adequacy guidelines which prescribe minimum levels of capital
and require that institutions meet certain risk-based capital requirements.
Reliance Savings Bank is required to meet the following capital standards: (i)
"Tier 1 capital" in an amount not less than 3% of total assets; (ii) "Tier 1
capital" in an amount not less than 4% of risk-weighted assets; and (iii) "total
capital" in an amount not less than 8% of risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial Institutions
Examination Council) are required to maintain "Tier 1 capital" equal to at least
3% of total assets (the "leverage capital" requirement). Tier 1 capital is
defined to include the sum of stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus), and minority interests in
consolidates subsidiaries, minus all intangible assets (with certain
exceptions), identified losses and qualifying investments in securities
subsidiaries. An institution that fails to meet the minimum leverage capital
requirement must file a capital restoration plan with the appropriate FDIC
regional director. At June 30, 1998, Reliance Savings Bank's ratio of Tier 1
capital to total assets was 48.92% or 45.92% in excess of the minimum leverage
capital requirement.
FDIC-insured institutions also are required to adhere to certain
risk-based capital guidelines which are designed to provide a measure of capital
more sensitive to the risk profiles of individual banks. Under the risk-based
capital guidelines, capital is divided into two tiers: core (Tier 1) capital, as
defined above, and the supplementary capital (Tier 2). Tier 2 capital is limited
to 100% of core capital and includes cumulative preferred stock, perpetual
preferred stock, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan and lease losses.
Allowance for possible loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Total capital is the
sum of Tier 1 and Tier 2 capital. The risk-based capital framework assigns
balance sheet assets to one of four broad risk categories which are assigned
risk-weights ranging from 0% to 100% based primarily on the degree of credit
risk associated with the obligor. Off-balance sheet items are converted to an
on-balance sheet "credit equivalent" amount utilizing certain conversion
factors. The weighted sum of the four risk-weighted categories equals
risk-weighted assets. At June 30, 1998, Reliance Savings Bank's Tier 1 capital
to risk-weighted assets was 69.71% or 65.71% in excess of the FDIC requirement,
and Reliance Savings Bank's total capital to risk-weighted assets was 49.32%, or
41.32% in excess of the FDIC requirement.
Wisconsin Regulations. Wisconsin-chartered savings banks are required
to maintain a minimum capital to assets ratio of 6% and must maintain total
capital necessary to ensure the continuation of insurance of deposit accounts by
the FDIC. If the Administrator determines that the financial condition, history,
management or earning prospects of a savings bank are not adequate, the
Commissioner may require a higher minimum capital level for the savings bank. If
a savings bank' capital ratio falls below the required level, the Administrator
may direct the savings bank to adhere to a specific written plan established by
the Administrator to correct the savings bank's operations, including a
prohibition on the declaration of dividends by the savings bank's board of
directors. At June 30, 1998, Reliance Savings Bank's total capital, as
calculated under Wisconsin law, was $21.2 million, or 51.08% of total assets,
which was 45.08% in excess of the required amount.
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INSURANCE OF DEPOSITS
Reliance Savings Bank's deposits are insured to applicable limits under
the SAIF of the FDIC. The FDIC regulations assign institutions to a particular
capital group based on the level of an institution's capital: "well
capitalized", "adequately capitalized", or "under capitalized". These three
groups are then divided into three subgroups reflecting varying levels of
supervisory concern, from those institutions considered to be healthy to those
which are considered to present substantial supervisory risk. This matrix
results in nine assessment risk classifications, with well-capitalized,
financially sound, institutions paying lower insurance of account premium rates
than are paid by undercapitalized institutions that could pose a risk of loss to
the insurance fund absent corrective action.
At present, Reliance Savings Bank pays no deposit insurance premium
based on its risk-based classification. While a future increase in insurance
premiums could have an adverse effect on earnings, Reliance Savings Bank does
not expect any increase in insurance assessments in the reasonably foreseeable
future.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. If insurance of accounts is
terminated, the accounts at the institution at the time of termination, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Management is aware of no existing
circumstances which could result in termination of the deposit insurance of
Reliance Savings Bank.
REGULATORY LEGISLATION AFFECTING DEPOSIT INSURANCE
Deposits of Reliance Savings Bank currently are insured to applicable
limits by the FDIC under the SAIF. The FDIC also insures commercial bank
deposits under the Bank Insurance Fund ("BIF"). Premium levels are set in order
to permit the funds to be capitalized at a level equal to 1.25% of total fund
deposits. Assessment rate changes made in 1995 created a deposit insurance
premium disparity between the two funds; while most BIF members were paying only
a nominal $2,000 annual premium, SAIF members were paying average rates of 23.4
basis points of deposits.
On September 30, 1996, Congress passed legislation to address the
deposit insurance premium disparity. The "Deposit Insurance Funds Act of 1996"
(the "DIF Act"), included as part of an Omnibus Appropriations Bill, directed
the FDIC to impose a special assessment on SAIF-assessable deposits at a rate
that would cause the SAIF to achieve its designated reserve ratio of 1.25% of
SAIF-insured deposits as of October 1, 1996. The DIF Act required that the
special assessment be applied against the SAIF-assessable deposits held be
institutions as of March 31, 1995. Pursuant to a final rule issued by the FDIC
on October 16, 1996, the special assessment rate was determined to be 65.7 basis
points. This one-time special assessment fully capitalized the SAIF and was
collected on November 27, 1996.
The amount of the assessment to Reliance Savings Bank was $144,000. The
special assessment was recorded on September 30, 1996 and had the effect of
reducing Reliance Savings Bank's earnings and capital by the after-tax amount of
the assessment as of the date of enactment, which was $87,000 or $0.04 per
share. As described below, with the recapitalization of the SAIF, BIF and SAIF
regular premiums will be comparable.
In addition, the DIF Act provided for the merger of BIF and SAIF into a
single Deposit Insurance Fund. This provision was scheduled to become effective
January 1, 1999, assuming that no insured depository institution is a savings
association on that date. The DIF legislation contemplated that further federal
legislation would be adopted to provide for a phase out over time of the savings
association charter; however, no such legislation was or will be adopted prior
to January 1, 1999. The DIF Act also calls for the Secretary of the Treasury to
undertake a study concerning the development of a common charter for all insured
depository institutions and the abolition of separate and distinct charters for
banks and savings associations.
Management does not anticipate that any of the foregoing legislation
will have a material impact on the Company's financial condition in future
periods.
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RESTRICTIONS ON LOANS TO AND TRANSACTIONS WITH INSIDERS AND AFFILIATES
FRB regulations limit the total amount a savings bank may lend to its
executive officers, directors, principal shareholders and their related
interests (collectively referred to herein as "affiliated persons"). Generally,
an affiliated person may borrow an aggregate amount not exceeding 15% of a
savings bank's unimpaired capital and unimpaired surplus on an unsecured basis
and an additional 10% on a secured basis. The regulations limit, with certain
exceptions, the aggregate amount a depository institution may lend to affiliated
persons as a class to an amount not exceeding the institution's unimpaired
capital and unimpaired surplus.
The FRB regulations also require that extensions of credit to insiders
(a) be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features, and (b)
not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the Reliance Savings Bank's capital. In addition, extensions of credit
in excess of certain limits must be approved by the Bank's Board of Directors.
Recent legislation now permits Reliance Savings Bank to make loans to executive
officers, directors and principal stockholders on preferential terms, provided
the extension of credit is made pursuant to a benefit or compensation program
that is widely available to employees of Reliance Savings Bank or its affiliates
and does not give preference to any insider over other employees of Reliance
Savings Bank.
Reliance Savings Bank also must comply with Sections 23A and 23B of the
Federal Reserve Act relating to transactions with affiliates in the same manner
and to the same extent as if the savings bank were a Federal Reserve member
bank. Generally, Sections 23A and 23B limit the extent to which an insured
institution or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and
surplus, plus an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and require that all
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to non-affiliates. The term
"covered transaction" includes the making of loans, the purchase of assets,
issuance of a guaranty and similar other types of transactions. The
Administrator, for safety and soundness reasons, may impose more stringent
restrictions on savings banks but may not exempt transactions from or otherwise
abridge Sections 23A and 23B. Exemptions form 23A and 23B may be granted only by
the FRB.
Unless prior approval of the Administrator is obtained, a savings bank
may not purchase, lease or acquire a site for an office building or an interest
in real estate from an affiliated person, including a stockholder owning more
than 10% of its capital stock, or from any firm, corporation, entity or family
in which an affiliated person or 10% stockholder has a direct or indirect
interest. Reliance Savings Bank has not been significantly affected by such
restrictions on loans to and transactions with affiliates.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977, as amended (the "CRA"),
as implemented by FDIC regulations, Reliance Savings Bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services it believes are best
suited to its particular community. The CRA requires the FDIC, in connection
with its examination of a bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. The law requires public
disclosure of an institution's CRA rating and also requires the primary
regulator to provide a written evaluation of an institution's performance.
Reliance Savings Bank's latest CRA rating, received on December 15, 1997 was
satisfactory.
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On May 4, 1995, the federal banking regulators adopted a final rule
("Final CRA Rule") governing compliance with the CRA. The Final CRA Rule
eliminates the previous CRA regulation's 12 assessment factors and substitutes a
performance based evaluation system. The Final CRA Rule will be phased in over a
period of time and become fully effective by July 1, 1997. Under the Final CRA
Rule, an institution's performance in meeting the credit needs of its entire
community, including low- and moderate-income areas, as required by the CRA,
will generally be evaluated under three assessment tests relating to lending,
investment and service.
Management of the holding company does not anticipate that the new CRA
regulations will adversely affect Reliance Savings Bank.
FEDERAL RESERVE SYSTEM
Regulation D, promulgated by the FRB, imposes reserve requirements on
all depository institutions, including savings banks and savings institutions,
which maintain transaction accounts or non-personal time deposits. Checking
accounts, NOW accounts and certain other types of accounts that permit payments
or transfers to third parties all within the definition of transaction accounts
and are subject to Regulation D reserve requirements, as are any non-personal
time deposits (including certain money market deposit accounts) at a savings
institution. For 1998, a depository institution must maintain average daily
reserves equal to 3% of the first $47.8 million of net transaction accounts,
plus 10% of that portion of total transaction accounts in excess of $47.8
million. The first $4.7 million of otherwise reservable balances are exempt from
the reserve requirements. These percentages and threshold limits are subject to
adjustment by the FRB. As of June 30, 1998, Reliance Savings Bank met its
Regulation D reserve requirements.
Thrift institutions also have authority to borrow from the Federal
Reserve Bank "discount window", but FRB policy generally requires thrift
institutions to exhaust all sources before borrowing from the Federal Reserve
System. Reliance Savings Bank had no discount window borrowings as of June 30,
1998.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System, consisting of 12 FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLBs operate in a safe and sound manner.
Reliance Savings Bank, as a member of the FHLB-Chicago, is required to
acquire and hold shares of capital stock in the FHLB-Chicago in an amount equal
to the greater of: (i) 1% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1% of 30% of total assets. Reliance Savings
Bank is in compliance with this requirement with an investment in FHLB-Chicago
stock of $200,000 at June 30, 1998.
Among other benefits, the FHLBs provide a central credit facility
primarily for member institutions. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB-Chicago. At June 30, 1998, Reliance
Savings Bank had $2.0 million in advances outstanding from FHLB-Chicago.
HOLDING COMPANY REGULATION
Federal Regulation. Reliance is a registered bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "BHCA"). As
such, Reliance is subject to examination, regulation and periodic reporting
under the BHCA, as administered by the FRB. The FRB has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC for Reliance Savings Bank. Reliance's total Tier 1
capital significantly exceeded such capital adequacy requirements.
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Reliance is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior FRB approval will be required for Reliance to acquire direct or indirect
ownership or control of any voting securities of any bank holding company if,
after giving effect to such acquisition, it would directly or indirectly, own or
control more than 5% of any class of voting shares of such bank or bank holding
company. The BHCA also prohibits the acquisition by Reliance of more than 5% of
the voting shares of substantially all the assets of a bank located outside the
State of Wisconsin unless such an acquisition is specifically authorized by the
laws of the state in which such bank is located.
FRB regulations govern a variety of bank holding company matters,
including redemption of outstanding equity securities, and non-banking
activities. A bank holding company generally is prohibited from engaging in,
acquiring direct or indirect control of any company engaged in non-bank
activities. One of the principal exemptions to this prohibition is for
activities found by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the principal
activities the FRB has determined by regulation to be so closely related to
banking are: (i) making or servicing loans; (ii) performing certain data
processing services; (iii) providing discount brokerage services; (iv) acting as
fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed primarily
to promote community welfare; and (vii) acquiring and/or operating a savings and
loan association.
Pursuant to FRB policy, dividends should be paid only out of current
earnings and only if the prospective rate of earnings retention by the bank
holding company appears consistent with its capital needs, asset quality and
overall financial condition. The FRB policy also requires that a bank holding
company serve as a source of financial strength to its subsidiary banks by
standing ready to use available resources to provide adequate capital funds to
those banks during periods of financial stress or adversity. These policies
could affect the ability of Reliance to pay cash dividends.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of Reliance Savings
Bank, the company, any subsidiary of Reliance and related interests of such
persons. See "Restrictions on Loans and Transactions with Insiders and
Affiliates." Moreover, subsidiaries of bank holding companies are prohibited
from engaging in certain tie-in arrangements (with Reliance or any of its
subsidiaries) in connection with any extension of credit, lease, sale of
property or furnishing of services.
Reliance and its subsidiary, Reliance Savings Bank, will be affected by
the monetary and fiscal policies of various agencies in the United States
government, including the Federal Reserve System. In view of changing conditions
in the national economy and in the money markets, it is impossible for
management of Reliance to accurately predict future changes in monetary policy
or the effect of such changes on the business or financial condition of
Reliance.
State Savings Bank Holding Company Regulation. In addition to the FRB
bank holding company regulations, a bank holding company that owns or controls,
directly or indirectly, more than 25% of the voting securities of a savings bank
also is subject to regulation as a savings bank holding company by the
Administrator.
ACQUISITION OF THE HOLDING COMPANY
Under the federal Change in Bank Control Act of 1978, as amended
("CBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concern, seeks to acquire 10% of more of the
outstanding shares of Reliance Common Stock, unless the FRB has found that the
acquisition will not result in a change in control of Reliance. Under the CBCA,
the FRB has 60 days within which to act on such notices, taking into
consideration convenience and needs of the communities served by Reliance and
Reliance Savings Bank, and
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the anti-trust effects of the acquisition. Under the BHCA, company would be
required to obtain prior approval from the FRB, or have such approval waived by
the FRB, before it may obtain "control" of Reliance within the meaning of the
BHCA. Control generally is defined to mean the ownership or power to vote 25% or
more of any class of voting securities of Reliance or the ability to control in
any manner the election of a majority of Reliance's directors. In addition, the
BHCA prohibits the acquisition of Reliance by a bank holding company located
outside the State of Wisconsin, unless such acquisition is specifically
authorized by Wisconsin Law.
EMPLOYEES
Reliance Savings Bank had 5 full-time and 2 part-time employees at June
30, 1998. The employees of Reliance Savings Bank are not represented by a
collective bargaining unit and Reliance Savings Bank believes its relationship
with its employees to be good.
PROPERTIES
Reliance Savings Bank conducts its operations through its full-service
office listed below.
<TABLE>
<CAPTION>
NET BOOK VALUE
YEAR OF PROPERTY AT
LOCATION OPENED OWNED OR LEASED JUNE 30, 1998
-------- ------ --------------- ---------------
<C> <C> <C> <C> <C>
3140 South 27th Street 1953 Owned $41,000
Milwaukee, WI 53215
</TABLE>
LEGAL PROCEEDINGS
Reliance Savings Bank is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business, which in the aggregate involve amounts that are believed by management
to be immaterial to the financial condition of Reliance Savings Bank.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELIANCE
GENERAL
Reliance's business currently consists of the business of Reliance
Savings Bank. Reliance Savings Bank is headquartered in Milwaukee, Wisconsin and
is a community-oriented, full-service financial institution offering a variety
of retail financial services to meet the needs of the communities it serves.
Reliance Savings Bank's principal business consists of attracting funds in the
form of deposits and investing such funds in loans secured by real estate,
investment securities (including United States government and other agency
obligations and mutual funds) and mortgage-backed and related securities.
The earnings of Reliance Savings Bank depend primarily on its level of
net interest income, which is the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
and related securities and other investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits. Net interest
income is a function of Reliance Savings Bank's interest rate spread, which is
the difference between the average yield earned on interest-earning assets and
the average rate paid on interest-bearing liabilities as well as a function of
the average balance of interest-earning assets as compared to interest-bearing
liabilities. Many of Reliance Savings Bank's assets, including mortgage loans
and mortgage-backed and related securities, are subject to reinvestment risk.
During periods of falling interest rates, higher yielding loans and
mortgage-backed and related securities are more likely to prepay and Reliance
Savings Bank may not be able to reinvest the proceeds from such repayment in
loans or securities with yields similar to those prepaying. Reliance Savings
Bank's earnings also are affected by the level of its other income, including
loan servicing, commitment and origination fees and gains on sale of loans and
investments as well as its level of noninterest expenses, including employee
compensation and benefits, directors' fees, occupancy and equipment costs and
federal deposit insurance premiums. Reliance Savings Bank's operating results
are significantly affected by general economic conditions, and the monetary,
fiscal and regulatory policies of governmental agencies. Lending activities are
influenced by the demand for and supply of housing, competition among lenders,
the level of interest rates and the availability of funds. Deposit flow and cost
of funds likewise are heavily influenced by prevailing market rates of interest
on competing investment alternatives, account maturities and the levels of
personal income and savings in Reliance Savings Bank's primary market area.
YEAR 2000 ISSUE
The "Year 2000 Issue" concerns a problem resulting from computer
programs being written using two digits rather than four digits to define the
applicable year. Any of Reliance's software programs, or software programs used
by its third-party providers, that are date-sensitive may recognize a date using
"00" as the year 1900 rather than the year 2000. If not corrected, this problem
could cause a major system failure or miscalculations and represent a material
cost to Reliance.
During 1997, Reliance developed a Year 2000 Compliance Plan and
conducted a review of its computer systems and its third-party systems
identifying those that could be affected by the Year 2000 Issue. The inventory
prepared included a review of its non-computer equipment and infrastructure
issues, such as its heating, ventilation and air-conditioning equipment, and
security equipment, which could have embedded systems, to verify that they will
function in Year 2000. The plan also identified all third-party service
providers, vendors, and commercial credit customers doing business with
Reliance.
All of Reliance's equipment, vendors and suppliers, and commercial
credit customers were analyzed and segregated into two categories, critical
systems and non-critical systems. Critical systems were defined as those having
date-sensitive attributes which, if not Year 2000 compliant, could have a
material impact on the operations of Reliance. Non-critical systems were defined
as those having date-sensitive attributes which, if not Year 2000 compliant,
could continue to function by alternative methods which would not have a
material impact on the operations of Reliance. An example of a critical system
is Reliance's internal data-processing systems and those of its third-party
providers since non-compliance would pose a significant risk to Reliance. An
example of a non-critical piece of equipment is Reliance's postage meter since,
if non-compliant, the alternative is to use stamps.
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During the first quarter of 1998, Reliance initiated formal
communications with all of its significant vendors, suppliers, and commercial
credit customers to inform them of Reliance's plan for Year 2000 compliance and
to determine the extent to which Reliance is vulnerable to those third parties'
failure to remedy their own Year 2000 issue. There can be no assurance that the
systems of other organizations upon which Reliance's operations rely, including
essential utilities and telecommunications providers, will be timely converted,
or would not have a materially adverse effect on Reliance. A target date of
December 31, 1998 has been established for the initial assessment of the
responses of vendors, suppliers and significant credit customers.
Reliance has not incurred any costs to date associated with its Year
2000 readiness plans other than the soft-dollar costs relating to its review
process. Reliance estimates its costs to be between $30,000 and $40,000 to
upgrade its computer hardware to be Year 2000 compliant. Reliance believes that,
with modifications to existing software used by Reliance and by its third-party
providers, the Year 2000 problem will not pose significant operational problems
for Reliance. Reliance does not anticipate costs to remedy the Year 2000 issue
will have a material impact on the financial condition of Reliance.
Due to the pending merger with St. Francis, the concerns related to the
Year 2000 issue may have little or no impact on the operations of Reliance as it
exists now. However, Reliance has developed contingency plans should the merger
not be completed. Those plans include the purchase of Year 2000 computer
hardware and for the testing of its computer systems with its third-party
servicer to be completed before the end of the first quarter of 1999.
MANAGEMENT STRATEGY
For many years, Reliance Savings Bank's financial condition has been
characterized by high capital and liquidity levels. While Reliance Savings Bank
has in recent years had funds to lend, Reliance Savings Bank believes there has
been a diminishing demand for one- to four-family mortgage loans in its local
market area (generally defined as an area within a three-mile radius of Reliance
Savings Bank's office). Reliance Savings Bank intends to continue to emphasize
one- to four family mortgage lending in its local market area, but also has been
originating, and intends to continue to originate one- to four-family,
residential construction, commercial real estate, commercial construction and
land development and multi-family loans both within and outside its local market
area in suburbs surrounding the City of Milwaukee, which encompass the Wisconsin
counties of Milwaukee, Waukesha, Ozaukee and Washington, in order to generate
earnings, adequately leverage its capital and make effective use of its liquid
assets.
Financial highlights and operating strategies of Reliance Savings Bank
include the following:
1. Profitability and Capital Strength. Reliance Savings Bank has been
profitable and has met all of its regulatory capital requirements over at least
the past 20 years. For the years ended June 30, 1997 and 1998 and for the three
months ended September 30, 1997 and 1998, Reliance's net income was $616,000,
$572,000, $163,000 and $103,000, respectively. Reliance's return on average
assets for the years ended June 30, 1997 and 1998 and for the three months ended
September 30, 1997 and 1998 was 1.32%, 1.24%, 1.36% and 0.96%, respectively.
Reliance's return on average equity for the years ended June 30, 1997 and 1998
and for the three months ended September 30, 1997 and 1998 was 2.44%, 2.43%,
2.72% and 1.77%, respectively.
At September 30, 1998, Reliance had $22.4 million of stockholders'
equity, or 55.71% of total assets, and met all of its regulatory capital
requirements, in each case on a fully phased-in basis, with GAAP capital of
55.71% of total assets and Tier 1 capital of 51.42% of total risk-weighted
assets.
2. Diversification of Lending Activities. The largest portion of
Reliance Savings Bank's loan portfolio is one- to four-family residential
mortgage loans, which amounted to $8.5 million, or 26.73% of total gross loans,
at September 30, 1998. The remaining $23.1 million, or 73.27% of total gross
loans, at September 30, 1998 consisted of $3.4 million of multi-family loans,
$7.4 million of commercial real estate loans, $4.3 million of residential
construction loans, $8.0 million of commercial construction and land development
loans, and $195,000 of consumer loans.
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3. Asset Quality. Reliance Savings Bank focuses on high asset
quality in its lending activities. At September 30, 1998, Reliance
Savings Bank had one non-performing loan totaling $193,000 representing
only 0.48% of total assets, and Reliance Savings Bank had no other
non-performing assets during the last three fiscal years. Moreover,
Reliance Savings Bank has not had any loan charge-offs during the last
three fiscal years or for the three months ended September 30, 1998.
During the years ended June 30, 1997 and 1998, respectively, Reliance
Savings Bank added $22,000 to its allowance for loan losses and there
were no charge-offs. During the three months ended September 30, 1997
and 1998, Reliance added $5,000 to its allowance for loan losses and
there were no charge-offs.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
GENERAL
Reliance had net income of $103,000 for the three months ended
September 30, 1998 compared to net income of $163,000 for the three months ended
September 30, 1997. The primary reason for the decrease in net income was due to
decreased interest income on investment securities and loans partially offset by
decreased interest expense on borrowings. Net income for the 1998 period was
also affected by higher professional services expense relating to Reliance's
pending merger partially offset by lower compensation and benefits expense.
NET INTEREST INCOME
Net interest income decreased $14,000 from $541,000 for the three
months ended September 30, 1997 to $527,000 for the three months ended September
30, 1998. The decrease in net interest income was due to decreased interest
income on investment securities and loans partially offset by decreased interest
expense on borrowings. Interest income on loans decreased as a result of a lower
portfolio average balance and a lower average yield while interest income on
investment securities decreased as a result of a lower portfolio average
balance. Interest expense on borrowings decreased due to a lower average balance
of borrowings.
PROVISION OF LOAN LOSSES
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on Reliance Savings Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions. There can be no
assurance that the allowance for loan losses will be adequate to cover losses
which may in fact be realized in the future and that additional provisions for
loan losses will not be required. The amount of the provision for loan losses
for the three months ended September 30, 1998 and 1997 reflected management's
intention to continue to make additions to Reliance Savings Bank's allowance for
loan losses until it is equal to approximately 1.0% of Reliance Savings Bank's
gross loan portfolio. However, Reliance Savings Bank will continue to monitor
its loan loss experience, the condition and composition of its loan portfolio
and general economic conditions, and may make further additions to its allowance
for loan losses to a greater or lesser extent than it has done historically,
depending upon changes in the aforementioned conditions.
There was one nonperforming loan of $197,000 at September 30, 1998 and
none at September 30,1997. As a result of this evaluation, Reliance Savings
Bank's provision for loan losses for the three months ended September 30, 1998
and 1997 amounted to $5,000 and $5,000 respectively.
NON-INTEREST INCOME
Non-interest income increased $5,000 from ($2,000) for the three months
ended September 30, 1997 to $3,000 for the three months ended September 30,
1998. The increase in non-interest income was the result of the $4,000 loss on
the sale of investments for the three months ended September 30, 1997.
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NON-INTEREST EXPENSE
Non-interest expense increased $80,000 from $253,000 for the three
months ended September 30, 1997 to $333,000 for the three months ended September
30, 1998. Compensation and benefits decreased $30,000 from $160,000 for the
three months ended September 30, 1997 to $130,000 for the three months ended
September 30, 1998 due to the decrease in costs associated with the pension
plan. Fees for professional services increased $107,000 from $22,000 for the
three months ended September 30, 1997 to $129,000 for the three months ended
September 30, 1998 due to legal fees for services rendered in connection with
the pending merger with St. Francis.
INCOME TAX EXPENSE
Income taxes fluctuated during the two periods due to the level of
pre-tax earnings.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
GENERAL
Net income for the year ended June 30, 1998 decreased 5.6% to $572,000
compared to $616,000 for the year ended June 30, 1997. The decrease in the net
income was primarily attributable to a decrease in net interest income. Net
interest income decreased 9.5% to $2.17 million for the year ended June 30, 1998
compared to $2.40 million for the year ended June 30, 1997, due primarily to an
increase in average interest-bearing liabilities, a decrease in interest-earning
assets, and a decrease in the interest rate spread. Non-interest income
increased 41.7% to $51,000 for the year ended June 30, 1998 compared to $36,000
for the year ended June 30, 1997. Non-interest expense decreased 11.8% to
$1,262,000 for the year ended June 30, 1998 compared to $1,431,000 for the year
ended June 30, 1997, primarily due to a $96,000 decrease in compensation and
benefits and a $151,000 decrease in federal insurance premiums partially offset
by a $65,000 increase in professional services. Income taxes decreased 0.3% to
$366,000 for the year ended June 30, 1998 compared to $367,000 for the year
ended June 30, 1997. The return on average assets decreased to 1.24% for the
year ended June 30, 1998 compared to 1.32% for the year ended June 30, 1997. The
return on average equity decreased to 2.43% for the year ended June 30, 1998
compared to 2.44% for the year ended June 30, 1997.
NET INTEREST INCOME
Net interest income is determined by an institution's interest rate
spread, the relative dollar amount or mix of interest-earning assets and
interest-bearing liabilities and the degree of match in the maturity and
repricing of its interest-earning assets and interest-bearing liabilities.
Net interest income decreased $229,000 to $2.17 million for the year
ended June 30, 1998 compared to $2.40 million for the year ended June 30, 1997.
The decrease was due to a $112,000 decrease in total interest income and an
increase in total interest expense of $117,000. The decrease in net interest
income was the result of a 5.5% increase in average interest-bearing
liabilities, and a 2.4% decline in average interest-earning assets, coupled with
a 32 basis point decrease in the interest rate spread. The decrease in interest
rate spread between June 30, 1998 and 1997 was due primarily to the increase in
the average cost of deposit accounts by 11 basis points and a 77 basis point
increase in the average cost of borrowing, while the average yield on
interest-earning assets declined 6 basis points for the same period.
The decrease in average interest-earning assets over interest-bearing
liabilities between June 30, 1998 and 1997 was due to the increase in the
average borrowings between periods of $1.48 million and a decrease in the
average balances of deposits accounts of $316,000 while the average balances of
loans and investments decreased by $1.11 million for the same period. Management
believes deposits declined due to general demographic changes in Reliance
Savings Bank's local market area and due to competition from alternative
investments that were more attractive to depositors during the period.
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INTEREST INCOME
Total interest income decreased $112,000, or 3.2% to $3.36 million for
the year ended June 30, 1998 compared to $3.47 million for the year ended June
30, 1997, as a result of an decrease in the average balance of interest-earning
assets and a decrease in the average yield on interest-earning assets. The
average yield on interest-earning assets decreased 6 basis points to 7.60% for
the year ended June 30, 1998 compared to 7.66% for the year ended June 30, 1997.
For the year ended June 30, 1998, Reliance Savings Bank's average yield on
investments was 5.41% compared to 6.07% for the year ended June 30, 1997. Total
interest-earning assets decreased 2.4% to $44.2 million for the year ended June
30, 1998 from $45.3 million for the year ended June 30, 1997.
Interest income on loans increased to $2.41 million for the year ended
June 30, 1998 compared to $2.23 million for the year ended June 30, 1997. The
increase was primarily due to an increase in average loan balances of $1.8
million, and an increase in the average yield of 6 basis points. Interest income
on investments decreased to $886,000 for the year ended June 30, 1998 from
$1,162,000 for the year ended June 30, 1997.
Interest income on mortgage-backed and related securities declined to
$48,000 for the year ended June 30, 1998 compared to $68,000 for the year ended
June 30, 1997. The decline was due to a reduction in the balance of
mortgage-backed and related securities.
INTEREST EXPENSE
Total interest expense consists of interest expense on deposits which
increased $4,000, or 0.4% to $915,000 for the year ended June 30, 1998 from
$911,000 for the year ended June 30, 1997 and interest expense on borrowings
which increased $113,000 to $274,000 for the year ended June 30, 1998 from
$161,000 for the year ended June 30, 1997. The general increase in market rates
of interest during the year ended June 30, 1998 resulted in increases in average
rates paid on all of Reliance Savings Bank's major categories of deposits to
5.18% for the year ended June 30, 1998 from 5.07% for the year ended June 30,
1997. This increase was partially offset by a $316,000 decrease in average
deposits to $17.7 million for the year ended June 30, 1998 from $18.0 million
for the year ended June 30, 1997. The level of deposit inflows during any given
period is heavily influenced by factors such as the general level of interest
rates in the economy as well as alternative yields that investors may obtain on
competing investment instruments. Management believes the higher returns on
equity investments over the past few years has made alternative financial
products, such as mutual funds, more competitive with Reliance Savings Bank's
traditional deposit base. In addition, Reliance Savings Bank's deposit base has
been decreasing due to general demographic changes in Reliance Savings Bank's
local market area and to competition from alternative investments that were more
attractive to depositors during the period.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $22,000 for both years ended June 30,
1998 and 1997. The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on Reliance Savings Bank's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may effect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions. The amount of the
provision for loan losses for both the years ended June 30, 1998 and 1997
reflect management's intention to continue to make annual additions to Reliance
Savings Bank's allowance for loan losses until it is equal to approximately 1.0%
of Reliance Savings Bank's gross loan portfolio. However, Reliance Savings Bank
will continue to monitor its loan loss experience, the condition and composition
of its loan portfolio and general economic conditions, and make further
additions to its allowance for loan losses to a greater or lesser extent than it
has done historically, depending upon changes in the aforementioned factors. The
allowance for loan losses totaled $169,000 and $147,000 at June 30, 1998 and
1997, respectively. The allowance for loan losses was 0.55% of gross loans at
June 30, 1998 and 0.49% of gross loans at June 30, 1997. Nonperforming loans
totaled $197,000 at June 30, 1998. There were no nonperforming loans at June 30,
1997. There were no charge-offs recorded by Reliance for the years ended June
30, 1998 and 1997.
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NON-INTEREST INCOME
Non-interest income increased to $51,000 for the year ended June 30,
1998 compared to $36,000 for the year ended June 30, 1997. The change was due in
part to an $28,000 investment gain during the year ended June 30, 1998 compared
to an $2,000 investment gain during the year ended June 30, 1997. The remainder
of the change was due to a decrease in the cash surrender value of life
insurance of $20,000 and an increase in real estate loan brokerage fee income of
$11,000 for the year ended June 30, 1998.
NON-INTEREST EXPENSE
Non-interest expense decreased $169,000, or 11.8%, to $1,262,000 for
the year ended June 30, 1998 from $1,431,000 for the year ended June 30, 1997.
The decrease was due primarily to a decrease in compensation and benefits of
$96,000 due to decreases in ESOP expense and pension expense and a decrease in
federal insurance premiums of $151,000 partially offset by an increase in fees
for professional services of $65,000. Non-interest expense as a percentage of
average assets (on an annualized basis) was 2.73% and 3.07%, respectively, for
the years ended June 30, 1998 and 1997.
INCOME TAX EXPENSE
Income tax expense decreased $1,000, or 0.3%, to $366,000 for the year
ended June 30, 1998 from $367,000 for the year ended June 30, 1997, primarily
due to decreased income before income taxes. The decrease reflects the decrease
in income before taxes from $983,000 for the year ended June 30, 1997 to
$938,000 for the year ended June 30, 1998. Reliance's effective tax rates were
39.0% and 37.3%, respectively, for the years ended June 30, 1998 and 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
GENERAL
Net income for the year ended June 30, 1997 increased 20.2% to $616,000
compared to $514,000 for the year ended June 30, 1996. The increase in the net
interest was primarily attributable to an increase in net interest income. Net
interest income increased 52.8% to $2.40 million for the year ended June 30,
1997 compared to $1.57 million for the year ended June 30, 1996, due primarily
to a decrease in average interest-bearing liabilities and an increase in
interest-earning assets, and an increase in the interest rate spread.
Non-interest income increased 111.8% to $36,000 for the year ended June 30, 1997
compared to $17,000 for the year ended June 30, 1996. Non-interest expense
increased 98.5% to $1,431,000 for the year ended June 30, 1997 compared to
$721,000 for the year ended June 30, 1996, primarily due to a $112,000 increase
in the FDIC assessment, a $155,000 increase in professional services and a
$406,000 increase in compensation and benefits. Income taxes increased 10.9% to
$367,000 for the year ended June 30, 1997 compared to $331,000 for the year
ended June 30, 1996. The return on average assets decreased to 1.32% for the
year ended June 30, 1997 compared to 1.40% for the year ended June 30, 1996. The
return on average equity decreased to 2.44% for the year ended June 30, 1997
compared to 3.45% for the year ended June 30, 1996.
NET INTEREST INCOME
Net interest income increased $829,000 to $2.40 million for the year
ended June 30, 1997 compared to $1.57 million for the year ended June 30, 1996.
The increase was due to a $748,000 increase in total interest income and a
decrease in total interest expense of $81,000. The increase in net interest
income was the result of a 1.5% decline in average interest-bearing liabilities,
and a 27.4% increase in average interest-earning assets, coupled with a 30 basis
point increase in the interest rate spread. The increase in interest rate spread
between June 30, 1997 and 1996 was due primarily to the decrease in the average
cost of deposit accounts by 30 basis points, while the average yield on
interest-earning assets remained level for the same period.
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The increase in average interest-earning assets over interest-bearing
liabilities between June 30, 1997 and 1996 was due to the decrease in the
average balances of deposit accounts between periods of $3.20 million while the
average balances of loans and investments increased by $9.76 million for the
same period. Management believes deposits declined due to general demographic
changes in Reliance Savings Bank's local market area and due to competition from
alternative investments that were more attractive to depositors during the
period.
INTEREST INCOME
Total interest income increased $748,000, or 27.5%, to $3.47 million
for the year ended June 30, 1997 compared to $2.72 million for the year ended
June 30, 1996, as a result of an increase in the average balance on
interest-earning assets. The average yield on interest-earning assets remained
level at 7.66% for the years ended June 30, 1997 and 1996. For the year ended
June 30, 1997, Reliance Savings Bank's average yield on loans was 8.82% compared
to 8.55% for the year ended June 30, 1996. Total interest earning assets
increased 27.5% to $45.3 million for the year ended June 30, 1997 from $35.6
million for the year ended June 30, 1996.
Interest income on loans increased to $2.23 million for the year ended
June 30, 1997 compared to $1.89 million for the year ended June 30, 1996. The
increase was primarily due to an increase in average loan balances of $3.2
million, and an increase in the average yield of 27 basis points. Interest
income on investments increased to $1,162,000 for the year ended June 30, 1997
from $743,000 for the year ended June 30, 1996.
Interest income on mortgage-backed and related securities declined to
$68,000 for the year ended June 30, 1997 compared to $84,000 for the year ended
June 30, 1996. The decline was due to a reduction in the balance of
mortgage-backed and related securities due to increased prepayments on a
mortgage-backed pool yielding over 10%.
INTEREST EXPENSE
Total interest expense decreased $81,000, or 7.0% to $1.07 million for
the year ended June 30, 1997 from $1.15 million for the year ended June 30,
1996. The general decrease in market rates of interest during the year ended
June 30, 1997 resulted in decreases in average rates paid on all of Reliance
Savings Bank's major categories of deposits to 5.07% for the year ended June 30,
1997 from 5.41 % for the year ended June 30, 1996. This decrease was coupled
with a $3.2 million decrease in average deposits to $18.0 million for the year
ended June 30, 1997 from $21.2 million for the year ended June 30, 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $22,000 for both years ended June 30,
1997 and 1996. The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on Reliance Savings Bank's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions. The amount of the
provision for loan losses for both the years ended June 30, 1997 and 1996
reflect management's intention to continue to make annual additions to Reliance
Savings Bank's allowance for loan losses until it is equal to approximately 1.0%
of Reliance Savings Bank's gross loan portfolio. However, Reliance Savings Bank
will continue to monitor its loan loss experience, the condition and composition
of its loan portfolio and general economic conditions, and make further
additions to its allowance for loan losses to a greater or lesser extent than it
has done historically, depending upon changes in the aforementioned factors. The
allowance for loan losses totaled $147,000 and $126,000 at June 30, 1997 and
1996, respectively. The allowance for loan losses was 0.49% and 0.47% of gross
loans at June 30, 1997 and 1996, respectively. There were no nonperforming loans
at June 30, 1997 and 1996. There were no charge-offs recorded by Reliance for
the years ended June 30, 1997 and 1996.
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NON-INTEREST INCOME
Non-interest income increased to $36,000, for the year ended June 30,
1997 compared to $17,000 for the year ended June 30, 1996. The change was due in
part to an $2,000 investment gain during the year ended June 30, 1997 compared
to an $3,000 investment loss during the year ended June 30, 1996. The remainder
of the change was due to an increase in the cash surrender value of life
insurance of $23,000 and a decrease in real estate loan brokerage fee income of
$8,000 for the year ended June 30, 1997.
NON-INTEREST EXPENSE
Non-interest expense increased $710,000, or 98.5%, to $1,431,000 for
the year ended June 30, 1997 from $721,000 for the year ended June 30, 1996. The
increase was due primarily to a special one-time FDIC assessment of $112,000, an
increase in compensation and benefits of $406,000, and an increase in fees for
professional services of $155,000. Reliance Savings Bank anticipates a continued
increase in non-interest expense as a result of the Conversion due to
anticipated increased legal and accounting fees. Noninterest expense as a
percentage of average assets (on an annualized basis) was 3.07% and 2.06%,
respectively, for the years ended June 30, 1997 and 1996.
INCOME TAX EXPENSE
Income tax expense increased $36,000, or 10.9%, to $367,000 for the
year ended June 30, 1997 from $331,000 for the year ended June 30, 1996. The
increase reflects the increase in income before taxes from $845,000 for the year
ended June 30, 1996 to $983,000 for the year ended June 30, 1997. Reliance's
effective tax rates were 37.3% and 39.2%, respectively, for the years ended June
30, 1997 and 1996.
FINANCIAL CONDITION
The following table summarizes certain information relating to
Reliance's statement of financial condition at the dates indicated.
<TABLE>
<CAPTION>
AT AT JUNE 30,
SEPTEMBER 30, -----------------------------------
1998 1998 1997 1996
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents....................... $ 4,099 $ 4,346 $ 3,048 $ 4,055
Investment securities........................... 8,037 10,987 14,964 19,354
Mortgage-backed securities...................... 411 456 685 800
Loans receivable, net........................... 27,004 25,798 27,601 22,931
LIABILITIES:
Deposits........................................ 17,380 17,330 17,596 18,200
Borrowings.................................... -- 2,000 6,008 --
STOCKHOLDERS' EQUITY,
SUBSTANTIALLY RESTRICTED........................... 22,535 22,372 22,966 29,348
</TABLE>
The statements of financial condition at June 30, 1998 and 1997 are
consolidated (see "Principles of Consolidation" in the Notes to Consolidated
Financial Statements).
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CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased to $4.3 million at June 30, 1998
from $3.0 million at June 30, 1997. The increase between 1997 and 1998 was
attributable to the decrease in investment securities during the period and the
decrease in borrowings. Cash and cash equivalents decreased $247,000 to $4.1
million at September 30, 1998 from $4.3 million at June 30, 1998, which resulted
from the use of cash to repay a portion the $2 million in borrowings retired
during the period.
INVESTMENT SECURITIES
Investment securities decreased to $11.4 million at June 30, 1998 from
$15.6 million at June 30, 1997. The change between 1997 and 1998 was primarily
due to the sale of investment securities to repay borrowings in the aggregate
amount of $4.0 million. Investment securities decreased $2.5 million to $8.4
million at September 30, 1998 from $10.9 million at June 30, 1998. The decrease
was primarily due to the sale of investment securities during the three months
ended September 30, 1998 in order to repay $2 million in borrowings.
Mortgage-backed and related securities declined to $463,000 at June 30,
1998 from $685,000 at June 30, 1997. The decrease was the result of normal
principal payments and from the sale of the $100,000 CMO. Mortgage-backed and
related securities decreased to $411,000 at September 30, 1998 from $456,000 at
June 30, 1998. Management decided to reinvest the repayment and prepayment
proceeds into higher yielding mortgage loans and other investment securities.
Reliance Savings Bank may, in future periods, leverage its capital base
by using the proceeds of borrowings from the FHLB-Chicago to purchase
mortgage-backed and related securities and investment securities. Therefore, if
the leveraging strategy is implemented, the size of Reliance Savings Bank's
mortgage-backed and related securities portfolio may increase in future periods.
LOANS RECEIVABLE
Net loans receivable decreased to $25.8 million at June 30, 1998 from
$27.6 million at June 30, 1997. The net change in loans arising from
originations and principal repayments for the years ended June 30, 1998 and 1997
was $(1,720,000) and $290,000 for one- to four-family loans, respectively;
$(1,181,000) and $19,000 for multi-family loans, respectively; $1.9 million and
$1.7 million for construction and land development loans, respectively; and,
$2.1 million and $1.2 million for commercial real estate loans, respectively.
There were no loans sold during these periods. As a result of the originations
and repayments during these periods, mortgage loans increased or decreased as
follows: one- to four-family mortgage loans were $9.3 million at June 30, 1998,
compared to $11.0 million at June 30, 1997; commercial construction and land
development loans were $10.3 million at June 30, 1998, compared to $8.4 million
at June 30, 1997; multi-family loans were $3.4 million at June 30, 1998,
compared to $4.6 million at June 30, 1997; and commercial real estate loans were
$7.5 million at June 30, 1998, compared to $5.4 million at June 30, 1997. The
large increase in commercial and land development loans is due to a strategic
decision to pursue these higher-yielding, shorter maturity loans. Net loans
receivable increased $1.2 million to $27 million at September 30, 1998 from
$25.8 million at June 30, 1998. The majority of the increase for the three
months ended September 30, 1998 relates to commercial and land development
loans.
DEPOSITS AND BORROWINGS
Deposits were $17.3 million and $17.6 million at June 30, 1998 and
1997, respectively. Deposits are Reliance Savings Bank's primary source of
externally generated funds. The level of deposits is heavily influenced by
factors such as the general level of short and long-term interest rates, as well
as alternative yields that investors may obtain on competing investment
instruments such as mutual funds. In recent years, the lower yields on bank
deposit products have made alternative financial products more competitive with
Reliance Savings Bank's traditional deposit products. During the year ended June
30, 1998, Reliance Savings Bank's certificate of deposit accounts increased by
$142,000 and non-certificate accounts declined by $408,000. At June 30, 1998 and
1997, demand
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accounts, which consist of interest-bearing and noninterest-bearing NOW
accounts, money market accounts and passbook accounts, were $3.3 million and
$3.7 million, respectively. The general decrease in these accounts was primarily
due to the increased competition from non-deposit accounts offering higher
yields than traditional deposit products. Reliance Savings Bank intends to focus
on increasing its core deposits in order to maintain a more stable deposit base.
However, although Reliance Savings Bank has been competitively pricing its
deposit products over the past two years, its core deposits have continued to
decline. Deposits increased $50,000 from June 30, 1998 to $17.4 million at
September 30, 1998.
Reliance Savings Bank had $2.0 million and $6.0 million in outstanding
advances or other borrowings at June 30, 1998 and 1997, respectively. Borrowings
decreased $2 million between June 30, 1998 and September 30, 1998, so that at
September 30, 1998 Reliance Savings Bank had no outstanding borrowings. This
decrease is primarily attributable to the narrowing spread between the yield on
investments and the cost of borrowings and management's decision to repay the
borrowings as they came due.
STOCKHOLDERS' EQUITY
Reliance's stockholders' equity declined to $22.4 million at June 30,
1998 from $23.0 million at June 30, 1997. The decrease was primarily
attributable to the stock repurchased through the various share repurchase
programs initiated to improve the return on equity. Stockholders' equity
increased as a result of Reliance's net income of $572,000 for the year ended
June 30, 1998. In addition, stockholders' equity also increased by unrealized
gains, net of taxes, for Reliance Savings Bank's securities which were held as
available for sale. For the year ended June 30, 1998, the unrealized gain was
$239,000, which was net of assumed taxes of $154,000, and for the year ended
June 30, 1997, the unrealized gain was 263,000, which was net of assumed taxes
of $169,000. Stockholders' equity increased $163,000 from $22.4 million at June
30, 1998 to $22.5 million at September 30, 1998, which increase is attributable
to Reliance's net income for the three months ended September 30, 1998.
LIQUIDITY, CAPITAL RESOURCES AND REGULATORY CAPITAL
Reliance Savings Bank's primary source of funds are deposits, proceeds
of principal and interest payments on loans, and principal and interest payments
on mortgage-backed and related securities and investment securities. Although
maturity and scheduled amortization of loans and investments are predictable,
sources of funds, deposit flows, mortgage loan prepayments and prepayments on
mortgage-backed and related securities are influenced significantly by general
interest rates, economic conditions and competition. During the year ended June
30, 1998, rates in general declined more significantly than during the year
ended June 30, 1997 causing mortgage loan prepayments to increase more than two
times the level experienced during the preceding year. For the years ended June
30, 1998 and 1997, Reliance Savings Bank reinvested loan and mortgage-backed and
related securities repayments into new mortgage loan originations, primarily
commercial and land development loans, and investment securities. In a period of
low and rising interest rates, it is anticipated that mortgage loan prepayments
will decrease, and any proceeds from such prepayments would be invested in
higher yielding loans or investments which would have the effect of increasing
interest income.
Reliance Savings Bank is required to maintain minimum levels of liquid
assets under Wisconsin law. Savings banks are required to maintain an average
daily balance of liquid assets (including cash, certain time deposits, certain
banker's acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations) of not less than 8% of its
average daily balance of net withdrawable accounts plus short-term borrowings.
Reliance Savings Bank's liquidity ratios were 78.56% and 75.05%, at June 30,
1998 and 1997, respectively and 61.73% at September 30, 1998.
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Reliance's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on Reliance Savings Bank's operating, financing,
lending and investing activities during any given period. At June 30, 1998 and
1997, and September 30, 1998, cash and cash equivalents were $4.3 million, $3.0
million and $4.1 million, respectively. The increase in cash and cash
equivalents was attributable to the increase in mortgage loan repayments during
the year.
Liquidity management for Reliance Savings Bank is both a daily and
long-term component of Reliance Savings Bank's management strategy. Reliance
Savings Bank maintains liquidity levels sufficient to accommodate normal deposit
fluctuations and various funding needs, and to meet its asset and liability
management objectives. Excess funds generally are invested in short-term
investments.
The primary investing activity of Reliance Savings Bank is the
origination of loans. For the years ended June 30, 1998 and 1997 and the three
months ended September 30, 1998 and 1997, Reliance Savings Bank originated $13.6
million, $8.5 million, $4.8 million and $3.1 million in mortgage loans,
respectively. There were no sales or purchases of mortgage loans during these
periods. Reliance Savings Bank also did not originate or purchase any
mortgage-backed and related securities during these periods. During the years
ended June 30, 1998 and 1997 and the three months ended September 30, 1998 and
1997, Reliance Savings Bank received principal repayments on loans totaling
$12.5 million, $5.2 million, $3.8 million and $3.7 million, respectively, and
principal repayments on mortgage-backed and related securities of $166,000,
$115,000, $45,000 and $161,000 respectively.
At June 30, 1998 and September 30, 1998, Reliance Savings Bank had
$946,000 and $475,000 in outstanding loan commitments, respectively. Reliance
Savings Bank had no commitments to purchase mortgage-backed and related
securities at those dates. Reliance Savings Bank anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process prior to the issuance of firm commitments.
Certificates of deposit which are scheduled to mature in one year or less at
June 30, 1998 were $10.4 million. Based on its historical experience, management
believes that a significant portion of such deposits will remain with Reliance
Savings Bank.
Effective June 7, 1993, Reliance Savings Bank converted from a
state-chartered mutual savings and loan regulated by the OTS to a
state-chartered mutual savings bank subject to regulation by the FDIC and the
Wisconsin Department of Financial Institutions. Applicable FDIC regulations
require institutions to meet three capital standards: (i) "Tier 1 capital" in an
amount not less than 3% of total assets; (ii) "Tier 1 capital" in an amount not
less than 4% of risk-weighted assets; and (iii) "Total Capital" in an amount not
less than 8% of risk-weighted assets. Wisconsin-chartered savings banks also are
required to maintain a minimum capital to assets ratio of 6%. The percent of
assets for Wisconsin regulatory capital purposes is based on total
unconsolidated assets. See "Business of the Parties to the Merger -- Reliance --
Regulations" for a discussion of Reliance Savings Bank's regulatory capital
requirements.
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<PAGE> 124
A summary of Reliance Savings Bank's regulatory capital follows:
<TABLE>
<CAPTION>
AT SEPTEMBER AT JUNE 30,
--------------------- ----------------------------------------------
1998 1997 1998
--------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF ASSETS AMOUNT OF ASSETS AMOUNT OF ASSETS
------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital under generally accepted
accounting principles................... $21,179 53.38% $20,157 47.28% $21,026 50.67%
------- ------ ------- ------ ------- ------
Tier 1 capital leverage.................... $20,399 51.42% $19,670 46.18% $20,297 48.92%
Tier 1 capital leverage requirement........ 1,190 3.00 1,278 3.00 1,245 3.00
------- ------ ------- ------ ------- ------
Excess..................................... $19,209 48.42% $18,392 43.18% $19,052 45.92%
======= ====== ======= ====== ======= ======
Tier 1 risk-based capital.................. $20,399 68.08% $19,670 74.18% $20,297 69.71%
Tier 1 risk-based capital requirement...... 1,188 4.00 1,061 4.00 1,165 4.00
------- ------ ------- ------ ------- ------
Excess..................................... $19,211 64,08% $18,609 70.18% $19,132 65.71%
======= ====== ======= ====== ======= ======
Total risk-based capital................... $20,573 51.86% $19,817 46.52% $20,466 49.32%
Total risk-based capital requirement....... 2,376 8.00 2,122 8.00 2,329 8.00
------- ------ ------- ------ ------- ------
Excess..................................... $18,197 43.86% $17,695 38.52% $18,137 41.32%
======= ====== ======= ====== ======= ======
Wisconsin regulatory capital............... $21,353 52.78% $20,304 47.66% $21,195 51.08%
Wisconsin regulatory capital requirement... 2,427 6.00 2,556 6.00 2,489 6.00
------- ------ ------- ------ ------- ------
Excess..................................... $18,926 46.78% $17,748 41.66% $18,706 45.08
======= ====== ======= ====== ======= ======
</TABLE>
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<PAGE> 125
Cash flows are categorized as to whether they relate to the operating,
investing or financing activities of Reliance Savings Bank. Cash flow from
operating activities include net income plus or minus non-cash income statement
items and cash flow related to the origination and sale of mortgage loans held
for sale. Cash flow from investing activities includes proceeds from the sale or
maturity of investment securities, principal payments collected on loans and
mortgage-backed and related securities, loan originations and purchases of
investments and mortgage-backed and related securities. Cash flow from financing
activities includes the increase or decrease in deposits, borrowings and escrows
and common stock transactions. The amount of principal repayments on loans and
mortgage-backed and related securities are heavily influenced by the general
level of interest rates in the economy. During periods in which Reliance Savings
Bank is unable to originate a sufficient amount of loans that it intends to
retain, such as ARM loans and other loans with shorter terms, and during periods
of high principal repayments, Reliance Savings Bank will increase liquid assets,
with remaining amounts invested in mortgage-backed and related securities.
Deposits were $17.3 million, $17.6 million and $17.4 million at June
30, 1998 and 1997 and September 30, 1998, respectively. Reliance Savings Bank's
certificates of deposit accounts at June 30, 1998 and 1997 and September 30,
1998 were $14.0 million, $13.9 million and $14.1 million, respectively, and
demand accounts, which consist of NOW accounts, money market accounts and
passbook accounts, were $3.3 million, $3.7 million and $3.3 million,
respectively, at June 30, 1998 and 1997 and September 30, 1998. The net decrease
was due to the increased competition for nondeposit products offering higher
yields than traditional deposit accounts.
DIVIDENDS
The Board of Directors of Reliance authorized a special distribution of
$3.00 per share to shareholders of record on November 8, 1996. A significant
portion of the special distribution represented a non-taxable return of capital
that resulted in a reduction in the cost basis of each share. Approximately
$0.075 per share of the special distribution represented the payment of a cash
dividend.
Declaration of future dividends by the Board of Directors will depend
upon a number of factors, including investment opportunities available to
Reliance and Reliance Savings Bank, capital requirements, regulatory limitations
and Reliance Savings Bank's and Reliance's financial condition and results of
operations, tax considerations and general economic conditions. The payment of
cash dividends by Reliance Savings Bank to Reliance will be subject to
significant regulatory restrictions. No assurances can be given that any
dividends will be paid or will continue to be paid.
COMMON STOCK REPURCHASE AND PURCHASE PROGRAMS
Reliance adopted two share repurchase programs for its common stock on
August 29, 1996 and June 20, 1997. The repurchase programs were adopted to
improve earnings per share and return on equity, and represented an attractive
investment alternative compared to other available investments. The repurchased
shares became treasury shares and have been used for general corporate purposes.
Reliance has notified the Wisconsin Department of Financial Institutions and the
FDIC of the repurchase program and has obtained regulatory approval for the
program consistent with applicable regulations.
Under the August 29, 1996 program, Reliance planned to purchase up to
5% of the outstanding shares of common stock, or approximately 128,117 shares,
at prevailing market prices. Approximately 34,000 shares were repurchased at an
approximate cost of $283,000. Under the June 20, 1997 program, up to 126,424
shares or 5% of the outstanding shares of common stock would be repurchased at
prevailing market prices commencing in late July 1997. In total, 126,424 shares
were repurchased at an approximate cost of $1,125,000.
Also on June 20, 1997, Reliance announced that the administrators of
the Reliance Savings Bank Recognition and Retention Plan (the "Retention Plan")
would begin the open market purchase of up to 75,855 shares, or 3% of the
outstanding shares of Reliance's common stock, which will be used for awards
under the Retention Plan. The purchase program calls for shares to be purchased
at prevailing market prices over a six-month period of time commencing in late
July 1997. Approximately 69,000 shares were purchased at an approximate cost of
$611,000.
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<PAGE> 126
IMPACT OF INFLATION AND CHANGING PRICES
Reliance's Consolidated Financial Statements and Notes thereto have
been prepared in accordance with generally accepted accounting principles
("GAAP"), which requires the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of Reliance's operations. Unlike
most industrial companies, nearly all of the assets and liabilities of Reliance
are monetary in nature. As a result, interest rates have a greater impact on
Reliance's performance than do the effects of general levels on inflation.
Interest rates do not necessarily move in the same direction or to the extent as
the price of goods and services.
ACCOUNTING DEVELOPMENTS
In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Compensation." The statement encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation cost would be shown as an expense on the
income statement. SFAS No. 123 is effective for calendar year 1996. However,
companies will be required to include in that year's financial statements
information about options granted in 1995. Companies can choose not to apply the
new accounting method and continue to apply current accounting requirements,
which generally result in no compensation cost for most fixed stock option
plans. Those that do so, however, will be required to disclose in the notes to
the financial statements what net income earnings per share would have been if
they had followed the new accounting method. Reliance Savings Bank has elected
to retain the accounting under APB Opinion No. 25.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinquishments of Liabilities." The
Statement focuses on the issues of accounting for transfers and servicing of
financial assets, extinquishments of liabilities and financial assets subject to
prepayment. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinquishments of liabilities occurring after December 31, 1996. The
provisions of this statement for financial assets subject to prepayment is
effective for financial assets held on or acquired after January 1, 1997. SFAS
No. 125 is not expected to have a material impact on the financial position or
results of operations of Reliance.
FASB issued SFAS No. 128, "Earnings per Share." SFAS No. 128 applies to
(a) companies with common stock or potential common stock (such as options,
warrants, or convertible securities) traded in a public market and (b) companies
that have filed or are in the process of filing with a regulatory agency to sell
securities in a public market. SFAS No. 128 requires companies to report
earnings per share data using the weighted-average number of common shares
outstanding during the period. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 and may not be
applied earlier.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all items
required to be recognized under accounting standards as components of
comprehensive income in a financial statement be displayed with the same
prominence as other financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
-123-
<PAGE> 127
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for years beginning
after June 15, 1999, although earlier adoption is permitted. This standard
establishes new rules for the recognition and measurement of derivatives and
hedging activities. It requires all derivatives to be recorded on the balance
sheet at fair value, although the timing of recognition in earnings will depend
on the classification of the hedge according to criteria established by SFAS No.
133. Changes in fair value of derivatives that do not meet these criteria are
required to be included in earnings in the period of the change. Reliance has no
determined the impact that SFAS No. 133 will have on its financial statements
and believes that such determination will no be meaningful until closer to the
date of initial adoption.
ASSET/LIABILITY MANAGEMENT
Reliance Savings Bank's profitability, like that of most financial
institutions, depends to a large extent upon its net interest income, which is
the difference between the interest it earns on interest-earning assets, such as
loans and investments, and the interest expense it pays on interest-bearing
liabilities, such as deposits and borrowings. The matching of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institutions'
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it matures or re-prices within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or re-price within a specific time period and the amount
of interest-bearing liabilities anticipated, based upon certain assumptions, to
mature or re-price within that time period. A gap is considered positive when
the amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities that mature or re-price within a specified time period. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets that mature or
re-price within a specified time period. During a period of rising interest
rates, therefore, a negative gap theoretically would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. Conversely, during a period of falling interest rates, a
negative gap position would theoretically tend to result in an increase in net
interest income while a positive gap would tend to affect net interest income
adversely.
In an attempt to manage vulnerability to interest rate changes,
management monitors Reliance Savings Bank's interest rate risk. The principal
objective of Reliance Savings Bank's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk for Reliance Savings Bank given its operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with board approved guidelines. Through such
management, Reliance Savings Bank seeks to reduce the vulnerability of its
operations to changes in interest rates. Reliance Savings Bank monitors its
interest rate risk as such risk relates to its operating strategies. Reliance
Savings Bank's Board of Directors has established an Asset/Liability Committee,
responsible for reviewing its asset/liability policies and interest rate risk
position, which meets monthly and reports trends to the Board of Directors on a
monthly basis and Reliance Savings Bank's interest rate risk position on a
quarterly basis.
Generally, Reliance Savings Bank utilizes the following strategies to
manage interest rate risk: (i) emphasizing the origination of adjustable rate
one- to four-family mortgage loans and non-one- to four-family mortgage loans
(which typically are either adjustable rate or short-term) for its loan
portfolio; (ii) holding primarily short-term mortgage-backed and related
securities and investment securities, and (iii) attempting to reduce the overall
interest rate sensitivity of liabilities by emphasizing core and longer-term
deposits.
By originating ARM loans and other mortgage loans with short to medium
terms and investing in relatively short to medium term mortgage-backed and
related securities and investment securities, Reliance Savings Bank has been
able to reduce interest rate risk by more closely matching the terms and
repricing characteristics of its assets and liabilities. Although Reliance
Savings Bank has significantly increased its emphasis upon originating ARM loans
and has been developing other types of mortgage loans with shorter average lives
or terms and invests in mortgage-backed and related securities with shorter
average lives, the level of Reliance Savings Bank's portfolio of fixed rate
mortgage loans and investments with longer average lives continues to affect its
gap position. Reliance Savings Bank's ARM loans also typically have annual and
lifetime caps on interest rate increases, which reduces the extent to which they
protect Reliance Savings Bank against interest rate risk. Further,
mortgage-backed securities
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<PAGE> 128
are subject to reinvestment risk. For example, during periods of
falling interest rates, mortgage-backed securities are more likely to prepay,
and Reliance Savings Bank may not be able to reinvest the proceeds from
prepayments in securities or other assets with yields similar to those of the
prepaying mortgage-backed securities. Mortgage-backed and related securities
also are subject to extension risk, which is the risk that the effective
maturity of the security may increase in a rising interest rate environment. The
market value of a security with a longer maturity typically is more sensitive to
changes in market rates of interest, and rising interest rates may have a more
pronounced adverse effect on the market value of mortgage-backed and related
securities than on other types of investment securities.
Reliance Savings Bank continues to closely monitor its interest rate
risk as that risk relates to its strategies. At June 30, 1998, total
interest-earning assets maturing or re-pricing within one year exceeded total
interest bearing liabilities maturing or re-pricing in the same period by $7.4
million, representing a positive cumulative one year gap ratio of 17.4%. With a
positive gap position, during periods of rising interest rates, it is projected
that the cost of Reliance Savings Bank's interest-bearing liabilities would rise
slower than the yield on its interest-earning assets, which would have a
positive effect upon net interest income. The opposite effect on net interest
income would occur in periods of falling interest rates. Reliance Savings Bank
also could experience substantial prepayments of its fixed rate mortgage loans
in periods of falling interest rates, which would likely result in the
reinvestment of such proceeds at market rates which are lower than current
rates.
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities at June 30, 1998, which are anticipated by
Reliance to mature or reprice in each of the time periods shown. Except as
stated below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. It is
intended to provide an approximation of the projected repricing of assets and
liabilities at June 30, 1998 on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a three month period and
subsequent selected time intervals. The loan amounts in the table reflect
principal balances expected to be redeployed and/or repriced as a result of
contractual amortization and anticipated prepayments of adjustable rate loans
and fixed rate loans, and as a result of contractual rate adjustments on
adjustable rate loans. For loans on residential properties, adjustable rate
loans and fixed rate loans are projected to prepay at rates between 15% and 30%
annually. Prepayment assumptions are based on OTS prepayment assumptions of 10%
- -30% based on loan type. Mortgage-backed and related securities are projected to
prepay at rates between 23% and 29% annually. Money market savings accounts,
passbook accounts and negotiable order of withdrawal ("NOW") accounts are
assumed to have decay rates between 40% and 70% annually.
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<PAGE> 129
<TABLE>
<CAPTION>
AT JUNE 30, 1998
---------------------------------------------------------------------
MORE THAN MORE THAN
WITHIN FOUR TO ONE YEAR THREE YEARS
THREE TWELVE TO THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
------- ------- --------- ----------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed............................................ $ 1,136 $3,330 $ 4,644 $ 897 $ 7,079 $17,086
Variable......................................... 559 4,160 3,818 -- -- 8,537
Consumer loans(2).................................. 23 65 81 3 5 177
Mortgage-backed and related securities ............ 7 20 53 55 285 420
Investment securities and other assets............. 11,951 95 99 -- 3,764 15,909
------- ------ ------- ------- ------- -------
Total interest-earning assets.................... $13,676 $7,670 $ 8,695 $ 955 $11,133 $42,129
======= ====== ======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits(3):
Interest-bearing demand NOW accounts............. $ 10 $ 31 $ 40 $ 14 $ 8 $ 103
Money market accounts............................ 168 505 115 41 23 852
Passbook accounts................................ 235 705 902 325 183 2,350
Certificates of deposit.......................... 3,834 6,590 3,221 380 -- 14,025
FHLB advances.................................... 2,000 -- -- -- -- 2,000
------- ------ ------- ------- ------- -------
Total interest-bearing liabilities............ $ 6,247 $7,831 $ 4,278 $ 760 $ 214 $19,330
======= ====== ======= ======= ======= =======
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities......... $ 7,429 ($161) $ 4,417 $ 195 $10,919 $22,799
======= ====== ======= ======= ======= =======
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities......... $ 7,429 $7,268 $11,685 $11,880 $22,799 $22,799
======= ====== ======= ======= ======= =======
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets......... 17.57% 17.19% 27.63% 28.09% 53.91% 53.91%
===== ====== ===== ===== ===== =====
</TABLE>
- -------------------------
[FN]
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period
in which they are due, and fixed rate assets are included in the
periods in which they are scheduled to be repaid based on scheduled
amortization, in each case adjusted to take into account estimated
prepayments utilizing OTS prepayment assumptions of 10% - 30% based on
loan type.
(2) Balances have been reduced for undisbursed loan proceeds, unearned
interest, deferred loan fees and allowances for loan losses, which
aggregated $4,926,000 at June 30, 1998. Consumer loans include home
equity loans.
(3) Although Reliance Savings Bank's NOW accounts, money market accounts
and passbook accounts generally are subject to immediate withdrawal,
management considers a certain amount of such accounts to be core
deposits having significantly longer effective maturities and times to
repricing based on Reliance Savings Bank's historical retention of such
deposits in changing interest rate environments. NOW accounts, passbook
savings accounts and money market accounts have been assumed to be
withdrawn at annual rates of 40%, 40% and 79%, respectively, of the
declining balance of such accounts during the period shown. The
withdrawal rates are higher than Reliance Savings Bank's historical
rates but are considered by management to be more indicative of
expected withdrawal rates currently. If all of Reliance Savings Bank's
NOW accounts, passbook savings and money market deposit accounts had
been assumed to be subject to repricing within one year, the one-year
cumulative excess of interest-earning assets over interest-bearing
liabilities would have been $5.7 million or 12.9% of total assets.
</FN>
-126-
<PAGE> 130
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. The interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans and mortgage-backed
securities, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In addition, the proportion of
ARM loans and mortgage-backed securities in Reliance Savings Bank's portfolios
could decrease in future periods if market interest rates remain at or decrease
below current levels due to the exercise of conversion options and refinancing
activity. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to
Reliance's average statements of financial condition and the statements of
income for the years ended June 30, 1998, 1997 and 1996, and reflects the
average yield on assets and average cost of liabilities for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------
1996 1997 1998
--------------------------- --------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans.................................. $22,079 $ 1,887 8.55% $25,290 $ 2,230 8.82% $27,150 $ 2,412 8.88%
Mortgage-backed and related securities. 895 84 9.39 716 68 9.50 506 48 9.49
Investment and other securities........ 12,444 743 5.97 19,156 1,162 6.07 16,363 886 5.41
Federal Home Loan Bank stock........... 153 10 6.54 168 12 7.14 200 14 7.00
------- ------- ---- ------- ------- ---- ------- ------- ----
Total interest-earning assets(1)... 35,571 2,724 7.66 45,330 3,472 7.66 44,219 3,360 7.60
Non-interest earning assets............ 1,021 -- ==== 1,273 -- ==== 2,013 -- ====
------- ------- ------- ------- ------- -------
Total assets......................... $36,592 $ 2,724 $46,603 $ 3,472 $46,232 $ 3,360
======= ======= ======= ======= ======= =======
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Total deposits......................... $21,167 $ 1,146 5.41 $17,971 $ 911 5.07 $17,655 $ 915 5.18
Advances from borrowers for taxes and
insurance............................ 7 -- -- -- -- -- -- -- --
Borrowings............................. 134 7 5.22 3,025 161 5.32 4,502 274 6.09
------- ------- ---- ------- ------- ---- ------- ------- ----
Total interest-bearing liabilities... 21,308 1,153 5.41 20,996 1,072 5.11 22,157 1,189 5.37
Non-interest-bearing liabilities....... 387 -- ==== 403 -- ==== 554 -- ====
Retained earnings...................... 14,897 -- 25,204 -- 23,521 --
------- ------- ------- ------- ------- -------
Total liabilities and retained earnings $36,592 $ 1,153 $46,603 $ 1,072 $46,232 $ 1,189
======= ======= ======= ======= ======= =======
Net interest income/interest rate
spread(2)................................. $ 1,571 2.25% $ 2,400 2.55% $ 2,171 2.23%
======= ==== ======= ==== ======= ====
Net interest-earning assets/net
interest margin(3)................... $14,263 4.42% $24,334 5.29% $22,062 4.91%
======= ==== ======= ==== ======= ====
Average interest-earning assets to
average interest-bearing liabilities. 166.9% 215.9% 199.6%
===== ===== =====
</TABLE>
- -------------------------
[FN]
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
</FN>
-127-
<PAGE> 131
Such yields and costs are derived by dividing income or expense by the
average balance of assets or Inabilities, respectively, for the periods shown.
Average balances are derived principally from average daily balances and include
non-accruing loans. The yields and costs include fees which are considered
adjustments to yields. The amount of interest income resulting from the
recognition of loan fees was $91,000, $68,000 and $22,000 for the years ended
June 30, 1998, 1997 and 1996, respectively. Interest income on nonaccruing loans
is reflected in the period it is collected and not in the periods it is earned.
Such amounts are not material to net interest income or net change in net
interest income in any period. Nonaccrual loans are included in the average
balances and do not have a material effect on the average yield.
RATE VOLUME ANALYSIS
The following table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Reliance's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to:
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (change in rate
multiplied by prior volume), and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the change due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1996
COMPARED TO COMPARED TO
YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
---------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------------- ----------------------------
RATE VOLUME NET RATE VOLUME NET
---- ------ --- ---- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................................ $ 17 $165 $ 182 $ 62 $ 281 $ 343
Mortgage-backed and related securities -- (20) (20) 1 (17) (16)
Investment and other securities...... (117) (159) (276) 12 407 419
Federal Home Loan Bank stock......... -- 2 2 1 1 2
----- ---- ----- ----- ------ -----
Total interest-earning assets.... $(100) $(12) $(112) $ 76 $ 672 $ 748
===== ==== ===== ===== ====== =====
INTEREST-BEARING LIABILITIES:
Total deposits....................... $ 19 $(15) $ 4 $ (70) $ (165) $(235)
Advances from borrowers for taxes
and insurance.................... -- -- -- -- -- --
Borrowings........................... 25 88 113 -- 154 154
----- ---- ----- ----- ------ -----
Total interest-bearing liabilities... 44 73 117 (70) (11) (81)
----- ---- ----- ----- ------ -----
Net change in net interest income.... $(144) $(85) $(229) $ 146 $ 683 $ 829
===== ==== ===== ===== ====== =====
</TABLE>
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<PAGE> 132
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Shareholders of record as of the close of business on the Voting Record
Date are entitled to one vote for each share of Reliance Common Stock then held.
As of the Voting Record Date, the Company had 2,395,564 shares of Reliance
Common Stock issued and outstanding.
The following table sets forth the beneficial ownership of shares of
Reliance Common Stock as of the Voting Record Date by each director of Reliance
and all directors and executive officers as a group. Members of the Reliance
Board also serve as directors of Reliance Savings Bank.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME OWNED (1) PERCENT OF CLASS
---- ---------------- ----------------
<S> <C> <C>
Allan T. Bach (2)(3)(4)................. 139,249 5.64%
Carol A. Barnharst (2)(3)(4)............ 122,520 4.98
O. William Held (2)..................... 71,975 2.98
John T. Lynch (2)....................... 76,106 3.12
Marjorie A. Spicuzza (2)(5)............. 76,106 3.12
All directors and executive officers
as a group (5 persons) .............. 485,956 18.22%
</TABLE>
- --------------------
[FN]
(1) Unless otherwise indicated, includes shares of Reliance Common Stock
held directly by the individuals as well as by members of such
individuals' immediate family who share the same household, shares held
in trust and other indirect forms of ownership over which shares the
individuals exercise sole or shared voting power and/or investment
power. Fractional shares of Common Stock held by certain executive
officers under the Reliance ESOP have been rounded to the nearest whole
share. Includes 18,286 shares of Reliance Common Stock underlying stock
options granted to each of the named individuals under the Reliance
Option Plan that vest upon completion of the Merger. Also includes
16,393 and 10,933 shares of Reliance Common Stock granted to Mr. Bach
and Ms. Barnharst, respectively, under the RRP that vest upon completion
of the Merger. For purposes of this disclosure, it is assumed that the
Merger is completed within 60 days of the date of this Proxy
Statement/Prospectus.
(2) Includes shares of Reliance Common Stock which the named individuals and
certain executive officers have the right to acquire within 60 days of
the Voting Record Date pursuant to the exercise of stock options: Mr.
Bach - 44,856 shares; Ms. Barnharst - 44,856 shares; Mr. Held - 44,856
shares; Mr. Lynch - 44,856 shares; and Ms. Spicuzza - 44,856 shares.
(3) Includes 32,786 and 21,866 shares of Reliance Common Stock awarded to
Mr. Bach and Ms. Barnharst, respectively, that have vested under the
RRP. Includes 10,257 shares of Reliance Common Stock awarded to Mr. Bach
and Ms. Barnharst, under the RRP that vest upon completion of the
Merger.
(4) Includes shares of Reliance Common Stock allocated to certain executive
officers under the Reliance ESOP, for which such individuals possess
shared voting power, of which approximately 9,957 shares and 9,258
shares have been allocated to the accounts of Mr. Bach and
Ms. Barnharst, respectively.
(5) Of the 76,106 shares indicated as beneficially owned by Ms. Spicuzza,
10,000 are owned by her sister who has sole voting and investment power
over such shares, and as to which Ms. Spicuzza disclaims beneficial
ownership.
</FN>
EXPERTS
The consolidated financial statements of Reliance included herein for
the fiscal years ended June 30, 1998 and 1997 have been audited by Schenck &
Associates, S.C., independent auditors, as set forth in their report thereon
included herein, and such consolidated financial statements are included herein
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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<PAGE> 133
The consolidated financial statements of St. Francis as of September
30, 1998 and 1997, and for each of the years in the three-year period ended
September 30, 1998, have been incorporated by reference herein in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the shares of St. Francis Common Stock to be issued in
the Merger will be passed upon for St. Francis by Michael Best & Friedrich LLP,
Milwaukee, Wisconsin. Certain legal matters will be passed upon for Reliance by
Schiff Hardin & Waite, Chicago, Illinois.
SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
Due to the proposed Merger, Reliance does not currently expect to hold
a 1999 Annual Meeting of Shareholders because Reliance will be merged with and
into St. Francis, with St. Francis as the surviving corporation following the
Merger. In the event the Merger is not consummated and such a meeting is held,
the following outlines the requirements for shareholder proposals and voting on
such proposals.
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS FOR INCLUSION IN 1999
PROXY MATERIALS
Any proposal which a shareholder wishes to have included in the proxy
materials of Reliance relating to the 1999 annual meeting of the shareholders of
Reliance, which is scheduled to be held in October 1999, must be received at the
principal executive offices of Reliance, 3140 South 27th Street, Milwaukee,
Wisconsin 53215, Attention: Carol A. Barnharst, Secretary, no later than May 20,
1999. If such proposal is in compliance with all of the requirements of Rule
14a-8 under the Exchange Act, it will be included in the proxy statement and set
forth on the form of proxy issued for such annual meeting of shareholders. It is
urged that any such proposals be sent certified mail, return receipt requested.
Nothing in this section shall be deemed to require Reliance to include
in its proxy statement and proxy relating to the 1999 Annual Meeting any
shareholder proposal which does not meet all of the requirements for inclusion
established by the SEC in effect at the time such proposal is received.
ADVANCE NOTICE REQUIREMENT FOR ANY PROPOSAL OR NOMINATION TO BE RAISED BY A
SHAREHOLDER
Shareholder proposals which are not submitted for inclusion in
Reliance's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before an annual meeting pursuant to Article VII of the Reliance
Articles, which provides that: (i) with respect to proposals to be brought
before an annual meeting, such proposal must be received by Reliance not less
than 60 days nor more than 90 days prior to the date of the previous year's
annual meeting of shareholders, or in the event no annual meeting was held in
the previous year, no later than ten days following the date notice of the
annual meeting is mailed to shareholders; and (ii) with respect to proposals to
be brought before a special meeting, not later than the close of business on the
tenth day following the date notice of such special meeting is mailed to
shareholders.
In accordance with Article VII of the Reliance Articles, the advance
notice of a proposal described above must set forth certain information,
including the shareholder's name and address, as they appear on Reliance's
record of shareholders, the class and number of shares of Reliance Common Stock
beneficially owned by such shareholder, a brief description of the proposed
business, the reason for considering the business at the shareholder meeting and
any material interest of the shareholder in the proposed business. In addition,
with respect to nominations for election to the Board of Directors made by a
shareholder, in accordance with Article VII of the Reliance Articles and Article
III of the Reliance By-laws, the following information must be provided: (i) the
name and address of the shareholder who intends to make the nomination and of
the person(s) to be nominated; (ii) a representation that the shareholder is a
holder of record of the stock of Reliance entitled to vote at such meeting and
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<PAGE> 134
intends to appear in person or by proxy at the meeting and to nominate the
person(s) specified in the notice; (iii) a description of all arrangements or
understandings between the shareholder and each nominee and any other person(s)
(naming such person(s)) pursuant to which the nomination(s) are to be made by
the shareholder; (iv) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the SEC; and (v) written consent of each nominee
to serve as a director of Reliance if so elected.
DISCRETIONARY VOTING OF 1999 PROXIES
Effective June 29, 1998, the SEC amended Rule 14a-4(c) under the
Exchange Act which governs a company's use of discretionary proxy voting
authority with respect to shareholder proposals that are not being included in a
company's proxy solicitation materials pursuant to Rule 14a-8 of the Exchange
Act. New Rule 14a-4(c)(1) provides that if a shareholder fails to notify
Reliance of such proposal at least 45 days prior to the month and day of mailing
of the prior year's proxy statement, then the management proxies named in the
form of proxy distributed in connection with Reliance's proxy statement would be
allowed to use their discretionary voting authority to address the proposal
submitted by the shareholder, without discussion of the proposal in the proxy
statement. Accordingly, if a shareholder who intends to present a proposal at
the 1999 Annual Meeting does not notify Reliance of such proposal on or prior to
August 3, 1999, then management proxies would be allowed to use their
discretionary voting authority to vote on the proposal when the proposal is
raised at the annual meeting, even though there is no discussion of the proposal
in the 1999 proxy statement.
PROPOSAL TO ADJOURN THE SPECIAL MEETING
---------------------------------------
(PROPOSAL NO. 2)
As described herein, the Reliance Board believes that shareholder
approval of the Merger proposal is in the best interests of Reliance's
shareholders. Also as noted herein, approval of the Merger proposal requires an
affirmative vote of the holders of a majority of the shares of Reliance Common
Stock entitled to vote on the Merger Agreement and Plan of Merger at the Special
Meeting.
If by the date of the Special Meeting, including any adjournments
thereof, the required vote for approval of the Merger proposal has not been
obtained, there are an insufficient number of persons present in person or by
proxy to constitute a quorum, or events subsequent to the date of this Proxy
Statement/Prospectus require St. Francis and Reliance to furnish additional
Proxy soliciting information to the Reliance shareholders and to give the
shareholders time to assimilate such information, the Reliance Board intends to
sponsor a proposal (or proposals), at such times and as often as necessary, to
adjourn the Special Meeting to a later date for the purpose of soliciting
additional votes on the Merger proposal. At any subsequent reconvening of the
Special Meeting, all proxies will be voted in the same manner as such proxies
would have been voted at the original convening of the Special Meeting (except
for any proxies which have theretofore effectively been revoked or withdrawn).
The time, date and place at and to which the Special Meeting would be reconvened
will be announced at the Special Meeting, and at any adjournments thereof. If,
however, the Special Meeting is adjourned more than 120 days after the date for
which the meeting was originally noticed, a new record date would be fixed for
the adjourned meeting and written notice of the place, date and time of the
adjourned meeting will be given.
In order to approve a proposal for adjournment of the Special Meeting,
the affirmative vote of a majority of the total votes cast in person or by proxy
must vote in favor of the proposal. In order to allow Reliance's management to
vote proxies received by Reliance at the time of the Special Meeting in favor of
such an adjournment, in the event that Reliance determines, in its sole
discretion, that such an adjournment is in the best interests of Reliance and
its shareholders, Reliance has submitted the questions or adjournment as a
separate matter for the consideration and vote of the shareholders. The Board of
Directors of Reliance recommends that shareholders vote FOR the proposal to
adjourn the Special Meeting so that such proxies may be voted in favor of such
adjournment under the circumstances described under this Proposal No. 2.
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<PAGE> 135
St. Francis or Reliance may terminate the Merger Agreement if the
Merger is not consummated by February 28, 1999 (subject to extension to May 31,
1999, in the case of a protest to the Merger under the Community Reinvestment
Act of 1977, as amended) (the "Termination Date"). If the Special Meeting is
adjourned to a date after the Termination Date, the Reliance Board would seek to
obtain an extension of the Termination Date from St. Francis. No assurances can
be made that St. Francis will agree to the extension, or that the other closing
conditions would not be adversely affected. See "Proposal To Approve The
Merger--Amendment and Waiver" and "--Termination." The fact of the possible
extension of the Termination Date will not be deemed to invalidate proxies
previously received, unless Reliance receives a later-dated proxy superseding a
prior one.
OTHER MATTERS WHICH MAY PROPERLY
COME BEFORE THE SPECIAL MEETING
The Board of Directors knows of no business which will be presented for
consideration at the Special Meeting other than as stated in the Notice of
Special Meeting of Shareholders. If, however, other matters are properly brought
before the Special Meeting or any adjournments or postponements thereof, it is
the intention of the persons named in the accompanying Proxy to vote the shares
represented thereby on such matters in accordance with their best judgment.
AVAILABLE INFORMATION
St. Francis and Reliance are subject to the informational and reporting
requirements of the Exchange Act, and, in accordance therewith, file reports,
proxy statements and other information with the SEC. The reports, proxy
statements and other information filed by St. Francis and Reliance can be
inspected and copied at the following regional offices of the Commission: 7
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained form the Public Reference Section of the Commission, Washington, D.C.
20549 at prescribed rates. Reports, proxy and information statements and
information regarding St. Francis and Reliance also may be obtained through the
Web site maintained by the Commission at http://www.sec.gov.
St. Francis has filed with the Commission a Registration Statement
under the Securities Act with respect to the St. Francis Common Stock to be
issued in connection with the Merger. This Proxy Statement/Prospectus omits
certain of the information contained in the Registration Statement in accordance
with the rules and regulations of the Commission. Reference is hereby made to
the Registration Statement and related exhibits for further information with
respect to St. Francis and the St. Francis Common Stock. Statements contained
herein concerning the provisions of any document are not necessarily complete
and, in each instance, where a copy of such document has been filed as an
exhibit to the Registration Statement or otherwise has been filed with the
Commission, reference is made to the copy so filed. Each such statement is
qualified in its entirety by such reference.
-132-
<PAGE> 136
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents or portions of documents filed with the
Commission by St. Francis (File No. 0-21298) pursuant to the Exchange Act are
incorporated by reference in this Proxy Statement/Prospectus and made a part
hereof:
1. St. Francis' Annual Report on Form 10-K for the fiscal year
ended September 30, 1998 (provided, however, that the
information referred to in Item 402(a)(8) of Regulation S-K
shall not be deemed to be incorporated by reference herein);
2. The description of St. Francis Common Stock and St. Francis
Series A Junior Participating Preferred Stock and Preferred
Stock Purchase Rights set forth in St. Francis' Registration
Statement on Form 8-A, dated September 25, 1997; and
3. All other reports filed by St. Francis pursuant to Section
13(a) or 15(d) of the Exchange Act since the end of the fiscal
period covered by the annual report referred to in (1) above.
The information relating to St. Francis and Reliance contained in this
Proxy Statement/Prospectus does not purport to be complete and should be read
together with the information in the documents that accompany this Proxy
Statement/Prospectus and the additional documents that are incorporated by
reference herein.
All documents filed by St. Francis pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the
Special Meeting will be deemed to be incorporated herein by reference and to be
a part hereof from the date of such filing. Any statement contained herein or in
a document incorporated or deemed to be incorporated herein by reference will be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein or in any other subsequently filed document which
also is, or is deemed to be, incorporated herein by reference modifies or
supersedes such statement. Any such statement so modified or superseded will not
be deemed to constitute a part hereof, except as so modified or superseded.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO
SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
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<PAGE> 137
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
ST. FRANCIS CAPITAL CORPORATION
AND
RELIANCE BANCSHARES, INC.
DATED AS OF JUNE 30, 1998
<PAGE> 138
TABLE OF CONTENTS
PAGE
----
ARTICLE ONE
THE REORGANIZATION..................................................... A-1
1.01 Plan of Merger.............................................. A-1
1.02 Effective Time.............................................. A-1
1.03 Manner of Merger............................................ A-1
1.04 Effect of Merger............................................ A-2
1.05 Conversion of Securities.................................... A-2
1.06 Election Procedures......................................... A-4
1.07 Exchange Procedures......................................... A-6
1.08 No Fractional Shares........................................ A-8
1.09 Dissenting Shares........................................... A-8
1.10 Withholding Rights.......................................... A-8
1.11 Options..................................................... A-9
1.12 Bank Merger................................................. A-9
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES OF ACQUIROR............................. A-10
2.01 Organization; Qualification; Good Standing; Corporate Power. A-10
2.02 Authorization............................................... A-10
2.03 Capitalization.............................................. A-10
2.04 Financial Statements........................................ A-11
2.05 Absence of Undisclosed Liabilities.......................... A-11
2.06 No Violation................................................ A-11
2.07 Consents and Approvals...................................... A-12
2.08 Litigation.................................................. A-12
2.09 Employee Benefit Plans...................................... A-12
2.10 Compliance with Environmental Laws.......................... A-14
2.11 Shares to be Issued in Merger............................... A-14
2.12 Broker's Fees............................................... A-14
2.13 Acquiror Information........................................ A-14
2.14 Regulatory Filings.......................................... A-14
2.15 Community Reinvestment Act Compliance....................... A-15
2.16 Approvals................................................... A-15
2.17 Other Information........................................... A-15
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... A-15
3.01 Organization; Qualification; Good Standing; Corporate Power. A-15
3.02 Authorization............................................... A-16
3.03 Capitalization.............................................. A-16
3.04 Financial Statements........................................ A-17
3.05 Absence of Undisclosed Liabilities.......................... A-18
3.06 No Violation................................................ A-18
3.07 Consents and Approvals...................................... A-19
3.08 Litigation.................................................. A-19
3.09 Taxes, Returns and Reports.................................. A-19
3.10 Corporate Properties........................................ A-20
3.11 Employee Benefit Plans...................................... A-21
i
<PAGE> 139
3.12 Brokerage Commissions and Fees................................. A-22
3.13 Certain Agreements............................................. A-22
3.14 Governing Documents............................................ A-23
3.15 Orders, Injunctions, Decrees; Compliance With Applicable Laws.. A-23
3.16 Shareholders of the Company.................................... A-23
3.17 Regulatory Filings............................................. A-23
3.18 Loans.......................................................... A-24
3.19 Loan Portfolio; Reports........................................ A-24
3.20 Mortgage-Backed and Related Securities......................... A-24
3.21 Allowance for Loan Losses...................................... A-24
3.22 Conduct........................................................ A-25
3.23 Fiduciary Responsibilities..................................... A-25
3.24 Compliance With Environmental Laws and Health and Safety Laws.. A-25
3.25 Other Information.............................................. A-26
3.26 Insider Interests.............................................. A-27
3.27 No Sensitive Transactions...................................... A-27
3.28 Community Reinvestment Act Compliance.......................... A-27
3.29 Approvals...................................................... A-27
3.30 Qualified Thrift Lender........................................ A-27
3.31 The ESOP....................................................... A-27
3.32 Absence of Agreements.......................................... A-27
3.33 Liquidation Account............................................ A-27
3.34 Insurance...................................................... A-28
3.35 Derivative Transactions........................................ A-28
3.36 Company Pension Plan........................................... A-28
3.37 Director Deferred Retirement Plan.............................. A-28
ARTICLE FOUR
COVENANTS OF ACQUIROR..................................................... A-28
4.01 Conduct Of Business: Certain Covenants......................... A-28
4.02 SEC Registration............................................... A-29
4.03 Authorization, Reservation and Listing of Common Stock......... A-29
4.04 Confidentiality................................................ A-29
4.05 Regulatory Application and Filings............................. A-29
4.06 Employment Agreements.......................................... A-30
4.07 Negative Covenant.............................................. A-30
4.08 Advisory Board................................................. A-30
4.09 Qualifying the Merger for Tax-Free Status...................... A-30
4.10 Indemnification................................................ A-30
ARTICLE FIVE
COVENANTS OF THE COMPANY.................................................. A-31
5.01 Registration Statement and Shareholders Meeting................ A-31
5.02 Conduct Of Business, Certain Covenants......................... A-31
5.03 Confirming and Conforming Accounting and Reserve Policies;
Integration.................................................... A-35
5.04 Information, Access Thereto.................................... A-35
5.05 Confidentiality................................................ A-35
5.06 Recommendation of Merger to Shareholders....................... A-36
5.07 Litigation Matters............................................. A-36
5.08 Bank Merger.................................................... A-36
5.09 No Solicitation................................................ A-36
5.10 Other Approvals................................................ A-36
5.11 Best Efforts................................................... A-36
ii
<PAGE> 140
5.12 Termination and Other Payments............................... A-36
5.13 Voting Agreements............................................ A-37
5.14 Advise of Changes............................................ A-37
ARTICLE SIX
ADDITIONAL COVENANTS AND AGREEMENTS..................................... A-37
6.01 Regulatory Matters........................................... A-37
6.02 Legal Conditions to Reorganization........................... A-38
6.03 Subsequent SEC Filings; Press Releases....................... A-38
6.04 Additional Agreements........................................ A-38
6.05 Advice of Changes............................................ A-38
6.06 Current Information.......................................... A-38
6.07 Termination of Regulatory Agreements......................... A-39
6.08 Tax Returns.................................................. A-39
6.09 Compensation and Benefit Plans; Existing Agreements.......... A-39
6.10 Environmental Studies........................................ A-40
ARTICLE SEVEN
CONDITIONS TO OBLIGATIONS OF EACH OF THE PARTIES........................ A-41
7.01 Regulatory Approvals......................................... A-41
7.02 Federal Tax Opinion.......................................... A-41
7.03 Registration Statement....................................... A-42
7.04 Orders, Decrees and Judgments................................ A-42
7.05 NASDAQ Listing............................................... A-42
ARTICLE EIGHT
FURTHER CONDITIONS TO THE OBLIGATIONS OF THE COMPANY.................... A-42
8.01 Compliance by Acquiror....................................... A-42
8.02 Opinion of Counsel........................................... A-42
8.03 Officers' Certificate........................................ A-42
8.04 Litigation................................................... A-42
8.05 No Environmental Condition................................... A-43
8.06 Opinion...................................................... A-43
8.07 Absence of Certain Changes or Events......................... A-43
8.08 Accountant's Letter.......................................... A-43
ARTICLE NINE
FURTHER CONDITIONS TO THE OBLIGATIONS OF ACQUIROR....................... A-43
9.01 Compliance by the Company.................................... A-43
9.02 Accuracy of Financial Statements............................. A-43
9.03 Net Worth.................................................... A-44
9.04 Sufficiency of Documents, Proceedings........................ A-44
9.05 Opinion of Counsel........................................... A-44
9.06 Officers' Certificate........................................ A-44
9.07 Absence of Certain Changes or Events......................... A-44
9.08 Litigation................................................... A-44
9.09 Agreements of Affiliates..................................... A-45
9.10 Bank Merger Agreement........................................ A-45
9.11 Consents Under Agreements.................................... A-45
9.12 Accountant's Letter.......................................... A-45
9.13 Approval by Affirmative Vote of Shareholders; Exercise of
Dissenters' Rights........................................... A-45
9.14 Nonperforming Assets......................................... A-45
iii
<PAGE> 141
ARTICLE TEN
TERMINATION AND AMENDMENT............................................... A-46
10.01 Termination.................................................. A-46
10.02 Effect of Termination........................................ A-47
10.03 Fee.......................................................... A-47
ARTICLE ELEVEN
MODIFICATIONS, AMENDMENTS AND WAIVER.................................... A-48
11.01 Modifications, Amendments and Waiver......................... A-48
ARTICLE TWELVE
MISCELLANEOUS........................................................... A-49
12.01 Closing....................................................... A-49
12.02 Articles of Merger............................................ A-49
12.03 Further Acts.................................................. A-49
12.04 Notices....................................................... A-49
12.05 Alternative Structure......................................... A-50
12.06 Expenses...................................................... A-50
12.07 Nonsurvival of Representations and Warranties................. A-50
12.08 Discussions With Other Banks, Bank Holding
Companies, Savings Associations and Bank-Related
Businesses.................................................... A-50
12.09 Entire Agreement.............................................. A-50
12.10 Governing Law................................................. A-50
12.11 Binding Effect and Parties in Interest........................ A-50
12.12 Captions...................................................... A-51
12.13 Relief Due to Breach.......................................... A-51
12.14 Invalidity.................................................... A-51
12.15 Publicity..................................................... A-51
12.16 Counterparts.................................................. A-51
EXHIBIT A: Agreement and Plan of Merger
EXHIBIT B: Bank Merger Agreement
EXHIBIT C: Form of Employment Agreement
EXHIBIT D: Form of Voting Agreements
EXHIBIT E: Legal Opinion
EXHIBIT F: Legal Opinion
EXHIBIT G: Affiliates' Letter
APPENDIX I: Disclosure Schedules
iv
<PAGE> 142
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") by and between
ST. FRANCIS CAPITAL CORPORATION, a Wisconsin corporation ("Acquiror"), and
RELIANCE BANCSHARES, INC., a Wisconsin corporation (the "Company"), is made and
entered into this 30th day of June, 1998.
W I T N E S S E T H:
WHEREAS, Acquiror and the Company desire that the Company be merged with
and into Acquiror in accordance with the applicable statutes of the State of
Wisconsin and in accordance with an Agreement and Plan of Merger (the "Plan of
Merger") substantially on the terms and in the form attached hereto as Exhibit
A (the merger provided for therein being called the "Merger"); and
WHEREAS, immediately upon the Merger, Acquiror and the Company intend that
Reliance Savings Bank, a wholly-owned subsidiary of the Company (the "Merging
Bank"), shall merge (the "Bank Merger" and such transaction together with the
Merger, the "Reorganization") with and into St. Francis Bank, F.S.B., a
wholly-owned subsidiary of Acquiror ("Acquiror-Bank");
NOW, THEREFORE, in consideration of the premises and the mutual and
dependent promises hereinafter contained, the parties do represent, warrant,
covenant and agree as follows:
ARTICLE ONE
THE REORGANIZATION
1.01 Plan of Merger. The Company and Acquiror hereby adopt and agree to
execute the Plan of Merger substantially in the form attached hereto as Exhibit
A, subject to the satisfaction (or lawful waiver) of each of the conditions to
the obligations of the parties to this Agreement.
1.02 Effective Time. The Merger shall be consummated upon the filing of
appropriate Articles of Merger with the Wisconsin Department of Financial
Institutions ("WDFI") in the form and manner required by the Wisconsin Business
Corporation Law ("WBCL"). The close of business on the date on which such
Articles of Merger shall have been filed is herein referred to as the "Effective
Time," unless some other date is agreed upon by the parties hereto and is
specified therein. Unless otherwise mutually agreed to in writing by Acquiror
and the Company, and subject to the terms and conditions hereof, the Effective
Time shall occur on the Closing Date (as defined in Section 12.01 hereof) or the
next succeeding business day thereafter.
1.03 Manner of Merger. At the Effective Time, the Company shall be merged
with and into Acquiror in accordance with applicable provisions of the WBCL and
on the terms and subject to the conditions contained in this Agreement and the
Plan of Merger. Simultaneously with the effectiveness of the Merger, (a) the
separate existence of the Company shall cease, and (b) Acquiror, as the
surviving corporation (the "Surviving Corporation"), shall continue to exist
under and be governed by the WBCL. The Merger is intended to be treated by the
parties as a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"). Upon the effectiveness of the
Merger, the articles of incorporation and bylaws of the Surviving Corporation
shall be the form of the articles of incorporation and bylaws of Acquiror as in
effect immediately prior to the Merger. Upon the effectiveness of the Merger,
the directors and officers of the Surviving Corporation shall be the persons
serving in such positions at Acquiror immediately prior to such effectiveness.
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1.04 Effect of Merger. Upon the Merger becoming effective:
(a) The separate existence of the Company shall cease and be merged
with and into Acquiror, as the Surviving Corporation, which shall possess
all of the rights, privileges, immunities, powers and franchises of a
public as well as of a private nature, and shall be subject to all of the
restrictions, disabilities and duties of each of the Company and
Acquiror; and all singular rights, privileges, immunities, powers and
franchises of each of the Company and Acquiror, and all property, real,
personal and mixed, and all debts due to either the Company or Acquiror
in whatever amount, including subscriptions to shares, and all other
things in action or belonging to each of the Company and Acquiror shall
be vested in the Surviving Corporation; and all property, rights,
privileges, immunities, powers and franchises, and all and every
interest, shall be thereafter as effectually the property of the
Surviving Corporation as they were of the Company and Acquiror and the
title to any real estate, or interest therein, vested by deed or
otherwise, in either of the Company and Acquiror shall not revert or be
in any way impaired by reason of the Merger.
(b) All rights of creditors and all liens upon any property of the
Company or Acquiror shall be preserved unimpaired and all debts,
liabilities and duties of the Company or Acquiror shall thenceforth
attach to the Surviving Corporation and may be enforced against the
Surviving Corporation to the same extent as if said debts, liabilities
and duties had been incurred or contracted by it; provided, however, that
all such liens shall attach only to those assets to which they were
attached prior to the Effective Time.
(c) Any action or proceeding, whether civil, criminal or
administrative, instituted, pending or threatened by or against either
the Company or Acquiror or relating to their assets, liabilities or
shares of common stock shall be prosecuted as if the Merger had not taken
place, and the Surviving Corporation may be substituted as a party in
such action or proceeding in place of the Company.
1.05 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of Acquiror, the Company or the holder
of any of the following securities, the shares of Acquiror and the Company shall
be converted as follows:
(a) Each share of the common stock, $.01 par value per share
("Acquiror Common Stock"), of Acquiror issued and outstanding immediately
prior to the Effective Time shall remain outstanding and shall be
unchanged after the Merger; and
(b) Each share of the common stock, $1.00 par value per share
("Company Common Stock"), of the Company issued and outstanding
immediately prior to the Effective Time (other than any shares held by
the Company as treasury shares or owned by Acquiror or any of its
wholly-owned subsidiaries, but in each case other than Trust Account
Shares or DPC Shares (each as defined below), which shall be canceled,
and other than any Dissenting Shares (as defined in Section 1.09)) shall
cease to be outstanding and shall be converted into and become, as the
holder thereof shall elect or be deemed to have elected pursuant to
Section 1.06(f) hereof, but subject to all the provisions of Section
1.06(g), (h) and (i) hereof:
(1) The right to receive an amount in cash (the "Per Share
Cash Distribution") equal to:
(a) $10.00, if the Acquiror Average Stock Price as
calculated herein is between $32.41 and $40.00;
(b) an amount equal to .250 of the Acquiror Average
Stock Price, if the Acquiror Average Stock Price as
calculated herein is between $40.01 and $42.00;
(c) $10.50, if the Acquiror Average Stock Price as
calculated herein is between $42.01 and $45.74;
(d) an amount equal to .2295 of the Acquiror Average
Stock Price, if the Acquiror Average Stock Price as
calculated herein is $45.75 or more;
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(e) If the Acquiror Average Stock Price is $32.40 or
less, then the Acquiror has the option of completing the
Merger using a Per Share Cash Distribution of $10.00 or
terminating the Agreement pursuant to Section 10.01(e) of the
Agreement; or
(2) the right to receive the following (the "Per Share Stock
Distribution):
(a) if the Acquiror Average Stock Price as calculated
hereunder is between $32.41 and $40.00, a fractional share of
Acquiror Common Stock as determined by a fraction the
numerator of which is $10.00 and the denominator of which is
the Acquiror Average Stock Price;
(b) if the Acquiror Average Stock Price is between
$40.01 and $42.00, .250 shares of Acquiror Common Stock;
(c) if the Acquiror Average Stock Price is between
$42.01 and $45.74 per share, a fractional share of Acquiror
Common Stock as determined by a fraction the numerator of
which is $10.50 and the denominator of which is the Acquiror
Average Stock Price;
(d) if the Acquiror Average Stock Price is $45.75 or
more, .2295 shares of Acquiror Common Stock;
(e) if the Acquiror Average Stock Price is $32.40 or
less then the Acquiror has the option of completing the
Merger using a modification of the Per Share Stock
Distribution equal to a fractional share of Acquiror Common
Stock as determined by a fraction the numerator of which is
$10.00 and the denominator of which is the Acquiror Average
Stock Price or terminating the Agreement pursuant to the
provisions of Section 10.01(e) hereof.
(c) If subsequent to the date of this Agreement but prior to the
Effective Time, Acquiror should split or combine its common stock, or pay
a dividend or other distribution in such common stock, then the Per Share
Stock Distribution shall be appropriately adjusted to reflect such split,
combination, dividend or distribution.
(d) "Acquiror Average Stock Price" means the average (rounded to the
nearest whole cent) of the last sale price of the day of one share of
Acquiror Common Stock as reported in The Wall Street Journal for the ten
consecutive trading days ending on the fifth business day preceding the
Effective Time, or in the absence of such report for any trading day in
The Wall Street Journal, the last sale price reported for such trading
day by NASDAQ, the automated quotation system of the National Association
of Securities Dealers, Inc., or in the absence thereof the mean of the
reported closing bid and asked quotations on such trading day as reported
in The Wall Street Journal or in the absence thereof, by NASDAQ; or in
the absence thereof from such other source upon which Acquiror and the
Company shall mutually agree.
(e) At the Effective Time, all shares of Company Common Stock that
are owned by the Company as treasury stock and all shares of Company
Common Stock that are owned directly or indirectly by Acquiror or the
Company or any of their respective wholly-owned subsidiaries (other than
shares of Company Common Stock held directly or indirectly in trust
accounts, managed accounts and the like or otherwise held in a fiduciary
capacity that are beneficially owned by third parties (any such shares,
and shares of Acquiror Common Stock which are similarly held, whether
held directly or indirectly by Acquiror or the Company or any of their
respective wholly-owned subsidiaries, as the case may be, being referred
to herein as "Trust Account Shares"), and other than any shares of
Company Common Stock held by Acquiror or the Company or any of their
respective wholly-owned subsidiaries in respect of a debt previously
contracted (any such shares of Company Common Stock, and shares of
Acquiror Common Stock which are similarly held, whether held directly or
indirectly by Acquiror or the Company or any of their respective
wholly-owned subsidiaries, being referred to herein as "DPC Shares"))
shall be cancelled and shall cease to exist and no stock of Acquiror or
other consideration shall be delivered in exchange therefor.
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All shares of Acquiror Common Stock that are owned by the Company or any
of its wholly-owned subsidiaries (other than Trust Account Shares and DPC
Shares) shall become treasury stock of Acquiror.
(f) There shall be included with each share of Acquiror Common Stock
issued in the Merger an equal number of any share purchase rights (the
"Rights") issued pursuant to the Rights Agreement (as defined in Section
2.03). All references in this Agreement to Acquiror Common Stock to be
received pursuant to the Merger should be deemed to include the Rights.
1.06 Election Procedures.
(a) On a date at least 30 days prior to the anticipated Closing Date
or on such other date as the Company and Acquiror may mutually agree
("Mailing Date"), the Exchange Agent (as defined below) shall mail to
each holder of record of the Company Common Stock, as of three business
days prior to the Mailing Date, an election form, a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss
and title to certificates previously representing the Company Common
Stock shall pass only upon delivery of such certificate to the Exchange
Agent) and other appropriate transmittal materials ("Election Form").
"Exchange Agent" means Firstar Trust Co. or such other bank or trust
company selected by Acquiror, and acceptable to the Company, to effect
the exchange of certificates. The Mailing Date may be the date of
mailing of the Proxy Statement/Prospectus, as defined in Section 6.01.
(b) An Election Form shall specify the method by which the amount of
the Per Share Cash Distribution will be calculated and the method by
which the Per Share Stock Distribution will be calculated, and shall
permit holders (or in the case of nominee record holders, the beneficial
owner through proper instructions and documentation), except for the
Reliance Savings Bank Employee Stock Ownership Plan (the "ESOP") which
shall receive the Per Share Cash Distribution in exchange for its shares
of Company Common Stock, to elect to receive (A) the Per Share Cash
Distribution with respect to a specified number of shares of Company
Common Stock (the "Cash Election Shares"), (B) the Per Share Stock
Distribution with respect to a specified number of shares of Company
Common Stock (the "Stock Election Shares"), or (C) indicate that such
holder makes no election with respect to a specified number of shares of
Company Common Stock (the "No Election Shares"). Each holder of shares
of Company Common Stock may elect to receive either the Per Share Cash
Distribution or the Per Share Stock Distribution for each share of
Company Common Stock held. However, each individual beneficial owner of
shares of Company Common Stock may only choose a combination of the Per
Share Cash Distribution and the Per Share Stock Distribution relating to
all of the shares of Company Common Stock beneficially owned by him, her
or it, if he, she or it chooses the Per Share Stock Distribution for a
sufficient number of shares to result in the issuance of at least 50
shares of Acquiror Common Stock. If the Exchange Agent determines that
the above share limit has not been complied with, the shares of Company
Common Stock to which the improper election has been made shall be deemed
No Election Shares.
(c) Any shares of Company Common Stock with respect to which the
holder thereof shall not, as of the Election Deadline (as defined below),
have made such an election by submission to the Exchange Agent of an
effective, properly completed Election Form shall be deemed to be No
Election Shares. "Election Deadline" means 4:00 p.m., Milwaukee time, on
a day 30-45 days following the Mailing Date, but which also shall be at
least one business day prior to the date of the Shareholders Meeting (as
defined in Section 5.01). Acquiror shall make an Election Form available
to all persons who become holders of Company Common Stock between the
date three business days prior to the Mailing Date and the close of
business on the day prior to the Election Deadline, and the Company will
provide to the Exchange Agent in a timely manner all information
necessary to comply with this provision.
(d) Any Dissenting Shares, as defined in Section 1.09, shall be
deemed Cash Election Shares, and with respect to such shares, the holders
thereof shall in no event be deemed to hold Stock Designee Shares
(defined below).
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(e) Any election as between the Per Share Cash Distribution or the
Per Share Stock Distribution shall have been properly made only if the
Exchange Agent shall have received a properly completed Election Form by
the Election Deadline. An Election Form will be properly completed only
if accompanied by certificates representing all shares of the Company
Common Stock covered thereby. An Election Form may be revoked or changed
by the person submitting such Election Form to the Exchange Agent by
written notice to the Exchange Agent, provided such notice is received by
the Exchange Agent at or prior to the Election Deadline. All Election
Forms shall be deemed revoked if the Exchange Agent is notified in
writing by Acquiror or the Company that this Agreement has been
terminated. The certificate or certificates representing the Company
Common Stock relating to any revoked Election Form shall be promptly
returned without charge to the person submitting such Election Form to
the Exchange Agent. The Exchange Agent shall have reasonable discretion
to determine when any election, modification or revocation is received
and whether any such election, modification or revocation has been
properly made.
(f) The aggregate amount of consideration, including amounts payable
in respect of Dissenting Shares and amounts paid in lieu of fractional
shares ("Consideration"), to be received by the Company shareholders in
exchange for their Company Common Stock shall consist of cash and
Acquiror Common Stock, to be determined as follows:
(1) the aggregate amount of Consideration that shall be payable to
Company shareholders, including the ESOP, in cash (the "Cash
Amount") shall be no greater than 40% of the aggregate value of all
of the Consideration to be issued or paid in connection with the
Merger;
(2) the total number of shares of Acquiror Common Stock to be
issued in connection with the Merger (the "Stock Amount") shall be
that number of whole shares of Acquiror Common Stock that has an
aggregate value, valuing such stock at the Acquiror Average Stock
Price for this purpose, at least equal to 60.0%, of the aggregate
value of all of the Consideration to be issued or paid in
connection with the Merger;
(3) the calculation of the aggregate amount of Consideration, the
Cash Amount and the Stock Amount shall be made by Acquiror. The
relative percentages that the Cash Amount (i.e. 0% to 40.0%) and
the Stock Amount (i.e. 60.0% to 100%) bear to the aggregate amount
of Consideration to be issued or paid in connection with the Merger
shall be determined as follows:
(i) The aggregate value of the Cash Amount
shall be 40.0% or less of the aggregate amount of
Consideration and shall be determined by multiplying the
Per Share Cash Distribution by the number of Cash Election
Shares and No Election Shares converted to a right to
receive the Per Share Cash Distribution;
(ii) The aggregate value of the Stock Election
Shares, valuing each such Stock Election Share as the
product of the Acquiror Average Stock Price multiplied by
the Per Share Stock Distribution, shall be 60.0% or more
of the aggregate value of all of the Consideration to be
issued or paid in connection with the Merger, with the
Stock Amount being equal to the number of whole shares of
Acquiror Common Stock to be issued or paid in connection
with the Merger; and
(g) Within five business days after the Effective Time, the Exchange
Agent shall effectuate the allocation among holders of the Company Common
Stock of the right to receive the Cash Election Shares and/or the Stock
Election Shares in the Merger in accordance with the Election Form as
follows:
(i) if the number of shares of Acquiror
Common Stock that would be issued upon conversion in the
Merger of the Stock Election Shares is less than the
Stock Amount, then
(A) all shares of Company Common Stock electing
Stock Election Shares will be converted into the
right to receive the Per Share Stock
Distribution,
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(B) subject to Section 1.06(d), the Exchange
Agent will select first from among the No
Election Shares, by random selection, and then
(if necessary) from among the Cash Election
Shares, pro rata in accordance with the number of
shares of Company Common Stock beneficially owned
by each Company shareholder and designated as
Cash Election Shares ("Stock Designee Shares"),
in each case subject to the requirement for
issuance pursuant to Section 1.06(b) of at least
50 shares of Acquiror Common Stock to each
recipient thereof, such that the number of Stock
Designee Shares will, when added to the number of
Stock Election Shares, equal the minimum Stock
Amount percentage, and the appropriate number of
Stock Designee Shares will be converted into the
right to receive the Per Share Stock Distribution
(provided, however, that no particular holder of
Cash Election Shares will be required to
designate all or a portion of his, her or its
Cash Election Shares as Stock Designee Shares if
such designation would threaten satisfaction of
any of the conditions to the consummation of the
Merger set forth in Article Seven), and
(C) Cash Election Shares and the No Election
Shares not designated Stock Designee Shares will
be converted into the right to receive the Per
Share Cash Distribution; or
(ii) if the number of shares of Acquiror Common Stock that
would be issued upon conversion of the Stock Election
Shares is equal to or greater than the Stock Amount, then
all shares of Company Common Stock electing Stock
Election Shares will be converted into the right to
receive the Per Share Stock Distribution and all Cash
Election Shares and No Election Shares will be converted
into the right to receive the Per Share Cash
Distribution.
(h) The random selection process to be used by the Exchange Agent to
select among the No Election Shares shall be as the Exchange Agent deems
equitable, or as may be mutually determined by the Company and Acquiror
and as shall be further described in the Election Form. The pro rata
process to be used by the Exchange Agent to designate Stock Designee
Shares in order to reach the Stock Amount shall be based on the
proportion that the number of Cash Election Shares beneficially owned by
each Company shareholder, bears to the total number of Cash Election
Shares (excluding Dissenting Shares).
(i) The extent to which elections by holders of Company Common Stock
will be accommodated will depend upon the respective number of shares of
Company Common Stock electing cash or stock (or making no election).
Accordingly, a holder of shares of Company Common Stock who elects cash,
or a combination of cash and shares of Acquiror Common Stock, may instead
receive just shares of Acquiror Common Stock, or a combination of cash
and shares of Acquiror Common Stock, or a different combination of cash
and shares of Acquiror Common Stock. In addition, if so directed by the
Acquiror, the Exchange Agent may alter the selection and pro rata process
in order to ensure that all of the conditions to consummation of the
Merger set forth in Article Seven may be complied with.
1.07 Exchange Procedures.
(a) At the Effective Time, there shall be issued the Stock Amount
and the amount of cash payable in the Merger ("Exchange Fund"). Upon
completion of the allocation procedures described above, Acquiror shall,
if necessary, issue to the Exchange Agent any additional shares of
Acquiror Common Stock in exchange for cash or issue to the Exchange Agent
any additional cash in exchange for Acquiror Common Stock.
(b) After the Effective Time, each previous holder of a certificate
that, prior to the Effective Time, represented the Company Common Stock
("Certificate") that prior thereto surrendered or thereafter surrenders
such a Certificate to the Exchange Agent will, upon acceptance thereof by
the Exchange Agent, be entitled to a certificate or certificates
representing the number of full shares of Acquiror Common Stock
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and/or the amount of cash into which the Certificate surrendered shall
have been converted pursuant to this Agreement and, if such holder's
Company Common Stock has been converted into Acquiror Common Stock, any
other distribution theretofore declared and not yet paid with respect to
the Acquiror Common Stock issuable in the Merger, in each case without
interest. The Exchange Agent shall not be entitled to vote or exercise
any rights of ownership with respect to the shares of Acquiror Common
Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed
with respect to such shares for the account of the persons entitled
thereto. No dividends or other distributions payable after the Effective
Time with respect to Acquiror Common Stock shall be paid to the holder of
any unsurrendered Certificate until the holder thereof shall duly
surrender such Certificate in accordance with this Article One. After
the surrender of a Certificate in accordance with this Article One, the
record holder thereof shall be entitled to receive any dividends or other
distributions, with any interest thereon, which became payable with
respect to the shares of Acquiror Common Stock represented by such
Certificate after the Effective Time but on or before the time of such
surrender. No holder of an unsurrendered Certificate shall be entitled,
until the surrender of such Certificate, to vote the shares of Acquiror
Common Stock into which his or her Company Common Stock shall have been
converted.
(c) The Exchange Agent shall accept such certificates upon
compliance with such reasonable terms and conditions as the Exchange
Agent may impose to effect an orderly exchange thereof in accordance with
customary exchange practices. Each outstanding certificate that, prior
to the Effective Time, represented Company Common Stock shall, except as
otherwise provided in this Agreement and until duly surrendered to the
Exchange Agent, be deemed to evidence ownership of the consideration into
which such Company Common Stock shall have been converted. After the
Effective Time, there shall be no further transfer on the records of the
Company of certificates representing Company Common Stock, and if such
certificates are presented to the Company for transfer, they shall be
canceled against delivery of the consideration provided therefor in this
Agreement. No dividends declared will be remitted to any person entitled
to receive Acquiror Common Stock under this Agreement until such person
surrenders the certificate or certificates representing Company Common
Stock, at which time such dividends shall be remitted to such person,
without interest and less any taxes that may have been imposed thereon.
Neither the Exchange Agent, Acquiror nor the Company shall be liable to
any holder of Company Common Stock for any consideration paid to a public
official pursuant to applicable abandoned property, escheat or similar
laws. Acquiror and the Exchange Agent shall be entitled to rely upon the
stock transfer books of the Company to establish the identity of those
persons entitled to receive consideration specified in this Agreement,
which books shall be conclusive with respect thereto. In the event of a
dispute with respect to ownership of any shares of Company Common Stock,
Acquiror and the Exchange Agent shall be entitled to deposit any
consideration represented thereby in escrow with an independent third
party and thereafter be relieved with respect to any claims thereto.
(d) If any certificate representing shares of Acquiror Common Stock
is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition
of the issuance thereof that the Certificate so surrendered shall be
properly endorsed (or accompanied by an appropriate instrument of
transfer) and otherwise in proper form for transfer, and that the person
requesting such exchange shall pay to the Exchange Agent in advance any
transfer or other taxes required by reason of the issuance of a
certificate representing shares of Acquiror Common Stock in any name
other than that of the registered holder of the Certificate surrendered,
or required for any other reason, or shall establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not payable.
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(e) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of the Company for six months after the Effective Time,
including dividends received pursuant to section 1.07(b) and any interest
paid on the Exchange Fund, shall be remitted back to Acquiror. Any
shareholders of the Company who have not theretofore complied with this
Article One shall thereafter look only to Acquiror for payment for their
shares of Company Common Stock. Notwithstanding the foregoing, neither
the Acquiror, the Company, the Exchange Agent, or any other person shall
be liable to any former holder of shares of Company Common Stock for any
amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if
required by Acquiror, the posting by such person of a bond in such amount
as Acquiror may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Certificate the
shares of Acquiror Common Stock or cash and cash in lieu of fractional
shares and unpaid dividends and distributions on Acquiror Common Stock
deliverable in respect thereof pursuant to this Agreement.
1.08 No Fractional Shares. Notwithstanding any other provision of this
Agreement, neither certificates nor scrip for fractional shares of Acquiror
Common Stock shall be issued in the Merger. Each holder of shares of Company
Common Stock who otherwise would have been entitled to a fraction of a share of
Acquiror Common Stock shall receive in lieu thereof cash (without interest) in
an amount determined by multiplying the fractional share interest to which such
holder would otherwise be entitled by the Acquiror Average Stock Price. No such
holder shall be entitled to dividends, voting rights or any other rights in
respect of any fractional share.
1.09 Dissenting Shares.
(a) "Dissenting Shares" means any shares held by any holder who
becomes entitled to payment of the fair value of such shares under the
WBCL. Any holder of Dissenting Shares shall be entitled to payment for
such shares only to the extent permitted by and in accordance with the
provisions of the WBCL; provided, however, that if, in accordance with
the WBCL, any holder of Dissenting Shares shall forfeit such right to
payment of the fair value of such shares, such shares shall thereupon be
deemed to have been converted into and to have become exchangeable for,
as of the Effective Time, the right to receive cash and/or Acquiror
Common Stock in accordance with the applicable provisions of this
Agreement. If such holder of Dissenting Shares shall effectively
withdraw or lose (through failure to perfect or otherwise) his or her
right to such payment after the Effective Time, such shares of Company
Common Stock of such holder shall be converted on a share by share basis
into the right to receive the Per Share Cash Distribution and/or the Per
Share Stock Distribution as the Acquiror shall determine.
(b) The Company shall give Acquiror prompt notice of any written
objections to the Merger and any written demands for the payment of the
fair value of any shares, withdrawals of such demands, and any other
instruments received by the Company pursuant to the WBCL, and the
opportunity to direct all negotiations and proceedings with respect to
such demands under the WBCL. The Company shall not voluntarily make any
payment with respect to any demands for payment of fair value and shall
not, except with the prior written consent of Acquiror, settle or offer
to settle any such demands.
1.10 Withholding Rights. Acquiror shall be entitled to deduct and
withhold from any amounts otherwise payable pursuant to this Agreement to any
holder of shares of Company Common Stock such amounts as Acquiror is required
under the Code or any provision of state, local or foreign tax law to deduct and
withhold with respect to the making of such payment. Any amounts so withheld
shall be treated for all purposes of this Agreement as having been paid to the
holder of Company Common Stock in respect of which such deduction and
withholding was made by Acquiror.
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1.11 Options.
(a) The Acquiror shall, as of the Closing Date, convert the outstanding
and unexercised options granted by the Company for the purchase of shares of
Company Common Stock, whether or not the option is then exercisable under the
terms of the Reliance Bancshares, Inc. 1997 Stock Option Plan (the "Option
Plan"), into cash in an amount equal to the excess of the Per Share Cash
Distribution over the exercise price of such option, multiplied by the number
of shares subject to such option, and such cash, net of any amount that must be
withheld for federal, state or local tax purposes, shall be paid to the holder
of such option within five (5) business days of the Closing Date, whereupon
such option shall terminate; provided that any holder of outstanding and
unexercised options granted by the Company to purchase Company Common Stock
who, by reason of their employment or other status with the Acquiror or
Acquiror-Bank after the Closing Date, would be eligible to participate in the
Acquiror's stock option plan may, on or prior to the Election Deadline, notify
Acquiror as to whether such holder elects to have his or her options converted
into options to purchase shares of Acquiror Common Stock, rather than into
cash, at an exercise price as determined below:
(i) The number of shares of Acquiror Common Stock to be subject to
the converted option shall be equal to the number of shares of Company
Common Stock subject to the original option multiplied by a fraction
determined by application of Section 1.05(b)(2) hereof, provided that any
fractional shares of Acquiror Common Stock resulting from such
multiplication shall be rounded down to the nearest whole share; and
(ii) The exercise price per share of Acquiror Common Stock under the
converted option shall be equal to the exercise price per share of
Company Common Stock under the original option divided by a fraction
determined by application of Section 1.05(b)(2) hereof, provided that
such exercise price shall be rounded up to the nearest cent.
(iii) The Acquiror agrees that a director of Reliance who becomes a
member of the Advisory Board, as defined in Section 4.08 hereof, shall be
deemed an "Outside Director" under the terms of the Acquiror's option
plan for purposes of being eligible to have any options to purchase
shares of Company Common Stock which are converted, under (i) and (ii)
above, into options for the purchase of Acquiror's Common Stock
administered under the terms of Acquiror's plan.
(b) The adjustment provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be and
is intended to be effected in a manner which is consistent with Section 424(a)
of the Code and is not intended as a modification of such option (as defined in
section 424(h)(3) of the Code). The duration and other terms of the converted
option shall be the same as the original option, except that all references to
the Company shall be deemed to be references to Acquiror.
(c) If Acquiror merges the Option Plan with its own option plan, each
converted option shall be subject to the terms, benefits, rights and features
of the Acquiror's option plan and the related agreement evidencing the grant of
such option thereunder from and after the Closing Date.
(d) All options which are issued and outstanding as of the date hereof
under the terms of the Option Plan will become fully vested and exercisable as
of the Closing Date.
(e) The Surviving Corporation may, at its option, merge the Option Plan
with its own plan or continue the Option Plan after the Effective Time provided
that such merger or continuance shall not reduce the vesting credit earned by
holders of converted options under the Option Plan prior to the Closing Date.
1.12 Bank Merger. The Company and the Acquiror intend to take all action
necessary and appropriate to cause, including causing the entering into of a
merger agreement (the "Bank Merger Agreement"), substantially on the terms and
in the form attached hereto as Exhibit B, pursuant to which the Acquiror-Bank
and the Merging Bank shall merge immediately following the Merger or as soon as
practicable thereafter with the Acquiror-Bank being the surviving bank
("Surviving Bank") thereof pursuant to the provisions of applicable law. At the
effective time of the Bank Merger, the charter and by-laws of the Surviving Bank
shall be the articles of association and by-
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laws of the Acquiror-Bank in effect immediately prior to the effective time of
the Bank Merger. At the effective time of the Bank Merger, the directors and
officers of the Surviving Bank shall be the directors and officers of the
Acquiror-Bank immediately prior to the effective time of the Bank Merger,
except that, provided the Surviving Bank can obtain all necessary regulatory
approvals, one outside director of the Merging Bank, as selected by the Board
of Directors of the Merging Bank, shall become a director of the Surviving Bank
as soon as practicable after the effective date of the Bank Merger.
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror represents and warrants to the Company as follows:
2.01 Organization; Qualification; Good Standing; Corporate Power.
(a) Acquiror is a corporation validly existing and in good standing
(meaning that it has filed its most recent required annual report, has
not filed articles of dissolution and all franchise taxes due and owing
have been paid) under the laws of the state of Wisconsin and is a
registered savings and loan holding company under the Home Owners' Loan
Act of 1933, as amended ("HOLA"). Acquiror has the corporate power and
authority to carry on its business as now conducted, and to own, lease
and operate its properties. The Articles of Incorporation and Bylaws of
Acquiror, copies of which previously have been made available to the
Company, are true, correct and complete copies of such documents in
effect as of the date of this Agreement.
(b) Acquiror-Bank is a federally chartered stock savings association
duly organized and in existence under the laws of the United States.
(c) Acquiror, and each of its subsidiaries (including the
Acquiror-Bank and all other direct and indirect subsidiaries of the
Acquiror, the "Subsidiaries"), hold all licenses, certificates, permits,
franchises and rights from all appropriate federal, state or other public
authorities necessary for the conduct of its and their businesses, except
where the failure to so hold would not have a material adverse effect on
Acquiror.
2.02 Authorization. The execution, delivery and performance of this
Agreement and the Plan of Merger by Acquiror and the consummation of the
Reorganization and the transactions contemplated hereby and thereby have been
and will be duly authorized and approved by all necessary corporate action, and
this Agreement and the Plan of Merger and the Bank Merger Agreement are and will
be legally binding on and enforceable against Acquiror in accordance with their
terms, and except as enforceability may be limited by bankruptcy laws,
insolvency laws or other laws affecting creditors' rights generally. The
execution and delivery of this Agreement and the Plan of Merger do not, and the
consummation of the Merger will not, violate the provisions of Acquiror's
Articles of Incorporation or Bylaws.
2.03 Capitalization. The authorized capital stock of Acquiror consists of
12,000,000 shares of Acquiror Common Stock, par value $.01 per share, of which
5,186,683 shares were issued and outstanding as of the date of this Agreement;
and 6,000,000 shares of Preferred Stock, par value $1.00 per share ("Acquiror
Preferred Stock") of which none are issued and outstanding as of the date
hereof. Except as provided herein, the Acquiror's stock option plan, and the
Rights Agreement dated September 25, 1997 by and between Acquiror and Firstar
Trust Company N.A. (the "Rights Agreement"), there are no outstanding warrants,
options, rights, calls or other commitments of any nature relating to the
issuance or sale of any other class of equity securities of Acquiror, as of the
date hereof. All of the 5,186,683 outstanding shares of Acquiror Common Stock
are duly authorized, validly issued, fully paid and nonassessable, subject to a
limitation contained in Section 180.0622(2)(b) of the WBCL, as judicially
interpreted, which provides that shareholders of Wisconsin corporations may be
personally liable for all debts owing to employees of the corporation for
services performed for such corporation for up to six months' service in any one
case, but not in an amount greater than the consideration paid for such shares.
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2.04 Financial Statements
(a) Acquiror has furnished to the Company true, correct and complete
copies of the audited Consolidated Statements of Financial Condition of
Acquiror as of the fiscal years ended September 30, 1996 and 1997 and the
related Consolidated Statements of Income, Consolidated Statements of
Changes in Shareholders' Equity and the Consolidated Statements of Cash
Flows for the fiscal years ended September 30, 1997, including the
respective notes thereto, together with the reports of KPMG Peat Marwick
LLP relating thereto (the "Financial Statements"). Such Financial
Statements fairly present the consolidated financial position of Acquiror
as of and for the periods ended on their respective dates and the
consolidated operating results and changes in financial position of
Acquiror for the indicated periods in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis. Since
September 30, 1997 to the best of Acquiror's knowledge, there have not
been any material changes in Acquiror's consolidated financial condition,
assets, liabilities or business, other than changes in the ordinary
course of business.
(b) Acquiror shall furnish the Company with copies of its unaudited
Quarterly Reports on Form 10-Q as filed with the Securities and Exchange
Commission (the "SEC") for each quarterly period subsequent to September
30, 1997 and Annual Reports on Form 10-K for fiscal years after September
30, 1997 and each financial report it or any of its Subsidiaries file
with the OTS subsequent to September 30, 1997, until the Closing Date (as
defined in Section 12.01) ("Subsequent Financial Statements").
(c) All of the aforesaid Financial Statements have been, and, with
respect to the Subsequent Financial Statements, will be, prepared in
accordance with GAAP, utilizing accounting practices consistent with
prior years except as otherwise disclosed, and comply or will comply with
applicable accounting requirements and with the rules and regulations of
the SEC with respect thereto. All of the aforesaid Financial Statements
present fairly, and all of the Subsequent Financial Statements will
present fairly, the financial position of the Acquiror and its
subsidiaries taken as a whole and the results of its and their operations
and changes in its and their financial position as of and for the periods
ending on their respective dates. The books and records of the Acquiror
and its Subsidiaries have been and are being maintained in all material
respects in accordance with GAAP and all other applicable legal
accounting requirements and reflect only actual transactions. Subject to
such changes which may result from an audit of any Subsequent Financial
Statements (which changes in the aggregate will not be material), the
allowance for loan losses in such Financial Statements is, and, with
respect to the Subsequent Financial Statements will be, adequate under
the standards applied by the OTS and based on past loan loss experiences
and potential losses in current portfolios to cover all known or
anticipated loan losses. Except with respect to this Agreement and the
transactions contemplated herein, there are, and with respect to the
Subsequent Financial Statements will be, no agreements, contracts or
other instruments to which the Acquiror or its subsidiaries are a party
or by which it or they or (to the knowledge of the Acquiror) any of the
officers, directors, employees or shareholders of the Acquiror or its
Subsidiaries have rights which would have a material adverse effect on
the consolidated financial position of the Acquiror or the financial
position of its subsidiaries which are not disclosed herein or reflected
in the Financial Statements and the Subsequent Financial Statements.
2.05 Absence of Undisclosed Liabilities. Except as and to the extent
fully reflected or reserved against in the Financial Statements or the
Subsequent Financial Statements, neither the Acquiror nor its Subsidiaries had,
nor with respect to the Subsequent Financial Statements will have, any
liabilities or obligations, of any nature, secured or unsecured (whether
accrued, absolute, contingent or otherwise) including, without limitation, any
tax liabilities due or to become due. Except as set forth on Schedule 2.05, the
Acquiror further represents and warrants that it does not know or have reason to
believe that there is or will be any basis for assertion against it or its
Subsidiaries as of the date of execution of this Agreement, or as of the date of
any Subsequent Financial Statements, of any liability or obligation of any
nature or any amount not fully reflected or reserved against in the Financial
Statements as of said dates and for subsequent periods or in the footnotes
thereto.
2.06 No Violation. Except as set forth on Schedule 2.06, neither the
execution and delivery of this Agreement by the Acquiror, the consummation by
Acquiror and Acquiror-Bank of the transactions contemplated hereby or thereby,
nor compliance by the Acquiror with any of the terms or provisions hereof or
thereof, will (a) violate any provision of the Articles of Incorporation or
Bylaws of Acquiror or the stock charter, bylaws or similar
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governing documents of Acquiror-Bank, or (b) assuming that the consents and
approvals referred to in Section 2.07 hereof are duly obtained, (i) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to Acquiror or Acquiror-Bank, or (ii) violate, conflict
with, result in a breach of any material provision of or the loss of any
material benefit, constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, result in the termination
of or a right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any material lien, pledge, security
interest, charge or other encumbrance upon any of the respective properties or
assets of Acquiror or Acquiror-Bank or any of their subsidiaries under any of
the material terms, conditions or provisions of any material note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Acquiror or Acquiror-Bank is a party, except
for such violations, conflicts, breaches or defaults which, either individually
or in the aggregate, would not have or be reasonably likely to have a material
adverse effect on Acquiror.
2.07 Consents and Approvals. Except for (a) the filing of applications,
notices or other documents necessary to obtain, and the receipt of, the
Requisite Regulatory Approvals (as defined in Section 7.01), (b) the filing with
the SEC of any necessary Registration Statement (as defined in Section 6.01),
(c) the filing of Articles of Merger with the WDFI pursuant to the provisions of
the WBCL, (d) such filings and approvals as are required to be made or obtained
under the securities or "Blue Sky" laws of various states in connection with the
issuance of the shares of Acquiror Common Stock pursuant to this Agreement, and
(e) such filings, authorizations or approvals as may be set forth on Schedule
2.07, no consents or approvals of or filings or registrations with any
governmental entity or with any third party are necessary in connection with the
execution and delivery by Acquiror of this Agreement, or the consummation by
Acquiror of the Reorganization.
2.08 Litigation. As of the date of this Agreement, except as set forth on
Schedule 2.08, there are no legal, administrative or other actions, suits,
proceedings or investigations of any kind or nature pending or, to the knowledge
of Acquiror, threatened against Acquiror that challenge the validity or
propriety of the transactions contemplated by this Agreement or which would have
a material adverse effect on Acquiror's consolidated financial condition,
assets, liabilities or business. Neither Acquiror nor Acquiror-Bank is subject
to, or in default with respect to, nor are any of its or their assets subject
to, any outstanding judgment, order or decree of any court or of any
governmental agency or instrumentality that has or is reasonably expected to
have a material adverse effect on Acquiror's consolidated financial condition,
assets, liabilities or business.
2.09 Employee Benefit Plans.
(a) All bonus, deferred compensation, pension, retirement,
profit-sharing, thrift savings, employee stock ownership, stock bonus,
stock purchase, restricted stock and stock option plans, all employment
or severance contracts, other material employee benefit plans and any
applicable "change in control" or similar provisions in any plan,
program, policy, contract or arrangement which cover employees or former
employees of the Acquiror and its ERISA Affiliates (defined below) and
all other benefit plans, contracts, programs, policies or arrangements
covering directors, employees or former employees of the Acquiror or its
ERISA Affiliates (the "Acquiror Employees"), including, but not limited
to, "employee benefit plans" within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
(collectively, the "Acquiror Compensation and Benefit Plans") are listed
on Schedule 2.09. True and complete copies of all Acquiror Compensation
and Benefit Plans and such contracts or arrangements, including, but not
limited to, any trust instruments and/or insurance and investment
contracts, if any, forming a part of any such Acquiror Compensation and
Benefit Plans and agreements, and all amendments thereto, including, but
not limited to (i) the actuarial report for such Plan (if applicable) and
the annual report (Form 5500 series) for each of the last two years, (ii)
the current summary plan description, and (iii) the most available recent
determination letter from the Internal Revenue Service (the "IRS") (if
applicable) for such Plan shall be available to the Company.
(b) Acquiror Compensation and Benefit Plans, other than
"Multi-Employer Plans" within the meaning of Sections 3(37) or 4001(a)(3)
of ERISA (the "Acquiror Plans"), covering Employees are in substantial
compliance with ERISA and all other applicable laws and regulations.
Each Acquiror Plan which is an "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA ("Acquiror Pension Plan") and which is
intended to be qualified under Section 401(a) of the Code, has received
or
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applied for a favorable determination letter from the IRS, and the
Acquiror is not aware of any circumstances likely to result in revocation
of any such favorable determination letter. The Acquiror's Employee
Stock Ownership Plan satisfies the requirements for an employee stock
ownership plan under Section 4975(e)(7) of the Code. There is no
material pending or threatened litigation relating to the Acquiror Plans.
Neither the Acquiror nor any of its ERISA Affiliates has engaged in a
transaction with respect to any Acquiror Plan that, could subject the
Acquiror or any of its ERISA Affiliates or any other party to a tax or
penalty imposed by Section 4975 of the Code or Section 502(i) or 502(l)
of ERISA in an amount which would be material.
(c) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by the Acquiror or any of its ERISA
Affiliates with respect to any ongoing, frozen or terminated
"single-employer plan," within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by any of them, or the
single-employer plan of any entity which is considered one employer with
the Acquiror or any of its ERISA Affiliates under Section 4001 of ERISA
or Section 414 of the Code (an "ERISA Affiliate"). Neither the Acquiror
nor any of its ERISA Affiliates has incurred or expects to incur any
withdrawal liability with respect to a Multi-Employer Plan under Subtitle
E of Title IV of ERISA (regardless of whether based on contributions of
an ERISA Affiliate). No notice of a "reportable event", within the
meaning of Section 4043 of ERISA, for which the 30-day reporting
requirement has not been waived has been required to be filed for any
Acquiror Plan or by any ERISA Affiliate within the twelve-month period
ending on the date hereof.
(d) All contributions required to be made under the terms of any
Acquiror Plan have been timely made. Neither any Acquiror Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA. Neither the Acquiror nor any of its
ERISA Affiliates has provided, or is required to provide, security to any
Acquiror Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the Code.
(e) Except as set forth on Schedule 2.09, neither the Acquiror nor
any of its ERISA Affiliates has any obligations for retiree health and
life benefits under any Acquiror Plan. Except as set forth on Schedule
2.09, there are no restrictions on the rights of the Acquiror or its
ERISA Affiliates to amend or terminate any such Acquiror Plan without
incurring any liability thereunder.
(f) No matter is pending relating to any of the Acquiror Plans
before any court or government agency.
(g) Neither the Acquiror nor any of its ERISA Affiliates presently
contributes to or is currently a party to any Multi-Employer Plan.
(h) Neither the Acquiror nor any of its ERISA Affiliates is a party
to, or is bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization
nor is the Acquiror or any of its ERISA Affiliates the subject of any
material proceeding asserting that the Acquiror or any such ERISA
Affiliate has committed an unfair labor practice or seeking to compel the
Acquiror or such ERISA Affiliate to bargain with any labor organization
as to wages or conditions of employment, nor is there any strike
involving the Acquiror or any of its ERISA Affiliates pending or
threatened, nor is the Acquiror or any of its ERISA Affiliates aware of
any activity involving its or any of its ERISA Affiliates" employees
seeking to certify a collective bargaining unit or engaging in any other
organizational activity.
(i) Neither the Acquiror nor any ERISA Affiliate presently
contributes to any Acquiror Plan that is or was subject to Title IV of
ERISA.
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(j) Except as set forth in Schedule 2.09, the consummation of the
transactions contemplated by this Agreement will not, either alone, or in
combination with another event (i) entitle any current or former employee
or officer of the Acquiror or an ERISA Affiliate to severance pay,
unemployment compensation or any other payment, except as expressly
provided in this Agreement or (ii) accelerate the time of payment or
vesting, or increase the amount, of compensation due any such employee or
officer.
(k) No Acquiror Plan provides for payment of an amount which taken
by itself would exceed amounts deductible for federal income tax purposes
by virtue of Section 280(G) of the Code.
2.10 Compliance with Environmental Laws. Except as set forth on Schedule
2.10, to Acquiror's knowledge, as of the date of this Agreement:
(a) The operations of Acquiror and its subsidiaries comply and have
complied with all Environmental Laws (as defined in Section 3.24); none
of the Acquiror or any of its subsidiaries' operations are the subject
of, nor is the Acquiror or any of its subsidiaries a party to, any
judicial or administrative proceeding, alleging the violation of
Environmental Laws; neither the Acquiror nor any of its subsidiaries is
the subject of a federal, state or local investigation, pending or
threatened, evaluating whether any remedial action is needed to respond
to a release of any Hazardous Material (as defined in Section 3.24); and
neither Acquiror nor any of its subsidiaries have reported a spill,
emission or release of a Hazardous Material.
(b) Except as set forth on Schedule 2.10, all real property owned
directly by Acquiror and its subsidiaries (the "Real Property") is in
compliance in all material respects with all Environmental Laws; neither
Acquiror nor any of its subsidiaries has any notice or knowledge
regarding the Real Property or its past use(s) which indicates
noncompliance with Environmental Laws; the Real Property is not subject
to any judicial or administrative proceedings alleging the violation of
Environmental Laws; the Real Property is not contaminated by any
Hazardous Material; the Real Property is not the subject of a federal,
state or local investigation evaluating whether any remedial action is
needed to respond to a release, emission or discharge of any Hazardous
Material into the environment; neither the Acquiror nor any of its
subsidiaries have transported any Hazardous Material to the Real Property
or from the Real Property to any waste treatment, storage or disposal
facility.
2.11 Shares to be Issued in Merger. The Acquiror Common Stock, which
certain shareholders of the Company will be entitled to receive upon
consummation of the Merger pursuant to the terms of the Plan of Merger, will, at
the Effective Time, be duly authorized and will, when issued pursuant to the
Plan of Merger, be validly issued, fully paid and nonassessable (subject to the
limitations provided in Section 180.0622(2)(b) of the WBCL).
2.12 Broker's Fees. Neither Acquiror, nor any of its subsidiaries, nor
any of their respective officers or directors, has employed any broker or finder
or incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement.
2.13 Acquiror Information. The information relating to Acquiror and its
subsidiaries to be contained or incorporated by reference in the Proxy
Statement/Prospectus (as defined in Section 6.01) and the Registration Statement
(as defined in Section 6.01) will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein
not misleading. The Registration Statement (except for such portions thereof
that relate only to the Company or any of its subsidiaries) will comply in all
material respects with the provisions of the Securities Act of 1933, as amended
(the "Securities Act") and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations thereunder.
2.14 Regulatory Filings. Schedule 2.14 is an accurate listing of each
registration statement, prospectus, report, schedule, proxy statement,
information statement or other shareholder communication used, circulated or
filed after January 1, 1997 by the Acquiror or any of its subsidiaries, copies
of which have been made available to the Company. The Acquiror and its
subsidiaries have filed and will continue to file in a timely manner all
required filings with (a) the SEC, (b) the Federal Reserve Board ("FRB"), (c)
the FDIC, and (d) the OTS (and will furnish Company with copies of all such
filings made subsequent to the date hereof until the Effective Time), and all
such filings were or will be, complete and accurate in all material respects as
of the dates of the filings, and no such filing
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made or will make any untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading.
Except for normal examinations conducted by the IRS, the OTS, the FDIC in the
regular course of the business of the Acquiror or its subsidiaries, no federal,
state or local governmental agency, commission or other entity has initiated
any proceeding or, to the best of the knowledge and belief of the Acquiror,
investigation into the business or operations of the Acquiror or its
subsidiaries within the past five years. Except as set forth on Schedule 2.14,
there is no unresolved violation, criticism or exception by the SEC, the FRB,
the FDIC, the OTS or other agency, commission or entity with respect to any
report or statement referred to herein. Since the date of any such filings,
there has been no material change in the condition of the Acquiror or any of
its Subsidiaries, financial or otherwise, such that, had such change occurred
prior to any such filing, such change would have been required to be disclosed
or described therein. Except as otherwise disclosed on Schedule 2.14, there is
no unresolved violation, criticism or exception by any regulatory agency with
respect to any report or statement relating to any examinations of the Acquiror
or any of its subsidiaries.
2.15 Community Reinvestment Act Compliance. Except as set forth on
Schedule 2.15, the Acquiror-Bank is in compliance with the applicable provisions
of the Community Reinvestment Act of 1977, as amended ("CRA") and the
regulations promulgated thereunder, and is not aware of any state of facts or
circumstances related to any planned or threatened CRA protest. As of the date
of this Agreement, the Acquiror-Bank has not been advised of the existence of
any act or circumstance or set of facts or circumstances which, if true, would
cause it to fail to be in compliance with the CRA or any federal or state fair
lending laws. The Acquiror Bank has not received a CRA rating from the OTS
which is less than "satisfactory."
2.16 Approvals. The Acquiror knows of no reason why the Requisite
Regulatory Approvals (as defined in Section 7.01) necessary to permit Acquiror
consummation of the transactions contemplated hereby in the manner provided
herein should not be obtained.
2.17 Other Information. No representation or warranty by the Acquiror
contained in this Agreement, or disclosure in any Schedule hereto prepared by
the Acquiror, certificate or other instrument or document furnished or to be
furnished by or on behalf of the Acquiror pursuant to this Agreement and no
information furnished or to be furnished by the Acquiror for use in the
Prospectus/Proxy Statement (as defined in Section 6.01) or the Registration
Statement (as defined in Section 6.01) or the regulatory filings contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated herein or therein which is
necessary to make the statements contained herein or therein. The
Prospectus/Proxy Statement (except for such portions thereof that relate solely
to the Company) will comply in all respects with the provisions of all
applicable laws, including the Securities Act and the Exchange Act.
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Acquiror as follows:
3.01 Organization; Qualification; Good Standing; Corporate Power.
(a) The Company is a corporation duly organized, validly existing
and in good standing (meaning that it has filed its most recent required
annual report, has not filed articles of dissolution and that all
franchise taxes due and owing have been paid) under the laws of the state
of Wisconsin and the Company is duly qualified to do business and is in
good standing in all jurisdictions (whether federal, state, local or
foreign) where its ownership or leasing of property or the conduct of its
business requires it to be qualified and in which the failure to be duly
qualified would have a material adverse effect upon the financial
condition, results of operations or business of the Company, taken as a
whole. The Company is a registered bank holding company and has the
corporate power and authority to carry on its business as it is now
conducted and to own, lease and operate its assets, properties and
business. The Company has the corporate power and authority to execute
and deliver this Agreement and the power to consummate the transactions
contemplated hereby.
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(b) The Merging Bank is a state-chartered stock savings bank duly
organized, validly existing and in good standing under the laws of the
State of Wisconsin. Set forth on Schedule 3.01 is a list of all direct
and indirect subsidiaries of the Company, including the Merging Bank
(collectively, the "Subsidiaries"), and the states of incorporation or
organization for each of its Subsidiaries and states in which each of its
Subsidiaries is qualified to do business. Each of its Subsidiaries has
the corporate power and authority to carry on its business as it is now
conducted and to own, lease and operate their properties, and are duly
qualified to do business and are in good standing in each jurisdiction
where its ownership or leasing of property or the conduct of its business
requires it to be qualified and in which the failure to be duly qualified
would have a material adverse effect upon its financial condition,
results of operation or business. The deposit accounts of the Merging
Bank are insured by the Federal Deposit Insurance Corporation ("FDIC")
through the Savings Association Insurance Fund (the "SAIF") to the
fullest extent permitted by law, and all premiums and assessments
required in connection therewith have been paid by the Merging Bank. The
Merging Bank is the only direct subsidiary of the Company, and is the
only subsidiary of the Company that is a "Significant Subsidiary" as such
term is defined in Regulation S-X promulgated by the SEC.
(c) The Company and its Subsidiaries hold all licenses,
certificates, permits, franchises and rights from all appropriate
federal, state or other public authorities necessary for the conduct of
its and their respective business, and a list of such licenses,
certificates, permits, franchises and rights is attached hereto as
Schedule 3.01. The Company and its Subsidiaries each have conducted its
and their business so as to comply with all applicable federal, state and
local statutes, ordinances, regulations or rules, and except as set forth
on Schedule 3.01, neither the Company nor any of its Subsidiaries is
presently charged with, or, to the Company's knowledge, under
governmental investigation with respect to, any actual or alleged
material violations of any statute, ordinance, regulation or rule; and
except as set forth on Schedule 3.01, neither the Company nor its
Subsidiaries are the subject of any pending or threatened proceeding by
any regulatory authority having jurisdiction over its or their business,
properties, assets or operations.
3.02 Authorization. The execution, delivery and performance of this
Agreement and the Plan of Merger by the Company and the consummation of the
Reorganization and the transactions contemplated hereby and thereby have been
and will be duly authorized and approved by all necessary corporate action, and
this Agreement, the Plan of Merger and the Bank Merger Agreement are and will be
legally binding on and enforceable against the Company and the Merging Bank in
accordance with their terms, subject to the approval of the shareholders of the
Company, and no other corporate proceedings on the part of the Company or the
Merging Bank are or will be necessary to approve this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the Plan of Merger do not, and the consummation of the Merger
will not, violate the Company's Articles of Incorporation or Bylaws. The
execution and delivery of the Bank Merger Agreement do not, and the consummation
of the Bank Merger will not, violate the Merging Bank's stock charter or Bylaws.
3.03 Capitalization.
(a) The authorized capitalization of the Company consists of (i)
6,000,000 shares of Company Common Stock, $1.00 par value per share, of
which 2,562,344 shares are issued and of which 2,403,701 shares are
outstanding, which includes 40,000 shares which are held by the trust
maintained pursuant to the Reliance Savings Bank Employee Stock Ownership
Plan (the "ESOP"), and 166,780 shares are held by the Company as treasury
shares, and (ii) 2,000,000 shares of Preferred Stock, $1.00 par value per
share, of which no shares are issued and outstanding. The Company has no
other class of stock and there are, and as of the Effective Time there
will be, no fractional shares of Company Common Stock issued or
outstanding.
(b) There are outstanding options for the purchase of 208,893 shares
of Company Common Stock granted to certain past and present directors,
officers and employees of the Company pursuant to the Reliance
Bancshares, Inc. 1997 Stock Option Plan (the "Option Plan") (the option
rights granted pursuant to the Option Plan as of the date hereof are
sometimes collectively referred to herein as the "Options"), and an
additional 38,204 Options that have been granted subject to completion of
the Merger, to certain current directors, officers and employees of the
Company and its subsidiaries pursuant to the Option Plan. The names of
the Optionees, the date of each Option to purchase, the number of shares
subject to each such
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Option, the expiration date of each such Option, and the price at which
each such Option may be exercised are set forth in Schedule 3.03. In
addition, the Company has awarded 81,980 shares as stock awards to
certain officers and employees of the Company pursuant to the Reliance
Savings Bank Recognition and Retention Plan (the "RRP"), and an
additional 20,514 shares have been awarded, subject to completion of the
Merger to certain Officers of the Company pursuant to the RRP, and has
purchased 102,494 shares of Company Common Stock (the "Restricted Stock")
to fund such obligations. The names of the recipients of Restricted
Stock under the RRP, the date of grant, the number of shares received and
the vesting schedule for each award are set forth on Schedule 3.03.
Except with respect to the Options and pursuant to the RRP and the terms
of this Agreement, neither the Company nor its Subsidiaries have granted
any outstanding warrants, options, rights, calls, agreements,
understandings or other commitments of any nature relating to the
authorization, issuance, sale or repurchase of any equity securities of
the Company or its Subsidiaries. Except as otherwise provided in the
Articles of Incorporation of the Company and except as set forth on
Schedule 3.03, only the 2,403,701 issued and outstanding shares of
Company Common Stock will be entitled to vote to approve this Agreement
and the Plan of Merger.
(c) The Company owns directly or indirectly all of the issued and
outstanding shares of capital stock of its Subsidiaries. Schedule 3.03
accurately identifies the number of shares of authorized and outstanding
capital stock of its Subsidiaries. Except as set forth on Schedule 3.03,
neither the Company nor any of its Subsidiaries owns directly or
indirectly any debt, equity or other proprietary interest in any other
corporation, joint venture, partnership, entity, association or other
business.
(d) All of the outstanding shares of the Company and its
Subsidiaries are validly issued, fully paid, nonassessable (subject to a
limitation with respect to Company Common Stock and capital stock of its
Subsidiaries which are Wisconsin corporations contained in Section
180.0622(2)(b) of the WBCL, as judicially interpreted, which provides
that shareholders of Wisconsin corporations may be personally liable for
all debts owing to employees of the corporation for services preformed
for the corporation for up to six months' in any one case, but not in an
amount greater than the consideration paid for each such shares) and free
of preemptive rights and, in the case of the shares of its Subsidiaries,
are owned free and clear of all liens, charges or encumbrances.
3.04 Financial Statements.
(a) The Company has furnished to Acquiror true, correct and complete
copies of: (i) the audited Consolidated Statements of Financial
Condition of the Company as of the fiscal years ended June 30, 1995, 1996
and 1997, and the related Consolidated Statements of Income Consolidated
Statements of Shareholders' Equity and Consolidated Statements of Cash
Flows for each of the three fiscal years ended June 30, 1995, 1996, and
1997, including the respective notes thereto, together with the reports
of Meier, Clancy, George & Co. LLP relating thereto; and (ii) the
unaudited Consolidated Statements of Financial Condition as of September
30, 1997 and December 31, 1997 and March 31, 1998, and the related
unaudited Consolidated Statements of Income, Consolidated Statements of
Shareholders' Equity and Consolidated Statements of Cash Flow for the
periods then ended ("Company Financial Statements"). Such Company
Financial Statements fairly present the financial position of the Company
and its Subsidiaries as of and for the periods ended on their respective
dates and the operating results of the Company and its Subsidiaries for
the indicated periods in conformity with GAAP applied on a consistent
basis. Since March 31, 1998 there have not been any changes in the
Company's consolidated financial condition, assets, liabilities or
business, other than changes in the ordinary course of business and as
set forth in the Company Financial Statements.
(b) The Company will furnish Acquiror with copies of its audited and
unaudited Consolidated Statements of Financial Condition, Consolidated
Statements of Income Consolidated Statements of Shareholders' Equity and
Consolidated Statements of Cash Flows for each quarterly and yearly
period subsequent to March 31, 1998, to be contained in the Company's
Form 10-QSB or Form 10-KSB as filed with the SEC for each quarterly or
yearly period subsequent to June 30, 1997 and each financial report it or
any of its Subsidiaries files with the OTS, subsequent to June 30, 1997
until the Closing Date (as defined in Section 12.01) ("Subsequent Company
Financial Statements").
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(c) All of the aforesaid Company Financial Statements have been,
and, with respect to the Subsequent Company Financial Statements, will
be, prepared in accordance with GAAP, utilizing accounting practices
consistent with prior years except as otherwise disclosed, and comply or
will comply with applicable accounting requirements and with the rules
and regulations of the SEC with respect thereto. All of the aforesaid
Company Financial Statements present fairly, and all of the Subsequent
Company Financial Statements will present fairly, the financial position
of the Company and its Subsidiaries taken as a whole and the results of
its and their operations and changes in its and their financial position
as of and for the periods ending on their respective dates. The books
and records of the Company and the Merging Bank have been and are being
maintained in all material respects in accordance with GAAP and all other
applicable legal accounting requirements and reflect only actual
transactions. Subject to such changes which may result from an audit of
any Subsequent Company Financial Statements (which changes in the
aggregate will not be material), the allowance for loan losses in such
Company Financial Statements is, and, with respect to the Subsequent
Company Financial Statements will be, adequate under the standards
applied by the WDFI and FDIC and based on past loan loss experiences and
potential losses in current portfolios to cover all known or anticipated
loan losses. Except with respect to this Agreement and the transactions
contemplated herein, there are, and with respect to the Subsequent
Financial Statements will be, no agreements, contracts or other
instruments to which the Company or its Subsidiaries are a party or by
which it or they or (to the knowledge of the Company) any of the
officers, directors, employees or shareholders of the Company or its
Subsidiaries have rights which would have a material adverse effect on
the consolidated financial position of the Company or the financial
position of the Merging Bank which are not disclosed herein or reflected
in the Company Financial Statements and the Subsequent Company Financial
Statements.
3.05 Absence of Undisclosed Liabilities. Except as and to the extent fully
reflected or reserved against in the Company Financial Statements or the
Subsequent Company Financial Statements, neither the Company nor its
Subsidiaries had, nor with respect to the Subsequent Company Financial
Statements will have, any liabilities or obligations, of any nature, secured or
unsecured (whether accrued, absolute, contingent or otherwise) including,
without limitation, any tax liabilities due or to become due. Except as set
forth on Schedule 3.05, the Company further represents and warrants that it does
not know or have reason to believe that there is or will be any basis for
assertion against it or its Subsidiaries as of the date of execution of this
Agreement, or as of the date of any Subsequent Company Financial Statements, of
any liability or obligation of any nature or any amount not fully reflected or
reserved against in the Company Financial Statements as of said dates and for
subsequent periods or in the footnotes thereto.
3.06 No Violation. Except as set forth on Schedule 3.06, neither the
execution and delivery of this Agreement by the Company nor the consummation by
the Company and the Merging Bank of the transactions contemplated hereby nor
compliance by the Company with any of the terms or provisions hereof will (a)
violate any provision of the Articles of Incorporation or Bylaws of the Company
or the stock charter, bylaws or similar governing documents of the Merging Bank,
or (b) assuming that the consents and approvals referred to in Section 3.07
hereof are duly obtained, (i) violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to the
Company or the Merging Bank, or any of their subsidiaries or any of their
respective properties or assets, or (ii) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of the Company or
the Merging Bank or any of their subsidiaries, under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which the Company
or the Merging Bank or any of their subsidiaries is a party, or by which they or
any of their respective properties or assets may be bound or affected, except
(in the case of clause (ii above) for such violations, conflicts, breaches or
defaults which, either individually or in the aggregate, would not have or be
reasonably likely to have a material adverse effect on the Company, the Merging
Bank or any of their subsidiaries.
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3.07 Consents and Approvals. Except for (a) the filing of applications,
notices or other documents necessary to obtain, and the receipt of, the
Requisite Regulatory Approvals (as defined in Section 7.01), (b) the filing with
the SEC of a proxy statement in definitive form relating to any meeting of the
Company's shareholders to be held in connection with this Agreement and the
transactions contemplated hereby, (c) the approval of this Agreement by the
requisite vote of the shareholders of the Company, (d) the filing of the
Articles of Merger with the WDFI pursuant to applicable provisions of the WBCL,
and (e) such consents, filings, authorizations or approvals as may be set forth
on Schedule 3.07, no consents or approvals of or filings or registrations with
any court, administrative agency or commission or other governmental authority
or instrumentality or with any third party are necessary in connection with (i)
the execution and delivery by the Company of this Agreement, (ii) the
consummation by Company of the Merger, and (iii) the consummation by the Merging
Bank of the Bank Merger and the other transactions contemplated hereby.
3.08 Litigation. Except as set forth on Schedule 3.08, there are no legal,
quasijudicial, administrative, or other actions, suits, proceedings or
investigations of any kind or nature pending or, to the knowledge of the
Company, threatened against the Company or its Subsidiaries that challenge the
validity or legality of the transactions contemplated by this Agreement or which
would have a material adverse effect on the financial condition, assets,
liabilities or business of the Company or its Subsidiaries, including any suits
involving a "lender liability" cause of action. Schedule 3.08 accurately
describes all litigation against the Company or its Subsidiaries in which the
amount claimed is in excess of $25,000 which is pending or, to the knowledge of
the Company, threatened against the Company or its Subsidiaries, including any
suits involving a "lender liability" cause of action. Except as set forth on
Schedule 3.08, neither the Company nor its Subsidiaries is subject to or in
default with respect to, nor are any of its or their assets subject to, any
outstanding judgment, order, decree or regulatory restriction of any court or of
any governmental agency or instrumentality.
3.09 Taxes, Returns and Reports.
(a) Schedule 3.09 provides a listing of the Federal, state, county,
local and foreign tax returns filed by the Company and any of its
Subsidiaries for the fiscal years ended June 30, 1997, 1996 and 1995
copies of which have been made available to the Acquiror. The reserve
for taxes in the Company Financial Statements is, and the reserve for
taxes in the Subsequent Company Financial Statements will be, adequate to
cover all tax liabilities of the Company and its Subsidiaries (including,
without limitation, income taxes and franchise fees) that may become
payable in future years in respect to any transactions consummated prior
to June 30, 1997 or, in the case of the Subsequent Company Financial
Statements prior to the dates thereof. Neither the Company nor any of
its Subsidiaries has or, to the best of the Company's knowledge, will
have any liability for taxes of any nature for or in respect of the
operation of its business or ownership of its or their assets from
October 1, 1997 up to and including the Effective Time, except to the
extent reflected in the Subsequent Company Financial Statements for
income taxes arising from the conduct of the Company's business and
ownership of its properties and are not yet due as of the date of this
Agreement, or as otherwise set forth on Schedule 3.09. Except as set
forth on Schedule 3.09, neither the Company nor any of its Subsidiaries
is a party to any action or proceeding, nor is any such action or
proceeding, to the Company's knowledge, threatened, by any governmental
entity for the assessment or collection of any taxes, and no deficiency
notices or reports have been received by the Company or any of its
Subsidiaries in respect of any deficiencies for any tax, assessment or
government charges.
(b) Except as may be reflected on Schedule 3.09, each of the Company
and its Subsidiaries has duly and timely filed all Federal, state,
county, local and foreign tax returns including, without limitation,
information returns and returns of estimated tax, required to be filed by
it on or prior to the date hereof (all such returns being accurate and
complete) and has duly paid or made adequate provision for the payment of
all Taxes (as defined below) that have been incurred by it or are due or
claimed to be due from it by Federal, state, county, local or foreign
taxing authorities on or prior to the date of this Agreement (including,
without limitation, if and to the extent applicable, those due in respect
of its properties, income, business, capital stock, deposits, franchises,
licenses, sales and payrolls) other than Taxes that are being contested
in good faith (and which are set forth on Schedule 3.09). The income tax
returns of the Company and its Subsidiaries have not been examined by the
IRS for the last 10 years. Except as may be reflected on Schedule 3.09,
there are no material disputes pending, or claims asserted, relating to
Taxes or
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assessments upon the Company or any of its Subsidiaries, nor does the
Company or any of its Subsidiaries have outstanding any currently
effective waivers extending the statutory period of limitation applicable
to any Federal, state, county, local or foreign income tax return for any
period. In addition, (i) proper and accurate amounts have been withheld
by the Company and its Subsidiaries from their employees, customers,
depositors, shareholders and others from whom they are required to
withhold Tax in compliance with all applicable Federal, state, county,
local and foreign laws, except where the failure to do so would not have
a material adverse effect on the Company or its Subsidiaries, the
Acquiror or the Surviving Corporation, and (ii) there are no Tax liens
upon any property or assets of the Company or its Subsidiaries except
liens for current Taxes not yet due. Except as, in the aggregate, would
not have a material adverse effect on the Company or its Subsidiaries,
the Acquiror or the Surviving Corporation, or as disclosed on Schedule
3.09, to the best of the Company's knowledge, (i) no property of the
Company or any of its Subsidiaries is property that the Company or any of
its Subsidiaries is required to treat as "tax-exempt use property" within
the meaning of Section 168(h) of the Code, (ii) neither the Company nor
any of its Subsidiaries has been required to include in income any
adjustment pursuant to Section 481 of the Code by reason of a voluntary
change in accounting method initiated by the Company or any of its
Subsidiaries, and the IRS has not initiated or proposed any such
adjustment or change in accounting method; and (iii) neither the Company
nor any of its Subsidiaries has entered into a transaction which is being
accounted for as an installment obligation under Section 453 of the Code.
(c) As used in this Agreement, the term "Tax" or "Taxes" means all
Federal, state, county, local, and foreign income, excise, gross
receipts, ad valorem, profits, gains, transfer gains, property, sales,
transfer, use, payroll, employment, severance, withholding, backup
withholding, intangibles, franchise and other taxes, governmental
charges, levies or like assessments, together with all penalties and
additions to Tax and interest thereon.
(d) The Merging Bank, at the close of its most recent taxable year,
qualified, and on the Closing Date will qualify, either as a "domestic
building and loan association" within the meaning of Section 7701(a)(19)
of the Code or as a "mutual savings bank" within the meaning of Section
591(b) of the Code that meets the requirements of Section 7701(a)(19)(C)
of the Code.
3.10 Corporate Properties.
(a) Schedule 3.10 accurately identifies: (i) all real property
owned, beneficially or otherwise, or controlled by the Company or its
Subsidiaries, whether owned outright, as a joint venture, or owned or
controlled in a fiduciary capacity, including properties now held by the
Company (or any Subsidiary) as a result of foreclosure or repossession or
carried on the books of the Company (or any Subsidiary) as "other
property owned" ("REO") or leased by the Company or its Subsidiaries (all
of which shall be defined as "Real Estate") and such Schedule 3.10 sets
forth a complete legal description of the Real Estate and a brief
description of any buildings located thereon; and (ii) all known
copyrights, patents, trademarks, trade names, franchises and related
applications and all other similar intangible assets owned by the Company
and its Subsidiaries. Except as set forth on Schedule 3.10, all of the
Company's or its Subsidiaries' properties, leasehold improvements and
equipment are in good operating condition, and all known copyrights,
patents, trademarks, trade names, franchises and related applications are
valid and in full force and effect in accordance with their terms, and
neither the Company nor any of its Subsidiaries knows of any conflict
with respect thereto that asserts the rights of others. To the best of
the Company's knowledge, neither the Company nor any of its Subsidiaries
has received or been threatened with a complaint that the Company or its
Subsidiaries are in violation of applicable building, zoning,
environmental, safety, or similar laws, ordinances, or regulations in
respect of their buildings or equipment, or the operation thereof. To
the best of the Company's knowledge, neither the Company nor any of its
Subsidiaries is in violation of any such law, ordinance, or regulation,
except as disclosed on Schedule 3.10. To the knowledge of the Company,
no proceedings to take all or any part of the properties of the Company
or its Subsidiaries (whether leased or owned) by condemnation or right of
eminent domain are pending or threatened.
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(b) Except as set forth on Schedule 3.10 and except for property in
foreclosure proceedings, the Company and its Subsidiaries have good and
marketable title to all their real and personal property, free, clear and
discharged of, and from, any and all liens, mortgages, charges,
encumbrances and/or security interests of any kind.
(c) The Company or any of its Subsidiaries (as the case may be), as
lessee, has the right under valid and subsisting leases to occupy, use,
possess and control all property leased by the Company or any of its
Subsidiaries, qualified only by the written terms of such leases, copies
of which are attached to Schedule 3.10.
3.11 Employee Benefit Plans.
(a) Set forth on Schedule 3.11 is an accurate description of all
bonus, deferred compensation, pension, retirement, profit-sharing, thrift
savings, employee stock ownership, stock bonus, stock purchase,
restricted stock and stock option plans, all employment or severance
contracts, other material employee benefit plans and any applicable
"change in control" or similar provisions in any plan, contract or
arrangement which cover employees or former employees of the Company and
its Subsidiaries, and all other benefit plans, contracts or arrangements
covering directors, employees or former employees of the Company or its
ERISA Affiliates (the "Employees"), including, but not limited to,
"employee benefit plans" within the meaning of Section 3(3) of ERISA
(collectively, the "Compensation and Benefit Plans"). True and complete
copies of all Compensation and Benefit Plans including, but not limited
to, any trust instruments and/or insurance and investment contracts, if
any, forming a part of any such Compensation and Benefit Plans and
agreements, and all amendments thereto, including, but not limited to (i)
the actuarial report for such Plan (if applicable) and the annual report
(Form 5500 series) for each of the last two years, (ii) the current
summary plan description, and (iii) the most recent determination letter
from the IRS (if applicable) for such plan, shall be available to the
Acquiror.
(b) Company Compensation and Benefit Plans, other than
"Multi-Employer Plans" within the meaning of Sections 3(37) or 4001(a)(3)
of ERISA, covering Employees (the "Plans"), are in substantial compliance
with ERISA. Each Plan which is an "employee pension benefit plan" within
the meaning of Section 3(2) of ERISA ("Pension Plan") and which is
intended to be qualified under Section 401(a) of the Code, has received a
favorable determination letter from the IRS, and the Company is not aware
of any circumstances likely to result in revocation of any such favorable
determination letter. The ESOP satisfies the requirements for an
employee stock ownership plan under Section 4975(e)(7) of the Code.
There is no pending or threatened litigation relating to the Plans.
Neither the Company nor any of its ERISA Affiliates has engaged in a
transaction with respect to any Plan that could subject the Company or
any of its ERISA Affiliate or any other party to a tax or penalty imposed
by Section 4975 of the Code or Section 502(i) of ERISA in an amount which
would be material.
(c) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by the Company or any of its ERISA
Affiliates with respect to any ongoing, frozen or terminated
"single-employer plan", within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by any of them, or the
single-employer plan of any entity which is considered one employer with
the Company or any of its ERISA Affiliates. Neither the Company nor any
of its ERISA Affiliates has incurred or expects to incur any withdrawal
liability with respect to a Multi-Employer Plan under Subtitle E of Title
IV of ERISA (regardless of whether based on contributions of an ERISA
Affiliate). No notice of a "reportable event," within the meaning of
Section 4043 of ERISA, for which the 30-day reporting requirement has not
been waived, has been required to be filed for any Pension Plan or by any
ERISA Affiliate within the twelve-month period ending on the date hereof.
(d) All contributions required to be made under the terms of any
Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA. Neither the Company nor any of its
ERISA Affiliates has provided, or is required to provide, security to any
Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the Code.
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(e) Neither the Company nor any of its ERISA Affiliates has any
obligations for retiree health and life benefits under any Plan, except
as set forth on Schedule 3.11. Except as set forth on Schedule 3.11,
there are no restrictions on the rights of the Company or its ERISA
Affiliates to amend or terminate any such Plan without incurring any
liability thereunder.
(f) Neither the Company nor any of its Subsidiaries is a party to,
or is bound by, any collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization, nor
is the Company or any of its Subsidiaries the subject of any material
proceeding asserting that the Company or any such Subsidiary has
committed an unfair labor practice or seeking to compel the Company or
such Subsidiary to bargain with any labor organization as to wages or
conditions of employment, nor is there any strike involving the Company
or any of its Subsidiaries pending or threatened, nor is the Company
aware of any activity involving its or any of its Subsidiaries' employees
seeking to certify a collective bargaining unit or engaging in any other
organizational activity.
(g) No matter is pending relating to any of the Company Plans before
any court or government agency.
(h) Neither the Company nor any of its ERISA Affiliates presently
contributes to or is currently a party to any Multi-Employer Plan.
(i) Neither the Company nor any ERISA Affiliate presently
contributes to any Company Plan that is or was subject to Title IV of
ERISA.
(j) No amounts payable under any of the Company Plans which taken by
itself will fail to be deductible for federal income tax purposes by
virtue of Section 280(G) of the Code.
3.12 Brokerage Commissions and Fees.
(a) All negotiations relating to this Agreement and the Plan of
Merger and the transactions contemplated herein and therein have been and
will be carried on by the Company its counsel, accountants, financial
advisor and other representatives directly with Acquiror, its counsel,
accountants and other representatives in such a manner as not to give
rise to any claim against Acquiror or the Company for any brokerage
commission, finder's fee, investment advisor's fee or other like payment,
except that the Company has agreed to make payment to Robert W. Baird &
Co., Incorporated for services rendered as financial advisor in
connection with the transactions contemplated herein pursuant to a letter
agreement dated as of May 22, 1998, a copy of which is attached as
Schedule 3.12.
(b) The Company has fee agreements with all outside attorneys,
accountants and other independent experts and advisors it has used or
plans to use in connection with the transactions contemplated in this
Agreement, which provide that such attorneys, accountants and other
independent experts and advisors will be compensated only at their normal
hourly or per diem rates plus reasonable out-of-pocket expenses.
3.13 Certain Agreements. Schedule 3.13 accurately identifies all of the
following agreements, contracts, or other instruments written or, to the
knowledge of the Company, oral, to which the Company or its Subsidiaries are a
party or by which any of them are bound or affected or by which any of the
stock, properties, or assets of the Company or its Subsidiaries are bound or
affected, or under which any of their officers, directors, employees, or
shareholders have rights: (a) all material contracts (as defined in Item
601(b)(10) of Regulation S-K promulgated by the SEC under the Securities Act) to
be performed after the date of this Agreement; (b) any agreements, plans or
arrangements under or pursuant to which any of the benefits of which will be
increased, or the vesting of benefits of which will be increased or accelerated,
by the occurrence of any of the transactions contemplated by this Agreement, or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement; and (c) except as entered
into with respect to loan transactions or workouts in the ordinary course of
business by the Company, any agreement, instrument or understanding of the
Company or its Subsidiaries, whether or not made in the ordinary and regular
course of business, involving an aggregate amount in
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excess of $25,000 per annum, or which materially restricts the conduct of any
line of business by the Company or its Subsidiaries. True, complete and
correct copies of all of the written agreements, contracts, or other
instruments, and written descriptions of the material details of any oral
agreements or instruments identified on Schedule 3.13, are attached to Schedule
3.13. Except as otherwise specifically disclosed on Schedule 3.13, all such
agreements, contracts or other instruments are valid and binding and are in
full force and effect and neither the Company nor any of its Subsidiaries is in
default under, or is in violation of, any such agreement, contract or other
instrument to which they are a party or by which they may be bound.
3.14 Governing Documents. Attached as Schedule 3.14 are true, complete
and correct copies of the following: (a) the Articles of Incorporation or
Charter, as the case may be, and all amendments thereto, of the Company and its
Subsidiaries; (b) the Bylaws of the Company and its Subsidiaries, as amended to
date; and (c) a specimen certificate for each type of outstanding security of
the Company and its Subsidiaries. The minute books of the Company, the Merging
Bank and its Subsidiaries accurately reflect all corporate actions held or taken
by their respective shareholders and Board of Directors since January 1, 1994,
including committees of their respective Boards of Directors.
3.15 Orders, Injunctions, Decrees; Compliance With Applicable Laws.
(a) Except as set forth on Schedule 3.15, neither the Company nor
any of its Subsidiaries is subject to any order, injunction or decree,
written agreement, consent agreement, or memorandum of understanding of
any governmental body or court, or is in violation of any order,
injunction, or decree, written agreement, consent agreement or memorandum
of understanding, or any other requirement of any governmental body or
court.
(b) Except as set forth on Schedule 3.15, neither the Company nor
any of its Subsidiaries is subject to any cease-and-desist or other order
issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter
or similar undertaking to, or is subject to any order or directive by, or
is a recipient of any extraordinary supervisory letter from, or has
adopted any board resolutions at the request of (each, whether or not set
forth on Schedule 3.15, a "Regulatory Agreement"), any regulatory agency
or other governmental entity that restricts the conduct of its business
or that in any manner relates to its capital adequacy, its credit
policies, its management or its business, nor has the Company or any of
its Subsidiaries been advised by any regulatory agency or other
governmental entity that it is considering issuing or requesting any
Regulatory Agreement.
(c) The Company and its Subsidiaries hold, and have at all times
held, all licenses, franchises, permits and authorizations necessary for
the lawful conduct of their respective businesses under and pursuant to
all, and have complied with and are not in default in any respect under
any, applicable laws, statutes, orders, rules, regulations, policies
and/or guidelines of any governmental entity, and neither the Company nor
any of its Subsidiaries knows of, or has received notice of any
violations of, any of the above.
3.16 Shareholders of the Company. As of the date of this Agreement,
Schedule 3.16 accurately identifies the names and addresses of all of the
shareholders who, to the Company's knowledge, beneficially own more than 5% of
Company Common Stock and the number of shares Company Common Stock believed to
be beneficially owned by each such shareholder and by each director and officer
of the Company.
3.17 Regulatory Filings. Schedule 3.17 is an accurate and complete
listing of each registration statement, prospectus, report, schedule, proxy
statement, information statement or other shareholder communication used,
circulated or filed after January 1, 1997 by the Company or any of its
Subsidiaries copies of which have been made available to the Acquiror. The
Company and its Subsidiaries have filed and will continue to file in a timely
manner all required filings with (a) the SEC, (b) the Federal Reserve Board
("FRB"), (c) the FDIC, and (d) the WDFI (and will furnish Acquiror with copies
of all such filings made subsequent to the date hereof until the Effective
Time), and all such filings were or will be, complete and accurate in all
material respects as of the dates of the filings, and no such filing made or
will make any untrue statement of a material fact or omitted or will omit to
state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading. Except
for normal examinations conducted by the IRS, the FRB, the FDIC or the WDFI in
the
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regular course of the business of the Company or its Subsidiaries, no federal,
state or local governmental agency, commission or other entity has initiated
any proceeding or, to the best of the knowledge and belief of the Company,
investigation into the business or operations of the Company or its
Subsidiaries within the past five years. Except as set forth on Schedule 3.17,
there is no unresolved violation, criticism or exception by the SEC, the
Federal Reserve, the FDIC, the WDFI or other agency, commission or entity with
respect to any report or statement referred to herein. Since the date of any
such filings, there has been no material change in the condition of the
Company, the Merging Bank, or any of its Subsidiaries, financial or otherwise,
such that, had such change occurred prior to any such filing, such change would
have been required to be disclosed or described therein. Except as otherwise
disclosed on Schedule 3.17, there is no unresolved violation, criticism or
exception by any regulatory agency with respect to any report or statement
relating to any examinations of the Company or any of its Subsidiaries.
3.18 Loans. All loans and loan commitments extended by the Company and
its Subsidiaries have been made in all material respects in accordance with
customary lending standards in the ordinary course of business. The loans and
loan commitments are evidenced in all material respects by appropriate and
sufficient documentation (including any and all documentation required by
applicable banking laws), and constitute valid and binding obligations of the
borrowers enforceable in accordance with their terms, except as limited by
applicable bankruptcy, insolvency, or other similar laws affecting the
enforcement of creditors' rights and remedies generally from time to time in
effect and by applicable law which may affect the availability of equitable
remedies. All such loans and loan commitments are, and at the Effective Time
will be, free and clear of any security interest, lien, encumbrance or other
charge, and the Company and its Subsidiaries have complied, and at the Effective
Time will have complied, in all material respects with all laws and regulations
relating to such loans and loan commitments. Except as set forth on Schedule
3.18, the loans and loan commitments are not subject to any offsets, or to the
knowledge of the Company, claims of offset, or claims of other liability on the
part of the Company or any of its Subsidiaries.
3.19 Loan Portfolio; Reports. Except as set forth on Schedule 3.19, as of
March 31, 1998, neither the Company nor any of its Subsidiaries is a party to
any written or oral (a) loan agreement, note or borrowing arrangement
(including, without limitation, leases, credit enhancements, commitments,
guarantees and interest-bearing assets) (collectively, "Loans"), other than
Loans the unpaid principal balance of which does not exceed $25,000, under the
terms of which the obligor was, as of March 31, 1998, over 90 days delinquent in
payment of principal or interest or in default under any other provision, or (b)
Loans to any director, executive officer or ten percent shareholder of the
Company or any of its Subsidiaries or, to the knowledge of the Company, any
person, corporation or enterprise controlling, controlled by or under common
control with any of the foregoing. Schedule 3.19 sets forth: each of the Loans
of the Company or any of its Subsidiaries with an unpaid principal amount in
excess of $25,000 and that as of the date of this Agreement are internally
classified as (a) "Substandard," "Doubtful," "Loss" or "Classified," (b)
"Criticized," "Other Loans Especially Mentioned" or "Special Mention," or (c)
"Credit Risk Assets," "Concerned Loans," "Watch List" or words of similar
import, in each case together with the principal amount of and accrued and
unpaid interest on each of such Loans and the identity of the borrower
thereunder; together with the aggregate principal amount of and accrued and
unpaid interest on all such Loans by category. The Company shall promptly
inform Acquiror of any Loans that become classified in the manner described in
the previous sentence, or any Loans the classification of which is changed at
any time after the date of this Agreement. The Company and its Subsidiaries
have internally classified, in the manner described above, all Loans that any
auditor or government examiner has criticized or classified, and the internal
classification of such Loans is at least as strict as the criticism or
classification thereof by an auditor or government examiner.
3.20 Mortgage-Backed and Related Securities and Investment Securities.
Schedule 3.20 sets forth the book and market value as of March 31, 1998 of the
mortgage-backed and related securities, securities held for sale and investment
securities of the Company and its Subsidiaries. Schedule 3.20 also lists a
mortgage-backed and related securities and investment securities report which
lists the securities descriptions, CUSIP numbers, pool face values, book values,
coupon rates and current market values.
3.21 Allowance for Loan Losses. The allowances for loan losses set forth
in the Company's Financial Statements and Subsequent Financial Statements were
established in accordance with the past practices and experiences of the Company
and its Subsidiaries.
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3.22 Conduct. Except as set forth on Schedule 3.22, since June 30, 1997,
neither the Company nor any of its Subsidiaries has (a) conducted its business
or entered into any transaction other than in the ordinary course of business
consistent with prudent banking practices, or incurred or became subject to any
liabilities or obligations except liabilities incurred in the ordinary course of
business consistent with prudent banking practices; (b) suffered any labor
trouble, or any event or condition of any character materially adversely
affecting its business or prospects; (c) discharged or satisfied any lien or
encumbrance or paid any obligation or liability other than those presented in
the Company Financial Statements or incurred after the date thereof in the
ordinary course of business consistent with prudent banking practices; (d)
mortgaged, pledged, or subjected to lien, charge or other encumbrance any part
of its assets, or sold or transferred any such assets, except in the ordinary
course of business consistent with prudent banking practices; (e) made or
permitted an amendment or termination of any contract to which it is a party
except in the ordinary course of business consistent with prudent banking
practices; (f) issued, agreed to issue or sold any of its capital stock or
corporate debt obligations (whether authorized and unissued or held in the
treasury); (g) granted any options, warrants or other rights for the purchase of
its capital stock; (h) declared, agreed to declare, set aside or paid any
dividend or other distribution in respect of its or their capital stock, or
directly or indirectly purchased, redeemed or otherwise acquired or agreed to
purchase or redeem or otherwise acquire any shares of such stock; (i) entered
into any employment contract with any officer or salaried employee, made any
accrual or arrangement for or payment of bonuses or special compensation of any
kind or any severance or termination pay to any of its present or former
officers or employees, increased the rate of compensation payable or to become
payable by them to any of its officers or employees, or instituted or made any
increase in any employee welfare, retirement or similar plan or arrangement, in
each case other than in the ordinary course of business consistent with prudent
banking practices or as contemplated pursuant to such contract, plan or
arrangement, or suffered any strike, work stoppage, slow-down or other labor
disturbance; or (j) entered into any other transaction other than in the
ordinary course of business consistent with prudent banking practices.
3.23 Fiduciary Responsibilities. The Company and its Subsidiaries have
performed all of their duties in their capacities as trustees, executors,
administrators, registrars, guardians, custodians, escrow agents, receivers or
any other fiduciary capacity in a manner which complies with all applicable
laws, regulations, orders, agreements, wills, instruments and common law
standards. The Company and the Merging Bank have properly administered all
accounts for which it acts as a fiduciary, including, but not limited to,
accounts for which it serves as a trustee, agent, custodian, personal
representative, guardian, conservator or investment adviser, in accordance with
the terms of the governing documents and applicable state and federal law and
regulation and common law. Neither the Company nor the Merging Bank nor any of
their respective directors, officers or employees has committed any breach of
trust with respect to any such fiduciary account which has had or could
reasonably be expected to have a material adverse effect on the Company, and the
accountings for each such fiduciary account are true and correct and accurately
reflect the assets of such fiduciary account. Neither the Company nor the
Merging Bank in the capacity as fiduciary of an IRA account or other tax
qualified plan maintained with the Merging Bank has permitted the acquisition of
shares of Company Common Stock into such IRA account or plan.
3.24 Compliance With Environmental Laws and Health and Safety Laws. For
purposes of this Agreement, the term "Environmental Laws" shall mean any and all
federal, state and local laws including statutes, regulations, ordinances,
codes, rules, orders, directives and other governmental restrictions and
requirements (including, but not limited to, those contained in or evidenced by
permits, temporary permits or exemption letters) relating to the discharge,
emission or release of air pollutants, water pollutants, solid wastes or process
waste water or otherwise relating to the environment, hazardous wastes,
hazardous materials, hazardous substances, toxic substances, asbestos, petroleum
or any fraction thereof, or any operations of or use of property by the Company
or its Subsidiaries that has an impact on the environment, including, but not
limited to, the Federal Solid Waste Disposal Act, the Federal Clean Air Act, the
Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of
1976, the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Toxic Substances Control Act, the Federal Water
Pollution Control Act, the National Environmental Policy Act, the Federal
Occupational Safety and Health Act, the Emergency Planning and Community
Right-to-Know Act, regulations of the Environmental Protection Agency,
regulations of the Nuclear Regulatory Agency, or any applicable federal or state
regulatory or administrative agency with authority over natural resources or
environmental protection now in effect or presently scheduled to come into
effect, all as presently amended. For the purposes of this Agreement, the term
"Hazardous Material" means any substance or material, whether liquid, solid or
gas which is listed, defined, designated or classified as hazardous substance,
hazardous waste, pollutant, contaminate, toxic substance, toxic waste,
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radioactive substance, radioactive material, radioactive waste or dangerous
substance under any Environmental Laws (as defined herein). The term "Hazardous
Material" shall include, but not be limited to the following: petroleum or
fraction thereof, underground storage tank, aboveground storage tank, asbestos
or asbestos-containing materials, polychlorinated byphenyls ("PCBs") and medical
waste.
(a) Except as set forth on Schedule 3.24, to the Company's knowledge, as of
the date of this Agreement:
(i) The operations of the Company and its Subsidiaries comply and
have complied with all Environmental Laws and all health and
safety statutes and regulations; none of the Company's or its
Subsidiaries' operations are the subject of, nor is the
Company or any of its Subsidiaries a party to, any judicial or
administrative proceeding, pending or threatened, alleging the
violation of any health or safety statute or regulation or
Environmental Laws; neither the Company nor its Subsidiaries
are the subject of a federal, state or local investigation,
pending or threatened, evaluating whether any remedial action
is needed to respond to a release of any Hazardous Material;
neither the Company nor its Subsidiaries have generated
Hazardous Materials except for those Hazardous Materials and
quantities typically associated with the business of the
Company; neither the Company nor its Subsidiaries have
arranged for the treatment or disposal of any Hazardous
Material except for those Hazardous Materials and quantities
typically associated with the business of the Company; neither
the Company nor its Subsidiaries have transported any
Hazardous Material for treatment, storage or disposal; and
neither the Company nor its Subsidiaries have reported a
spill, emission or release of a Hazardous Material.
(ii) All Real Estate (as defined in Section 3.10) is in compliance
in all material respects with all Environmental Laws; neither
the Company nor any of its Subsidiaries has any notice or
knowledge regarding the Real Estate or its past use(s) which
indicates noncompliance, or potential noncompliance, with any
Environmental Law; the Real Estate is not subject to any
judicial or administrative proceedings alleging the violation
of any federal, state or local health or safety statute or
regulation or any Environmental Laws; the Real Estate is not
contaminated by any Hazardous Material; the Real Estate is not
the subject of a federal, state or local investigation
evaluating whether any remedial action is needed to respond to
a release, emission or discharge of any Hazardous Material
into the environment; neither the Company nor its Subsidiaries
have generated any Hazardous Material on the Real Estate;
neither the Company nor any of its Subsidiaries has
transported any Hazardous Material to the Real Estate or from
the Real Estate to any waste treatment, storage or disposal
facility; to the knowledge of the Company and its Subsidiaries
the Real Estate and buildings occupied by the Company and its
Subsidiaries contain no urea-formaldehyde insulation, asbestos
or asbestos by-products, lead or regulated levels of PCBs; the
Real Estate contains no fill material; and the Real Estate
does not face any risk of contamination by a Hazardous
Material from any nearby property.
(b) Environmental Studies. The Acquiror shall have the right to
conduct such environmental studies in connection with the Company's
representations and warranties as set forth in this Section 3.24 pursuant
to the terms of Section 6.10 hereof.
3.25 Other Information. No representation or warranty by the Company
contained in this Agreement, or disclosure in any Schedule hereto prepared by
the Company or certificate or other instrument or document furnished or to be
furnished by or on behalf of the Company pursuant to this Agreement and no
information furnished or to be furnished by the Company for use in the
Prospectus/Proxy Statement (as defined in Section 6.01) or the Registration
Statement (as defined in Section 6.01) or the regulatory filings contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated herein or therein which is
necessary to make the statements contained herein or therein. The
Prospectus/Proxy Statement (except for
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such portions thereof that relate solely to the Acquiror) will comply in all
respects with the provisions of all applicable laws, including the Securities
Act and the Exchange Act.
3.26 Insider Interests. Except as set forth on Schedule 3.26, all loans,
extensions of credit and other contractual arrangements (including deposit
relationships) between the Company or its Subsidiaries and any officer or
director, of the Company or its Subsidiaries, or any affiliate of any such
officer or director, conform to applicable rules and regulations and
requirements of all applicable regulatory agencies, and all such loans,
extensions of credit and other contractual arrangements are described on
Schedule 3.26. Except as set forth on Schedule 3.26: (a) no officer or director
of the Company or its Subsidiaries has any interest in any property, real or
personal, tangible or intangible, used in or pertaining to the business of the
Company or its Subsidiaries; and (b) there are no transactions or business
relationships between the Company or its Subsidiaries and their respective
directors and executive officers which would require disclosure in the Company's
proxy statements, the Registration Statement or the Proxy Statement/Prospectus
pursuant to Item 404 of Regulation S-K promulgated by the SEC. The Company does
not have a written insider trading policy.
3.27 No Sensitive Transactions. Except as set forth on Schedule 3.27,
within the past five years, neither the Company nor its Subsidiaries nor, to the
Company's knowledge, any director, employee, or agent of the Company or its
Subsidiaries, has directly or indirectly used funds or other assets of the
Company or its Subsidiaries for (a) illegal contributions, gifts, entertainment,
or other expenses related to political activities; (b) payments to or for the
benefit of any governmental official or employee, other than payments required
or permitted by law; (c) illegal payments to or for the benefit of any person,
firm, corporation or other entity, or any officer, employee, agent or
representative thereof; or (d) the establishment or maintenance of an illegal
secret or unrecorded fund.
3.28 Community Reinvestment Act Compliance. Except as set forth on
Schedule 3.28, the Merging-Bank is in compliance with the applicable provisions
of the Community Reinvestment Act of 1977, as amended ("CRA") and the
regulations promulgated thereunder, and is not aware of any state of facts or
circumstances related to any planned or threatened CRA protest. As of the date
of this Agreement, the Merging Bank has not been advised of the existence of any
act or circumstance or set of facts or circumstances which, if true, would cause
it to fail to be in compliance with the CRA or any federal or state fair lending
laws. The Merging Bank has not received a CRA rating from the FDIC which is less
than "satisfactory."
3.29 Approvals. The Company knows of no reason why the Requisite
Regulatory Approvals (as defined in Section 7.01) necessary to permit Acquiror
consummation of the transactions contemplated hereby in the manner provided
herein should not be obtained.
3.30 Qualified Thrift Lender. The Merging Bank is a "Qualified Thrift
Lender" as defined under Section 10(m) of the HOLA, codified at 12 USC Sec.
1467a(m).
3.31 The ESOP. The Company is the sole lender to the ESOP. Accelerated
cash payments under the loan agreement entered into between the Company and the
ESOP (the "ESOP Loan") are not required by virtue of the acquisition of the
Company by Acquiror, except as otherwise provided in this Agreement.
3.32 Absence of Agreements. Except as set forth in Schedule 3.32, neither
the Company nor any of its Subsidiaries: (a) is a party to any agreement or
arrangement entered into in connection with the consummation of a federally or
state assisted acquisition of a depository institution pursuant to which the
Company or any of its Subsidiaries is entitled to receive financial assistance
or indemnification from any governmental agency; or (b) is a party to any
agreement, option or contract, the subject of which involves or relates to the
merger, consolidation or sale of assets or stock of the Company or any
subsidiary other than this Agreement; and (c) there are no negotiations pending
relating to any such agreement, option or contract to which the Company or any
Subsidiary is a party.
3.33 Liquidation Account. The liquidation account established by the
Merging Bank in connection with its conversion from the mutual to stock form has
been maintained since its establishment in accordance with applicable laws.
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3.34 Insurance. Schedule 3.34 contains a true, correct and complete list
of all insurance policies and bonds maintained by the Company and its
Subsidiaries, including the name of the insurer, the policy number, the type of
policy and any applicable deductibles, and all such insurance policies and bonds
are in full force and effect and have been in full force and effect at all times
during which the Company or any Subsidiary had any insurable interest in the
subject of such insurance policies and bonds. As of the date hereof, neither the
Company nor any Subsidiary has received any notice of cancellation or amendment
of any such policy or bond or is in default under any such policy or bond, no
coverage thereunder is being disputed and all material claims thereunder have
been filed in a timely fashion and all premiums due thereon on or prior to the
date of Closing have been paid as and when due. The existing insurance carried
by the Company and its Subsidiaries is and will continue to be, in respect of
the nature of the risks insured against and the amount of coverage provided,
substantially similar in kind and amount to that customarily carried by parties
similarly situated who own properties and engage in businesses substantially
similar to that of the Company and its Subsidiaries. True and complete copies of
all such policies and bonds reflected on Schedule 3.34 are available for
inspection by Acquiror.
3.35 Derivative Transactions. Schedule 3.35 sets forth all holdings by the
Company or any of its Subsidiaries of positions in forwards, futures, options on
futures, swaps and any other instrument within the scope of the Company's
Board-approved investment policy ("Derivative Instruments"). Except as set forth
on Schedule 3.35, since June 30, 1997, neither the Company nor any of its
Subsidiaries has engaged in any transactions in or involving Derivative
Instruments. None of the counterparties to any contract or agreement with
respect to any such instrument is in default with respect to such contract or
agreement and no such contract or agreement, were it to be a Loan held by the
Company or any of its Subsidiaries, would be classified as "Other Loans
Especially Mentioned," "Special Mention," "Substandard," "Doubtful," "Loss,"
"Classified," "Criticized," "Credit Risk Assets," "Concerned Loans" or words of
similar import. The financial position of the Company and its Subsidiaries on a
consolidated basis under or with respect to each such instrument has been
reflected in the books and records of the Company and such Subsidiaries in
accordance with generally accepted accounting principles consistently applied,
and no open exposure of the Company or any of its Subsidiaries with respect to
any such instrument (or with respect to multiple instruments with respect to any
single counterparty) exceeds $25,000.
3.36 Company Pension Plan. The Company will withdraw from the Savings
Association Retirement Fund ("Company Pension Plan"), as adopted by the Company
effective July 1, 1967, prior to the Effective Time. No additional contributions
are required or shall be made under or to the Company Pension Plan from the date
of execution of the Agreement through the Effective Time and there are no
accrued service or other funding deficiencies or liabilities of whatsoever kind
or nature related to the Company Pension Plan or to the Company's withdrawal
therefrom.
3.37 Director Deferred Retirement Plan. Except as identified in Schedule
3.37, all obligations of the Company under the Reliance Savings Bank
Non-Qualified Deferred Retirement Plan for Directors have been fully funded
through the purchase of single-premium life insurance policies purchased by the
Company and/or the Merging Bank and maintained for such purpose.
ARTICLE FOUR
COVENANTS OF ACQUIROR
Acquiror hereby covenants and agrees with the Company as follows:
4.01 Conduct Of Business: Certain Covenants. From and after the execution
and delivery of this Agreement and until the Effective Time, Acquiror and each
of its subsidiaries will:
(a) Conduct its business and operate in the usual ordinary course in
accordance with prudent and sound banking and business practices; and
(b) Use its best efforts to remain in good standing with all
applicable banking regulatory authorities to the extent required to
continue the operation of their respective businesses which are material
to the Acquiror's operations as a whole.
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4.02 SEC Registration. Acquiror shall file with the SEC, as soon as
practicable after the execution of this Agreement but in no event later than 90
days from the date of this Agreement, any necessary Registration Statement (as
defined in Section 6.01(a)) covering the Acquiror Common Stock to be issued
pursuant to this Agreement and the Plan of Merger (provided that the Company has
given to Acquiror all information concerning the Company which is required for
inclusion in the Registration Statement), and shall use its best efforts to
cause the same to become effective and thereafter, until the Effective Time or
termination of this Agreement, to keep the same effective and, if necessary,
amend and supplement the same. Acquiror shall, as soon as practicable after the
execution of this Agreement, take all actions necessary to have the shares of
Acquiror Common Stock to be delivered in exchange for Company Common Stock
qualified or registered for offering and sale, or to identify and perfect an
exemption therefrom, under the securities or "Blue Sky" laws of each
jurisdiction within the United States in which shareholders of the Company
reside. In advance of filing the Registration Statement, Acquiror shall provide
the Company and its counsel with a copy of the Registration Statement and an
opportunity to comment thereon. Acquiror shall advise the Company, promptly
after Acquiror receives notice thereof, of the time when the Registration
Statement has become effective or any supplement or amendment has been filed, of
the issuance of any stop order or the suspension of qualification of Acquiror
Common Stock for offering or sale in any jurisdiction, of the initiation or
threat of any proceeding for any such purpose, or of any request by the SEC for
the amendment or supplement of the Registration Statement or for additional
information. None of the information furnished by the Acquiror for inclusion in
the Registration Statement, when it shall become effective, and at all times
subsequent to such effectiveness, or the Proxy Statement/Prospectus (as defined
in Section 6.01(a)), when mailed or at the time of the Shareholders Meeting (as
defined in Section 5.01(a)), or in the case of any other document filed with the
SEC or any state securities commission, at the respective times at which such
documents are filed with the SEC or such state securities commission, shall
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
4.03 Authorization, Reservation and Listing of Common Stock. By
appropriate resolution, the Board of Directors of Acquiror shall, prior to the
Effective Time, authorize and reserve the required number of shares of Acquiror
Common Stock to be issued pursuant to this Agreement and the Plan of Merger.
Acquiror also shall use all reasonable efforts to cause the shares of Acquiror
Common Stock to be issued pursuant to the Plan of Merger to be approved for
listing on the Nasdaq National Market subject to official notice of issuance,
prior to the Effective Time.
4.04 Confidentiality. Acquiror shall cause all internal, nonpublic
financial and business information obtained by it from the Company and its
Subsidiaries to be treated confidentially (exercising the same degree of care as
it uses to preserve and safeguard its own confidential information); provided,
however, that notwithstanding the foregoing, nothing contained herein shall
prevent or restrict Acquiror from making such disclosure thereof as may be
required by law in connection with the offering and sale of Acquiror Common
Stock pursuant to this Agreement or as may be required in the performance of
this Agreement. Furthermore, Acquiror shall have no obligation to keep
confidential any information that (a) was already known to Acquiror and was
received from a source other than the Company or any of its Subsidiaries,
directors, officers, employees or agents, provided that the source making such
information available was not bound by a confidentiality agreement or other
contractual, legal or fiduciary obligation of confidentiality with respect to
such information, or (b) is or becomes generally available to the public other
than as a result of a disclosure by the parties hereto to one another. If the
Merger shall not be consummated, all nonpublic financial statements, documents
and materials and all copies thereof shall be returned to the Company or
destroyed by Acquiror and shall not be used by Acquiror in any way that could be
reasonably expected to be detrimental to the Company and will not be disclosed
to others except as specifically permitted above.
4.05 Regulatory Application and Filings. As soon as practicable after the
execution of this Agreement but in no event later than 90 days from the date of
this Agreement (subject to receipt by Acquiror from the Company of all
information of the Company and the Merging Bank as requested), Acquiror shall
submit and file all necessary applications, notices or statements with the
appropriate regulatory agencies and governmental entities for approval of the
transactions contemplated by this Agreement.
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4.06 Employment Agreements. Acquiror agrees to provide an employment
agreement between Ms. Carol A. Barnharst and Acquiror, which agreement shall
commence as of the Effective Time and run for an initial term of three (3) years
at her current base salary level and shall be in the form attached hereto as
Exhibit C. Acquiror further agrees to honor the provisions of the present
contract between Mr. Allan T. Bach and the Company, including those that relate
to a termination of employment following a change-in-control of the Company.
4.07 Negative Covenant. From and after the date of this Agreement,
Acquiror shall not take any action, or agree to take any action, which
constitutes a material breach or default of its obligations under this
Agreement.
4.08 Advisory Board. Acquiror shall create an advisory board (the
"Advisory Board") to (a) assist in the integration of the operations of the
Merging Bank into those of the Acquiror-Bank, and (b) advise with respect to
community relations within the market presently served by the Merging Bank. The
Advisory Board shall consist of all current members of the Board of Directors of
the Merging Bank who are members of such Board as of the Effective Time and who
do not become, as of the Effective Time, a member of a Board of Directors within
the organizational structure of Acquiror and its affiliates. Advisory Board
members shall receive a retainer fee of $10,000 per year commencing at the
Effective Time and continuing until such time as the Advisory Board is
discontinued and payable in monthly installments to each Advisory Board member.
The Advisory Board shall initially meet with the same frequency (although not
necessarily on the same dates) as there are regularly scheduled meetings of the
Board of Directors of the Acquiror Bank, or more frequently at the request of
Acquiror. Acquiror shall review the Advisory Board function annually to consider
its continuation and frequency of meetings and intends to continue the Advisory
Board subject to annual appointment of its members for at least 3 years
following the Effective Time. The Advisory Board shall report to Acquiror
through Ms. Carol A. Barnharst, who shall be the Advisory Board's liaison for
reporting purposes.
4.09 Qualifying the Merger for Tax-Free Status. Acquiror and its
Subsidiaries shall not take or cause to be taken any action which would
disqualify the Merger as a tax-free reorganization under Section 368 of the
Code.
4.10 Indemnification. In the event of any threatened or actual claim,
action, suit, proceeding or investigation, whether civil, criminal or
administrative, including, without limitation, any such claim, action, suit,
proceeding or investigation in which any individual who is now, or has been at
any time prior to the date of this Agreement, or who becomes prior to the
Effective Time, a director or officer or employee of the Company or its
Subsidiaries (the "Indemnified Parties"), is, or is threatened to be, made a
party based in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he or she is or was a director, officer or
employee of the Company or its Subsidiaries or any of their respective
predecessors, or (ii) this Agreement or the Plan of Merger or any of the
transactions contemplated hereby or thereby, whether in any case asserted or
arising before or after the Effective Time, Acquiror agrees to cooperate and use
reasonable efforts to defend against and respond thereto. It is understood and
agreed that after the Effective Time, Acquiror shall (and shall cause the
Surviving Corporation to) indemnify and hold harmless, as and to the fullest
extent permitted by law, each such Indemnified Party against any losses, claims,
damages, liabilities, costs, expenses (including payment of reasonable
attorney's fees and expenses and other costs in advance of the final disposition
of any claim, suit, proceeding or investigation incurred by each Indemnified
Party to the fullest extent permitted by law upon receipt of any undertaking
required by applicable law), judgments, fines and amounts paid in settlement in
connection with any such threatened or actual claim, action, suit, proceeding or
investigation, and in the event of any such threatened or actual claim, action,
suit, proceeding or investigation (whether asserted or arising before or after
the Effective Time), the Indemnified Parties may retain counsel reasonably
satisfactory to them after consultation with the Surviving Corporation;
provided, however, that (A) Acquiror shall have the right to assume the defense
thereof and upon such assumption Acquiror shall not be liable to any Indemnified
Party for any legal expenses of other counsel or any other expenses subsequently
incurred by any Indemnified Party in connection with the defense thereof, except
that if Acquiror elects not to assume such defense or counsel for the
Indemnified Parties reasonably advises the Indemnified Parties that there are
issues that raise conflicts of interest between Acquiror and the Indemnified
Parties, the Indemnified Parties may retain counsel reasonably satisfactory to
them after consultation with Acquiror, and Acquiror shall pay the reasonable
fees and expenses of such counsel for the Indemnified Parties, (B) Acquiror
shall be obligated pursuant to this paragraph to pay for only one firm of
counsel for all Indemnified Parties, unless an Indemnified Party shall have
reasonably concluded, based on an opinion of counsel, that there is a material
conflict of interest between the
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interests of such Indemnified Party and the interests of one or more other
Indemnified Parties and that the interests of such Indemnified Party will not be
adequately represented unless separate counsel is retained, in which case,
Acquiror shall be obligated to pay such separate counsel, (C) Acquiror shall not
be liable for any settlement effected without its prior written consent (which
consent shall not be unreasonably withheld) and (D) Acquiror shall have no
obligation hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and nonappealable, that indemnification of such Indemnified Party
in the manner contemplated hereby is prohibited by applicable law. Any
Indemnified Party wishing to claim Indemnification under this Section 4.10, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify Acquiror thereof, provided that the failure to so notify shall not affect
the obligations of Acquiror under this Section 4.10 except to the extent such
failure to notify materially prejudices Acquiror. The Acquiror's obligations
under this Section 4.10 shall continue in full force and effect for the period
of the applicable statute of limitations; provided, however, that all rights to
indemnification in respect of any claim (a "Claim") asserted or made within such
period shall continue until the final disposition of such Claim.
ARTICLE FIVE
COVENANTS OF THE COMPANY
The Company hereby covenants and agrees with Acquiror as follows:
5.01 Registration Statement and Shareholders Meeting.
(a) The Company shall cause a meeting of its shareholders (the
"Shareholders Meeting") to be held after the execution of this Agreement
and upon availability of the Proxy Statement/Prospectus (as defined in
Section 6.01(a)) for the purpose of acting upon this Agreement and the
Plan of Merger, and in connection therewith shall distribute the Proxy
Statement/Prospectus and any amendments or supplements thereto as prepared
by Acquiror in cooperation with the Company. The Company shall solicit
proxies from its shareholders in accordance with applicable law, including
the rules and regulations of the SEC, shall cooperate with the Acquiror to
have the Registration Statement declared effective, and shall furnish all
information concerning the Company and its shareholders (but not including
the names and addresses of its shareholders) as may be requested by
Acquiror in connection with any such action. In addition, if so requested
by Acquiror, the Company shall retain a proxy solicitation firm acceptable
to Acquiror, for the purpose of soliciting proxies in connection with the
Shareholders Meeting. The cost of the proxy solicitation firm shall be
borne solely by the Company.
(b) None of the information furnished by the Company for inclusion in
the Registration Statement, when it shall become effective, and at all
times subsequent to such effectiveness, or the Proxy Statement/Prospectus,
when mailed or at the time of the Shareholders Meeting, or in the cases of
any other document filed with the SEC or any state securities commission,
at the respective times at which such documents are filed with the SEC or
such State securities commission, shall contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements contained therein, in light of
the circumstances under which they are made, not misleading.
5.02 Conduct Of Business, Certain Covenants.
(a) From and after the execution and delivery of this Agreement and
until the Effective Time, the Company and each of its Subsidiaries shall:
(i) conduct its business and operate in the usual ordinary
course of business in accordance with prudent and sound
banking and business practices, including charging off all
loans required to be charged off by federal and state
regulators and regulations, statutes and sound banking
practices and maintain its and their books and records, in
accordance with GAAP;
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(ii) maintain an allowance for loan losses deemed by management
of the Company to be adequate based on GAAP;
(iii) remain in good standing with all applicable federal and
state regulatory authorities and preserve each of its and
their existing banking locations;
(iv) use its and their best efforts to retain the services of
its and their present officers and employees;
(v) maintain insurance covering the performance of its and
their directors, officers and employees and maintain in
full force and effect all of the insurance policies
reflected on Schedule 3.34 hereto;
(vi) take no action which would adversely affect or delay the
ability of the Company or Acquiror to obtain any necessary
approvals, consents or waivers of any governmental
authority required for the transactions contemplated
hereby;
(vii) consult with Acquiror prior to acquiring any interest in
real property, except in the ordinary course of business or
entering into any contract or agreement having a term of
more than one year;
(viii) take no action which would cause the termination or
cancellation by the FDIC of insurance in respect of the
Merging Bank's deposits; and
(ix) cooperate with the Acquiror to provide timely notice to its
data processor of the Merging Bank's intent to terminate
its data processing agreement (the "Data Processing
Agreement") on or about the Effective Time. The Company
shall use its reasonable best efforts to make arrangements
such that the services provided under the Data Processing
Agreement continue to be provided up to the Effective Time.
(b) From and after the execution and delivery of this Agreement and
until the Effective Time, the Company and its Subsidiaries shall not,
without the prior consent of Acquiror:
(i) amend its or their Articles of Incorporation, Charter or
Bylaws;
(ii) except in connection with the exercise of previously
granted Options, issue, deliver or sell, or authorize or
propose the issuance, delivery or sale of, any shares of
its or their capital stock, or issue or grant any stock
options, warrants, rights, calls or commitments of any
character calling for or permitting the issue or sale of
its or their capital stock (or securities convertible into
or exchangeable, with or without additional consideration,
for shares of such capital stock) or any stock appreciation
rights;
(iii) make payment of any cash dividend, or institute any other
form of dividend or distribution, with respect to the
Company's or its Subsidiaries' capital stock;
(iv) increase or reduce the number of shares of its or their
capital stock issued or outstanding by repurchase,
split-up, reverse split, reclassification, distribution of
stock dividends, or change of par or stated value;
(v) except in connection with the exercise of previously
granted Options, purchase, permit the conversion of or
otherwise acquire or transfer for any consideration any
outstanding shares of its or their capital stock or
securities carrying the right to acquire, or convert into
or exchange for such stock, with or without additional
consideration;
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(vi) make or grant any general or individual wage or salary
increase or fringe benefit increase, or increase in any
manner the compensation or fringe benefits of any of its
directors, officers or employees, or pay any bonus, pension
or retirement allowance to any such directors, officers or
employees, except in accordance with any plan or agreement
set forth on Schedule 5.02(b)(vi), or become a party to,
adopt, amend or otherwise modify or make any contribution
outside the ordinary course of business to any Compensation
and Benefit Plan, any bonus, pension, profit sharing,
retirement or other compensation plan or enter into any
contract of employment with any officer which is not
terminable at will without cost or other liability (other
than benefits accrued as of the date of such termination),
or enter into, modify, or renew any contract, agreement,
commitment or arrangement providing for the payment to any
director, officer or employee of such party of compensation
or benefits contingent, or the terms of which are
materially altered, upon the occurrence of any of the
transactions contemplated by this Agreement; provided
however, that (i) the annual compensation of officers
employed by the Company and Merging Bank as of July 1, 1998
may be increased effective as of such date in a manner
consistent with prior practice of the Company and the
Merging Bank, provided that the combined amount of the
annual increases put into effect for all such officers
shall not exceed, in the aggregate, 5% of the total amount
paid to such officers for the year ended June 30, 1998, and
(ii) the Company and the Merging Bank may pay to their
employees year-end bonuses for the 1998 fiscal year, in a
manner and amount consistent with prior practice of the
Company and the Merging Bank;
(vii) incur any obligations or liabilities or make any capital
expenditures except in the ordinary course of business or
make any equity investment or commitment to make such an
investment in real estate or in any real estate development
project, other than in connection with foreclosure,
settlements in lieu of foreclosure or troubled loan or debt
restructurings in the ordinary course of business
consistent with prudent banking practices;
(viii) mortgage, pledge (except pledges required for Federal Home
Loan Bank ("FHLB") advances or pledges of such assets as
may be required to permit the Merging Bank to accept
deposits of public funds) or subject to any material lien
(excluding mechanics' liens), charge, permit a security
interest on, or encumber any of its or their assets,
properties or other rights, except for liens for taxes not
yet due and payable;
(ix) transfer or lease any of its or their assets or property
except in the ordinary course of business, or close any
banking office, or file any application to relocate or
terminate the operations of any office of it or its
Subsidiaries;
(x) transfer or grant any rights under any leases, licenses or
agreements, other than in the ordinary course of business;
(xi) other than with respect to loan transactions (including,
without limitation, letters of credit and purchase of
leases), the purchase of obligations of the government of
the United States or agencies of the United States, sales
for less than $25,000 of real estate owned by the Company
or its Subsidiaries, make or enter into any transaction,
contract or agreement or incur any other commitment where
the amount involved exceeds $50,000 or the term exceeds 1
year;
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(xii) incur any indebtedness for borrowed money, assume,
guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual,
corporation or other entity, except for deposit liabilities
and except for indebtedness incurred for liquidity purposes
in the ordinary course of business and consistent with the
Company's and its Subsidiaries' past practice with respect
to the incurrence of indebtedness, the repayment term of
which does not exceed nine months; provided, however, that
nothing in this Section shall prohibit the Company from
incurring FHLB advances in the ordinary course of business
for liquidity purposes, in amounts consistent with
approvals of the Board of Directors existing on the date
hereof and disclosed to Acquiror on Schedule 5.02(b)(xii)
hereof;
(xiii) cancel or compromise any debt or claim which has not
previously been charged off other than in the ordinary
course of business in an aggregate amount which is not
materially adverse to the Company or any of its
Subsidiaries, or settle any claim, action or proceeding
involving any liability of the Company or its Subsidiaries
for money damages or material restrictions upon the
operation of the Company or any of its Subsidiaries;
(xiv) enter into any transaction other than in the ordinary
course of business or enter into any new, or materially
alter or expand any present, line of business or change any
of its methods of accounting (except as required by changes
in GAAP or regulatory accounting principles as concurred in
by Acquiror's independent auditors or by Section 5.03(a))
or change any of its methods of reporting income and
deductions for income tax purposes from those employed in
the preparation of its income tax returns for the fiscal
year ended June 30, 1997, except as required by law;
(xv) take any action which constitutes a breach or default of
its obligations under this Agreement or which is reasonably
likely to delay or jeopardize the receipt of any of the
Requisite Regulatory Approvals (as defined in Section 7.01)
required hereby or cause any of the other conditions set
forth in Articles Seven or Nine hereof to fail or take any
action that is intended or could reasonably be expected to
result in any of its representations or warranties set
forth in this Agreement being or becoming untrue in any
material respect;
(xvi) make or commit to make any loan over $150,000;
(xvii) purchase or commit to purchase any bulk loan servicing
portfolio;
(xviii) make any payment to any director, officer, employee or
independent contractor, in connection with or as a result
of the transactions contemplated by this Agreement, or
otherwise, that is not deductible under either Sections
162(a)(1) or 404 of the Code or is not an ordinary business
expense for travel, meals or entertainment authorized by
the Company in furtherance of the duties of the director,
officer or employee; provided, however, that payment of the
out-of-pocket expenses of the Company's professional
advisors shall not be restricted by this paragraph (xviii);
(xix) take or cause to be taken any action which would disqualify
the Merger as a tax-free reorganization under Section 368
of the Code; or
(xx) fail to comply in any material respect with any laws,
regulations or governmental actions applicable to it or to
the conduct of its business.
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5.03 Confirming and Conforming Accounting and Reserve Policies;
Integration.
(a) Notwithstanding the Company's belief that it has established all
reserves and taken all provision for possible loan losses required by GAAP
and applicable laws, rules and regulations, the Company recognizes that
Acquiror may have adopted different loan, accrual and reserve policies
(including loan classifications and levels of reserves for possible loan
losses). At the request of Acquiror, the Company shall, within five days
prior to the Closing Date, use its best efforts to (i) establish and take
such reserves and accruals as Acquiror shall request to conform, on a
mutually satisfactory basis, the Company's loan, accrual and reserve
policies to Acquiror's policies, and (ii) establish and take such
accruals, reserves and charges in order to implement such policies in
respect of excess facilities and equipment capacity, severance costs,
litigation matters, write-off or write-down of various assets and other
appropriate accounting adjustments, and to recognize for financial
accounting purposes the expenses of the Reorganization; provided, however
that the Company shall not be required to take any action that (i) is not
consistent with GAAP, (ii) would materially impair its regulatory capital,
or (iii) that is inconsistent with any formal or informal undertaking by
the Company to any banking regulatory agency which has been disclosed in
writing to the Company.
(b) During the period from the date of this Agreement to the
Effective Time, the Company shall, and shall cause its Subsidiaries and
its officers, directors and employees to, cooperate with and assist the
Acquiror in the formulation of a plan of integration for Acquiror and the
Company, and Acquiror Bank and the Merging Bank.
5.04 Information, Access Thereto. Acquiror, its representatives and agents
shall, at all times during normal business hours prior to the Effective Time,
have full and continuing access to the facilities, employees, operations,
records and properties of the Company and its Subsidiaries. Acquiror, its
representatives and agents may, prior to the Effective Time, make or cause to be
made such investigation of the operations, records and properties of the Company
and its Subsidiaries, and of its and their financial and legal condition as
Acquiror shall deem necessary or advisable to familiarize itself with such
records, properties and other matters. Upon request, the Company and its
Subsidiaries shall furnish Acquiror or its representatives or agents, its and
their attorneys, responses to auditors' requests for information and such
financial and operating data and other information requested by Acquiror,
developed by the Company or its Subsidiaries, its and their auditors,
accountants or attorneys, and will permit Acquiror, its representatives or
agents to discuss such information directly with any individual or firm
performing auditing or accounting functions for the Company or its Subsidiaries,
and such auditors and accountants shall be directed to furnish copies of any
reports or financial information as developed to Acquiror or its representatives
or agents. Acquiror and Acquiror's agents, contractors and environmental
consultants also shall have the right of access to the Real Estate before the
Effective Time for the purpose of undertaking such environmental investigation
and testing as Acquiror deems necessary or appropriate pursuant to Section 6.10.
Acquiror and Acquiror's agents, contractors and environmental consultants also
shall have the right of access to the Company's and its Subsidiaries records or
employees for the purpose of carrying out necessary investigation and testing.
No investigation by Acquiror shall affect the representations and warranties
made by the Company herein.
5.05 Confidentiality. The Company shall cause all internal, nonpublic
financial and business information obtained by it from Acquiror or any of its
Subsidiaries to be treated confidentially (exercising the same degree of care as
it uses to preserve and safeguard its own confidential information); provided,
however, that notwithstanding the foregoing, nothing contained herein shall
prevent or restrict the Company from making such disclosure thereof as may be
required by law in connection with the consummation of the Reorganization or as
may be required in performance of this Agreement. Furthermore, the Company shall
have no obligation to keep confidential any information that (a) was already
known to the Company and was received from a source other than the Acquiror or
any of its Subsidiaries, directors, officers, employees or agents, provided that
the source making such information available was not bound by a confidentiality
agreement or other contractual, legal or fiduciary obligation of confidentiality
with respect to such information, or (b) is or becomes generally available to
the public other than as a result of a disclosure by the parties hereto to one
another. If the Merger shall not be consummated, all nonpublic financial and
business information, documents and material and all copies thereof shall be
returned to Acquiror, or destroyed by the Company, and shall not be used by the
Company in any way that reasonably could be expected to be detrimental to
Acquiror and will not be disclosed to others except as specifically permitted
above.
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5.06 Recommendation of Merger to Shareholders. The Board of Directors of
the Company shall recommend in the Proxy Statement/Prospectus, consistent with
its fiduciary duties, approval of this Agreement, the Plan of Merger and the
Merger to all shareholders of the Company entitled to vote thereon.
5.07 Litigation Matters. The Company shall consult with Acquiror about any
proposed settlement or lack thereof, or any disposition of, any litigation
matter in which it or any of its Subsidiaries is or becomes involved and the
amount involved exceeds $50,000.
5.08 Bank Merger. The Company shall cause the Merging Bank to take all
such corporate action as is required to complete the Bank Merger, including
approval by the Board of Directors of the Merging Bank and execution by
appropriate officers of the Merging Bank of the Bank Merger Agreement.
5.09 No Solicitation. From and after the date hereof until termination of
this Agreement, neither the Company, its Subsidiaries, nor any of their
respective officers, directors, employees, agents or affiliates (including,
without limitation, any investment banker, attorney, accountant or
representative retained by the Company or any of its Subsidiaries) will,
directly or indirectly, initiate, solicit or knowingly encourage (including by
way of furnishing nonpublic information or assistance), or take any other action
to facilitate knowingly, any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal
(as defined below), or enter into or maintain or continue discussions or
negotiate with any person or entity in furtherance of such inquiries or to
obtain an Acquisition Proposal or agree to or endorse any Acquisition Proposal,
or authorize or permit any of its officers, directors or employees or any of its
Subsidiaries or any investment banker, financial advisor, attorney, accountant
or other representative retained by any of its Subsidiaries to take any such
action. The Company shall notify Acquiror orally (within one business day) and
in writing (as promptly as practicable) of all relevant details relating to all
inquiries and proposals which it or any of its Subsidiaries or any such officer,
director, employee, investment banker, financial advisor, attorney, accountant
or other representative may receive relating to any of such matters and if such
inquiry or proposal is in writing, the Company shall deliver promptly to
Acquiror a copy of such inquiry or proposal. Notwithstanding the foregoing, the
Company may enter into discussions or negotiations or provide information in
connection with an unsolicited Acquisition Proposal if the Board of Directors of
the Company has been advised in writing by such Board's outside legal counsel
that in the exercise of its fiduciary obligations such discussions or
negotiations should be commenced or such information should be furnished. For
purposes of this Agreement, "Acquisition Proposal" shall mean any of the
following involving the Company or any of its Subsidiaries (other than the
transactions contemplated hereunder): (a) any merger, consolidation, share
exchange, business combination or other similar transaction; (b) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more
of the assets of the Company and its Subsidiaries, taken as a whole, in a single
transaction or series of transactions; (c) any tender offer or exchange offer
for 10% or more of the outstanding shares of capital stock of the Company or the
filing of a registration statement under the Securities Act in connection
therewith; or (d) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing.
5.10 Other Approvals. The Company shall cooperate and use its best efforts
to obtain all written consents and approvals of other persons in connection with
any lease or other agreement, the benefits of which cannot be retained upon
consummation of the transactions contemplated hereby without such written
consent or approval.
5.11 Best Efforts. The Company agrees to use its best efforts to cause the
conditions contained in Articles Seven and Nine to be satisfied and to effect
the Reorganization.
5.12 Termination and Other Payments. Notwithstanding anything in this
Agreement to the contrary, all severance and termination payments, benefits,
acceleration of benefit vesting and other compensation paid by the Company or
any of its Subsidiaries, as provided for in this Agreement or otherwise, shall
not exceed the level of payments and benefits which would be deductible under
Section 280G of the Code, giving effect to any obligations of Acquiror or any
subsidiary thereof, as provided herein.
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5.13 Voting Agreements. Within 20 days of the date of this Agreement, the
Company shall obtain and deliver to Acquiror signed voting agreements ("Voting
Agreements"), substantially in the form attached hereto as Exhibit D, from each
of its executive officers and directors in their individual capacity, to the
effect that he or she will vote the shares of Company Common Stock beneficially
owned by him or her in favor of the Merger and all transactions related thereto,
and he or she will not dispose of any shares of Company Common Stock
beneficially owned by him or her prior to the Effective Time, subject to certain
exceptions as provided in the Voting Agreements.
5.14 Advise of Changes. Between the date hereof and the Closing Date, the
Company shall promptly advise Acquiror in writing of any fact or document which,
if existing or known as of the date hereof, would have been required to be set
forth, disclosed, or made available to Acquiror pursuant to this Agreement or of
any fact which, if existing or known as of the date hereof, would have made any
of the representations contained herein materially untrue.
ARTICLE SIX
ADDITIONAL COVENANTS AND AGREEMENTS
6.01 Regulatory Matters.
(a) The Acquiror shall prepare and file with the SEC a registration
statement on Form S-4 covering the Acquiror Common Stock to be issued
pursuant to this Agreement and the Plan of Merger (the "Registration
Statement"), and the Company shall give to Acquiror all information
concerning the Company which is required for inclusion in the
Registration Statement. The Registration Statement shall include a proxy
statement/prospectus (the "Proxy Statement/Prospectus") prepared for use
in connection with the Shareholders Meeting, all in accordance with the
rules and regulations of the SEC. Acquiror shall use all reasonable
efforts to obtain all necessary state securities law or "Blue Sky"
permits and approvals required to carry out the transactions contemplated
by this Agreement, and the Company shall furnish all information
concerning the Company and the holders of Company Common Stock as may be
requested in connection with any such action.
(b) The parties hereto shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, effect all applications, notices, petitions and filings,
and obtain as promptly as practicable all Requisite Regulatory Approvals,
permits, consents, approvals and authorizations of all third parties,
regulatory agencies and governmental entities which are necessary or
advisable to consummate the transactions contemplated by this Agreement.
The Company and Acquiror shall have the right to review in advance, and
to the extent practicable each will consult the other on, in each case
subject to applicable laws relating to the exchange of information, all
the information relating to the Company or Acquiror, as the case may be,
and any of their respective subsidiaries, which appear in any filing made
with, or written materials submitted to, any third party, regulatory
agency or governmental entity in connection with the transactions
contemplated by this Agreement; provided, however, that nothing contained
herein shall be deemed to provide either party with a right to review any
information provided to any regulatory agency or governmental entity on a
confidential basis in connection with the transactions contemplated
hereby. In exercising the foregoing right, each of the parties hereto
shall act reasonably and as promptly as practicable. The parties hereto
agree that they will consult with each other with respect to the
obtaining of all Requisite Regulatory Approvals, permits, consents,
approvals and authorizations of all third parties, regulatory agencies
and governmental entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the
other apprised of the status of matters relating to completion of the
transactions contemplated herein.
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(c) Acquiror and the Company shall, upon request, furnish each other
with all information concerning themselves, their subsidiaries,
directors, officers and shareholders and such other matters as may be
reasonably necessary or advisable in connection with the Registration
Statement or any other statement, filing, notice or application made by
or on behalf of Acquiror, the Company or any of their respective
subsidiaries to any regulatory agency or governmental entity in
connection with the Reorganization and the other transactions
contemplated by this Agreement.
(d) The Acquiror and the Company shall promptly advise each other
upon receiving any communication relating to the transactions
contemplated herein from any regulatory agency or governmental entity
whose consent or approval is required for consummation of the
transactions contemplated by this Agreement.
6.02 Legal Conditions to Reorganization. Each of Acquiror and the Company
shall, and shall cause its subsidiaries to, use their reasonable best efforts
(a) to take, or cause to be taken, all actions necessary, proper or advisable to
comply promptly with all legal requirements which may be imposed on such party
or its subsidiaries with respect to the Reorganization and, subject to the
conditions set forth in Articles Seven, Eight and Nine hereof, to consummate the
transactions contemplated by this Agreement, and (b) to obtain (and to cooperate
with the other party to obtain) any Requisite Regulatory Approval, consent,
authorization, order or approval of, or any exemption by, any governmental
entity and any other third party which is required to be obtained by the Company
or Acquiror or any of their respective subsidiaries in connection with the
Reorganization and the other transactions contemplated by this Agreement.
6.03 Subsequent SEC Filings; Press Releases. As soon as reasonably
available, but in no event more than three business days after the filing
thereof with the SEC, Acquiror shall deliver to the Company and the Company
shall deliver to Acquiror their respective reports, including Forms 8-K, 10-Q,
10-K, proxy statements (and the small business issuer equivalents), as filed
with the SEC under the Exchange Act. In addition, from and after the date of
this Agreement through the Effective Time, the Company and the Acquiror shall
promptly deliver to the other copies of all press releases issued by it or any
of its Subsidiaries. Neither party will issue any release or other publicity
about the Merger or the transactions contemplated by this Agreement without
prior notice to the other.
6.04 Additional Agreements. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement, or to vest the Acquiror with full title to all properties, assets,
rights, approvals, immunities and franchises of the Company or any of its
Subsidiaries, the proper officers and directors of each party to this Agreement
and their respective subsidiaries shall take all such necessary action as may be
requested by Acquiror.
6.05 Advice of Changes. The Company shall promptly advise Acquiror of any
change or event having a material adverse effect on it or which it believes
would or would be reasonably likely to cause or constitute a material breach of
any of its representations, warranties or covenants contained herein, and
Acquiror shall promptly advise the Company of any change or event having a
material adverse effect on it or which it believes would or would be reasonably
likely to cause or constitute a material breach of its representatives,
warranties or covenants contained herein. From time to time prior to the
Effective Time, the Company and Acquiror shall promptly supplement or amend
their respective Disclosure Schedules delivered in connection with the execution
of this Agreement to reflect any matter which, if existing, occurring or known
at the date of this Agreement, would have been required to be set forth or
described in such Disclosure Schedules or which is necessary to correct any
information in such Disclosure Schedules which has been rendered inaccurate
thereby.
6.06 Current Information. During the period from the date of this
Agreement to the Effective Time, the Company shall cause one or more of its
designated representatives to confer on a regular and frequent basis (not less
than monthly) with representatives of Acquiror and to report (a) the general
status of the ongoing operations of the Company and its Subsidiaries, and (b)
the status of, and the action proposed to be taken with respect to, those loans
held by the Company or any of its Subsidiaries which, individually or in
combination with one or more other loans to the same borrower thereunder, have
an unpaid principal amount of $50,000 or more and are non-performing assets. The
Company shall promptly notify Acquiror of any material change in the normal
course of business or in the operation or the properties of the Company or any
of its Subsidiaries and of any governmental complaints,
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investigations or hearings (or communications indicating that the same may be
contemplated), or the institution or the threat of material litigation involving
the Company or any of its Subsidiaries, and shall keep Acquiror fully informed
of such events.
6.07 Termination of Regulatory Agreements. The Company and the Merging
Bank shall use their reasonable best efforts to cause all regulatory agreements,
which have or reasonably could be expected to have a material adverse effect on
the Company taken as a whole, to which the Company or the Merging Bank is or
becomes subject to be terminated and to be of no further force and effect at or
prior to the Effective Time.
6.08 Tax Returns. The Company shall prepare and file, as approved or as
may be directed by Acquiror, any tax returns with respect to the Merger.
6.09 Compensation and Benefit Plans; Existing Agreements.
(a) RRP. All shares of Company Common Stock awarded pursuant to the RRP
shall become fully vested and nonforfeitable prior to or at the Effective Time
as provided in the RRP. Recipients of shares awarded pursuant to the RRP
(including recipients who become vested in the RRP shares after the date of this
Agreement, including at the Effective Time) shall be entitled to elect cash or
Acquiror Common Stock in the same manner as the holders of Company Common Stock.
No additional shares of Company Common Stock shall be granted after the date of
this Agreement pursuant to the RRP. The RRP shall be terminated as soon as
practicable after the Effective Time and all remaining unallocated shares held
by the RRP, if any, shall be extinguished as of the Effective Time. All shares
of Company Common Stock awarded, pursuant to the RRP shall be considered issued
and outstanding shares at the Effective Time for all purposes and in particular
for purposes of Article I of this Agreement.
(b) ESOP. The ESOP shall receive the Per Share Cash Distribution in
exchange for its shares of Company Common Stock. As of the Effective Time, the
Reliance Savings Bank Employee Stock Ownership Plan ("ESOP") shall be terminated
as Acquiror and the Company shall mutually determine, and the loan between
Reliance Bancshares, Inc. and the ESOP shall be repaid in full with cash
consideration received by the ESOP with respect to unallocated shares of Company
Common Stock held in a suspense account under the ESOP. Any cash consideration
received with respect to such Company Common Stock held in the suspense account
under the ESOP, remaining after such repayment, shall be allocated to the ESOP
accounts of those Company Employees who are ESOP participants and beneficiaries
("ESOP participants") in accordance with the terms of the ESOP as amended with
respect to such termination. All ESOP participants shall fully vest and have a
nonforfeitable interest in their accounts under the ESOP, determined as of the
Effective Time. As soon as practicable after the receipt of a favorable
determination letter from the IRS as to the tax qualified status of the ESOP
upon its termination under Sections 401(a) and 4975(e) of the Code (the "Final
Determination Letter"), distribution of the benefits under the ESOP shall be
made to ESOP participants. From and after the date of this Agreement, and in
anticipation of such determination and distribution, Acquiror, Company and their
respective representatives, prior to the Effective Time, and Acquiror and its
representatives after the Effective Time, shall use their best efforts to apply
for and obtain such favorable Final Determination Letter from the IRS. In the
event that Acquiror, Company and their respective representatives prior to the
Effective Time, and Acquiror and its representatives after the Effective Time,
reasonably determine that the ESOP cannot obtain a favorable Final Determination
Letter, or that the amounts held therein cannot be so applied, allocated or
distributed without causing the ESOP to lose its tax qualified status, the
Company prior to the Effective Time, and Acquiror after the Effective Time,
shall take such action as they may determine with respect to the distribution of
benefits to the ESOP participants, provided that the assets of the ESOP shall be
held or paid for the benefit of the ESOP participants, and provided further that
in no event shall any portion of the amounts held in the ESOP revert, directly
or indirectly to the Company or any affiliate thereof or to Acquiror or any
affiliate thereof.
(c) Company Pension Plan. All participants in the Company Pension Plan
shall be fully vested as of the Effective Time in their accrued benefits
thereunder, and all amounts contributed by the Company to the Company Pension
Plan prior to the Effective Time shall be applied to provide benefits to
participants. As of the Effective Time, the Company"s participation in the
Company Pension Plan shall terminate.
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(d) Non-Qualified Deferred Retirement Plan for Directors. Acquiror agrees
to assume the obligations of the Company under the Reliance Savings Bank
Non-Qualified Deferred Retirement Plan for Directors, as in effect on the date
hereof, and from and after the Effective Time to continue to perform and satisfy
the terms and obligations thereof. Acquiror agrees that the transactions
contemplated by this Agreement constitute a change of control of the Company for
purposes of such Plan.
(e) Benefit Plans. At the Effective Time, each Employee of the Company and
its Subsidiaries shall immediately become entitled to participate in each of the
Acquiror Plans, including without limitation, group hospitalization, medical,
life and disability insurance plans, severance plans, qualified retirement, ESOP
and savings plans, stock option plans, and management recognition plans, in
which similarly situated employees of Acquiror and its Subsidiaries participate
and to the same extent as such employees of Acquiror. The period of employment
and compensation of each Employee of the Company and its Subsidiaries with the
Company and its Subsidiaries shall be counted for all purposes (except for
purposes of benefit accrual) under the Acquiror Plans, including without
limitation, for purposes of vesting and eligibility. Any expenses incurred by an
Employee of the Company or its Subsidiaries under the Company"s welfare benefit
plans (such as deductibles or co-payments) shall be counted for all purposes
under the Acquiror Plans. Acquiror shall waive any preexisting condition
exclusions for conditions existing on the Effective Time and actively at work
requirements for periods ending on the Effective Time contained in the Acquiror
Plans as they apply to Employees of the Company and its Subsidiaries and former
employees and their dependents; provided that the Acquiror's waiver of
preexisting conditions shall not extend to any condition which has prevented an
Employee's coverage under comparable benefit plans of the Company or the Merging
Bank. Notwithstanding anything in this Section 6.09 to the contrary,
participation by the Employees in any of the Acquiror Plans with respect to
which the eligibility of employees of Acquiror to participate is at the sole
discretion of Acquiror, shall be at the sole discretion of the Acquiror applied
in the same manner as such discretion is applied to similarly situated employees
of Acquiror. Also, not withstanding anything in this Section 6.09 to the
contrary, Acquiror shall have sole discretion with respect to the determination
whether to terminate, merge or continue any employee benefit plan or program of
the Company or any of its Subsidiaries (other than the ESOP, the Company Pension
Plan or the Non-Qualified Deferred Retirement Plan for Directors); provided,
however, that Acquiror shall continue to maintain Company plans other than
stock-based incentive plans and the tax qualified plans of the Company until the
Employees are permitted to participate in similar Acquiror Plans. At the
Effective Time, Acquiror or a subsidiary thereof shall be substituted for the
Company as the sponsoring employer under those plans with respect to which the
Company or a Subsidiary is a sponsoring employer immediately prior to the
Effective Time, and which plan is assumed by the Acquiror pursuant to the terms
of this Agreement, and Acquiror or a subsidiary thereof shall assume and be
vested with all of the powers, rights, duties, obligations, and liabilities
previously vested in the Company or a Subsidiary with respect to each such plan.
(f) Retiree Medical Coverage. From and after the Effective Time, Acquiror
shall maintain post-retirement medical and health coverage no less favorable
than that maintained by the Company at the Effective Time, as described in
Schedule 6.09(f), with respect to former and current officers and employees and
current non-employee directors of the Company and its Subsidiaries, and their
dependents, who satisfy the requirements for coverage under such program.
(g) Successors of Acquiror. The provisions of this Section 6.09 shall be
binding upon and inure to the benefit of any successor to the Acquiror.
6.10 Environmental Studies.
(a) The Acquiror may in its discretion retain an environmental
consultant or consulting firm to perform an Environmental Survey of any
Real Estate (as defined in Section 3.10). Acquiror acknowledges receipt of
a Phase I Environmental Site Assessment of the property located at 3140
South 27th Street, dated June 5, 1998, which Assessment has been paid for
by the Company. The term "Environmental Survey" includes, but shall not be
limited to: a public records search; review of Company documents;
interviewing Company employees; on-site physical examination of premises;
surveying; soil boring; analytical testing of the Real Estate; and report
preparation. The Company shall provide site access and other cooperation
as required to perform the Environmental Survey. Acquiror shall have sole
direction over the performance and completion of the Environmental Survey
and the costs of any phase I environmental audit shall be borne solely by
the Company, with the costs of any further environmental
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evaluation work to be shared equally by the Acquiror and the Company.
Within one week of receipt, the party receiving any environment
evaluation report shall deliver copies of all reports and analytical data
to the other.
(b) In the event the Environmental Survey identifies an
Environmental Condition (as defined herein), which in the opinion of
Acquiror may have a material adverse effect on the business of the
Company or any of its Subsidiaries, the Acquiror may terminate this
Agreement pursuant to Section 10.01(h) hereof; or upon Acquiror's demand
made within three weeks of receipt of the Environmental Survey, the
Company shall cure, abate, correct or remedy such Environmental Condition
to the satisfaction of the Acquiror prior to the Effective Time, and if
the Company shall not cure, abate, correct, remedy such Environmental
Condition to the satisfaction of the Acquiror prior to the Effective
Time, the Acquiror shall have the right to terminate this Agreement
pursuant to Section 10.01(h) hereof. The term "Environmental Condition"
means any condition in, on or directly related to the Real Estate which
requires cleanup, remedy, abatement or restoration of any structure,
surface water, groundwater, soil or any natural resource under any
Environmental Law.
(c) If the Acquiror elects to terminate this Agreement pursuant to
paragraph (b) above, the Company shall indemnify and hold harmless
Acquiror and its successors, assigns, lessees and licensees, and also the
officers, employees, and shareholders of any of them, from and against
all claims, administrative orders, actions, proceedings, demands,
assessments, judgments, debts, damages, costs, charges and expenses,
including but not limited to court costs, attorneys' fees, interest and
penalties, and from and against all liabilities, obligations, losses and
damages of whatever nature that may be made against it or them or which
they may sustain or be put to arising from or by reason of any
contamination or Environmental Condition of the Real Estate.
ARTICLE SEVEN
CONDITIONS TO OBLIGATIONS OF EACH OF THE PARTIES
The obligation of each of the parties hereto to consummate the
transactions contemplated by this Agreement are subject to the satisfaction of
the following conditions at or prior to the Effective Time:
7.01 Regulatory Approvals. The parties hereto shall have received all
regulatory approvals, consents and waivers required to consummate the
transactions contemplated by this Agreement (including the transactions
contemplated by the Plan of Merger) from the appropriate regulatory agencies and
governmental entities, including the OTS, the FDIC, the WDFI and any other state
and banking authorities, and each such approval shall remain in full force and
effect and all statutory waiting periods in connection therewith shall have
expired and such approvals and the transactions contemplated thereby shall not
have been contested by any federal or state governmental authority or any other
third party by formal proceeding; provided, however, that no approval, consent
or waiver shall be deemed to have been received if it shall include any
condition or requirement that, in the opinion of the Acquiror, would so
adversely affect the economic or business benefits of the transactions
contemplated by this Agreement to Acquiror so as to render inadvisable the
consummation of the transactions contemplated herein (all such approvals and
expiration of applicable waiting periods referred to as "Requisite Regulatory
Approvals").
7.02 Federal Tax Opinion. The Company and Acquiror shall have received
from Michael Best & Friedrich, an opinion, dated the Effective Time, in form and
substance reasonably satisfactory to the Company and Acquiror, to the effect
that, on the basis of the facts, representations and assumptions set forth in
such opinion, (a) the Merger will for federal income tax purposes constitute a
reorganization within the meaning of Section 368, or any successor thereto, of
the Code, and (b) that, except with respect to holders of Company Common Stock
who exercise dissenters' rights and except for cash payments, including cash in
lieu of a fractional share interest and cash paid to those holders of Company
Common Stock who receive the Per Share Cash Consideration, (i) no gain or loss
will be recognized by a holder
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of Company Common Stock upon conversion in the Merger of Company Common Stock
into Acquiror Common Stock, (ii) the basis of Acquiror Common Stock to be
received in the Merger by a holder of Company Common Stock will be the same as
such holder's basis in the Company Common Stock exchanged therefor, and (iii)
the holding period of Acquiror Common Stock to be received in the Merger by a
holder of Company Common Stock will include the period during which such holder
held the Company Common Stock exchanged therefor, provided that such Company
Common Stock was held as a capital asset immediately prior to the consummation
of the Merger. In rendering such opinion, Michael Best & Friedrich may rely upon
representations contained in certificates of officers of Acquiror, the Company
and others.
7.03 Registration Statement. The Registration Statement filed by Acquiror
with the SEC with respect to the Acquiror Common Stock to be issued pursuant to
this Agreement and the Plan of Merger shall have become effective and no stop
order proceedings with respect thereto shall be pending or threatened.
7.04 Orders, Decrees and Judgments. Consummation of the transactions
contemplated by this Agreement shall not violate any order, decree or judgment
of any court or governmental body having competent jurisdiction. No order,
injunction or decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the Merger
or any of the other transactions contemplated by this Agreement shall be in
effect. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any governmental entity which
prohibits, materially restricts or makes illegal the consummation of the Merger.
7.05 NASDAQ Listing. The shares of Acquiror Common Stock which shall be
issued to the shareholders of the Company upon consummation of the Merger shall
have been authorized for listing on the Nasdaq National Market, subject to
official notice of issuance.
ARTICLE EIGHT
FURTHER CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligation of the Company to consummate the transactions contemplated
by this Agreement is further subject to the satisfaction of the following
conditions:
8.01 Compliance by Acquiror. (a) All material terms, covenants and
conditions of this Agreement required to be complied with and satisfied by
Acquiror at or prior to the Effective Time shall have been duly complied with
and satisfied in all material respects, and (b) the representations and
warranties made by Acquiror, as may be updated pursuant to Section 6.05 hereof,
shall be true and correct in all material respects at and as of the Effective
Time, except for those specifically relating to a time or times other than the
Effective Time (which shall be true and correct in all material respects at such
time or times), and except for those matters which in the aggregate do not have
a material adverse effect on the consolidated financial condition and earnings
of Acquiror and its subsidiaries taken as a whole. The Company shall have
received a certificate signed on behalf of the Acquiror by the Chief Executive
Officer and the Chief Financial Officer to the foregoing effects.
8.02 Opinion of Counsel. There shall have been delivered and addressed to
the Company an opinion of Michael Best & Friedrich, in the form attached hereto
as Exhibit E, dated as of the Closing Date.
8.03 Officers' Certificate. Acquiror shall deliver to the Company a
certificate signed by its President or any Executive Vice President and by its
Secretary or Assistant Secretary, dated the Closing Date, certifying in their
official capacity to his or her respective best knowledge and belief, that
Acquiror has met and complied with all conditions necessary to make this
Agreement and the Plan of Merger effective as to it.
8.04 Litigation. Acquiror shall not be made a party to, or to the knowledge
of Acquiror threatened by, any actions, suits, proceedings, litigation or legal
proceedings which, in the reasonable opinion of the Company have or are likely
to have a material adverse effect on the consolidated assets, properties,
business, operations or condition, financial or otherwise, of Acquiror. No
action, suit, proceeding or claim shall have been instituted, made or threatened
by any person relating to the Merger or the validity or propriety of the
transactions contemplated by this Agreement or the Plan of Merger which would
make consummation of the Merger inadvisable in the reasonable opinion of the
Company.
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8.05 No Environmental Condition. At the Effective Time, there shall be no
Environmental Condition existing with respect to any Real Property, which has or
is likely to have a material adverse effect on the consolidated assets,
properties, business, operations or condition, financial or otherwise, of
Acquiror, and with respect to which Acquiror has not taken reasonable steps to
cure, abate, correct or remedy such Environmental Condition to the reasonable
satisfaction of the Company. For purposes of this Section 8.05, a "material
adverse effect" shall mean the existence of an Environmental Condition where the
amount which is likely to be charged to Acquiror exceeds 1% of Acquiror's total
shareholders' equity.
8.06 Opinion. The Company will receive an opinion from Robert W. Baird &
Co. Incorporated, dated as of the date of the Proxy Statement/Prospectus, to the
effect that, subject to the terms, conditions and qualifications set forth
therein, the consideration as set forth herein to be received by the
shareholders of the Company pursuant to the Merger is fair to such shareholders
from a financial point of view.
8.07 Absence of Certain Changes or Events. As of the Closing Date, there
shall have been no "Material Adverse Change in the Acquiror" (as defined below)
from that which was represented and warranted on the date of this Agreement
pursuant to this Agreement and the Schedules provided on the date of this
Agreement, it being understood that any updates provided pursuant to Section
6.05 hereof do not constitute a waiver or other consent to any Adverse Change in
the Acquiror. For purposes of this Section 8.07, a "Material Adverse Change in
the Acquiror" shall mean any adverse change in the business, financial
condition, operating results or prospects of the Acquiror (other than general
economic or business conditions) or the existence of any pending or threatened
litigation or administrative action which (i) creates any reasonable possibility
that the Acquiror may incur a material loss that has not been reserved against;
(ii) challenges any portion of the Reorganization and which, in the reasonable
opinion of the Company, would be likely to enjoin consummation, or result in
rescission, of any part of the Reorganization; or (iii) the Company's board of
directors reasonably determines, in good faith and in the exercise of its
fiduciary duty, would render consummation of the Reorganization adverse in a
material manner to the best interests of the Company"s shareholders.
8.08 Accountant's Letter. The Acquiror shall have caused to be delivered to
the Company letters from the Acquiror's independent public accountants, KPMG
Peat Marwick LLP, dated the date on which the Registration Statement shall
become effective, and dated the Effective Time, and addressed to the Company and
the Acquiror, with respect to the Acquiror's consolidated financial position and
results of operation, and which describes procedures which shall be consistent
with applicable professional standards for letters delivered by independent
accountants in connection with comparable transactions.
ARTICLE NINE
FURTHER CONDITIONS TO THE OBLIGATIONS OF ACQUIROR
The obligation of Acquiror to consummate the transactions contemplated by
this Agreement is further subject to the satisfaction of the following
conditions:
9.01 Compliance by the Company. (a) All material terms, covenants and
conditions of this Agreement required to be complied with and satisfied by the
Company at or prior to the Effective Time shall have been duly complied with and
satisfied in all material respects, and (b) the representations and warranties
made by the Company, as may be updated pursuant to Section 6.05 hereof, shall be
true and correct in all material respects at and as of the Effective Time,
except for those specifically relating to a time or times other than the
Effective Time (which shall be true and correct at such time or times), and
except for those matters which in the aggregate do not have a material adverse
effect on the consolidated financial condition and earnings of the Company and
its subsidiaries taken as a whole. The Acquiror shall have received a
certificate signed on behalf of the Company by the Chief Executive Officer and
the Chief Financial Officer to the foregoing effects.
9.02 Accuracy of Financial Statements. The Company Financial Statements and
Subsequent Company Financial Statements heretofore or hereafter furnished to
Acquiror shall not be inaccurate in any material respect.
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9.03 Net Worth. As of the close of business on the day immediately
preceding the Effective Time, the Company's net worth, as shown by the sum of
its total shareholders' equity plus the allowance for loan losses but excluding
any adjustments made as a result of the application of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", any adjustments recorded
pursuant to Section 5.03(a), plus an allowance of up to $210,000 for legal,
accounting, and investment advisor/fairness opinion fees incurred in connection
with the transactions contemplated by this Agreement, shall not be less than the
amount set forth in the Company's Consolidated Statement of Financial Condition
at March 31, 1998. The Company shall deliver to Acquiror a certificate signed by
its Chief Financial Officer, dated the Closing Date, certifying to such effect.
9.04 Sufficiency of Documents, Proceedings. All documents delivered by and
proceedings of the Company in connection with the transactions contemplated by
this Agreement and the Plan of Merger shall be reasonably satisfactory to
Acquiror.
9.05 Opinion of Counsel. There shall have been delivered to Acquiror an
opinion of Schiff, Hardin & Waite, legal counsel to the Company, in the form
attached hereto as Exhibit F, dated the Closing Date.
9.06 Officers' Certificate. The Company shall deliver to Acquiror a
certificate signed by its Chairman of the Board, President and Chief Executive
Officer and Secretary, dated the Closing Date certifying in their official
capacity to their respective best knowledge and belief that the Company has met
and complied with all conditions necessary to make this Agreement and the Plan
of Merger effective as to the Company. The Company also shall have delivered all
such other certificates and documents with respect to the Company as may have
been requested by Acquiror.
9.07 Absence of Certain Changes or Events. As of the Closing Date, there
shall have been no "Material Adverse Change in the Company" (as defined below)
from that which was represented and warranted on the date of this Agreement
pursuant to this Agreement and the Schedules provided on the date of this
Agreement, it being understood that any updates provided pursuant to Section
5.14 and 6.05 hereof do not constitute a waiver or other consent to any Material
Adverse Change in the Company. For purposes of this Section 9.07, a "Material
Adverse Change in the Company" shall mean any adverse change in the business,
financial condition, operating results or prospects of the Company (other than
general economic or business conditions) and its Subsidiaries or the existence
of any pending or threatened litigation or administrative action which (i)
creates any reasonable possibility that the Company or its Subsidiaries may
incur a material loss that has not been reserved against; (ii) materially
challenges any portion of the Reorganization and which, in the reasonable
opinion of Acquiror, would be likely to enjoin consummation, or result in
rescission, of any part of the Reorganization; or (iii) Acquiror's board of
directors reasonably determines, in the exercise of its fiduciary duty, would
render consummation of the Reorganization adverse in a material manner to the
best interests of Acquiror's shareholders.
9.08 Litigation. Neither the Company nor its Subsidiaries shall be made a
party to, or to the knowledge of the Company, threatened by, any actions, suits,
proceedings, litigation or legal proceedings which, in the reasonable opinion of
Acquiror, have or are likely to have a material adverse effect on the
consolidated assets, properties, business, operations or condition, financial or
otherwise, of the Company or the assets, properties, business, operations or
condition, financial or otherwise, of the Merging Bank, nor shall any director
or officer or former director or officer of the Company or its Subsidiaries be
made a party to, or threatened by, any actions, suits, proceedings, litigation
or legal proceedings relating to their performance or nonperformance of their
legal or fiduciary duties as directors and officers of the Company or its
Subsidiaries which in the reasonable opinion of the Board of Directors of
Acquiror is likely to have a material adverse effect on the Company or the
Merging Bank. No action, suit, proceeding or claim shall have been instituted,
made or threatened by any person relating to the Merger or the validity or
propriety of the transactions contemplated by this Agreement or the Plan of
Merger or the Bank Merger Agreement which would make consummation of the
Reorganization inadvisable in the reasonable opinion of Acquiror.
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9.09 Agreements of Affiliates.
(a) As soon as practicable after the Mailing Date, the Company shall
deliver to Acquiror a letter identifying all persons who the Company
believes to be, at the time this Agreement is submitted to a vote of the
shareholders of the Company, "affiliates" of the Company for purposes of
Rule 145 under the Securities Act. The Company shall use its best
efforts to cause each person who is identified as an "affiliate" in the
letter referred to above to deliver to Acquiror prior to the Effective
Time a written agreement, in substantially the form attached hereto as
Exhibit G, providing that each such person will agree not to sell,
pledge, transfer or otherwise dispose of the shares of Acquiror Common
Stock to be received by such person in the Merger except in compliance
with the applicable provisions of the Securities Act. Prior to the
Effective Time, the Company shall amend and supplement such letter and
use its best efforts to cause each additional person who is identified as
an "affiliate" to execute a written agreement in substantially the form
of Exhibit G.
(b) As soon as practicable after the Mailing Date, Acquiror and the
Company shall identify all shareholders of the Company who may be
required to make certain representations and covenants such that the
Merger will be treated as a reorganization within the meaning of Section
368 of the Code, and the Company shall use its best efforts to cause each
of these shareholders to sign a written agreement containing such
representations and covenants.
9.10 Bank Merger Agreement. The Bank Merger Agreement shall have been duly
authorized and approved by the Merging Bank so as to permit the Bank Merger to
be consummated as contemplated thereby.
9.11 Consents Under Agreements. The consent, approval or waiver of each
person whose consent or approval shall be required in order to permit the
succession by the Surviving Corporation pursuant to the Merger or by the
Acquiror-Bank pursuant to the Bank Merger Agreement to any obligation, right or
interest of the Company or any of its Subsidiaries under any loan or credit
agreement, note, mortgage, indenture, lease, license or other agreement or
instrument shall have been obtained, except where the failure to obtain such
consent, approval or waiver would not materially adversely affect the economic
or business benefits of the transactions contemplated by this Agreement to
Acquiror.
9.12 Accountant's Letter. The Company shall have caused to be delivered to
Acquiror letters from the Company's independent public accountants, Schenck &
Associates, S.C. dated the date on which the Registration Statement shall become
effective, and dated the Effective Time, and addressed to Acquiror and the
Company, with respect to the Company's consolidated financial position and
results of operation, and which describes procedures which shall be consistent
with applicable professional standards for letters delivered by independent
accountants in connection with comparable transactions.
9.13 Approval by Affirmative Vote of Shareholders; Exercise of Dissenters'
Rights. This Agreement and the Plan of Merger shall have been duly approved,
confirmed and ratified by the requisite majority vote of the shareholders of the
Company.
9.14 Nonperforming Assets. At the end of each of the Company's fiscal
quarters commencing December 31, 1997, the aggregate amount of all nonperforming
assets does not exceed 0.5% of the Company's total assets.
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ARTICLE TEN
TERMINATION AND AMENDMENT
10.01 Termination. This Agreement may be terminated and the Plan of Merger
abandoned at any time prior to the filing of the Articles of Merger (whether
before or after approval of this Agreement and the Plan of Merger by the
shareholders of the Company):
(a) by written agreement between Acquiror and the Company authorized
by a majority of the entire Board of Directors of each;
(b) by Acquiror, (i) provided Acquiror has used its best efforts to
ensure that all of the conditions set forth in Articles Seven and Eight
have been fulfilled, if any of the conditions set forth in Articles Seven
or Nine hereof shall not have been fulfilled and shall not have been
waived or shall have become impossible of fulfillment or (ii) if the
Company shall have failed to perform and comply with, in all material
respects, its agreements and covenants hereunder and such failure to
perform or comply shall not have been remedied within thirty (30) days
after receipt by the Company of notice in writing from the Acquiror,
specifying the nature of such failure and requesting that it be remedied;
(c) by the Company, (i) provided the Company has used its best
efforts to ensure that all of the conditions set forth in Articles Seven
and Nine have been fulfilled, if any of the conditions set forth in
Articles Seven or Eight hereof shall not have been fulfilled and shall
not have been waived or shall have become impossible of fulfillment or
(ii) if the Acquiror shall have failed to perform and comply with, in all
material respects, its agreements and covenants hereunder and such
failure to perform or comply shall not have been remedied within thirty
(30) days after receipt by the Acquiror of notice in writing from the
Company, specifying the nature of such failure and requesting that it be
remedied;
(d) by either Acquiror or the Company if the Merger is not
consummated on or before February 28, 1999, unless the failure to
consummate shall be due to the failure of the party seeking to terminate
to perform or observe the covenants and agreements of such party set
forth herein; provided, however, that if the Requisite Regulatory
Approvals have not been obtained due to a protest under the Community
Reinvestment Act, such deadline shall automatically be extended to May
31, 1999;
(e) by Acquiror in the event the Acquiror Average Stock Price is
$32.40 or less;
(f) by either Acquiror or the Company upon written notice to the
other party (i) 90 days after the date on which any request for
application shall have been withdrawn at the request or recommendation of
the regulatory agency or governmental entity which must grant a Requisite
Regulatory Approval, or a Requisite Regulatory Approval shall have been
denied, unless within the 90-day period following such denial or
withdrawal, a petition for rehearing or an amended application has been
filed with the applicable regulatory agency or governmental entity,
provided, however, that no party shall have the right to terminate this
Agreement pursuant to this Section 10.01(f) if such denial or request or
recommendation for withdrawal shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe the covenants
and agreements of such party set forth herein; or (ii) if any court,
regulatory agency or governmental entity of competent jurisdiction shall
have issued a final nonappealable order enjoining or otherwise
prohibiting the consummation of any of the transactions contemplated by
this Agreement;
(g) by Acquiror if notice of changes to any of the Company's
Disclosure Schedules is provided by the Company, and Acquiror reasonably
determines that such changes would have a material adverse effect upon
the business of the Company or its Subsidiaries if the transactions
contemplated by this Agreement were consummated;
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(h) by Acquiror within three weeks of receipt of the Environmental
Survey pursuant to the provisions of Section 6.10(b) hereof in the event
an Environmental Survey identifies an Environmental Condition, or by
Acquiror if upon the Acquiror's request, the Company shall not have
cured, abated, corrected or remedied an Environmental Condition to the
satisfaction of the Acquiror prior to the Effective Time; or
(i) by the Company if notice of changes to any of Acquiror's
Disclosure Schedules is provided by Acquiror and the Company reasonably
determines that such changes would have a material adverse effect upon
the business of Acquiror and its subsidiaries if the transactions
contemplated by this Agreement were consummated.
(j) by the Company, if the Board of Directors of the Company shall
determine in good faith and in the exercise of reasonable judgment (based
on the advice of independent financial advisors and counsel) that a bona
fide, written and unsolicited proposal or offer made by a corporation
(excluding the Acquiror or any of its Subsidiaries or affiliates),
partnership, person, other entity, or group (as defined in Section
13(d)(3) of the Exchange Act) with respect to an Acquisition Proposal is
more favorable to the Company and its shareholders than the transactions
contemplated hereby.
(k) by the Acquiror, if a Company Purchase Event as defined in
Section 10.03(b) occurs prior to the termination of this Agreement.
10.02 Effect of Termination. In the event this Agreement and the Plan of
Merger are terminated as provided herein, this Agreement and the Plan of Merger
shall become void and of no further force and effect without any liability on
the part of the terminating party or parties or their respective shareholders,
directors or officers; provided, however, that Sections 4.04, 5.05, 10.02,
10.03, 12.06 and 12.13 of this Agreement shall survive any such termination
and, except if the Company pays the Acquiror the Fee, as defined in Section
10.03(a), and expenses under Section 12.06, that no party shall be relieved or
released from any liability or damages arising out of its willful breach of any
provision of this Agreement. In the event of termination of this Agreement,
written notice thereof and the reasons therefor shall be given to the other
parties by the terminating party.
10.03 Fee.
(a) The Company hereby agrees to pay Acquiror and Acquiror shall be
entitled to receipt of a fee (the "Fee") of $875,000 in the event of:
(i) termination by the Company as provided in Section
10.01(j);
(ii) termination by the Acquiror as provided in Section
10.01(k);
(iii) the Merger contemplated herein not
being consummated because the Company materially
breaches its obligations under this Agreement; or
(iv) following the occurence of a Company
Purchase Event as defined in Section 10.03(b), at any
time within twelve (12) months of the date of
termination of this Agreement pursuant to Sections
10.01(b)(ii), 10.01(g), by the Company pursuant to
Section 10.01(f)(i) or pursuant to Section 10.01(b)(i)
because the condition of Section 9.13 is not satisfied.
Such payment shall be made in immediately available funds within five
business days after delivery of notice of entitlement by Acquiror.
(b) The term "Company Purchase Event" shall mean any of the
following events, or the Company or any of its Subsidiaries agreeing to,
orally or in writing, to enter into an agreement relating to any of the
following events:
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(i) the acquisition by any person, other than Acquiror or any
of its subsidiaries, alone or together with such person's
affiliates and associates or any group, of beneficial
ownership of 25% or more of the Company Common Stock (for
purposes of this Subsection (b)(i), the terms "group" and
"beneficial ownership" shall be as defined in Section 13(d)
of the Exchange Act and regulations promulgated thereunder
and as interpreted thereunder);
(ii) a merger, consolidation, share exchange, business
combination or any other similar transaction involving the
Company or the Merging Bank, other than a transaction
involving the Acquiror or any of its Subsidiaries;
(iii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of 50% or more of the assets of the
Company or the Merging Bank, in a single transaction or
series of transactions, other than a transaction involving
the Acquiror or any of its Subsidiaries; or
(iv) the Board of Directors of the Company does not recommend
approval of the Reorganization to their shareholders and
the transactions contemplated thereby unless Acquiror has
materially breached its representations, warranties or
covenants provided herein and has not attempted to cure
such breach to the reasonable satisfaction of the Company.
(c) The Company shall notify Acquiror promptly in writing of its
knowledge of the occurrence of any Company Purchase Event; provided,
however, that the giving of such notice by the Company shall not be a
condition to the right of Acquiror to the Fee.
(d) Notwithstanding Section 12.13 and any provision in this Agreement
to the contrary, payment by the Company to the Acquiror of the Fee and
expenses (as provided in Section 12.06) shall relieve the Company of any
claim for damages by the Acquiror or any other remedy.
ARTICLE ELEVEN
MODIFICATIONS, AMENDMENTS AND WAIVER
11.01 Modifications, Amendments and Waiver. At any time prior to the
Effective Time and before or after shareholder approval of this Agreement and
the Plan of Merger by the Company's shareholders, the Company and Acquiror may
(a) by written agreement executed by a duly authorized officer of each, extend
the time for the performance of any of the obligations or other acts of the
parties hereto, (b) by written notice executed by a duly authorized officer of
the party adversely affected waive compliance in whole or in part with any of
the covenants, agreements or conditions contained in this Agreement or the Plan
of Merger, or (c) by written agreement executed by a duly authorized officer of
each, make any other amendment or modification of this Agreement or the Plan of
Merger; provided, however, that, after Company shareholder approval of this
Agreement, no such extension, waiver, amendment or modification shall adversely
affect the amount of the consideration to be received in the Merger by the
shareholders of the Company. Any such extension, waiver, amendment or
modification shall be conclusively evidenced by the execution and delivery of
the same by the President or any Executive Vice President in the case of
Acquiror, or the President or any Vice President in the case of the Company,
attested to by the Secretary or Assistant Secretary of each party. The failure
of any party at any time or times to require performance of any provision hereof
shall in no manner affect such party's right at a later time to enforce the
same. No waiver by any party of any condition or of the breach of any term
contained in this Agreement or the Plan of Merger, whether by conduct or
otherwise, in any one or more instances shall be deemed to be or construed as a
further or continuing waiver of any such condition or a waiver of any other
condition or of the breach of any other term of this Agreement or the Plan of
Merger.
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ARTICLE TWELVE
MISCELLANEOUS
12.01 Closing. A closing (the "Closing") of the transactions provided for
herein shall take place on a date chosen by mutual agreement of the Company and
Acquiror, upon the satisfaction or waiver of all of the conditions to the Merger
set forth herein and in the Plan of Merger but in no event later than the last
business day of the month in which all conditions to the Merger set forth herein
and in the Plan of Merger have been satisfied or waived (the "Closing Date"), at
the offices of Michael Best & Friedrich in Milwaukee, Wisconsin. At the Closing,
the parties will exchange the certificates, opinions and other documents called
for herein. Subject to the terms and conditions hereof, consummation of the
Merger in the manner described herein shall be accomplished as soon as
practicable after the exchange of the documents at the Closing has been
completed.
12.02 Articles of Merger. Subject to the provisions of this Agreement, on
the Closing Date, as herein defined, the Articles of Merger shall be signed,
verified and affirmed as required by the WBCL and duly filed with the WDFI.
12.03 Further Acts. Each of the parties (a) shall perform such further acts
and execute such further documents as may be reasonably required to effect the
Merger (including, without limitation, the certification, execution,
acknowledgement and filing of the Plan of Merger) and to effect the Bank Merger,
and (b) shall use all reasonable efforts to satisfy or obtain the satisfaction
of the conditions set forth in Articles Seven, Eight and Nine hereof.
12.04 Notices. All documents, notices, requests, demands and other
communications that are required or permitted to be delivered or given under
this Agreement and the Plan of Merger shall be in writing and shall be deemed to
have been duly delivered or given upon the delivery or mailing thereof, as the
case may be, if delivered personally or sent by registered or certified mail,
return receipt requested, postage prepaid:
(a) if to the Company, to:
Allan T. Bach
President and Chief Executive Officer
Reliance Bancshares, Inc.
3140 South 27th Street
Milwaukee, Wisconsin 53215
with a copy to:
Christopher J. Zinski
Schiff Hardin & Waite
7300 Sears Tower
Chicago, Illinois 60606
(b) and if to Acquiror to:
Mr. Thomas R. Perz
President and Chief Executive Officer
St. Francis Capital Corporation
13400 Bishops Lane, Suite 350
Brookfield, Wisconsin 53005-6203
with a copy to:
W. Charles Jackson
Michael Best & Friedrich LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
or to such other person or address as a party hereto shall specify hereunder.
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12.05 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Effective Time, Acquiror shall be
entitled to revise the structure of the Merger and related transactions,
provided however, that the transactions comprising such revised structure shall
not delay the Closing Date or prevent the Merger from being deemed a
reorganization within the meaning of Section 368 of the Code and that Acquiror
shall bear the costs of effecting any such revision. This Agreement and any
related documents shall be appropriately amended in order to reflect any such
revised structure.
12.06 Expenses. Unless otherwise specifically referred herein, the Company
and Acquiror each shall pay all of their own fees and expenses incident to the
negotiation, preparation, execution and performance of this Agreement, the Bank
Merger Agreement and the Shareholders Meeting, including the fees and expenses
of their own counsel, accountants, investment bankers and other experts, whether
or not the transactions contemplated by this Agreement are consummated, except
that the parties agree to divide equally the costs of printing the Registration
Statement and the Proxy Statement/Prospectus and the cost of filing the
Registration Statement with the SEC and listing the additional shares of
Acquiror Common Stock with NASDAQ; provided, however, in the event this
Agreement is terminated by either party hereto pursuant to Sections 10.01(b)(i)
or (c)(i) because the condition in Section 8.06 shall not have been fulfilled,
or pursuant to Sections 10.01(b), (c), (g), (h) or (i), or in the event the
Company is obligated to pay the Acquiror the Fee pursuant to Section 10.03, the
terminating party shall be entitled to recover from the other party the actual
fees and expenses incurred by the terminating party incident hereto provided,
however, that in no event will either party be required to reimburse the other
for its fees and expenses in excess of $80,000.
12.07 Nonsurvival of Representations and Warranties. All representations,
warranties and agreements in this Agreement or in any instrument delivered by
the Company or the Acquiror pursuant to or in connection with this Agreement
shall expire at the Effective Time, except that the agreements of the parties
which by their terms are to be performed in whole or in part after the Effective
Time shall survive the Effective Time, shall be enforceable only by the parties
hereto, but shall not create any third party beneficiary rights.
12.08 Discussions With Other Banks, Bank Holding Companies, Savings
Associations and Bank-Related Businesses. Acquiror now or in the future may be
discussing possible acquisition of other financial institutions or their holding
companies or bank-related businesses but such discussions, if any, are
preliminary in nature and there can be no assurance at this time that agreements
for affiliation will be reached, or if reached, will be consummated. However, it
is agreed that additional financial institutions or their holding companies or
bank-related businesses may become affiliated with or acquired by Acquiror prior
to, concurrently with, or after the date hereof, on such terms as Acquiror and
any such other financial institutions or their holding company or bank-related
businesses may in their discretion agree. Acquiror agrees that no such
affiliation or acquisition shall result in the undue delay in the affiliation of
Acquiror and the Company.
12.09 Entire Agreement. This Agreement (including the Acquiror and Company
disclosure schedules and Exhibits attached hereto and as subsequently may be
amended pursuant to the terms hereof), the Plan of Merger and the Bank Merger
Agreement constitute the entire agreement and understanding of the parties with
respect to the transactions contemplated hereby and thereby, supersede any and
all prior agreements and understandings relating to the subject matter hereof
and thereof and may not be modified, amended or terminated except in writing
signed by each of the parties hereto.
12.10 Governing Law. This Agreement, the Plan of Merger and the Bank Merger
Agreement shall be governed by, and construed and enforced in accordance with,
the laws of the State of Wisconsin as such laws are applied to contracts entered
into to be performed entirely within Wisconsin.
12.11 Binding Effect and Parties in Interest. This Agreement and the Plan
of Merger may not be assigned by any party hereto without the written consent of
the other parties. This Agreement and the Plan of Merger shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, expressed or
implied, is intended to confer upon any other person any rights or remedies of
any nature whatsoever under or by reason of this Agreement and the Plan of
Merger otherwise than as specifically provided herein.
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12.12 Captions. The caption headings of the Articles, Sections and
subsections of this Agreement are for convenience of reference only and are not
intended to be, and should not be construed as, a part of this Agreement or the
Plan of Merger.
12.13 Relief Due to Breach.
(a) Notwithstanding anything in this Agreement to the contrary and except
as provided below, the Company and its Subsidiaries and Acquiror and its
subsidiaries agree that irreparable damage would occur in the event that the
provisions of this Agreement were not performed in accordance with its specific
terms or was otherwise breached. It is accordingly agreed that each of the
Acquiror and the Company shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically the terms and
provisions hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
(b) If this Agreement is terminated by reason of a willful breach by the
Company or any of its Subsidiaries, then the Company or any of its Subsidiaries
shall be liable to the Acquiror for all actual, consequential and incidental
damages suffered by the Acquiror arising from such willful breach.
(c) If this Agreement is terminated by reason of a willful breach by the
Acquiror or any of its subsidiaries, then Acquiror or its subsidiaries shall be
liable to the Company for all actual, consequential and incidental damages
suffered by the Company arising from such willful breach.
12.14 Invalidity. If any provision is invalid or unenforceable, the parties
hereto shall use their best efforts to modify or amend the provision to be valid
and enforceable and to properly reflect the intention of the parties in the
first instance.
12.15 Publicity. Except as otherwise required by law, so long as this
Agreement is in effect, neither Acquiror nor the Company shall, nor shall permit
any of its Subsidiaries to, issue or cause the publication of any press release
or other written statement for general circulation with respect to the
transactions contemplated by this Agreement, without the consent of the other
party, which consent shall not be unreasonably withheld.
12.16 Counterparts. Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
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<PAGE> 193
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement as of the date set forth hereafter.
ST. FRANCIS CAPITAL CORPORATION
Dated: June 30, 1998 By: /s/ Thomas R. Perz
----------------------------------------------
Thomas R. Perz, President and Chief Executive
Officer
Attest: /s/ William R. Hotz
----------------------------------------------
Executive Vice President, Secretary and
General Counsel
RELIANCE BANCSHARES, INC.
Dated: June 30, 1998 By: /s/ Allan T. Bach
----------------------------------------------
Allan T. Bach, President and Chief Executive
Officer
Attest: /s/ Carol A. Barnharst
----------------------------------------------
Vice President and Chief Financial Officer
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<PAGE> 194
EXHIBIT B
AGREEMENT AND PLAN OF MERGER
<PAGE> 195
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Plan of Merger") is made and
entered into as of September 22, 1998, between St. Francis Capital Corporation,
a Wisconsin corporation ("Acquiror"), and Reliance Bancshares, Inc., a
Wisconsin corporation (the "Company"). Acquiror and the Company are
hereinafter sometimes collectively referred to as the "Constituent
Corporations."
RECITALS
Acquiror is a corporation duly organized, validly existing and in good
standing under the laws of the State of Wisconsin. As of the date hereof, the
authorized capital stock of Acquiror consists of 12,000,000 shares of common
stock, $.01 par value per share ("Acquiror Common Stock"), of which 5,186,683
shares were issued and outstanding at June 30, 1998; and 6,000,000 shares of
Preferred Stock, $1.00 par value per share, of which none are outstanding as of
the date hereof.
The Company is a corporation duly organized and validly existing under the
laws of the State of Wisconsin. As of the date hereof, the authorized capital
stock of the Company consists of 6,000,000 shares of Company common stock,
$1.00 par value per share ("Company Common Stock"), of which 2,562,344 shares
were issued and 2,403,701 more outstanding at June 30, 1998; and 2,000,000
shares of Preferred Stock, $1.00 par value per share, of which none are
outstanding as of the date hereof.
Acquiror and the Company have entered into an Agreement and Plan of
Reorganization, dated June 30, 1998 (the "Agreement"), setting forth certain
representations, warranties, covenants and agreements in connection with the
transactions therein and herein contemplated and which contemplates the merger
of the Company with and into Acquiror (the "Merger") in accordance with this
Plan of Merger.
Immediately following the Merger or as soon as practicable thereafter,
Acquiror and the Company intend that Reliance Savings Bank, a wholly-owned
subsidiary of the Company (the "Merging Bank"), shall merge (the "Bank Merger"
and such transaction together with the Merger, the "Reorganization") with and
into St. Francis Bank, F.S.B., a wholly-owned subsidiary of Acquiror
("Acquiror-Bank").
The respective Boards of Directors of the Company and Acquiror deem the
Merger advisable and in the best interest of each such corporation and their
respective shareholders. The respective Boards of Directors of the Company and
Acquiror, by resolutions duly adopted, have approved the Agreement and Plan of
Merger and the transactions contemplated thereby and hereby, and the Agreement
and Plan of Merger have been submitted to and approved by the requisite vote of
the Company's shareholders.
Therefore, in consideration of the premises and the mutual covenants and
agreements contained herein, Acquiror and the Company hereby covenant and agree
as follows:
ARTICLE I
1.01 Merger of the Company into Acquiror. The Company shall be merged
with and into Acquiror at the Effective Time (as defined in Section 1.02) in
accordance with the applicable provisions of the Wisconsin Business Corporation
Law (the "WBCL") and on the terms and subject to the conditions contained in
the Agreement. Simultaneously with the effectiveness of the Merger, (a) the
separate existence of the Company shall cease, and (b) Acquiror, as the
surviving corporation (the "Surviving Corporation"), shall continue to exist
under and be governed by the WBCL.
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<PAGE> 196
1.02 Effective Time. The Merger shall be consummated upon the filing of
appropriate Articles of Merger with the Wisconsin Department of Financial
Institutions ("WDFI") in the form and manner required by the WBCL. The close
of business on the date on which such Articles of Merger shall have been filed
is herein referred to as the "Effective Time," unless some other date is agreed
upon by Acquiror and the Company. Unless otherwise mutually agreed upon in
writing by the parties, and subject to the terms and conditions hereof, the
Effective Time shall occur on the Closing Date (as defined in Section 12.01 of
the Agreement) or the next succeeding business day thereafter.
1.03 Effect of the Merger. Upon the Effective Time:
(a) The separate existence of the Company shall cease and be merged
with and into Acquiror, as the Surviving Corporation, which shall possess
all of the rights, privileges, immunities, powers and franchises of a
public as well as of a private nature, and shall be subject to all of the
restrictions, disabilities and duties, of each of the Company and
Acquiror; and all singular rights, privileges, immunities, powers and
franchises of each of the Company and Acquiror, and all property, real,
personal and mixed, and all debts due to either the Company or Acquiror
in whatever amount, including subscriptions to shares, and all other
things in action or belonging to each of the Company and Acquiror shall
be vested in the Surviving Corporation; and all property, rights,
privileges, immunities, powers and franchises, and all and every
interest, shall be thereafter as effectually the property of the
Surviving Corporation as they were of the Company and Acquiror and the
title to any real estate, or interest therein, vested by deed or
otherwise, in either of the Company and Acquiror shall not revert or be
in any way impaired by reason of the Merger.
(b) All rights of creditors and all liens upon any property of the
Company or Acquiror shall be preserved unimpaired and all debts,
liabilities and duties of the Company or Acquiror shall thenceforth
attach to the Surviving Corporation and may be enforced against the
Surviving Corporation to the same extent as if said debts, liabilities
and duties had been incurred or contracted by it, provided, however, that
all such liens shall attach only to those assets to which they were
attached prior to the Effective Time.
(c) Any action or proceeding, whether civil, criminal or
administrative, instituted, pending or threatened by or against either
the Company or Acquiror or relating to their assets, liabilities or
shares of common stock shall be prosecuted as if the Merger had not taken
place, and the Surviving Corporation may be substituted as a party in
such action or proceeding in place of the Company.
1.04 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further assignments
or assurances in law or any other acts are necessary or desirable to (a) vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation its
rights, title or interest in, to or under any of the rights, properties or
assets of the Company acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger, or (b) otherwise carry out
the purposes of the Agreement and this Plan of Merger, the Company and its
proper officers and directors shall be deemed to have granted to the Surviving
Corporation an irrevocable power of attorney to execute and deliver all such
proper deeds, assignments and assurances in law and to do all acts necessary or
proper to vest, perfect or confirm title to and possession of such rights,
properties or assets in the Surviving Corporation and otherwise to carry out
the purposes of the Agreement and this Plan of Merger; and the proper officers
and directors of the Surviving Corporation are fully authorized in the name of
the Company or otherwise to take any and all such action.
ARTICLE II
2.01 Name. The name of the Surviving Corporation shall be "St. Francis
Capital Corporation."
2.02 Articles of Incorporation. The Articles of Incorporation of
Acquiror, as in effect immediately prior to the Effective Time shall, from and
after the Effective Time, be and continue to be the Articles of Incorporation
of the Surviving Corporation until the same are duly amended in accordance with
applicable law.
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2.03 Bylaws. The Bylaws of Acquiror, as in effect immediately prior to
the Effective Time shall, from and after the Effective Time, be and continue to
be the Bylaws of the Surviving Corporation until the same are amended as
provided therein or provided in the Articles of Incorporation of the Surviving
Corporation.
2.04 Officers and Directors. On and after the Effective Time, the
officers and directors of the Surviving Corporation shall be the persons
serving in such positions of Acquiror immediately prior to the Effective Time.
ARTICLE III
3.01 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of Acquiror, the Company or the
holder of any of the following securities, the shares of Acquiror and the
Company shall be converted as follows:
(a) Each share of the common stock, $.01 par value per share
("Acquiror Common Stock"), of Acquiror issued and outstanding immediately
prior to the Effective Time shall remain outstanding and shall be
unchanged after the Merger; and
(b) Each share of the common stock, $1.00 par value per share
("Company Common Stock"), of the Company issued and outstanding
immediately prior to the Effective Time (other than any shares held by
the Company as treasury shares or owned by Acquiror or any of its
wholly-owned subsidiaries, but in each case other than Trust Account
Shares or DPC Shares (each as defined below), which shall be canceled,
and other than any Dissenting Shares (as defined in Section 3.05(a)
hereof)) shall cease to be outstanding and shall be converted into and
become, as the holder thereof shall elect or be deemed to have elected
pursuant to Section 3.02(f) but subject to all the provisions of Section
3.02(g), (h) and (i) hereof;
(1) The right to receive an amount in cash (the "Per Share
Cash Distribution") equal to:
(a) $10.00, if the Acquiror Average Stock Price as
calculated herein is between $32.41 and $40.00;
(b) an amount equal to .250 of the Acquiror Average
Stock Price, if the Acquiror Average Stock Price as
calculated herein is between $40.01 and $42.00;
(c) $10.50, if the Acquiror Average Stock Price as
calculated herein is between $42.01 and $45.74;
(d) an amount equal to .2295 of the Acquiror Average
Stock Price, if the Acquiror Average Stock Price as
calculated herein is $45.75 or more;
(e) If the Acquiror Average Stock Price is $32.40 or
less, then the Acquiror has the option of completing the
Merger using a Per Share Cash Distribution of $10.00 or
terminating the Agreement pursuant to Section 10.01(e) of the
Agreement; or
(2) the right to receive the following (the "Per Share Stock
Distribution"):
(a) if the Acquiror Average Stock Price as calculated
hereunder is between $32.41 and $40.00, a fractional share of
Acquiror Common Stock as determined by a fraction the
numerator of which is $10.00 and the denominator of which is
the Acquiror Average Stock Price;
(b) if the Acquiror Average Stock Price is between
$40.01 and $42.00, .250 shares of Acquiror Common Stock;
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(c) if the Acquiror Average Stock Price is between
$42.01 and $45.74 per share, a fractional share of Acquiror
Common Stock as determined by a fraction the numerator of
which is $10.50 and the denominator of which is the Acquiror
Average Stock Price;
(d) if the Acquiror Average Stock Price is $45.75 or
more, .2295 shares of Acquiror Common Stock;
(e) if the Acquiror Average Stock Price is $32.40 or
less, then the Acquiror has the option of completing the
Merger using a modification of the Per Share Stock
Distribution equal to a fractional share of Acquiror Common
Stock as determined by a fraction the numerator of which is
$10.00 and the denominator of which is the Acquiror Average
Stock Price or terminating the Agreement pursuant to the
provisions of Section 10.01(e) of the Agreement.
(c) If subsequent to the date of this Agreement but prior to the
Effective Time, Acquiror should split or combine its common stock, or pay
a dividend or other distribution in such common stock, then the Per Share
Stock Distribution shall be appropriately adjusted to reflect such split,
combination, dividend or distribution.
(d) "Acquiror Average Stock Price" means the average (rounded to the
nearest whole cent) of the last sale price of the day of one share of
Acquiror Common Stock as reported in The Wall Street Journal for the ten
consecutive trading days ending on the fifth business day preceding the
Effective Time, or in the absence of such report for any trading day in
The Wall Street Journal, the last sale price reported for such trading
day by NASDAQ, the automated quotation system of the National Association
of Securities Dealers, Inc., or in the absence thereof the mean of the
reported closing bid and asked quotations on such trading day as reported
in The Wall Street Journal or in the absence thereof, by NASDAQ; or in
the absence thereof from such other source upon which Acquiror and the
Company shall mutually agree.
(e) At the Effective Time, all shares of Company Common Stock that
are owned by the Company as treasury stock and all shares of Company
Common Stock that are owned directly or indirectly by Acquiror or the
Company or any of their respective wholly-owned subsidiaries (other than
shares of Company Common Stock held directly or indirectly in trust
accounts, managed accounts and the like or otherwise held in a fiduciary
capacity that are beneficially owned by third parties (any such shares,
and shares of Acquiror Common Stock which are similarly held, whether
held directly or indirectly by Acquiror or the Company or any of their
respective wholly-owned subsidiaries, as the case may be, being referred
to herein as "Trust Account Shares"), and other than any shares of
Company Common Stock held by Acquiror or the Company or any of their
respective wholly-owned subsidiaries in respect of a debt previously
contracted (any such shares of Company Common Stock, and shares of
Acquiror Common Stock which are similarly held, whether held directly or
indirectly by Acquiror or the Company or any of their respective
wholly-owned subsidiaries, being referred to herein as "DPC Shares"))
shall be cancelled and shall cease to exist and no stock of Acquiror or
other consideration shall be delivered in exchange therefor. All shares
of Acquiror Common Stock that are owned by the Company or any of its
wholly-owned subsidiaries (other than Trust Account Shares and DPC
Shares) shall become treasury stock of Acquiror.
(f) There shall be included with each share of Acquiror Common Stock
issued in the Merger an equal number of any share purchase rights (the
"Rights") issued pursuant to the Rights Agreement (as defined in Section
2.03 of the Agreement). All references in this Merger Agreement to
Acquiror Common Stock to be received pursuant to the Merger should be
deemed to include the Rights.
3.02 Election Procedures.
(a) On a date at least 30 days prior to the anticipated Closing Date
or on such other date as the Company and Acquiror may mutually agree
("Mailing Date"), the Exchange Agent (as defined below) shall mail to
each holder of record of the Company Common Stock, as of three business
days prior to the Mailing Date, an election form, a letter of transmittal
(which shall specify that delivery shall be effected,
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and risk of loss and title to certificates previously representing the
Company Common Stock shall pass only upon delivery of such certificate to
the Exchange Agent) and other appropriate transmittal materials
("Election Form"). "Exchange Agent" means Firstar Trust Co. or such
other bank or trust company selected by Acquiror, and acceptable to the
Company, to effect the exchange of certificates. The Mailing Date may be
the date of mailing of the Proxy Statement/Prospectus, as defined in
Section 6.01 of the Agreement.
(b) An Election Form shall specify the method by which the amount of
the Per Share Cash Distribution will be calculated and the method by
which the Per Share Stock Distribution will be calculated, and shall
permit holders (or in the case of nominee record holders, the beneficial
owner through proper instructions and documentation), except for the
Reliance Savings Bank Employee Stock Ownership Plan (the "ESOP") which
shall receive the Per Share Cash Distribution in exchange for its shares
of Company Common Stock, to elect to receive (A) the Per Share Cash
Distribution with respect to a specified number of shares of Company
Common Stock (the "Cash Election Shares"), (B) the Per Share Stock
Distribution with respect to a specified number of shares of Company
Common Stock (the "Stock Election Shares"), or (C) indicate that such
holder makes no election with respect to a specified number of shares of
Company Common Stock (the "No Election Shares"). Each holder of shares
of Company Common Stock may elect to receive either the Per Share Cash
Distribution or the Per Share Stock Distribution for each share of
Company Common Stock held. However, each individual beneficial owner of
shares of Company Common Stock may only choose a combination of the Per
Share Cash Distribution and the Per Share Stock Distribution relating to
all of the shares of Company Common Stock beneficially owned by him, her
or it, if he, she or it chooses the Per Share Stock Distribution for a
sufficient number of shares to result in the issuance of at least 50
shares of Acquiror Common Stock. If the Exchange Agent determines that
the above share limit has not been complied with, the shares of Company
Common Stock to which the improper election has been made shall be deemed
No Election Shares.
(c) Any shares of Company Common Stock with respect to which the
holder thereof shall not, as of the Election Deadline (as defined below),
have made such an election by submission to the Exchange Agent of an
effective, properly completed Election Form shall be deemed to be No
Election Shares. "Election Deadline" means 4:00 p.m., Milwaukee time, on
a day 30-45 days following the Mailing Date, but which also shall be at
least one business day prior to the date of the Shareholders Meeting (as
defined in Section 5.01 of the Agreement). Acquiror shall make an
Election Form available to all persons who become holders of Company
Common Stock between the date three business days prior to the Mailing
Date and the close of business on the day prior to the Election Deadline,
and the Company will provide to the Exchange Agent in a timely manner all
information necessary to comply with this provision.
(d) Any Dissenting Shares shall be deemed Cash Election Shares, and
with respect to such shares, the holders thereof shall in no event be
deemed to hold Stock Designee Shares (defined below).
(e) Any election as between the Per Share Cash Distribution or the
Per Share Stock Distribution shall have been properly made only if the
Exchange Agent shall have received a properly completed Election Form by
the Election Deadline. An Election Form will be properly completed only
if accompanied by certificates representing all shares of the Company
Common Stock covered thereby. An Election Form may be revoked or changed
by the person submitting such Election Form to the Exchange Agent by
written notice to the Exchange Agent, provided such notice is received by
the Exchange Agent at or prior to the Election Deadline. All Election
Forms shall be deemed revoked if the Exchange Agent is notified in
writing by Acquiror or the Company that this Agreement has been
terminated. The certificate or certificates representing the Company
Common Stock relating to any revoked Election Form shall be promptly
returned without charge to the person submitting such Election Form to
the Exchange Agent. The Exchange Agent shall have reasonable discretion
to determine when any election, modification or revocation is received
and whether any such election, modification or revocation has been
properly made.
(f) The aggregate amount of consideration, including amounts payable
in respect of Dissenting Shares and amounts paid in lieu of fractional
shares ("Consideration"), to be received by the Company shareholders in
exchange for their Company Common Stock shall consist of cash and
Acquiror Common Stock, to be determined as follows:
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(1) the aggregate amount of Consideration that shall be payable to
Company shareholders, including the ESOP, in cash (the "Cash
Amount") shall be no greater than 40% of the aggregate value of all
of the Consideration to be issued or paid in connection with the
Merger;
(2) the total number of shares of Acquiror Common Stock to be
issued in connection with the Merger (the "Stock Amount") shall be
that number of whole shares of Acquiror Common Stock that has an
aggregate value, valuing such stock at the Acquiror Average Stock
Price for this purpose, at least equal to 60.0%, of the aggregate
value of all of the Consideration to be issued or paid in
connection with the Merger;
(3) the calculation of the aggregate amount of Consideration, the
Cash Amount and the Stock Amount shall be made by Acquiror. The
relative percentages that the Cash Amount (i.e. 0% to 40.0%) and
the Stock Amount (i.e. 60.0% to 100%) bear to the aggregate amount
of Consideration to be issued or paid in connection with the Merger
shall be determined as follows:
(i) The aggregate value of the Cash Amount shall be 40.0% or
less of the aggregate amount of Consideration and shall be
determined by multiplying the Per Share Cash Distribution
by the number of Cash Election Shares and No Election
Shares converted to a right to receive the Per Share Cash
Distribution;
(ii) The aggregate value of the Stock Election Shares, valuing
each such Stock Election Share as the product of the
Acquiror Average Stock Price multiplied by the Per Share
Stock Distribution, shall be 60.0% or more of the aggregate
value of all of the Consideration to be issued or paid in
connection with the Merger, with the Stock Amount being
equal to the number of whole shares of Acquiror Common
Stock to be issued or paid in connection with the Merger;
and
(g) Within five business days after the Effective Time, the Exchange
Agent shall effectuate the allocation among holders of the Company Common
Stock of the right to receive the Cash Election Shares and/or the Stock
Election Shares in the Merger in accordance with the Election Form as
follows:
(i) if the number of shares of Acquiror Common Stock that would
be issued upon conversion in the Merger of the Stock
Election Shares is less than the Stock Amount, then
(A) all shares of Company Common Stock electing
Stock Election Shares will be converted into the
right to receive the Per Share Stock Distribution,
(B) subject to Section 3.02(d), the Exchange
Agent will select first from among the No
Election Shares, by random selection, and then
(if necessary) from among the Cash Election
Shares, pro rata in accordance with the number of
shares of Company Common Stock beneficially owned
by each Company shareholder and designated as
Cash Election Shares ("Stock Designee Shares"),
in each case subject to the requirement for
issuance pursuant to Section 3.06(b) of at least
50 shares of Acquiror Common Stock to each
recipient thereof, such that the number of Stock
Designee Shares will, when added to the number of
Stock Election Shares, equal the minimum Stock
Amount percentage, and the appropriate number of
Stock Designee Shares will be converted into the
right to receive the Per Share Stock Distribution
(provided, however, that no particular holder of
Cash Election Shares will be required to
designate all or a portion of his, her or its
Cash Election Shares as Stock Designee Shares if
such designation would threaten satisfaction of
any of the conditions to the consummation of the
Merger set forth in Article Seven of the
Agreement), and
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(C) Cash Election Shares and the No Election
Shares not designated Stock Designee Shares will
be converted into the right to receive the Per
Share Cash Distribution; or
(ii) if the number of shares of Acquiror Common Stock that would
be issued upon conversion of the Stock Election Shares is
equal to or greater than the Stock Amount, then all shares
of Company Common Stock electing Stock Election Shares will
be converted into the right to receive the Per Share Stock
Distribution and all Cash Election Shares and No Election
Shares will be converted into the right to receive the Per
Share Cash Distribution.
(h) The random selection process to be used by the Exchange Agent to
select among the No Election Shares shall be as the Exchange Agent deems
equitable, or as may be mutually determined by the Company and Acquiror
and as shall be further described in the Election Form. The pro rata
process to be used by the Exchange Agent to designate Stock Designee
Shares in order to reach the Stock Amount shall be based on the
proportion that the number of Cash Election Shares beneficially owned by
each Company shareholder, bears to the total number of Cash Election
Shares (excluding Dissenting Shares).
(i) The extent to which elections by holders of Company Common Stock
will be accommodated will depend upon the respective number of shares of
Company Common Stock electing cash or stock (or making no election).
Accordingly, a holder of shares of Company Common Stock who elects cash,
or a combination of cash and shares of Acquiror Common Stock, may instead
receive just shares of Acquiror Common Stock, or a combination of cash
and shares of Acquiror Common Stock, or a different combination of cash
and shares of Acquiror Common Stock. In addition, if so directed by the
Acquiror, the Exchange Agent may alter the selection and pro rata process
in order to ensure that all of the conditions to consummation of the
Merger set forth in Article Seven of the Agreement may be complied with.
3.03 Exchange Procedures.
(a) At the Effective Time, there shall be issued the Stock Amount
and the amount of cash payable in the Merger ("Exchange Fund"). Upon
completion of the allocation procedures described above, Acquiror shall,
if necessary, issue to the Exchange Agent any additional shares of
Acquiror Common Stock in exchange for cash or issue to the Exchange Agent
any additional cash in exchange for Acquiror Common Stock.
(b) After the Effective Time, each previous holder of a certificate
that, prior to the Effective Time, represented the Company Common Stock
("Certificate") that prior thereto surrendered or thereafter surrenders
such a Certificate to the Exchange Agent will, upon acceptance thereof by
the Exchange Agent, be entitled to a certificate or certificates
representing the number of full shares of Acquiror Common Stock and/or
the amount of cash into which the Certificate surrendered shall have been
converted pursuant to this Agreement and, if such holder's Company Common
Stock has been converted into Acquiror Common Stock, any other
distribution theretofore declared and not yet paid with respect to the
Acquiror Common Stock issuable in the Merger, in each case without
interest. The Exchange Agent shall not be entitled to vote or exercise
any rights of ownership with respect to the shares of Acquiror Common
Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed
with respect to such shares for the account of the persons entitled
thereto. No dividends or other distributions payable after the Effective
Time with respect to Acquiror Common Stock shall be paid to the holder of
any unsurrendered Certificate until the holder thereof shall duly
surrender such Certificate in accordance with this Article Three. After
the surrender of a Certificate in accordance with this Article Three, the
record holder thereof shall be entitled to receive any dividends or other
distributions, with any interest thereon, which became payable with
respect to the shares of Acquiror Common Stock represented by such
Certificate after the Effective Time but on or before the time of such
surrender. No holder of an unsurrendered Certificate shall be entitled,
until the surrender of such Certificate, to vote the shares of Acquiror
Common Stock into which his or her Company Common Stock shall have been
converted.
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(c) The Exchange Agent shall accept such certificates upon
compliance with such reasonable terms and conditions as the Exchange
Agent may impose to effect an orderly exchange thereof in accordance with
customary exchange practices. Each outstanding certificate that, prior
to the Effective Time, represented Company Common Stock shall, except as
otherwise provided in this Agreement and until duly surrendered to the
Exchange Agent, be deemed to evidence ownership of the consideration into
which such Company Common Stock shall have been converted. After the
Effective Time, there shall be no further transfer on the records of the
Company of certificates representing Company Common Stock, and if such
certificates are presented to the Company for transfer, they shall be
canceled against delivery of the consideration provided therefor in this
Agreement. No dividends declared will be remitted to any person entitled
to receive Acquiror Common Stock under this Agreement until such person
surrenders the certificate or certificates representing Company Common
Stock, at which time such dividends shall be remitted to such person,
without interest and less any taxes that may have been imposed thereon.
Neither the Exchange Agent, Acquiror nor the Company shall be liable to
any holder of Company Common Stock for any consideration paid to a public
official pursuant to applicable abandoned property, escheat or similar
laws. Acquiror and the Exchange Agent shall be entitled to rely upon the
stock transfer books of the Company to establish the identity of those
persons entitled to receive consideration specified in this Agreement,
which books shall be conclusive with respect thereto. In the event of a
dispute with respect to ownership of any shares of Company Common Stock,
Acquiror and the Exchange Agent shall be entitled to deposit any
consideration represented thereby in escrow with an independent third
party and thereafter be relieved with respect to any claims thereto.
(d) If any certificate representing shares of Acquiror Common Stock
is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition
of the issuance thereof that the Certificate so surrendered shall be
properly endorsed (or accompanied by an appropriate instrument of
transfer) and otherwise in proper form for transfer, and that the person
requesting such exchange shall pay to the Exchange Agent in advance any
transfer or other taxes required by reason of the issuance of a
certificate representing shares of Acquiror Common Stock in any name
other than that of the registered holder of the Certificate surrendered,
or required for any other reason, or shall establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not payable.
(e) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of the Company for six months after the Effective Time,
including dividends received pursuant to section 3.03(b) and any interest
paid on the Exchange Fund, shall be remitted back to Acquiror. Any
shareholders of the Company who have not theretofore complied with this
Article Three shall thereafter look only to Acquiror for payment for
their shares of Company Common Stock. Notwithstanding the foregoing,
neither the Acquiror, the Company, the Exchange Agent, or any other
person shall be liable to any former holder of shares of Company Common
Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if
required by Acquiror, the posting by such person of a bond in such amount
as Acquiror may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Certificate the
shares of Acquiror Common Stock or cash and cash in lieu of fractional
shares and unpaid dividends and distributions on Acquiror Common Stock
deliverable in respect thereof pursuant to this Agreement.
3.04 No Fractional Shares. Notwithstanding any other provision of this
Agreement, neither certificates nor scrip for fractional shares of Acquiror
Common Stock shall be issued in the Merger. Each holder of shares of Company
Common Stock who otherwise would have been entitled to a fraction of a share of
Acquiror Common Stock shall receive in lieu thereof cash (without interest) in
an amount determined by multiplying the fractional share interest to which such
holder would otherwise be entitled by the Acquiror Average Stock Price. No
such holder shall be entitled to dividends, voting rights or any other rights
in respect of any fractional share.
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3.05 Dissenting Shares.
(a) "Dissenting Shares" means any shares held by any holder who
becomes entitled to payment of the fair value of such shares under the
WBCL. Any holder of Dissenting Shares shall be entitled to payment for
such shares only to the extent permitted by and in accordance with the
provisions of the WBCL; provided, however, that if, in accordance with
the WBCL, any holder of Dissenting Shares shall forfeit such right to
payment of the fair value of such shares, such shares shall thereupon be
deemed to have been converted into and to have become exchangeable for,
as of the Effective Time, the right to receive cash and/or Acquiror
Common Stock in accordance with the applicable provisions of this
Agreement. If such holder of Dissenting Shares shall effectively
withdraw or lose (through failure to perfect or otherwise) his or her
right to such payment after the Effective Time, such shares of Company
Common Stock of such holder shall be converted on a share by share basis
into the right to receive the Per Share Cash Distribution and/or the Per
Share Stock Distribution as the Acquiror shall determine.
(b) The Company shall give Acquiror prompt notice of any written
objections to the Merger and any written demands for the payment of the
fair value of any shares, withdrawals of such demands, and any other
instruments received by the Company pursuant to the WBCL, and the
opportunity to direct all negotiations and proceedings with respect to
such demands under the WBCL. The Company shall not voluntarily make any
payment with respect to any demands for payment of fair value and shall
not, except with the prior written consent of Acquiror, settle or offer
to settle any such demands.
3.06 Withholding Rights. Acquiror shall be entitled to deduct and withhold
from any amounts otherwise payable pursuant to this Agreement to any holder of
shares of Company Common Stock such amounts as Acquiror is required under the
Code or any provision of state, local or foreign tax law to deduct and withhold
with respect to the making of such payment. Any amounts so withheld shall be
treated for all purposes of this Agreement as having been paid to the holder of
Company Common Stock in respect of which such deduction and withholding was
made by Acquiror.
3.07 Options.
(a) The Acquiror shall, as of the Closing Date, convert the outstanding
and unexercised options granted by the Company for the purchase of shares of
Company Common Stock, whether or not the option is then exercisable under the
terms of the Reliance Bancshares, Inc. 1997 Stock Option Plan (the ?Option
Plan?), into cash in an amount equal to the excess of the Per Share Cash
Distribution over the exercise price of such option, multiplied by the number
of shares subject to such option, and such cash, net of any amount that must be
withheld for federal, state or local tax purposes, shall be paid to the holder
of such option within five (5) business days of the Closing Date, whereupon
such option shall terminate; provided that any holder of outstanding and
unexercised options granted by the Company to purchase Company Common Stock
who, by reason of their employment or other status with the Acquiror or
Acquiror-Bank after the Closing Date, would be eligible to participate in the
Acquiror's stock option plan may, on or prior to the Election Deadline, notify
Acquiror as to whether such holder elects to have his or her options converted
into options to purchase shares of Acquiror Common Stock, rather than into
cash, at an exercise price as determined below:
(i) The number of shares of Acquiror Common Stock to be subject to
the converted option shall be equal to the number of shares of Company
Common Stock subject to the original option multiplied by a fraction
determined by application of Section 3.01(b)(2) provided that any
fractional shares of Acquiror Common Stock resulting from such
multiplication shall be rounded down to the nearest whole share; and
(ii) The exercise price per share of Acquiror Common Stock under the
converted option shall be equal to the exercise price per share of
Company Common Stock under the original option divided by a fraction
determined by application of Section 3.01(b)(2), provided that such
exercise price shall be rounded up to the nearest cent.
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(iii) The Acquiror agrees that a director of Reliance who becomes a
member of the Advisory Board, as defined in Section 4.08 of the
Agreement, shall be deemed an "Outside Director" under the terms of the
Acquiror's option plan for purposes of being eligible to have any options
to purchase shares of Company Common Stock which are converted, under (i)
and (ii) above, into options for the purchase of Acquiror's Common Stock
administered under the terms of Acquiror's plan.
(b) The adjustment provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be and
is intended to be effected in a manner which is consistent with Section 424(a)
of the Code and is not intended as a modification of such option (as defined in
section 424(h)(3) of the Code). The duration and other terms of the converted
option shall be the same as the original option, except that all references to
the Company shall be deemed to be references to Acquiror.
(c) If Acquiror merges the Option Plan with its own option plan, each
converted option shall be subject to the terms, benefits, rights and features
of the Acquiror's option plan and the related agreement evidencing the grant of
such option thereunder from and after the Closing Date.
(d) All options which are issued and outstanding as of the date hereof
under the terms of the Option Plan will become fully vested and exercisable as
of the Closing Date.
(e) The Surviving Corporation may, at its option, merge the Option Plan
with its own plan or continue the Option Plan after the Effective Time provided
that such merger or continuance shall not reduce the vesting credit earned by
holders of converted options under the Option Plan prior to the Closing Date.
3.08 Bank Merger. The Company and the Acquiror intend to take all action
necessary and appropriate to cause, including causing the entering into of a
merger agreement (the "Bank Merger Agreement"), pursuant to which the
Acquiror-Bank and the Merging Bank shall merge immediately following the Merger
or as soon as practicable thereafter with the Acquiror-Bank being the surviving
bank ("Surviving Bank") thereof pursuant to the provisions of applicable law.
At the effective time of the Bank Merger, the charter and by-laws of the
Surviving Bank shall be the articles of association and by-laws of the
Acquiror-Bank in effect immediately prior to the effective time of the Bank
Merger. At the effective time of the Bank Merger, the directors and officers
of the Surviving Bank shall be the directors and officers of the Acquiror-Bank
immediately prior to the effective time of the Bank Merger, except that,
provided the Surviving Bank can obtain all necessary regulatory approvals, one
outside director of the Merging Bank, as selected by the Board of Directors of
the Merging Bank, shall become a director of the Surviving Bank as soon as
practicable after the effective date of the Bank Merger.
ARTICLE IV
4.01 Notices. All documents, notices, requests, demands and other
communications that are required or permitted to be delivered or given under
this Plan of Merger shall be in writing and shall be deemed to have been duly
delivered or given upon the delivery or mailing thereof, as the case may be, if
delivered personally or sent by registered or certified mail, return receipt
requested, postage prepaid:
(a) if to the Company, to:
Allan T. Bach
President and Chief Executive Officer
Reliance Bancshares, Inc.
3140 South 27th Street
Milwaukee, Wisconsin 53515
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with a copy to:
Christopher J. Zinski
Schiff Hardin & Waite
7300 Sears Tower
Chicago, Illinois 60606
(b) and if to Acquiror to:
Thomas R. Perz
President and Chief Executive Officer
St. Francis Capital Corporation
13400 Bishops Lane, Suite 350
Brookfield, Wisconsin 53005-6203
with a copy to:
W. Charles Jackson
Michael Best & Friedrich
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
or to such other person or address as a party hereto shall specify hereunder.
4.02 Consummation of the Merger. Consummation of the Merger is
conditioned upon the fulfillment or waiver of the conditions precedent set
forth in Articles Seven, Eight and Nine of the Agreement.
4.03 Counterparts. This Plan of Merger may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one agreement.
4.04 Governing Law. This Plan of Merger shall be governed in all
respects, including, but not limited to, validity, interpretation, effect and
performance, by the laws of the State of Wisconsin.
4.05 Amendment. Subject to applicable law, this Plan of Merger may be
amended, modified or supplemented only by written agreement of Acquiror and the
Company, by their respective officers thereunto duly authorized, at any time
prior to the Effective Time.
4.06 Waiver. Any of the terms or conditions of this Plan of Merger may be
waived at any time by whichever of the Constituent Corporations is, or the
shareholders of which are, entitled to the benefit thereof by action taken by
the Board of Directors of such Constituent Corporation.
4.07 Termination. This Plan of Merger shall terminate simultaneously upon
the termination of the Agreement in accordance with Article Ten thereof. There
shall be no liability on the part of any of the parties hereto (or any of their
respective directors or officers) except as otherwise provided in the
Agreement.
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IN WITNESS WHEREOF, each of the Constituent Corporations have caused this
Plan of Merger to be executed on their behalf by their officers hereunto duly
authorized all as of the date first above written.
ATTEST: ST. FRANCIS CAPITAL CORPORATION
By:/s/ William R. Hotz By:/s/ Thomas R. Perz
- -------------------------------------- --------------------------------------
Willaim R. Hotz Thomas R. Perz
Executive Vice President, Secretary President and Chief Executive
and General Counsel Officer
ATTEST: RELIANCE BANCSHARES, INC.
By:/s/ Carol A. Barnharst By:/s/ Allan T. Bach
- -------------------------------------- --------------------------------------
Carol A. Barnharst Allan T. Bach
Vice President and Chief Financial President and Chief Executive
Officer Officer
B-12
<PAGE> 207
EXHIBIT C
OPINION OF ROBERT W. BAIRD & CO. INCORPORATED
<PAGE> 208
December 8, 1998
Board of Directors
Reliance Bancshares, Inc.
3140 S. 27th Street
Milwaukee, WI 53125
Ladies and Gentlemen:
Reliance Bancshares, Inc. ("Reliance") has entered into an Agreement
and Plan of Reorganization (the "Agreement") with St. Francis Capital
Corporation ("St. Francis"). Pursuant to the Agreement, at the Effective Time
(as defined in the Agreement), Reliance shall be merged with and into St.
Francis and, immediately thereafter, Reliance Savings Bank, a wholly owned
subsidiary of Reliance, will be merged with and into St. Francis Bank, F.S.B., a
wholly owned subsidiary of St. Francis (collectively, the "Merger") and each
share of the common stock, $1.00 par value per share ("Company Common Stock") of
Reliance (other than Dissenting Shares (as defined in the Agreement) and shares
held by Reliance, St. Francis or any of their respective subsidiaries) will be
converted into the right to receive the Merger Consideration (as hereinafter
defined).
The "Merger Consideration" means an amount in cash equal to the Per
Share Cash Distribution (as hereinafter defined) or a fractional share of St.
Francis common stock, par value $0.01 per share ("Acquiror Common Stock") equal
to the Per Share Stock Distribution (as hereinafter defined), as the holder of
Company Common Stock may elect or deem to have elected pursuant to the Agreement
(and subject to the limitations on such elections set forth in the Agreement).
The "Per Share Cash Distribution" means (i) $10.00, if the Acquiror Average
Stock Price (as defined in Section 1.05(d) of the Agreement) is $40.00 or less,
(ii) an amount equal to 0.250 of the Acquiror Average Stock Price, if the
Acquiror Average Stock Price is between $40.01 and $42.00, (iii) $10.50, if the
Acquiror Average Stock Price is between $42.01 and $45.74, and (iv) an amount
equal to 0.2295 of the Acquiror Average Stock Price, if the Acquiror Average
Stock Price is $45.75 or more. The "Per Share Stock Distribution" means a
fractional share of Acquiror Common Stock equal to (i) $10.00, divided by the
Acquiror Average Stock Price, if the Acquiror Average Stock Price is $40.00 or
less, (ii) 0.250, if the Acquiror Average Stock Price is between $40.01 and
$42.00, (iii) $10.50, divided by the Acquiror Average Stock Price, if the
Acquiror Average Stock Price is between $42.01 and $45.74 and (iv) 0.2295 of the
Acquiror Average Stock Price, if the Acquiror Average Stock Price is $45.75 or
more.
<PAGE> 209
Reliance Bancshares, Inc.
December 8, 1998
Page 2
You have requested our opinion as to the fairness, from a financial
point of view, of the Merger Consideration to the holders of Company Common
Stock (other than St. Francis and its affiliated companies).
Robert W. Baird & Co. Incorporated ("Baird"), as part of its investment
banking business, is engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
In conducting our investigation and analysis and in arriving at our
opinion herein, we have reviewed such information and taken into account such
financial and economic factors as we have deemed relevant under the
circumstances. In that connection, we have, among other things: (i) reviewed
certain internal information, primarily financial in nature, including
projections, concerning the business and operations of Reliance and St. Francis
furnished to us for purposes of our analysis, as well as publicly available
information including but not limited to Reliance's and St. Francis' recent
filings with the Securities and Exchange Commission and equity analyst research
reports prepared by various investment banking firms including Baird; (ii)
reviewed the Agreement; (iii) compared the historical market prices and trading
activity of the Company Common Stock and Acquiror Common Stock with those of
certain other publicly traded companies we deemed relevant; (iv) compared the
financial position and operating results of Reliance and St. Francis with those
of other publicly traded companies we deemed relevant; (v) compared the proposed
financial terms of the Merger with the financial terms of certain other business
combinations involving thrift institutions we deemed relevant; and (vi) reviewed
certain potential pro forma effects of the Merger on St. Francis. We have held
discussions with members of Reliance's and St. Francis' respective senior
managements concerning Reliance's and St. Francis' historical and current
financial condition and operating results, as well as the future prospects of
Reliance and St. Francis, respectively. We have not been requested to, and did
not, solicit third party indications of interest in acquiring all or any part of
Reliance. We have also considered such other information, financial studies,
analysis and investigations and financial, economic and market criteria which we
deemed relevant for the preparation of this opinion.
In arriving at our opinion, we have assumed and relied upon the
accuracy and completeness of all of the financial and other information that was
publicly available or provided to us by or on behalf of Reliance and St.
Francis, and have not been engaged to independently verify any such information.
We have assumed, with your consent, (i) that all material assets and liabilities
(contingent or otherwise, known or unknown) of Reliance and St. Francis are as
set forth in their respective financial statements; (ii) the Merger will be
accounted for under the purchase method of accounting; (iii) the Merger will be
consummated in accordance with the terms of the Agreement without any amendment
thereto and without waiver of any condition; (iv) the prospective cost savings
and revenue enhancements contemplated by managements of both companies following
the Merger will be realized; and (v) all shareholder and required regulatory
approvals will be obtained in a timely manner. We have also assumed that the
financial forecasts examined by us were reasonably prepared on bases reflecting
the best
<PAGE> 210
Reliance Bancshares, Inc.
December 8, 1998
Page 3
available estimates and good faith judgments of Reliance's and St. Francis'
respective senior managements as to future performance of Reliance and St.
Francis, respectively. In conducting our review, we have not undertaken nor
obtained an independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of Reliance and St. Francis nor have we
made a physical inspection of the properties or facilities of Reliance or St.
Francis. Our opinion necessarily is based upon economic, monetary and market
conditions as they exist and can be evaluated on the date hereof, and does not
predict or take into account any changes which may occur, or information which
may become available, after the date hereof. Furthermore, we express no opinion
as to the price or trading range at which Reliance's or St. Francis' securities
(including without limitations the Company Common Stock and Acquiror Common
Stock) will trade following the date hereof.
Our opinion has been prepared at the request and for the information of
the Board of Directors of Reliance, and shall not be used for any other purpose
or disclosed to any other party without the prior written consent of Baird;
provided, however, that this letter may be reproduced in full in the Proxy
Statement-Prospectus to be provided to Reliance's shareholders in connection
with the Merger. This opinion does not address the relative merits of the Merger
and any other potential transactions or business strategies considered by
Reliance's Board of Directors, and does not constitute a recommendation to any
shareholder of Reliance as to how any such shareholder should vote with respect
to the Merger. Baird will receive a fee for rendering this opinion. In the past,
we have provided investment banking and financial advisory services to Reliance
and St. Francis, including in connection with both Reliance's and St. Francis'
conversions from mutual to stock companies, for which we received our customary
compensation.
In the ordinary course of our business, we may from time to time trade
the securities of Reliance and St. Francis for our own account or the accounts
of our customers and, accordingly, may at any time hold long or short positions
in such securities.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Merger Consideration is fair, from a financial point of
view, to the holders of Company Common Stock (other than St.
Francis and its affiliated companies).
Very truly yours,
ROBERT W. BAIRD & CO. INCORPORATED
