<PAGE> 1
As filed with the Securities And Exchange Commission on December 7, 1998.
Registration No. 333-64621
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------
ST. FRANCIS CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WISCONSIN 6711 39-1747461
- --------------------------------- -----------------------------------------------------------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Code Number) Identification no.)
</TABLE>
13400 BISHOPS LANE, SUITE 350
BROOKFIELD, WISCONSIN 53005-6203
(414) 486-8700
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
THOMAS R. PERZ, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
ST. FRANCIS CAPITAL CORPORATION
13400 BISHOPS LANE, SUITE 350
BROOKFIELD, WISCONSIN 53005-6203
(414) 486-8700
(Name, Address, Including Zip Code, and Telephone Number, including Area
Code, of Agent for Service)
Copies To:
W. CHARLES JACKSON, ESQ. CHRISTOPHER J. ZINSKI, ESQ.
MICHAEL BEST & FRIEDRICH LLP SCHIFF HARDIN & WAITE
100 EAST WISCONSIN AVENUE 6600 SEARS TOWER
SUITE 3300 CHICAGO, ILLINOIS 60606-6473
MILWAUKEE, WISCONSIN 53202
-------------------------
Approximate date of commencement of proposed sale of securities to the public:
At the effective time of the merger ("Merger") of Reliance Bancshares, Inc.
("Reliance") with and into St. Francis Capital Corporation ("St. Francis") as
described in the attached Proxy Statement/Prospectus.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHOULD BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
[RELIANCE BANCSHARES, INC. LETTERHEAD]
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
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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> 4
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> 5
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 6-8, 14-16, AND 38-40 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 30 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> 6
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.
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TABLE OF CONTENTS
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PAGE
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FORWARD-LOOKING STATEMENTS ................................................. 2
QUESTIONS AND ANSWERS ABOUT THE MERGER ..................................... 5
SUMMARY .................................................................... 11
The Parties to the Merger .................................................. 11
The Reliance Special Meeting ............................................... 12
The Merger ................................................................. 14
Comparative per Share Information .......................................... 23
Comparative Market and Stock Price Information ............................. 24
Selected Historical Financial Information .................................. 26
INTRODUCTION ............................................................... 29
RISK FACTORS ............................................................... 30
THE SPECIAL MEETING ........................................................ 34
PROPOSAL TO APPROVE THE MERGER
(Proposal No. 1) ........................................................... 37
General .................................................................... 37
The Merger and the Bank Merger ............................................. 37
Effect of The Merger ....................................................... 37
Effective Time ............................................................. 38
Merger Consideration ....................................................... 38
Price-Based Termination .................................................... 40
Background of the Merger ................................................... 40
Reasons For The Merger and Recommendation of the Reliance Board of Directors 43
Opinion of Reliance Financial Advisor ...................................... 46
Election and Allocation Procedures ......................................... 50
Issuance of Stock and Payment of Cash ...................................... 54
Representations and Warranties ............................................. 55
Certain Covenants .......................................................... 55
Conditions to Each Party's Obligations ..................................... 56
Regulatory Approvals ....................................................... 58
Conduct of Business Pending Merger ......................................... 58
Amendment and Waiver ....................................................... 61
Termination ................................................................ 61
Management After the Merger ................................................ 62
Interests of Certain Persons In The Merger ................................. 62
Effect On Reliance Employee Benefit Plans .................................. 65
Certain Federal Income Tax Consequences .................................... 66
Accounting Treatment ....................................................... 69
NASDAQ Listing ............................................................. 69
Expenses ................................................................... 69
Voting Agreements .......................................................... 69
Termination Fee Arrangements ............................................... 69
Resales of St. Francis Common Stock ........................................ 70
No Appraisal or Dissenters' Rights ......................................... 70
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DESCRIPTION OF ST. FRANCIS CAPITAL STOCK .................................... 71
General ..................................................................... 71
St. Francis Common Stock .................................................... 71
St. Francis Preferred Stock ................................................. 72
Rights Plan ................................................................. 72
Changes in Control .......................................................... 72
COMPARISON OF SHAREHOLDERS' RIGHTS ............................................ 75
Vacancies on the Board of Directors ......................................... 75
Advance Notice of Nominations of Directors and Shareholder Proposals ........ 75
Shareholder Rights Plan ..................................................... 75
BUSINESS OF THE PARTIES TO THE MERGER ....................................... 76
St. Francis ................................................................. 76
Reliance .................................................................... 76
Regulations ................................................................. 103
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELIANCE ....................................... 113
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ................................ 132
EXPERTS ..................................................................... 132
LEGAL MATTERS ............................................................... 133
SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING............................ 133
Deadline for Submission of Shareholder Proposals for Inclusion in
1999 Proxy Materials.................................................... 133
Advance Notice Requirement for Any Proposal or Nomination to be Raised
by a Shareholder........................................................ 133
Discretionary Voting of 1999 Proxies.................................... 134
PROPOSAL TO ADJOURN THE SPECIAL MEETING
(Proposal No. 2) ............................................................ 134
OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE SPECIAL MEETING ............ 135
AVAILABLE INFORMATION........................................................ 135
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ........................... 136
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
</TABLE>
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ANNUAL FINANCIAL STATEMENTS ................................................... F-9
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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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 40 through 45.
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> 11
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.
-7-
<PAGE> 12
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 14-16 and 38-40.
-8-
<PAGE> 13
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 30-33. 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 40-45). 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 66 through 68.
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.
-9-
<PAGE> 14
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 provides 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 34-36.
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
-10-
<PAGE> 15
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 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.
-11-
<PAGE> 16
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.
-12-
<PAGE> 17
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.
-13-
<PAGE> 18
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.
-14-
<PAGE> 19
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.
-15-
<PAGE> 20
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 TRUST CO., 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."
-16-
<PAGE> 21
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."
-17-
<PAGE> 22
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.......... On 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
READ SUCH OPINION CAREFULLY IN ITS ENTIRETY. See
"Proposal to Approve the Merger--Opinion of
Reliance Financial Advisor."
-18-
<PAGE> 23
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."
-19-
<PAGE> 24
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.
-20-
<PAGE> 25
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.
-21-
<PAGE> 26
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."
-22-
<PAGE> 27
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
tables 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>
- -------------------------
(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.
-23-
<PAGE> 28
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>
-24-
<PAGE> 29
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.
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<PAGE> 30
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.
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<PAGE> 31
ST. FRANCIS CAPITAL CORPORATION
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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
Real estate held for investment ........... 29,997 51,476 36,865 24,264 9,818
Real estate held for sale ................. 20,772 -- -- -- --
Deposits .................................. 1,216,874 1,087,136 877,684 688,348 569,892
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>
- -------------------------
(1) General and administrative expenses for the year ended September 30, 1996
included a one-time special SAIF assessment of $4.2 million.
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<PAGE> 32
RELIANCE BANCSHARES, INC.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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>
- -------------------------
(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.
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<PAGE> 33
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
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<PAGE> 34
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.
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
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<PAGE> 35
effectively or to take advantages of new opportunities after the Merger.
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
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<PAGE> 36
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.
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 currently 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.
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<PAGE> 37
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 not to 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.
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.
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<PAGE> 38
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.
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:
- 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.
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- 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.
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
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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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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> 42
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
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<PAGE> 43
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
------------------- ---------- --------------- ------------------
<C> <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> 44
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 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
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reduced Reliance's shareholders' equity by $7.3 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,
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<PAGE> 46
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.
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 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
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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 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
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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%.
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.
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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
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
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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.
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 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.
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
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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.
(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
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(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.
(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.
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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.
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.
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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.
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
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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 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.
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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,
(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
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(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
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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 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
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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 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
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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 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
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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.
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.
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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.
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.
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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.
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
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of termination of the Merger Agreement where termination has occurred (A) by
reason of Reliance having failed to 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
-------------------------------------------------------
MULTI-
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>
- ---------------
(1) Includes some construction loans.
(2) These amounts are net of loans in process.
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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>
- ---------------
(1) Includes some construction loans.
(2) These amounts are net of loans in process.
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,
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<PAGE> 84
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
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.
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<PAGE> 85
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.
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,
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<PAGE> 86
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.
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.
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<PAGE> 87
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 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.
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<PAGE> 88
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.
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>
- -----------
(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.
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.
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<PAGE> 89
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.
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.
-85-
<PAGE> 90
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.
-86-
<PAGE> 91
At June 30, 1996, 1997 and 1998, delinquencies in Reliance Savings Bank's
loan portfolio were as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1996 AT JUNE 30, 1997
---------------------------------------- --------------------------------------
90 DAYS OR 90 DAYS OR
60-89 DAYS MORE(1) 60-89 DAYS MORE(1)
------------------- ------------------ ------------------ ------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
-------- --------- ------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family ...................... 0 $ -- 0 $ -- 2 $ 195 0 $ --
Multi-family ............................. 0 -- 0 -- 0 -- 0 --
Commercial real estate ................... 0 -- 0 -- 0 -- 0 --
Residential construction ................. 0 -- 0 -- 0 -- 0 --
Commercial construction/land development . 0 -- 0 -- 0 -- 0 --
-------- -------- ------- --------- ------- ----- ---- ------
Total mortgage loans ................... 0 -- 0 -- 2 195 0 --
CONSUMER LOANS:
Home equity .............................. 0 -- 0 -- 0 -- 0 --
Other consumer ........................... 0 -- 0 -- 0 -- 0 --
-------- -------- ------- --------- ------- ----- ---- ------
Total consumer loans ................... 0 -- 0 -- 0 -- 0 --
-------- -------- ------- --------- ------- ----- ---- ------
Total gross loans ................... 0 $ -- 0 $ -- 2 $ 195 0 $ --
======== ======== ======= ========= ======= ===== ==== ======
Delinquent loans to gross loans
(including loans held for sale) ........... 0.00% 0.00% 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.
-87-
<PAGE> 92
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.
-88-
<PAGE> 93
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.
-89-
<PAGE> 94
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>
-90-
<PAGE> 95
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>
1998
-----------------------------------------
% OF
% OF LOANS IN
TOTAL CATEGORY
BY OUTSTANDING
BREAKDOWN OF ALLOWANCE AMOUNT CATEGORY LOANS
- ---------------------- -------- ---------- ------------
(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 .. $169 100.00%
==== ======
</TABLE>
- 91 -
<PAGE> 96
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.
-92-
<PAGE> 97
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.
-93-
<PAGE> 98
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
-----------------------------------------------------------------------------------------------------
ONE YEAR OVER ONE TO OVER FIVE TO
OR LESS FIVE YEARS TEN YEARS OVER TEN YEARS
-------------------- -------------------- --------------------- ---------------------
WEIGHTED 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 9.4%
===== ==== ==== ====
</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 12.5 95 100 14.60 97 -- -- --
---- ------ ---- ---- ------ ---- ---- ----- ----
Total mortgage-backed
and related securities.... $800 100.00% $852 $685 100.00% $732 $420 00.00% $456
==== ====== ==== ==== ====== ==== ==== ===== ====
</TABLE>
-94-
<PAGE> 99
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>
-95-
<PAGE> 100
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>
-96-
<PAGE> 101
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
----------------------------------------------------------------------------------------------
NO
OVER ONE TO FIVE OVER FIVE TO TEN CONTRACTUAL
ONE YEAR OR LESS YEARS YEARS OVER TEN YEARS MATURITY
------------------- ------------------- ------------------ ------------------ ---------
CARRYING CARRYING CARRYING CARRYING CARRYING
VALUE OR WEIGHTED VALUE OR WEIGHTED VALUE OR WEIGHTED VALUE OR WEIGHTED VALUE OR
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED
COST YIELD COST YIELD COST YIELD COST YIELD COST
--------- -------- --------- -------- --------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <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..... -- -- -- -- -- -- -- -- 4,604
Corporate debt securities.......... -- -- -- -- -- -- 2,585 5.70% --
Certificates of deposit............ 394 6.21% 99 5.60% -- -- -- -- --
FHLB stock......................... -- -- -- -- -- -- -- -- 200
Equity securities-FHLMC
stock............................ -- -- -- -- -- -- -- -- 1,293
----- ----- ------- ------- ------
Total securities available
for sale......................... $ 394 6.21% $ 99 5.60% $ 2,006 6.66% $ 2,585 5.70% $6,097
===== ===== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------------------------
INVESTMENT SECURITIES TOTALS
----------------------------------------
AVERAGE CARRYING
REMAINING VALUE OR APPROX. WEIGHTED
YEARS TO AMORTIZED MARKET AVERAGE
MATURITY COST VALUE YIELD
--------- -------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Government and other
agency obligations............... 9.92 $ 2,000 $ 2,006 6.60
Equity securities-mutual funds..... -- 4,725 4,604 5.48
Corporate debt securities.......... 23.55 2,585 2,585 5.70
Certificates of deposit............ 0.56 486 493 5.96
FHLB stock......................... -- 200 200 --
Equity securities-FHLMC
stock............................ -- 28 1,293 39.70
----- ------- ------- -----
Total securities available
for sale......................... $10,024 $11,181 5.77
======= =======
</TABLE>
-97-
<PAGE> 102
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>
YEARS 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>
-98-
<PAGE> 103
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
------- -------
<S> <C> <C>
(IN THOUSANDS)
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>
-99-
<PAGE> 104
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 1998
----------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------ -------- -------- ------ -------- -------- ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEMAND ACCOUNTS:
Non-interest bearing ........... $ 89 0.49% --% $ 35 0.20% --% $ 68 0.39% --%
Interest-bearing (NOW) ......... 126 0.69 2.50 92 0.52 2.50 35 0.20 2.50
Money market ................... 952 5.23 3.45 926 5.26 3.45 852 4.92 3.40
Passbook ....................... 2,775 15.25 2.78 2,660 15.12 2.78 2,350 13.56 2.77
------- ------- ------- ------ ------- ------
Total demand accounts ......... 3,942 21.66 2.87 3,713 21.10 2.91 3,305 19.07 2.87
CERTIFICATE OF DEPOSIT ACCOUNTS:
Six months and less ............ 7,230 39.73 5.59 6,410 36.43 5.59 6,452 37.23 5.62
Six to twelve months ........... 3,533 19.41 5.49 4,326 24.58 5.49 3,972 22.91 5.66
Thirteen to 36 months .......... 2,813 15.46 5.84 2,807 15.95 5.84 3,221 18.59 5.91
37 to 60 months ................ 632 3.47 6.01 289 1.64 6.01 380 2.20 6.22
61 to 90 months ................ 50 0.27 8.00 51 0.29 8.00 -- -- --
Jumbo (over 90 months) ......... -- -- -- -- -- -- -- -- --
------- ------- ------- ------ ------- ------
Total certificates of deposit .. 14,258 78.34 5.64 13,883 78.90 5.63 14,025 80.93 5.71
------- ------- ------- ------ ------- ------
Total deposit accounts ......... $18,200 100.00% 5.04 $17,596 100.00% 5.05 $17,330 100.00% 5.17
======= ======= ======= ====== ======= ======
</TABLE>
-100-
<PAGE> 105
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>
-101-
<PAGE> 106
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>
- ---------------
(1) Computed on the basis of average monthly balances.
-102-
<PAGE> 107
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.
-103-
<PAGE> 108
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".
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.
-104-
<PAGE> 109
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-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.
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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.
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
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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.
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
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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
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common charter for all insured depository institutions and the abolition of
separate and distinct charters for banks and savings associations.
Management does not anticipate that any of the foregoing legislation will
have a material impact on the Company's financial condition in future periods.
RESTRICTIONS ON LOANS TO AND TRANSACTIONS WITH INSIDERS AND AFFILIATES
FRB regulations limit the total amount a savings bank may lend to its
executive officers, directors, principal shareholders and their related
interests (collectively referred to herein as "affiliated persons"). Generally,
an affiliated person may borrow an aggregate amount not exceeding 15% of a
savings bank's unimpaired capital and unimpaired surplus on an unsecured basis
and an additional 10% on a secured basis. The regulations limit, with certain
exceptions, the aggregate amount a depository institution may lend to affiliated
persons as a class to an amount not exceeding the institution's unimpaired
capital and unimpaired surplus.
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.
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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.
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.
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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.
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.
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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 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
-------- ------ --------------- --------------
<S> <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.
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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.
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.
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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.
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
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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.
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.
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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.
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.
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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.
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
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June 30, 1996. The return on average assets decreased to 1.32% for the year
ended June 30, 1997 compared to 1.40% for the year ended June 30, 1996. The
return on average equity decreased to 2.44% for the year ended June 30, 1997
compared to 3.45% for the year ended June 30, 1996.
NET INTEREST INCOME
Net interest income increased $829,000 to $2.40 million for the year ended
June 30, 1997 compared to $1.57 million for the year ended June 30, 1996. The
increase was due to a $748,000 increase in total interest income and a decrease
in total interest expense of $81,000. The increase in net interest income was
the result of a 1.5% decline in average interest-bearing liabilities, and a
27.4% increase in average interest-earning assets, coupled with a 30 basis point
increase in the interest rate spread. The increase in interest rate spread
between June 30, 1997 and 1996 was due primarily to the decrease in the average
cost of deposit accounts by 30 basis points, while the average yield on
interest-earning assets remained level for the same period.
The increase in average interest-earning assets over interest-bearing
liabilities between June 30, 1997 and 1996 was due to the decrease in the
average balances of deposit accounts between periods of $3.20 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.
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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.
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.
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FINANCIAL CONDITION
The following table summarizes certain information relating to Reliance's
statement of financial condition at the dates indicated.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 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).
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.
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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 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.
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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.
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> 128
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> 129
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> 130
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 displayed with the same prominence
as other financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for years beginning
after June 15, 1999, although earlier adoption is permitted. This standard
establishes new rules for the recognition and measurement of derivatives and
hedging activities. It requires all derivatives to be recorded on the balance
sheet at fair value, although the timing of recognition in earnings will depend
on the classification of the hedge according to criteria established by SFAS 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
not determined the impact that SFAS No. 133 will have on its financial
statements and believes that such determination will not be meaningful until
closer to the date of initial adoption.
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<PAGE> 131
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 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
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<PAGE> 132
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> 133
<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>
- ----------------------
(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.
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<PAGE> 134
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>
_________________________
(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.
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<PAGE> 135
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>
-131-
<PAGE> 136
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>
- --------------------
(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.
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.
-132-
<PAGE> 137
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
-133-
<PAGE> 138
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.
-134-
<PAGE> 139
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.
-135-
<PAGE> 140
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.
- 136 -
<PAGE> 141
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR RELIANCE BANCSHARES, INC.
<TABLE>
<S> <C>
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Statements of Financial Condition at September 30, 1998 and June 30, 1998 ......... F-2
Consolidated Statements of Income for the three months ended September 30, 1998 and 1997 ....... F-3
Consolidated Statements of Stockholder's Equity for the three months ended September 30, 1998 .. F-4
Consolidated Statements of Cash Flows for the three months ended September 30, 1998 and 1997 ... F-5
Notes to Unaudited Consolidated Financial Statements ........................................... F-7
ANNUAL FINANCIAL STATEMENTS:
Independent Auditors' Report ................................................................... F-9
Consolidated Statements of Financial Condition at June 30, 1998 and 1997 ....................... F-10
Consolidated Statements of Income for the years ended June 30, 1998, 1997 and 1996 ............. F-11
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1996, 1997 and 1998 F-12
Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 ......... F-13
Notes to Consolidated Financial Statements ..................................................... F-15
</TABLE>
F-1
<PAGE> 142
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ---------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash ......................................................... $ 180 $ 842
Cash equivalent interest-bearing deposits .................... 3,919 3,504
------- -------
Total cash and cash equivalents .......................... 4,099 4,346
Investments:
Certificates of deposit .................................. 294 493
Investment securities available for sale, at fair value .. 8,448 10,949
Federal Home Loan Bank stock -- at cost ...................... 200 200
Loans receivable -- net ...................................... 27,004 25,798
Accrued interest receivable .................................. 104 87
Office properties and equipment .............................. 71 75
Prepaid expenses and other assets ............................ 234 341
------- -------
Total assets ............................................. $40,454 $42,289
======= =======
LIABILITIES AND EQUITY
Deposit accounts ............................................. $17,380 $17,330
Borrowed funds ............................................... -- 2,000
Income taxes:
Current .................................................. (37) 20
Deferred ................................................. 292 263
Accrued and other liabilities:
Interest ................................................. 21 31
Other .................................................... 263 273
------- -------
Total liabilities ...................................... 17,919 19,917
------- -------
Commitments and contingencies ................................... -- --
Stockholders' equity:
Common stock, $1.00 par value; 6,000,000 shares
authorized; 2,562,344 shares issued ...................... 2,562 2,562
Additional paid-in-capital ................................... 10,010 10,001
Unearned ESOP compensation ................................... (449) (449)
Accumulated other comprehensive income ....................... 780 729
Retained earnings -- substantially restricted ................ 11,146 11,043
Treasury stock, at cost, 166,780 and 166,780 shares .......... (1,514) (1,514)
------- -------
Total stockholders' equity ............................... 22,535 22,372
------- -------
Total liabilities and stockholders' equity ........... $40,454 $42,289
======= =======
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
F-2
<PAGE> 143
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
----- -----
(UNAUDITED)
<S> <C> <C>
Interest and dividend income:
Mortgage loans ..................................................... $ 582 $ 599
Investment securities .............................................. 191 239
Mortgage-backed and related securities ............................. 10 15
Other loans ........................................................ -- --
Dividends on stock in Federal Home Loan Bank ....................... 3 3
----- -----
Total interest and dividends ................................... 786 856
----- -----
Interest expense:
Deposits and escrows ............................................... 227 227
Notes payable and other borrowings ................................. 32 88
----- -----
Total interest expense ......................................... 259 315
----- -----
Net interest income ............................................ 527 541
Provisions for loan losses ............................................ 5 5
----- -----
Net interest income after provision for loan losses ................ 522 536
----- -----
Non-interest income:
Gain (loss) on sales of investment ................................. -- (4)
Other income ....................................................... -- --
Loan fees and service charges ...................................... 3 2
----- -----
Total non-interest income ...................................... 3 (2)
----- -----
Operating income ............................................... 525 534
----- -----
Non-interest expense:
Compensation and benefits .......................................... 130 160
Occupancy .......................................................... 7 7
Advertising ........................................................ 1 2
Furniture and equipment ............................................ 1 1
Federal insurance premiums ......................................... 3 3
Professional services .............................................. 129 22
Data processing .................................................... 20 18
Stationery, communications and other operating expenses ............ 19 20
Directors' fees and expenses of directors, officers and employees .. 23 20
----- -----
Total non-interest expense ..................................... 333 253
----- -----
Income before income taxes ..................................... 192 281
----- -----
Income taxes:
Current ............................................................ 92 121
Deferred ........................................................... (3) (3)
----- -----
Total income taxes ............................................. 89 118
----- -----
Net income ..................................................... $ 103 $ 163
===== =====
Earnings per share (basic and diluted) ................................ $0.04 $0.07
===== =====
Dividends per share ................................................... $ -- $ --
===== =====
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
F-3
<PAGE> 144
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNEARNED OTHER TOTAL
COMMON PAID-IN ESOP COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL COMPENSATION INCOME EARNINGS STOCK EQUITY
------ ---------- ------------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 ........ $2,562 $10,001 $(449) $729 $11,043 $(1,514) $22,372
Comprehensive Income
Net income ..................... -- -- -- -- 103 -- 103
Other comprehensive income, net of tax:
Change in unrealized gain
(loss) on securities
available for sale, net
of applicable deferred
income taxes of $32 ... -- -- -- 51 -- -- 51
-------
Total Comprehensive Income 154
-------
Amortization of unearned
ESOP compensation .............. -- 9 -- -- -- -- 9
------- ------- ------ ----- ------- ------- -------
Balances at June 30, 1998 ........ $2,562 $10,010 $(449) $780 $11,146 $(1,514) $22,535
======= ======= ====== ===== ======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
F-4
<PAGE> 145
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ...................................................... $ 103 $ 163
Adjustments to reconcile net income to net cash provided
by operating activities ........................................ 4 4
Provision for depreciation ................................... 5 5
Provision for loan losses .................................... (24) (25)
Amortization of premiums, discounts and fees-net ............. 9 28
ESOP expenses ................................................ (57) 81
Provision for (reduction of) deferred income taxes ........... (3) (3)
Increase (decrease) in interest receivable ................... (17) (12)
Net increase (decrease) in accrued/other liabilities ......... (20) 11
Net (increase) decrease in prepaid expense and other assets .. 107 6
Loss (gain) on investments ................................... -- 4
------- -------
Net cash provided (used) by investing activities .......... 107 262
------- -------
Cash Flows from Investing Activities:
Proceeds from sale/maturities of investment securities
available for sale ............................................. 4,752 776
Purchase of investment securities available for sale ............ (2,000) (1,898)
Net (increase) decrease in loans ................................ (1,185) 583
Principal payments collected on mortgage-backed securities ...... 29 165
------- -------
Net cash provided (used) by investing activities ............. 1,596 (374)
------- -------
Cash Flows from Financing Activities:
Purchase of treasury stock ...................................... -- (483)
Repayments of short-term borrowing .............................. (2,000) --
Proceeds from securities sold under repurchase agreements ....... -- 2,043
Payments on securities sold under repurchase agreements ......... -- (2,008)
Increase (decrease) in deposit accounts ......................... 50 106
------- -------
Net cash provided (used) by financing activities ............. (1,950) (342)
------- -------
Increase (decrease) in cash and cash equivalents ............. (247) (454)
Cash and Cash Equivalents at beginning of period ...................... 4,346 3,048
------- -------
Cash and Cash Equivalents at end of period ............................ $ 4,099 $ 2,594
======= =======
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-5
<PAGE> 146
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
------ ------
(UNAUDITED)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposit accounts . . . . . . . . . . . . . $ 27 $ 28
Income taxes . . . . . . . . . . . . . . . . . . . . . 148 109
Interest on borrowings . . . . . . . . . . . . . . . . 32 88
Noncash investing activities:
Loans transferred to foreclosed properties
and real estate in judgment . . . . . . . . . . . . . -- --
Total increase in unrealized gains on securities
available for sale . . . . . . . . . . . . . . . . . . 84 40
Investments transferred to available for sale
from held-to-maturity, at cost . . . . . . . . . . . -- 3,818
</TABLE>
Accounting Policies Note: Cash equivalents include demand deposits at other
financial institutions and the Federal Home Loan
Bank.
See accompanying Notes to Unaudited Consolidated Financial Statements
F-6
<PAGE> 147
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The information contained in the accompanying consolidated financial
statements at and for the three months ended September 30, 1998 and 1997
is unaudited. In the opinion of management, the interim financial
statements contain all adjustments (none of which were other than normal
recurring entries) necessary for a fair statement of the results of
operations for the interim periods. The results of operations for the
interim periods are not necessarily indicative of the results which may be
expected for the entire fiscal year. The accompanying consolidated
financial statements should be read in conjunction with the consolidated
financial statements for the year ended June 30, 1998 contained elsewhere
herein.
2. In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (SFAS No. 128). SFAS 128 simplifies the
standards for computing earnings per share and makes the calculation
comparable to international standards. SFAS 128 replaces primary earnings
per share with a presentation of basic earnings per share. It also requires
dual presentation basic and diluted earnings per share and a reconciliation
of basic to diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.
SFAS, 128 is effective for financial statements issued for periods ending
after December 15, 1997, and requires restatement of all prior earnings per
share data.
The following reconciles amounts reported in the financial statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Income available to
Common Shareholders:
Basic earnings per share ..... $103,000 $2,329,287 $0.04
=====
Effect of diluted securities
Options ...................... -- 34,334
-------- ----------
Income available to
Common Shareholders:
Diluted earnings per share ... $103,000 $2,363,287 $0.04
======== ========== =====
</TABLE>
Weighted-average shares outstanding for the three months ended September 30,
1997 were 2,445,689 for basic and 2,452,142 for diluted.
F-7
<PAGE> 148
3. During the quarter ended September 30, 1997, the Company transferred its
investments from its held-to-maturity portfolio to is available-for-sale
portfolio. This was done as the result of the sale, from its
held-to-maturity portfolio, of a $200,000 REMIC, on which a $1,375 realized
loss was incurred, whose nature and volatility was inconsistent with the
Company's 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.
4. The Financial Accounting Standards Board (FASB) has issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
Company adopted SFAS No. 130 on July 1, 1998.
The Company's comprehensive income for the three months ended September
30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Net income...................................... $103,000 $163,000
Other comprehensive income, net of taxes
Unrealized gains (losses) arising
during the period...................... 51,000 24,000
-------- --------
Comprehensive income............................ $154,000 $187,000
======== ========
</TABLE>
F-8
<PAGE> 149
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Reliance Bancshares, Inc.
Milwaukee, Wisconsin
We have audited the accompanying consolidated statements of financial
condition of RELIANCE BANCSHARES, INC. as of June 30, 1998 and 1997 and the
related consolidated statements of income, retained earnings, and cash flows for
the three years in the period ended June 30, 1998. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RELIANCE
BANCSHARES, INC. as of June 30, 1998 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended June 30, 1998
in conformity with generally accepted accounting principles.
SCHENCK & ASSOCIATES, SC
Brookfield, Wisconsin
July 31, 1998
F-9
<PAGE> 150
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------
1998 1997
------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash ......................................................... $ 842 $ 829
Cash equivalent interest-bearing deposits .................... 3,504 2,219
------- -------
Total cash and cash equivalents .......................... 4,346 3,048
Investments:
Certificates of deposit .................................. 493 294
Investment securities available-for-sale, at fair value .. 10,949 11,481
Investment securities held-to-maturity
(estimated market value of $3,934 in 1997) ........... -- 3,874
Federal Home Loan Bank stock - at cost ....................... 200 200
Loans receivable - net ....................................... 25,798 27,601
Accrued interest receivable .................................. 87 182
Office properties and equipment .............................. 75 86
Prepaid expenses and other assets ............................ 341 243
------- -------
Total assets ............................................. $42,289 $47,009
======= =======
LIABILITIES AND EQUITY
Deposit accounts ............................................. $17,330 $17,596
Borrowed funds ............................................... 2,000 6,008
Income taxes:
Current .................................................. 20 --
Deferred ................................................. 263 197
Accrued and other liabilities:
Interest ................................................. 31 32
Other .................................................... 273 210
-------- ---------
Total liabilities .................................... 19,917 24,043
-------- ---------
Commitments and contingencies ................................... -- --
Stockholders' equity:
Common stock, $1.00 par value; 6,000,000 shares
authorized; 2,562,344 shares issued ...................... 2,562 2,562
Additional paid-in-capital ................................... 10,001 9,947
Unearned ESOP compensation ................................... (449) (449)
Unrealized gain on securities available for sale, net of
applicable deferred income taxes ......................... 729 490
Retained earnings - substantially restricted ................. 11,043 10,471
Treasury stock, at cost, 166,780 and 6,519 shares ............ (1,514) (55)
-------- ---------
Total stockholders' equity ............................... 22,372 22,966
-------- ---------
Total liabilities and stockholders' equity ........... $42,289 $47,009
======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-10
<PAGE> 151
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and dividend income:
Mortgage loans .................................... $ 2,412 $ 2,230 $ 1,886
Investment securities ............................. 886 1,162 743
Mortgage-backed and related securities ............ 48 68 84
Other loans ....................................... -- -- 1
Dividends on stock in Federal Home Loan Bank ...... 14 12 10
------- ------- -------
Total interest and dividends .................. 3,360 3,472 2,724
------- ------- -------
Interest expense:
Deposits and escrows .............................. 915 911 1,146
Notes payable and other borrowings ................ 274 161 7
------- ------- -------
Total interest expense ........................ 1,189 1,072 1,153
------- ------- -------
Net interest income ........................... 2,171 2,400 1,571
Provisions for loan losses ........................... 22 22 22
------- ------- -------
Net interest income after provision for loan losses 2,149 2,378 1,549
------- ------- -------
Non-interest income:
Gain (loss) on sales of investment ................ 28 2 (3)
Other income ...................................... 13 23 9
Loan fees and service charges ..................... 10 11 11
------- ------- -------
Total non-interest income ..................... 51 36 17
------- ------- -------
Operating income .............................. 2,200 2,414 1,566
------- ------- -------
Non-interest expense:
Compensation and benefits ......................... 668 764 358
Occupancy ......................................... 29 30 30
Advertising ....................................... 8 7 7
Furniture and equipment ........................... 12 14 22
Federal insurance premiums ........................ 11 162 50
Professional services ............................. 251 186 31
Data processing ................................... 74 72 70
Stationery, communications and other
operating expenses ............................... 99 96 60
Directors' fees and expenses of directors,
officers and employees ........................... 110 100 93
------- ------- -------
Total non-interest expense .................... 1,262 1,431 721
------- ------- -------
Income before income taxes .................... 938 983 845
------- ------- -------
Income taxes:
Current ........................................... 455 433 336
Deferred .......................................... (89) (66) (5)
------- ------- -------
Total income taxes ............................ 366 367 331
------- ------- -------
Net income .................................... $ 572 $ 616 $ 514
======= ======= =======
Earnings per share (basic and diluted) ............... $ 0.24 $ 0.25 $ 0.21
======= ======= ========
Dividends per share .................................. $ -- $ 3.00 $ --
======= ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-11
<PAGE> 152
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES
AVAILABLE
FOR SALE, NET
ADDITIONAL UNEARNED OF APPLICABLE TOTAL
COMMON PAID-IN ESOP DEFERRED RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL COMPENSATION INCOME TAXES EARNINGS STOCK EQUITY
------ ---------- ------------ ------------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995 ........ $ -- $ -- $ -- $ 83 $ 9,533 $ -- $ 9,616
Sale of 2,562,344 shares of
commons stock at $8 per share,
net of related expenses ........ 2,562 17,225 (713) -- -- -- 19,074
Net income ....................... -- -- -- -- 514 -- 514
Change in unrealized gain (loss)
on securities available for
sale net of applicable deferred
income taxes of $92 ............ -- -- -- 144 -- -- 144
------ ------- ----- ---- ------- -------- -------
Balances at June 30, 1996 ........ 2,562 17,225 (713) 227 10,047 -- 29,348
Net income ....................... -- -- -- -- 616 -- 616
Cash dividend ($3.00 per share) .. -- (7,374) 2 -- (192) -- (7,317)
Purchase of treasury stock ....... -- -- -- -- -- (283) (283)
Issuance of treasury stock for
retention plan ................. -- (15) -- -- -- 228 213
Amortization of unearned
ESOP compensation .............. -- 111 15 -- -- -- 126
Change in unrealized gain (loss)
on securities available for
sale, net of applicable
deferred income taxes of $169 .. -- -- -- 263 -- -- 263
------ ------- ----- ---- ------- ------- -------
Balances at June 30, 1997 ........ 2,562 9,947 (449) 490 10,471 (55) 22,966
Net income ....................... -- -- -- -- 572 -- 572
Purchase of treasury stock ....... -- -- -- -- -- (1,736) (1,736)
Issuance of treasury stock for
retention and option plans ..... -- -- -- -- -- 277 277
Amortization of unearned
ESOP compensation .............. -- 54 -- -- -- -- 54
Change in unrealized gain (loss)
on securities available for
sale, net of applicable
deferred income taxes of $154 .. -- -- -- 239 -- -- 239
------ ------- ----- ---- ------- ------- -------
Balances at June 30, 1998 ........ $2,562 $10,001 $(449) $729 $11,043 $(1,514) $22,372
====== ======= ===== ==== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-12
<PAGE> 153
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
1998 1997 1996
------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................... $ 572 $616 $514
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for depreciation ................... 16 18 23
Provision for loan losses .................... 22 22 22
Amortization of premiums, discounts
and fees-net ............................... (100) (79) (33)
ESOP expenses ................................ 54 126 --
Increase (decrease) in income taxes payable .. 20 (5) (59)
Provision for (reduction of) deferred
income taxes ............................... (89) (66) (4)
(Increase) decrease in interest receivable ... 95 (9) (78)
Net increase (decrease) in accrued/other
liabilities ................................ 62 126 15
Net (increase) decrease in prepaid expense
and other assets ........................... (98) (31) 9
Loss (gain) on investments ................... (28) (2) 3
------ ------ -------
Net cash provided (used) by operating
activities ............................... 526 716 412
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Federal Home Loan Bank stock ....... -- (43) (5)
Proceeds from sale/maturities of investment
securities held to maturity .................. -- 9,460 5,434
Purchase of investment securities
held to maturity ............................. -- (1,000) (12,188)
Proceeds from sales/maturities of
investment securities available for sale ..... 11,371 3,192 1,505
Purchase of investment securities
available for sale ........................... (7,000) (6,818) (4,994)
Net (increase) decrease in loans ............... 1,873 (4,624) (1,896)
Principal payments collected on
mortgage-backed securities ................... 266 115 220
Purchase of fixed assets ....................... (5) (20) --
------ ------ -------
Net cash provided (used) by investing
activities ................................. 6,505 262 (11,924)
------ ------ -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-13
<PAGE> 154
RELIANCE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock .......... -- -- 19,074
Purchase of treasury stock .......................... (1,736) (283) --
Treasury stock issued ............................... 227 213 --
Repayments of short-term borrowing .................. (2,000) -- (650)
Proceeds from short-term borrowing .................. -- 4,000 650
Proceeds from securities sold under
repurchase agreements ............................. -- 4,053 --
Payments on securities sold under repurchase
agreements ........................................ (2,008) (2,046) --
Increase (decrease) in deposit accounts ............. (266) (605) (4,112)
Increase (decrease) in advance payments
by borrowers ...................................... -- -- (172)
Payment of cash dividend ............................ -- (7,317) --
------- ------- -------
Net cash provided (used) by financing activities .. (5,733) (1,985) 14,790
------- ------- -------
Increase (decrease) in cash and cash equivalents .. 1,298 (1,007) 3,278
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...... 3,048 4,055 777
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 4,346 $ 3,048 $ 4,055
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposit accounts ........................ $ 147 $ 148 $ 183
Income taxes ........................................ 436 438 395
Interest on borrowings .............................. 274 161 18
Noncash investing activities:
Loans transferred to foreclosed properties
and real estate in judgment ....................... -- -- --
Total increase in unrealized gains
on securities available for sale .................. 398 432 236
Investments transferred to available for
sale from held-to-maturity, at cost ................. 3,818 -- --
</TABLE>
Accounting Policies Note: Cash equivalents include demand deposits at other
financial institutions and the Federal Home Loan Bank.
See accompanying Notes to Consolidated Financial Statements
F-14
<PAGE> 155
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Reliance Bancshares, Inc. and Subsidiary (the
Company) conform to generally accepted accounting principles and prevailing
practices within the thrift industry. A summary of the more significant
accounting policies follows:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Reliance Bancshares, Inc. and its wholly-owned subsidiary, Reliance Savings Bank
(the Bank). All significant intercompany accounts and transactions have been
eliminated in consolidation.
BUSINESS
Reliance Bancshares, Inc. provides a full range of financial services to
individual customers in southeastern Wisconsin through its wholly-owned insured
banking subsidiary, Reliance Savings Bank. The Bank is a state chartered stock
savings bank which conducts its business through one facility. The Bank
emphasizes permanent and construction loans secured by real estate. The Bank's
primary deposit products are savings accounts and certificates of deposit.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENT SECURITIES
The Company's investments in securities are classified in two categories and
accounted for as follows:
SECURITIES HELD TO MATURITY -- Debt and mortgage-backed securities for
which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for
amortization of premiums and accretion of discounts, which
are recognized in interest using the interest method over
the period to maturity.
SECURITIES AVAILABLE FOR SALE -- Securities available for sale consist of
equity securities and certain debt and mortgage-backed securities not
classified as securities held to maturity. Unrealized holding gains and
losses, net of tax, on securities available for sale are reported as a net
amount in a separate component of stockholders' equity until realized, if
judged to be temporary.
The Company does not hold any trading securities at June 30, 1998.
Gains and losses on the sale of securities available for sale are determined
using the specific identification method.
MORTGAGE-BACKED SECURITIES
The Company has a portfolio of mortgage-backed certificates which bear interest
at stated rates ranging from 8.5% to 15% and which mature between 2005 and 2020.
Most of the pools were acquired at a discount; a few were acquired at a nominal
premium. Mortgage-backed certificates acquired at a discount after July 1, 1982
are being amortized and included in the Company's gross income using the
interest method. Prior year discounts are being amortized on a straight-line
basis over eleven to twelve years. The difference in prior year discount
amortization on a straight-line basis versus the interest method is not
material. The Company will continue to amortize discounts on mortgage-backed
certificates purchased prior to July 1, 1982 on a straight-line basis. Premium
amortizations are not material in amount. The Company has adequate liquidity and
capital, and it is generally management's intention
F-15
<PAGE> 156
to hold such assets to maturity. Should any be sold, gains and losses will be
recognized based on the specific identification method.
At June 30, 1998, 1997, the Company had no outstanding commitments to sell loans
or securities.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses, and net deferred loan origination fees and discounts.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
INTEREST ON LOANS
Interest on loans is recorded as income as the borrowers' payments become due.
Interest collected in advance of the payment due date is deferred until the
payment is due. Uncollected interest on loans in excess of 90 days delinquent is
fully reserved (June 30, 1998 - $5,687, June 30, 1997 - $0).
LOAN ORIGINATION FEES AND RELATED COSTS
Prior to July 1, 1988, the Bank recognized loan origination fees as income over
a period of ten years at ten percent a year, and the related costs associated
with these loans were expensed as incurred.
Loan fees received on or after July 1, 1988, are accounted for in accordance
with FASB Statement No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases."
Accordingly, loan origination fees and certain direct loan origination costs are
being deferred and the net amount amortized as an adjustment of the related
loan's yield. The Bank is generally amortizing these amounts over the
contractual life of the related loans.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated depreciation
and include expenditures for new facilities and items which substantially
increase the useful lives of existing buildings and equipment. Building and
equipment are depreciated on the straight-line method over the estimated lives
of the assets. Expenditures for normal repairs and maintenance are charged to
operations as incurred. When properties are retired or otherwise disposed of,
the related costs and accumulated depreciation are removed from the respective
accounts and the resulting gain or loss is recorded in income. The estimated
useful lives used to compute depreciation for financial reporting purposes are
as follows:
Office, buildings and improvements 10-42 years
Furniture, fixtures and equipment 5-10 years
Automobile 6 years
F-16
<PAGE> 157
INCOME TAXES
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities result primarily from the Company and the Bank
reporting taxable using the cash basis method of accounting which differs from
the accrual method used in reporting income on the financial statements, as
measured by the enacted tax rates which will be in effect when these differences
are expected to reverse.
REAL ESTATE OWNED/REAL ESTATE IN JUDGMENT
Property acquired in settlement of loans is recorded at the lower of the related
principal balance upon foreclosure or its fair value. Costs of developing and
improving such properties are to be capitalized. Expenses related to holding
such real estate, net of rental and other income, are charged against income as
incurred. A provision for estimated losses is recorded when it is known that the
net realizable value is less than the carrying value.
Profit on the sale of real estate is recognized as income in the year sold only
to the extent that cash is received. Excess profit, if any, is deferred and
recognized as income as principal payments are made on the loan or contract.
EARNINGS PER SHARE
On April 18, 1996, Reliance Savings Bank converted from a state-chartered mutual
savings bank to a state-chartered stock savings bank with the concurrent
formation of a holding company. As part of this conversion, Reliance Bancshares,
Inc. sold 2,562,344 shares of stock.
Earnings per share are based on the weighted average number of common shares
outstanding during each period and common stock equivalent shares, using the
treasury share method. ESOP shares that are committed to be released are
considered to be outstanding. Primary and fully diluted earnings per share are
the same. The common stock equivalents consist entirely of stock options. The
resulting weighted average number of shares used in computing earnings per share
for the year ended June 30, 1998 and 1997 is 2,399,250 and 2,456,131 shares of
common stock.
Earnings per share of common stock for the year ended June 30, 1996, were
computed based on consolidated net income and weighted average outstanding
shares of common stock computed as if Reliance Bancshares, Inc. initial public
offering had taken place on July 1, 1995. In this computation, net income was
not adjusted for the additional income which could have been earned had the net
proceeds from the offering been available for investment as of July 1, 1995.
Uncommitted ESOP shares (89,125) were not included in the weighted average
outstanding shares per SOP 93-6. The resulting weighted average number of shares
of common stock is 2,473,219.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board "APB")
Opinion No. 2,. "Accounting for Stock Issued to Employees." Entities electing
to retain the accounting under APB Opinion No. 25 must make pro forma
disclosure of net income and earnings per share, as if the fair value based
method of accounting under SFAS No. 123 had been applied. Reliance Bancshares,
Inc. has elected to retain the intrinsic value based method of accounting. See
Note 12 for additional information concerning SFAS No. 123.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform to current year
presentation.
F-17
<PAGE> 158
NOTE 2 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The carrying value (amortized cost) and estimated market values of investment
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equity securities - common stock ............ $ 28 $1,265 $ -- $ 1,293
Mortgage-backed securities .................. 423 40 -- 463
U. S. Government and other
marketable securities ..................... 4,585 5 -- 4,590
Equity securities - mutual funds ............ 4,725 -- 122 4,603
------ ------ ---- -------
Total .................................... $9,761 $1,310 $122 $10,949
====== ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equity securities - common stock ............ $ 28 $918 $ -- $ 946
Corporate debt securities ................... 5,122 12 2 5,132
Equity securities - mutual funds ............ 5,525 -- 122 5,403
------- ---- ---- -------
Total ................................. $10,675 $930 $124 $11,481
======= ==== ==== =======
</TABLE>
Detail of sales of investment securities available-for-sale are as follows:
<TABLE>
<CAPTION>
PROCEEDS
FROM GROSS GROSS
SALES GAINS LOSSES
-------- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED
June 30, 1998 .................. $11,046 $ 32 $ 4
June 30, 1997 .................. 3,652 2 --
June 30, 1996 .................. 500 -- 3
</TABLE>
F-18
<PAGE> 159
NOTE 3 - INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost and estimated market values of investment securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities ......... $ 685 $50 $3 $ 732
U.S. Treasury obligations and
obligations of U.S. agencies ....... 3,189 13 -- 3,203
------ --- -- ------
$3,874 $63 $3 $3,934
====== === == ======
</TABLE>
The amortized cost and estimated market value of investment securities by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities on those securities where the borrowers may have the
right to call or prepay the obligation with or without call or prepayment
penalties.
Contractual maturities are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------- --------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Within one year or no maturity .......... $-- $-- $4,753 $ 5,896
Greater than one year but less
than five years ...................... -- -- 14 15
Greater than five years but less
than ten years ....................... -- -- 147 160
Greater than ten years .................. -- -- 4,847 4,878
--- --- ----- -------
Total ............................. $-- $-- $9,761 $10.949
=== === ====== =======
</TABLE>
F-19
<PAGE> 160
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans:
One-to-four family residential .. $9,315 $11,035
Multi-family residential ........ 3,423 4,604
Commercial ...................... 7,489 5,376
Construction .................... 10,320 8,420
Consumer and other loans:
Savings account ................. 2 2
Second mortgages ................ 177 355
------- -------
Total loans .................. 30,726 29,792
------- -------
Less:
Undisbursed loan proceeds ....... 4,595 1,890
Deferred loan fees .............. 164 154
Allowance for loan losses ....... 169 147
------- -------
4,928 2,191
------- -------
Loans receivable - net ....... $25,798 $27,601
======= =======
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1998 1997 1996
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year ......... $147 $126 $104
Provisions charged against income .. 22 21 22
Charge-offs and recoveries - net ... -- -- --
---- ------ ----
Balance at end of year ............... $169 $147 $126
==== ====== ====
</TABLE>
The existing allowance for loan losses is considered neither inadequate nor
excessive relative to credit risk.
Loans receivable from officers and directors aggregated $19,090 and $154,801 at
June 30, 1998 and 1997.
The Bank did not have any specific allowance for loan losses at June 30, 1998
and 1997. The Bank's policy is to set up a specific loss allowance when it
becomes evident that a specific loan would be disposed of at a loss.
The majority of the Bank's lending activity is with borrowers located in
metropolitan Milwaukee, Wisconsin. Although the Bank has a diversified
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the general economic conditions of the area.
F-20
<PAGE> 161
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Investment securities . . . . . . . . . . . . . . . $ 40 $107
Mortgage-backed securities. . . . . . . . . . . . . 3 5
Loans receivable. . . . . . . . . . . . . . . . . . 44 70
---- ----
$ 87 $182
==== ====
</TABLE>
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land. . . . . . . . . . . . . . . . . . . . . . . . $ 7 $ 7
Office building . . . . . . . . . . . . . . . . . . 147 147
Furniture, fixtures and equipment . . . . . . . . . 116 111
Automobile. . . . . . . . . . . . . . . . . . . . . 32 32
---- ----
302 297
Less accumulated depreciation . . . . . . . . . . . 227 211
---- ----
$ 75 $ 86
==== ====
</TABLE>
Depreciation charged to operations totalled $16,000, $18,000 and $23,000 for the
years ended June 30, 1998, 1997 and 1996.
F-21
<PAGE> 162
NOTE 7 - DEPOSIT ACCOUNTS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------
1998 1997
--------------------------- ---------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------- -------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Non-interest-bearing .. $ 68 0.39% -- $ 35 0.20% --
NOW ................... 35 0.20% 2.50% 92 0.52% 2.50%
Passbook .............. 2,350 13.56% 2.77% 2,660 15.13% 2.78%
Money market .......... 852 4.92% 3.40% 926 5.26% 3.45%
------- -------- ------- --------
Total demand accounts ... $ 3,305 19.07% 2.87% $ 3,713 21.10% 2.89%
------- -------- ------- --------
Certificate accounts:
3.00% to 3.99% ........ $ 11 0.06% 3.40% $ 11 0.06% 3.40%
4.00% to 4.99% ........ -- -- -- -- -- --
5.00% to 5.99% ........ 9,938 57.35% 5.50% 11,138 63.30% 5.52%
6.00% to 6.99% ........ 3,797 21.91% 6.15% 2,467 14.02% 6.10%
7.00% to 7.99% ........ 227 1.31% 7.30% 216 1.23% 7.30%
8.00% to 8.99% ........ 52 0.30% 8.00% 51 0.29% 8.00%
------- -------- ------- --------
Total certificates ...... $14,025 80.93% 5.71% $13,883 78.90% 5.65%
------- -------- ------- --------
Total deposit accounts .. $17,330 100.00% 5.17% $17,596 100.00% 5.07%
======= ======== ======= ========
</TABLE>
Deposit accounts with individual balances of $100,000 or more totalled
$1,402,000 and $1,402,000 at June 30, 1998 and 1997, respectively.
On June 30, 1998, certificate accounts have scheduled maturity dates as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTALS
------- ------ ---- ---- ---- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
3.00% to 3.99% . . . . . $11 $-- $-- $-- $ -- $-- $ 11
4.00% to 4.99% . . . . . -- -- -- -- -- -- --
5.00% to 5.99% . . . . . 7,971 1,457 281 20 209 -- 9,938
6.00% to 6.99% . . . . . 2,380 826 493 5 93 -- 3,797
7.00% to 7.99% . . . . . 63 164 -- -- -- -- 227
8.00% to 8.99% . . . . . -- -- -- -- 52 -- 52
------- ------ ---- --- ---- --- -------
$10,425 $2,447 $774 $25 $354 $-- $14,025
======= ====== ==== === ==== === =======
</TABLE>
Interest expense on deposit accounts consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1998 1997 1996
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook, money market and
certificate accounts ... $913 $908 $1,144
NOW accounts ............. 2 3 2
---- ---- ------
$915 $911 $1,146
==== ==== ======
</TABLE>
F-22
<PAGE> 163
\
NOTE 8 - BORROWINGS
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------
1998 1997
---------------- ------- -----------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- ------ -------- ------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Securities sold under
agreements to repurchase .. 1998 $ -- -- $2,007 5.70%
Advances from the
Federal Home Loan Bank .... 1998 2,000 6.19% 4,000 5.97%
------ ------
$2,000 $6,007 5.84%
====== ======
</TABLE>
The securities underlying the repurchase agreement are book entry securities.
The dealer may sell, loan or otherwise dispose of such securities to other
parties in the normal course of their operations, but have agreed to resell to
Reliance Bancshares, Inc. identical or substantially the same securities upon
the maturities of the agreements. Securities sold under repurchase agreements
averaged $532,000 for the year ended June 30, 1998, and the maximum outstanding
at any month-end during 1998 was $2,0 million.
FHLB advances are collateralized by residential real estate loans with a
carrying value of $12.4 million at June 30, 1998, and all Federal Home Loan Bank
stock.
In addition, the Company has a $2.0 million line of credit with Bank One,
Milwaukee. Any advances bear interest based on either the LIBOR or prime rate.
Reliance Bancshares, Inc. has the option to select the interest rate.
NOTE 9 - STOCKHOLDERS' EQUITY
At the time of its stock conversion, the Bank established a liquidation account
in an amount equal to its total net worth as of the date of the latest statement
of financial condition. The amount of the liquidation account was determined to
be $10,049,000. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the Bank
after the conversion. The liquidation account will be reduced annually to the
extent that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each account
holder will be entitled to receive a distribution from the liquidation account
in an amount proportionate to the current adjusted qualifying balances for
accounts then hold. Except for the purchase of stock and payment of dividends by
the Bank, the existence of the liquidation account will not restrict use or
application of stockholders' equity.
F-23
<PAGE> 164
In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation, the Bank is required to maintain a minimum level of
capital. Also, Wisconsin chartered savings banks are required to meet minimum
capital levels of 6%. The following table summarizes the Bank's capital
requirements and ratios.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-------------------------------------------------------------
AMOUNT RATIOS
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
------- -------- ----------- ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital .. $20,297 $1,165 $19,132 69.71% 4.00% 65.71%
Tier 2 risk-based capital .. 20,466 2,329 18,137 49.32% 8.00% 41.32%
Leverage ratio ............. 20,297 1,245 19,052 48.92% 3.00% 45.92%
State of Wisconsin ......... 21,195 2,489 18,706 51.08% 6.00% 45.08%
</TABLE>
The Bank's capital exceeds all of the fully phased-in capital requirements
imposed by federal and Wisconsin law and regulation.
The following table summarizes the differences between the Company's
stockholders' equity and the Bank's regulatory capital at June 30, 1998:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK-BASED RISK-BASED LEVERAGE STATE OF
CAPITAL CAPITAL RATIO WISCONSIN
---------- ---------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total consolidated stockholders' equity ........... $22,372 $22,372 $22,372 $22,372
Holding Company stockholders' equity
not available for regulatory purposes ............ (1,346) (1,346) (1,346) (1,346)
General loss allowances ........................... -- 169 -- 169
Unrealized gain on securities available for sale .. (729) (729) (729) --
------- ------- ------- -------
$20,297 $20,466 $20,297 $21,195
======= ======= ======= =======
</TABLE>
F-24
<PAGE> 165
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1998 1997 1996
-------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision:
Federal .............................. $360 $341 $264
State ................................ 95 92 72
---- ----- ----
Total current ..................... $455 $433 $336
==== ===== ====
Deferred tax provision (credit):
Federal .............................. (71) (52) (4)
State ................................ (18) (14) (1)
---- ----- ----
Total deferred .................... (89) (66) (5)
---- ----- ----
Total provision for income taxes .. $366 $367 $331
==== ===== ====
</TABLE>
At June 30, 1998 the Bank had a net capital loss carry-forward for tax return
purposes of $14,781 which, if unused, $591 expires in 1999, and $11,172 expires
in 2000, and $3,018 expires in 2001.
Actual income tax expense differs from the "expected" income tax expense,
computed by applying the statutory federal corporate tax rate of 34% to income
before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1998 1997 1996
-------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal taxes at statutory rates ...... $319 $334 $287
Increase (decrease) resulting from:
State income taxes - net of federal
income tax benefit ............. 49 51 44
Increase in cash value of
life insurance ................. (1) (9) --
Other - net ....................... (1) (9) --
---- ---- ----
Provision for income taxes ............ $366 $367 $331
==== ==== ====
</TABLE>
F-25
<PAGE> 166
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
------ -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred loan fees ..................... $ 65 $ 60
Allowance for loan losses .............. 58 49
Accrued expenses ....................... 43 37
Deferred compensation .................. 72 47
Other .................................. 14 10
------ -----
Gross deferred tax assets ........... $ 252 $ 203
====== =====
Deferred tax liabilities:
Accrued income ......................... $ 38 $ 75
FHLB stock dividends ................... 6 6
Depreciation ........................... 1 3
Unrealized gain on securities .......... 470 316
------ -----
Gross deferred tax liabilities ...... $ 515 $ 400
====== =====
Net deferred tax asset (liability) .. $(263) $(197)
====== =====
</TABLE>
Previously, the Bank qualified under provisions of the Internal Revenue Code
which permitted as a deduction from taxable income allowable bad debt deductions
which significantly exceeded actual experience and the financial statement loan
loss provisions. A deferred tax liability was not required on these excess tax
bad debt reserves. At June 30, 1998, the Bank's tax bad debt reserves were
approximately $1,401,000. The Bank is now required to establish a deferred tax
liability for the excess of its tax bad debt reserves over the balance at the
close of the base year. The amount of the base year reserves is considered to
meet the indefinite reversal criteria of Accounting Principles Board Opinion No.
12, "Accounting for Income Taxes - Special Areas," and accordingly, is not
subject to deferred taxes. The Bank's base year tax bad debt reserves were
approximately $1,401,000. Income taxes would be imposed at the then-applicable
rates if the Bank were to use these reserves for any other purpose other than to
absorb bad debt losses. In August 1996, federal legislation was enacted which
repealed the favorable bad debt method for savings and loan associations.
Subsequent to this repeal, the Bank continues to be subject to this potential
tax liability to the extent payments or distributions of these appropriated
earnings occur.
NOTE 11 - FORECLOSED PROPERTIES AND REAL ESTATE IN JUDGMENT
Foreclosed properties and real estate in judgment is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Real estate in judgment subject to redemption .. $ -- $ --
Foreclosed properties .......................... -- --
Allowance for losses ........................... -- --
----- -----
$ $
===== ======
</TABLE>
F-26
<PAGE> 167
NOTE 12 - OFFICER, DIRECTOR AND EMPLOYEE BENEFIT PLAN
The Bank is a participant in the multi-employer Financial Institutions
Retirement Fund ("FIRF"). The FIRF covers substantially all of the Bank's
employees and provides benefits based on compensation and years of service for
employees age 21 and over after one year of eligibility service. The Bank's
contributions are determined by FIRF and generally represent the normal cost of
the plan. The plan provides benefits of approximately 1.5% of the average of the
five highest years of compensation times the number of years of service. Pension
costs and funding include normal costs and amortization of prior serv ice costs
over 15 years. The FIRF does not make separate actuarial valuations or segregate
plan assets by participating employer. As a result, disclosure required by SFAS
No. 87, "Employer's Accounting for Pensions," cannot be made. Significant
actuarial assumptions for the FIRF include a 7.5% return on plan investments.
Pension expense is based on the Bank's contributions as determined by the FIRF.
The market value of the net assets of the fund exceeds the liabilities for the
present value of accrued benefits in the aggregate. Contributions of $1,000,
$31,000 and $29,000 were made for the years ended June 30, 1998, 1997 and 1996,
respectively.
Concurrent with the conversion from a mutual savings bank to a stock savings
bank, the Bank borrowed funds from the holding company to purchase 89,125 shares
of Reliance Bancshares, Inc. common stock to establish an Employee Stock
Ownership Plan (ESOP) for substantially all of its employees. The loan is to be
repaid over fifteen years and bears interest at 7.0%. Unallocated ESOP shares
are reflected as a reduction from stockholders' equity in the Company's
consolidated statements of financial condition. 6,164 and 16,196 shares were
allocated to participants for the year ended June 30, 1998 and 1997. Expense to
the ESOP was $54,000, and $127,000 for 1998 and 1997. ESOP shares as of June 30
were as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Allocated shares ............................ 22,360 16,196
Shares ratably released for allocation ...... -- --
Unreleased shares ........................... 66,765 72,929
-------- --------
Total ESOP shares ........................... 89,125 89,1295
======== ========
Fair value of unreleased shares at June 30 .. $550,811 $610,780
======== ========
</TABLE>
The Bank has a nonqualified deferred retirement plan for directors. The Plan was
approved by the Commissioner of Savings and Loan of the State of Wisconsin on
June 20, 1994. The Plan provides for each director to receive additional
benefits at retirement. In the event of death during service, the same amounts
are payable to a director designated beneficiary. The Bank has acquired
permanent life insurance policies on the individuals to fund the Plans. The cash
value of the policies totaled $219,000 at June 30, 1998. The directors have no
rights, title or interest in the insurance policies. The deferred compensation
liabilities are being accrued ratably from July 1994 to the respective normal
retirement dates. As of June 30, 1998 and 1997, $121,114 and $88,450 had been
accrued for the Plan.
RECOGNITION AND RETENTION PLAN
The Recognition and Retention Plan of the bank was adopted on May 15, 1997 to
enable the Bank to reward and retain key officers. A total of 81,980 shares of
common stock were awarded. One-third of the shares become vested on date of
adoption, one-third vested on May 15, 1998, and the remaining one-third will
vest on May 15, 1999. Compensation expense for stock rewarded under this plan is
recorded over the vesting periods, and totaled $211,000 and $242,000 for the
years ended June 30, 1998 and 1997. Since the plan was adopted during 1997,
there are no expenses for the year ended June 30, 1996.
F-27
<PAGE> 168
STOCK OPTION PLAN
The Stock Option Plan of the Company was adopted on May 15, 1997. A total of
256,234 shares of common stock were authorized to be reserved for the grant of
both incentive and nonincentive stock options to officers and directors. The
option exercise price is equal to the fair market value of the common stock on
the date of the grant ($7.81 on May 15, 1997). The option term cannot exceed ten
years. A total of 221,066 shares of common stock were granted under the plan on
May 15, 1997. On April 8, 1998, 38,204 shares were granted under the plan. The
options vested one-third on May 15, 1997 and one-third on May 15, 1998, and will
vest one-third on May 15, 1999.
As disclosed in Note 1, the Company has elected to allow APB Opinion No. 25
"Accounting for Stock Issued to Employees," and related interpretations for
accounting for its stock option grants. Accordingly, no compensation expense has
been recognized for the Company's stock option grants. Had compensation cost for
the Company's 1998 and 1997 grant for stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been reduced by $96,000 and $171,000 and $.04 and $.07.
Assumptions used to estimate the value was a risk free interest rate of 5.44%,
expected life of ten years, volatility of 21% and no expected dividends.
The following is a summary of stock option transactions for the year ended June
30, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Initial grant date - May 15, 1997 ....... 221,066 $7.81
Granted ................................. 38,204 9.25
Exercised ............................... (8,137) 7.81
Forfeited ............................... (4,036) 7.81
------- ------
Outstanding at June 30, 1998 ............ 247,097 8.03
======= ======
Available for future grant at year-end .. 1,000
=======
</TABLE>
F-28
<PAGE> 169
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER
COMMITMENTS
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instrument consists of commitments to extend credit. This instrument
involves, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the statement of financial condition. The
contract amounts reflect the extent of involvement the Bank has in the
particular class of financial instrument. The Bank's maximum exposure to credit
loss for commitments to extend credit is represented by the contract amount of
those instruments.
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit:
Fixed rate ............... $946 $1,890
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and generally
require payment of a fee. As some commitments expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates the creditworthiness of each customer on a case
by case basis. The Bank generally extends credit only on a secured basis.
Collateral obtained varies, but consists primarily of one- to four-family
residences.
Commitments to extend credit on a fixed-rate basis expose the Bank to a certain
amount of interest rate risk if market rates of interest substantially increase
during the commitment period.
The Bank is a party to various legal actions normally associated with financial
institutions, the aggregate effect of which, in management's and legal counsel's
opinion, would not be material to the financial condition of Reliance
Bancshares, Inc.
NOTE 14 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement No. 107, ("Disclosures about Fair Value of Financial Instruments"),
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair market estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not necessarily
represent the underlying value of Reliance Bancshares, Inc. Reliance Bancshares,
Inc. does not routinely measure the market value of financial instruments
because such measurements represent point-in-time estimates of value. It is
generally not the intent of Reliance Bancshares, Inc. to liquidate and therefore
realize the difference between market value and carrying value and even if it
were, there is no assurance that the estimated market values could be realized.
Thus, the information presented is not particularly relevant to predicting
Reliance Bancshares, Inc.'s future earnings or cash flows.
The following methods and assumptions were used by Reliance Bancshares, Inc. in
estimating its fair value disclosures for financial instruments.
F-29
<PAGE> 170
CASH AND SHORT-TERM INVESTMENTS
The carrying values approximate the fair values for these assets.
SECURITIES AVAILABLE FOR SALE, INVESTMENTS, AND MORTGAGE-BACKED SECURITIES
Fair values are based on quoted market prices, where available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
LOANS
Fair values are based on quoted market prices for loans with similar financial
characteristics.
DEPOSITS
The fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW accounts, money market, and checking accounts, is
the amount payable on demand at the reporting date. The fair value of fixed rate
time deposits is calculated using discounted cash flows applying interest rates
currently being offered on similar certificates.
BORROWINGS
The carrying amounts of short-term borrowings approximate their fair values.
OFF-BALANCE SHEET INSTRUMENTS
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. The fair
value of these off-balance-sheet items approximates the recorded amounts of the
related fees and is not material.
The carrying amounts and estimated fair value of financial instruments were as
follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------
1998 1997
-------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents ...... $4,346 $4,346 $3,048 $ 3,048
Certificates of Deposit ........ 493 493 294 294
Securities available for sale .. 10,949 10,949 11,481 11,481
Securities held to maturity .... -- -- 3,874 3,934
Loans receivable ............... 25,798 26,947 27,601 28,859
Financial Liabilities:
Deposits:
Demand deposits ............. 3,305 3,305 3,713 3,713
Certificates ................ 14,025 14,921 13,883 14,609
Borrowed funds ................. 2,000 2,000 6,008 6,008
</TABLE>
F-30
<PAGE> 171
NOTE 15 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of June 30, 1998
and 1997 and condensed statements of income and cash flows for the period then
ended for Reliance Bancshares, Inc. should be read in conjunction with the
consolidated financial statements and the notes thereto.
CONDENSED STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash ....................................... $ 49 $ 416
Cash equivalent interest-bearing deposits .. 1,950 936
Investment securities available for sale ... -- 1,005
Investment securities held to maturity ..... -- 1,992
Investment in savings bank subsidiary ...... 21,026 20,157
Loan to ESOP ............................... 449 449
Other assets ............................... $ 107 $ 28
------- -------
Total assets ............................. $23,581 $24,983
======= =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Borrowed funds ............................... $ -- $ 2,008
Liabilities .................................. 8 9
-------- -------
Total liabilities .......................... $ 8 $ 2,017
======== =======
Stockholders' equity ......................... 23,573 22,966
-------- -------
Total liabilities and stockholders' equity . $ 23,581 $24,983
======== =======
</TABLE>
CONDENSED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30 JUNE 30
1998 1997
---------- ----------
<S> <C> <C>
Interest income ................................ $ 180 $404
Interest expense ............................... 34 75
---- ---
Net interest income .......................... 146 329
Non-interest income ............................ -- 2
---- ---
Operating income ............................. 146 331
Non-interest expense
Compensation and employee benefits ........... 11 6
Professional services ........................ 94 88
Other ........................................ 43 34
---- ---
Total non-interest expense ................ 148 128
---- ---
Income (loss) before income taxes equity
in undistributed earnings of subsidiary . (2) 203
Income tax ..................................... (1) 80
---- ---
Income (loss) before equity in undistributed
earnings of subsidiary .................. (1) 123
Equity in undistributed earnings of subsidiary . 815 753
---- ---
Net income ................................. $ 814 $876
==== ===
</TABLE>
F-31
<PAGE> 172
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30 JUNE 30
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 814 $ 876
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary .................... (869) (1,114)
Amortization ...................................................... (8) (7)
ESOP expenses ..................................................... 54 126
Net (increase) decrease in other assets ........................... (79) 22
Net increase (decrease) in other liabilities ...................... 1 (5)
Loss (gain) on investments ........................................ -- (2)
-------- --------
Net cash provided operating activities: ................................ (87) (104)
-------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale ................... -- (4,000)
Proceeds from sales/maturities of investment
securities available for sale ....................................... 3,000 3,462
Proceeds from sales/maturities of investment
securities held to maturity ......................................... -- 5,000
Payment received on loan to ESOP ....................................... -- 248
-------- --------
Net cash provided (used) by investing activities .................... 3,000 4,710
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock upon conversion ............. -- --
Cash dividends ......................................................... -- (7,317)
Purchase of treasury stock ............................................. (526) (283)
Treasury stock issued .................................................. 268 213
Proceeds from securities sold under repurchase agreements .............. -- 4,053
Payments on securities sold under repurchase agreements ................ (2,008) (2,046)
-------- --------
Net cash provided (used) by financing activities .................... (2,266) (5,380)
-------- --------
Increase (decrease) in cash and cash equivalents ....................... 647 (774)
Cash and cash equivalents at beginning of year .............................. 1,352 2,126
-------- --------
Cash and cash equivalents at end of year .................................... $ 1,999 $ 1,352
======== ========
</TABLE>
F-32
<PAGE> 173
NOTE 16 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
SEPT. 30 DEC. 31 MAR. 31, JUNE 30,
1997 1997 1998 1998
-------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest and dividend income ......... $ 856 $ 837 $ 849 $ 818
Interest expense ..................... 315 302 286 286
-------- --------- --------- --------
Net interest income ............... 541 535 563 532
Provision for loan losses ............ 5 5 6 6
-------- --------- --------- --------
Net interest income after provision
for loan losses .................. 536 530 557 526
Non-interest income .................. (2) 16 2 35
Non-interest expense ................. 253 341 332 336
-------- --------- --------- --------
Income before income taxes ........ 281 205 227 225
Income taxes ......................... 118 76 80 92
-------- --------- --------- --------
Net income ........................ $ 163 $ 129 $ 147 $ 133
======== ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
SEPT. 30 DEC. 31 MAR. 31, JUNE 30,
1996 1996 1997 1997
-------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest and dividend income ......... $ 836 $ 891 $ 839 $ 906
Interest expense ..................... 231 252 281 308
-------- --------- --------- --------
Net interest income ............... 605 639 558 598
Provision for loan losses ............ 5 6 6 5
-------- --------- --------- --------
Net interest income after provision
for loan losses .................. 600 633 552 593
Non-interest income .................. 3 5 2 26
Non-interest expense ................. 346 229 262 594
-------- --------- --------- --------
Income before income taxes ........ 257 409 292 25
Income taxes ......................... 98 156 116 (3)
-------- --------- --------- --------
Net income ........................ $ 159 $ 253 $ 176 $ 28
======== ========= ========= ========
</TABLE>
F-33
<PAGE> 174
The following schedule is a summary of earnings per share and market information
during the years ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
SEPT. 30 DEC. 31 MAR. 31, JUNE 30,
1997 1997 1998 1998
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Earnings per share .. $0.07 $0.05 $0.07 $0.05
Dividends paid ...... -- -- -- --
Market information:
Trading range
High ............. 9.000 9.750 10.125 8.875
Low .............. 7.750 8.250 8.750 8.063
Close ............ 8.500 9.500 8.875 8.250
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
SEPT. 30 DEC. 31 MAR. 31, JUNE 30,
1996 1996 1997 1997
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Earnings per share .. $ 0.06 $ 0.10 $ 0.07 $ 0.02
Dividends paid ...... -- 3.00 -- --
Market information:
Trading range
High ............. 8.750 10.250 7.750 8.500
Low .............. 7.625 6.125 6.375 7.000
Close ............ 8.625 6.750 7.250 8.375
</TABLE>
NOTE 17 -- FEDERAL DEPOSIT INSURANCE CORPORATION SPECIAL ASSESSMENT
Federal legislation enacted on September 30, 1996 addressed inadequate funding
of the Savings Association Insurance Fund ("SAIF"), which had resulted in a
large deposit insurance premium disparity between banks insured by the Bank
Insurance Fund ("BIF") and SAIF insured thrifts. As a result of this new
legislation, a one-time special assessment was imposed on thrift institutions,
and the Company recognized a $144,000 pretax charge for the year ended June 30,
1997 for assessment on its savings bank subsidiary. The after tax impact on
earnings amounted to $87,000. The legislation also provides for a reduction in
deposit insurance premiums in subsequent periods and other regulatory reforms.
NOTE 18 -- PENDING MERGER
On June 30, 1998, the Company signed a definitive Agreement and Plan of
Reorganization that provides for the acquisition of the Company and thus the
Bank by St. Francis Capital Corporation ("St. Francis"). Under the terms of the
definitive agreement, St. Francis will acquire all of the outstanding shares of
the Company through a merger transaction pursuant to which the Company's
shareholders will elect to receive either cash or shares of St. Francis's common
stock in exchange for their shares (the "Merger"). Consummation of the
transaction is subject to regulatory approval, approval of the Company's
shareholders and the satisfaction of certain other conditions.
F-34
<PAGE> 175
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE> 176
EXHIBIT B
AGREEMENT AND PLAN OF MERGER
<PAGE> 177
EXHIBIT C
OPINION OF ROBERT W. BAIRD & CO. INCORPORATED
<PAGE> 178
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> 179
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> 180
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
<PAGE> 181
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is incorporated under the Wisconsin Business Corporation Law
("WBCL"). Under Section 180.0851(1) of the WBCL, the Registrant is required to
indemnify a director or officer, to the extent such person is successful on the
merits or otherwise in the defense of a proceeding, for all reasonable expenses
incurred in the proceeding if such person was a party because he or she was a
director or officer of the Registrant. In all other cases, the Registrant is
required by Section 180.0851(2) to indemnify a director or officer against
liability incurred in a proceeding to which such a person was a party because he
or she was a director or officer of the Registrant, unless it is determined that
he or she breached or failed to perform a duty owed to the Registrant and the
breach or failure to perform constitutes: (i) a willful failure to deal fairly
with the Registrant or its shareholders in connection with a matter in which the
director or officer has a material conflict of interest; (ii) a violation of
criminal law, unless the director or officer had reasonable cause to believe his
or her conduct was lawful or no reasonable cause to believe his or her conduct
was unlawful; (iii) a transaction from which the director or officer derived an
improper personal profit; or (iv) willful misconduct. Section 180.0858(1) of the
WBCL provides that, subject to certain limitations, the mandatory
indemnification provisions do not preclude any additional right to
indemnification or allowance of expenses that a director or officer may have
under the Registrant's articles of incorporation, bylaws, a written agreement or
a resolution of the Board of Directors or shareholders.
Section 180.0859 of the WBCL provides that it is the public policy of the
State of Wisconsin to require or permit indemnification, allowance of expenses
and insurance to the extent required to be permitted under Sections 180.0850 to
180.0858 of the WBCL, for any liability incurred in connection with a proceeding
involving a federal or state statute, rule or regulation regulating the offer,
sale or purchase of securities.
Section 180.0828 of the WBCL provides that, with certain exceptions, a
director is not liable to a corporation, its shareholders, or any person
asserting rights on behalf of the corporation or its shareholders, for damages,
settlements, fees, fines, penalties or other monetary liabilities arising from a
breach of, or failure to perform, any duty resulting solely from his or her
status as a director, unless the person asserting liability proves that the
breach or failure to perform constitutes any of the four exceptions to mandatory
indemnification under Section 180.0851(2) referred to above.
Section 180.0833 of the WBCL provides that with certain exceptions,
directors of the Registrant against whom claims are asserted with respect to the
declaration of improper dividends or distributions to shareholders or certain
other improper acts which they approved are entitled to contribution from other
directors who approved such actions and from shareholders who knowingly accepted
an improper dividend or distribution, as provided therein. In addition, Articles
VIII and IX of the Registrant's Articles of Incorporation provide as follows:
"ARTICLE VII. INDEMNIFICATION.
A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of service as a director or
officer of the Corporation or is or was serving or has agreed to
serve at the request of the Corporation as a director or officer of
another corporation, including, without limitation, any subsidiary,
partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action
in their capacity as a director or officer or in any other capacity
while serving as such, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the WBCL, as the same
exists or may hereafter be amended (but, in the case of any
amendment, only to the extent the amendment permits the Corporation
to provide broader indemnification rights than such law permitted
prior to amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, Employee Retirement
Income Security Act of 1974 excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by the indemnitee
in connection therewith; provided, however, that, except as provided
in Section C of this Article VIII with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify
such indemnitee in connection with a proceeding (or part thereof)
initiated by the indemnitee only if the proceeding (or part thereof)
was authorized by the Board pursuant to the WBCL on written request
by the indemnitee to the Corporation.
- 136 -
<PAGE> 182
B. The right to indemnification conferred in Section A of this Article
VIII shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its
final disposition ("advancement of expenses"); provided, that if the
WBCL requires, an advancement of expenses incurred by an indemnitee in
his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking
("undertaking"), by or on behalf of the indemnitee, to repay all
amounts so advanced if it is ultimately determined by final judicial
decision from which there is no further right to appeal ("final
adjudication") that the indemnitee is not entitled to indemnification
for expenses under this Section B or otherwise, together with a
written affirmation by the indemnitee of his or her good faith belief
that he or she has not breached or failed his or her duties to the
Corporation. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article VIII shall be
contract rights and such rights shall continue as to an indemnitee who
has ceased to be a director or officer and shall inure to the benefit
of the indemnitee's heirs, executors and administrators.
C. The rights to indemnifications and to advancement of expenses
conferred in this Article VIII shall not be exclusive of any other
right which any person may have or hereafter acquire under any
statute, these Articles of Incorporation, By-laws, agreement, vote of
shareholders or directors, or otherwise.
D. The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, regardless of
whether the Corporation would have the power to indemnify such person
against such expense, liability or loss under the WBCL.
E. The Corporation may, as authorized from time to time by a
majority vote of disinterested directors, grant indemnification
and advancement of expenses to any employee or agent of the
Corporation or any person who is or was serving or has agreed
to serve at the request of the Corporation as an employee or
agent of another corporation, including, without limitation,
any subsidiary of the Corporation, partnership, joint venture,
trust or other enterprise, including service with respect to an
employee benefit plan, to the fullest extent of this Article
VIII permits indemnification and advancement of expenses for
directors and officers of the Corporation.
ARTICLE IX. LIMITATION OF LIABILITY.
A director of this Corporation shall not be personally liable to the
Corporation or its shareholders, or any person asserting rights on behalf
of the Corporation or its shareholders, for monetary damages for breach or
failure to perform any duty resulting from his or her status unless the
person asserting liability proves that the breach or failure to perform
constitutes: (i) a willful failure to deal fairly with the Corporation or
its shareholders in a matter in which the director has a material conflict
of interest, (ii) a violation of criminal law, unless the director had
reasonable cause to believe his or her conduct was lawful, (iii) a
transaction from which the director received an improper personal benefit,
or (iv) willful misconduct. If the WBCL is hereafter amended to authorize
corporate action further alienating or limiting the personal liability of
directors, the liability of directors of the Corporation shall be
eliminated or limited to the fullest extent permitted by such law as
amended."
The directors and officers of St. Francis Bank, F.S.B. ("St. Francis Bank")
are included in the Registrant's directors' and officers' liability insurance
policy. The Registrant's insurance policy provides that, subject to the
applicable liability limits and retention amounts, the insurer will reimburse
directors and officers of St. Francis Bank and the Registrant for a "loss" (as
defined in the policy) sustained by a director or officer resulting from any
claim made against them for a "wrongful act" (as defined in the policy). The
policy also provides that, subject to the applicable liability limits and
retention amounts, the insurer will reimburse the Registrant for a loss for
which the Registrant has lawfully indemnified (or is required or permitted by
law to indemnify) a director or officer resulting from any such claim. Subject
to certain exclusions set forth in the policy, "wrongful act" is defined to mean
any actual or alleged error, misstatement, misleading statement, act or
omission, or neglect or breach of duty by the directors or officers in the
discharge of their duties solely in their capacities as such directors or
officers.
- 137 -
<PAGE> 183
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated June 30, 1998, by and between
St. Francis Capital Corporation and Reliance Bancshares, Inc.(1)
2.2 Agreement and Plan of Merger, dated September 22, 1998, between St.
Francis Capital Corporation and Reliance Bancshares, Inc.(1)
3.1 St. Francis' Articles of Incorporation (incorporated by reference to St.
Francis' Form S-1 Registration Statement (33-58680) declared effective by
the SEC on April 22, 1993).
3.2 Articles of Amendment to St. Francis' Articles of Incorporation
(incorporated by reference to Exhibit A of the Rights Agreement filed as
Exhibit 3.5 to St. Francis' Current Report on Form 8-K filed September 26,
1997).
3.3 St. Francis' Bylaws (incorporated by reference to St. Francis' Annual
Report on Form 10-K for the fiscal year ended September 30, 1995).
4.1 Rights Agreement between St. Francis and Firstar Trust Company, as Rights
Agent, dated September 25, 1997 (incorporated by reference to Exhibit 4.1
to St. Francis' Current Report on Form 8-K filed September 26, 1997).
5.1 Opinion of Michael Best & Friedrich LLP regarding Legality of Securities
being Issued.(1)
8.1 Opinion of Michael Best & Friedrich LLP regarding federal income tax
consequences.(1)
10.1 Employment Agreement - Allan T. Bach.(1)
10.2 Proposed Employment Agreement - Carol A. Barnharst.(1)
10.3 Form of Voting Agreement by and between St. Francis and the executive
officers and directors of Reliance in their individual capacity.(1)
10.4 Form of Letter Agreement by and between St. Francis and "affiliates" of
Reliance.(1)
21.1 Subsidiaries of St. Francis.(1)
23.1 Consent of Michael Best & Friedrich LLP as to the Legality of the
Securities Being Issued (contained in its opinion filed as Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Schenck & Associates, S.C.
23.4 Consent of Michael Best & Friedrich LLP as to its tax opinion (contained
in its opinion filed as Exhibit 8.1).
23.5 Consent of Robert W. Baird & Co., Incorporated, Financial Advisor to
Reliance Bancshares, Inc. (included in Exhibit C to the Proxy
Statement/Prospectus).
</TABLE>
- 138 -
<PAGE> 184
24.1 Power of Attorney (contained in the Signature Page of this
Registration Statement).(1)
- -----------------
(1) Previously filed.
99.1 Form of proxy to be mailed to shareholders of Reliance.
(b) FINANCIAL STATEMENT SCHEDULES
Not applicable.
(c) REPORTS, OPINIONS OR APPRAISALS
1. Opinion of Robert W. Baird & Co., Incorporated (included
herein as Exhibit C to the Proxy Statement/Prospectus).
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be
reflected in the form of the prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d)
of the Exchange
-139-
<PAGE> 185
Act) which is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(C) The undersigned Registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3
or Rule 14c-3 under the Exchange Act; and, where interim
financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is
sent or given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such
interim financial information.
(D) (1) The undersigned registrant hereby undertakes as follows:
that prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a
part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the
applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable
form.
(2) The undersigned Registrant undertakes that every prospectus
(i) that is filed pursuant to paragraph (1) immediately
preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and
will not be used until such amendment is effective, and
that, for purposes of determining any liability under the
Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
(E) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons
of the Registrant pursuant to any existing provision or
arrangement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(F) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form,
within one business day of receipt of such request, and to send
the incorporated document by first class mail or other equally
prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration
Statement through the date of responding to the request.
(G) The undersigned Registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of, and included in the Registration
Statement when it became effective.
-140-
<PAGE> 186
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, St.
Francis Capital Corporation has duly caused this Pre-Effective Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Brookfield, State of Wisconsin on
December 7 , 1998.
ST. FRANCIS CAPITAL CORP.
By: /s/ Thomas R. Perz
-------------------------------------
Thomas R.Perz,
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas R. Perz and Jon D. Sorenson or any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any state of the United States, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents may lawfully do or cause
to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS PRE-EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED
BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Thomas R. Perz President, Chief Executive December 7, 1998
- ------------------------ Officer and Director (Principal
Thomas R. Perz Executive and Operating Officer)
/s/ Jon D. Sorenson* Chief Financial Officer and December 7, 1998
- ------------------------ Treasurer (Principal Financial
Jon D. Sorenson and Accounting Officer)
/s/ John C. Schlosser* Chairman of the Board and December 7, 1998
- ------------------------ Director
John C. Schlosser
/s/ David J. Drury* Director December 7, 1998
- ------------------------
David J. Drury
/s/ Rudolph T. Hoppe* Director December 7, 1998
- ------------------------
Rudolph T. Hoppe
/s/ Edward W. Mentzer* Director December 7, 1998
- ------------------------
Edward W. Mentzer
/s/ Jeffrey A. Reigle* Director December 7, 1998
- ------------------------
Jeffrey A. Reigle
/s/ Julia H. Taylor* Director December 7, 1998
- ------------------------
Julia H. Taylor
/s/ Edmund O. Templeton* Director December 7, 1998
- ------------------------
Edmund O. Templeton
</TABLE>
* By:/s/ Thomas R. Perz
--------------------------------
Thomas R. Perz, Attorney-in-fact
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
St. Francis Capital Corporation:
We consent to the use of our reports incorporated herein by reference and to the
reference to our Firm under the "Experts" heading in the registration statement.
Milwaukee, Wisconsin KPMG Peat Marwick LLP
December 7, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated July 31, 1998, with respect to the consolidated
financial statements of Reliance Bancshares, Inc. in the Registration Statement
(Form S-4) of St. Francis Capital Corporation.
Schenck & Associates, SC
Certified Public Accountants
Brookfield, Wisconsin
December 4, 1998
<PAGE> 1
RELIANCE BANCSHARES, INC.
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 20, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders (the "Special Meeting") and the Proxy
Statement/Prospectus and, revoking any proxy heretofore given, hereby
constitutes and appoints Messrs. John T. Lynch and O. William Held to represent
and to vote, as designated below, all the shares of common stock, $1.00 par
value per share ("Common Stock"), of Reliance Bancshares, Inc. (the "Company")
held of record by the undersigned on December 4, 1998, at the Special Meeting
which will be held on January 20, 1999, at 2:00 p.m., Milwaukee time, at the
Clarion Hotel & Conference Center, 5311 South Howell Avenue, Milwaukee,
Wisconsin, or any adjustments or postponements thereof.
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED BELOW, BUT IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE MATTERS
LISTED BELOW. If any other business is presented at the Special Meeting or any
adjournments or postponements thereof, this proxy will be voted by the named
proxies in their best judgment and discretion. At the present time, the Board
of Directors of the Company knows of no other business to be presented at the
Special Meeting.
Please mark your votes as in this example: [X]
DETACH BELOW AND RETURN USING THE ENVELOPE PROVIDED
RELIANCE BANCSHARES, INC. 1999 SPECIAL MEETING OF SHAREHOLDERS
1. To approve and adopt an Agreement and Plan of Reorganization, dated as of
June 30, 1998 (the "Merger Agreement"), and the related Agreement and Plan
of Merger, dated September 22, 1998 (the "Plan of Merger"), between St.
Francis Capital Corporation, a Wisconsin corporation ("St. Francis") and
the Company providing for the merger of the Company with and into St.
Francis, whereby each outstanding share of the Company's Common Stock will
be converted into the right to receive cash in an amount ranging from
$10.00 per share of the Company's Common Stock up to an amount equal to
.2295 multiplied by the average market price of St. Francis' common stock
over a measurement period defined in the Merger Agreement (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 actual St. Francis Average Stock Price), or an overall
combination thereof, subject to certain election and allocation procedures
set forth in the Proxy Statement/Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To adjourn the Special Meeting to solicit additional votes in favor of the
Merger Agreement and the Plan of Merger in the event that the required vote
for approval and adoption of the Merger Agreement and the Plan of Merger
has not been obtained by the date of the Special Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the special meeting or any
adjournments or postponements thereof.
Dated:
-------------------------------------------------
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Signatures
IMPORTANT: Please sign your name exactly as it appears
hereon. When signing as an attorney, administrator,
agent, corporation, officer, executor, trustee,
guardian or similar position, please add your full
title to our signature. If shares of common stock are
held jointly, each holder may sign but only one
signature is required.
