LETTERHEAD OF CONTINENTAL BANK
AUGUST 22, 1997
Dear Stockholder:
You are hereby invited to attend a Special Meeting of Stockholders
of Continental Bank ("Continental"), which will be held on September 25, 1997 at
the principal office of Continental, 118 Seventh Street, Garden City, New York
at 3:30 p.m. (the "Special Meeting"). As you may be aware, Continental, Reliance
Bancorp, Inc. ("Reliance") and Reliance's wholly-owned subsidiary, Reliance
Federal Savings Bank ("Reliance Bank"), entered into an Agreement and Plan of
Merger, dated as of May 3, 1997 and amended as of July 1, 1997 (as amended, the
"Merger Agreement"), which provides for the merger (the "Merger") of Continental
with and into Reliance Bank with Reliance Bank being the surviving corporation.
At the Special Meeting, you will be asked to consider and vote upon a proposal
to approve the Merger Agreement.
The Merger Agreement provides that the aggregate consideration
payable to stockholders of Continental in the Merger will consist of 1.1 shares
of common stock, par value $0.01 per share, of Reliance for each share of
Continental common stock, par value $5.00 per share ("Continental Common
Stock"). Under the terms of the Merger Agreement, cash will be paid in lieu of
fractional shares of Reliance common stock.
THE MERGER AGREEMENT HAS BEEN UNANIMOUSLY APPROVED BY THE BOARD OF
DIRECTORS OF CONTINENTAL. YOUR BOARD HAS DETERMINED THAT THE MERGER IS IN THE
BEST INTERESTS OF CONTINENTAL AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
The investment banking firm of Sandler O'Neill & Partners, L.P. has
advised your Board of Directors that, in its opinion, as of August 22, 1997, the
consideration to be received by the holders of Continental Common Stock is fair
from a financial point of view to the holders of such shares.
Consummation of the Merger is subject to certain conditions,
including the approval of the Merger Agreement by the requisite vote of
Continental stockholders and the approval of the Merger by various regulatory
agencies.
The enclosed Notice of Special Meeting of Stockholders and Proxy
Statement-Prospectus describe the Merger and provide information regarding the
Special Meeting. Please read these materials carefully.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU
OWN. THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES
OF CONTINENTAL COMMON STOCK ELIGIBLE TO VOTE IS REQUIRED TO APPROVE THE MERGER
AGREEMENT. A FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN
PERSON WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT.
THEREFORE, I URGE YOU TO FILL IN, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED
PROXY CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE AS SOON AS POSSIBLE TO ASSURE
THAT YOUR SHARES WILL BE VOTED AT THE SPECIAL MEETING. YOU SHOULD NOT SEND IN
CERTIFICATES FOR YOUR SHARES OF CONTINENTAL COMMON STOCK AT THIS TIME.
On behalf of the Board of Directors, we thank you for your support
and urge you to vote FOR approval of the Merger Agreement.
If you have any questions, please call us at (516) 741-2400. I look
forward to seeing you on September 25, 1997.
Sincerely,
John P. Sullivan
President and Chief Executive Officer
<PAGE>
CONTINENTAL BANK
118 SEVENTH STREET
GARDEN CITY, NEW YORK 11530
(516) 741-2400
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
A Special Meeting of Stockholders (the "Special Meeting") of
Continental Bank ("Continental") will be held on September 25, 1997 at the
principal office of Continental, 118 Seventh Street, Garden City, New York, at
3:30 p.m., for the following purposes:
1. To consider and vote upon a proposal to approve an Agreement and
Plan of Merger, dated as of May 3, 1997 and amended as of July 1,
1997, by and among Reliance Bancorp, Inc., a Delaware corporation
("Reliance"), Reliance Federal Savings Bank, a federally
chartered savings bank and wholly-owned subsidiary of Reliance
("Reliance Bank"), and Continental (as amended, the "Merger
Agreement"), which provides for the merger of Continental with
and into Reliance Bank, with Reliance Bank being the surviving
corporation, pursuant to which each share of common stock, par
value $5.00 per share, of Continental ("Continental Common
Stock") will be converted into the right to receive 1.1 shares of
common stock, par value $0.01 per share, of Reliance. A copy of
the Merger Agreement is included as Appendix A to the
accompanying Proxy Statement-Prospectus.
2. To consider and vote upon a proposal to authorize the Board of
Directors of Continental, in its discretion, to vote upon such
other business as may properly come before the Special Meeting
and any adjournment or postponement thereof, including, without
limitation, a motion to adjourn the Special Meeting to another
time or place for the purpose of soliciting additional proxies in
order to approve and adopt the Merger Agreement, or otherwise.
Pursuant to Continental's bylaws, Continental's Board of Directors has fixed the
close of business on AUGUST 18, 1997 as the record date for the determination of
stockholders entitled to notice of and to vote at the Special Meeting. Only
holders of record of Continental Common Stock at the close of business on that
date are entitled to notice of and to vote at the Special Meeting. Any holder of
Continental Common Stock entitled to vote on the Merger Agreement who does not
vote in favor thereof has the right to receive payment of the fair value of such
holder's shares of Continental Common Stock upon compliance with the provisions
of Section 6022 of the New York Banking Law, the full text of which is included
as Appendix F to the Proxy Statement-Prospectus attached to this Notice of
Special Meeting. For a summary of the dissenters' rights of Continental's
stockholders, see "THE MERGER -- Dissenters' Rights" in the Proxy
Statement-Prospectus. Failure to comply strictly with the procedures set forth
in Section 6022 of the New York Banking Law will cause the stockholder to lose
dissenters' rights.
IT IS IMPORTANT THAT YOUR SHARES BE VOTED. THE AFFIRMATIVE VOTE OF THE HOLDERS
OF TWO-THIRDS OF THE OUTSTANDING SHARES OF CONTINENTAL COMMON STOCK ELIGIBLE TO
VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT. A FAILURE TO RETURN A PROPERLY
EXECUTED PROXY CARD OR TO VOTE IN PERSON WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE MERGER AGREEMENT. PLEASE FILL IN, SIGN, DATE AND PROMPTLY RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. IF YOU DECIDE TO
ATTEND THE SPECIAL MEETING, YOU CAN REVOKE YOUR PROXY AND VOTE PERSONALLY ON
EACH MATTER BROUGHT BEFORE THE SPECIAL MEETING.
By Order of the Board of Directors,
Thomas R. Cangemi
Senior Vice President and Corporate Secretary
Garden City, New York
August 22, 1997
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Reliance Bancorp, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 6035 11-3187176
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code No.) Identification No.)
585 STEWART AVENUE
GARDEN CITY, NEW YORK 11530
(516) 229-9300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
RAYMOND A. NIELSEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RELIANCE BANCORP, INC.
585 STEWART AVENUE
GARDEN CITY, NEW YORK 11530
(516) 229-9300
WITH COPIES TO:
OMER S.J. WILLIAMS, ESQ.
THACHER PROFFITT & WOOD
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 912-7400
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Approximate date of commencement of proposed sale to the public: AT THE
EFFECTIVE TIME OF THE MERGER OF CONTINENTAL BANK WITH AND INTO RELIANCE FEDERAL
SAVINGS BANK AS DESCRIBED IN THE ATTACHED PROXY STATEMENT-PROSPECTUS.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount to Be Offering Price per Aggregate Offering Amount of
to Be Registered Registered(1) Unit(2) Price(3) Registration Fee(3)(4)
<S> <C> <C> <C> <C> <C>
Common Stock, $0.01 par
value(5) 1,013,909 $ $31,938,133.50 $9,678.22
================================ ================= ===================== ====================== ======================
</TABLE>
- --------
1. This Registration Statement covers the maximum number of shares of the
Registrant's common stock that may be issued in the transaction described
herein. In accordance with Rule 416, this Registration Statement shall
also register any additional shares of the Registrant's common stock that
may become issuable to prevent dilution resulting from stock splits, stock
dividends or similar transactions as provided by the agreement relating to
the merger described herein.
2. Not applicable.
3. Estimated solely for the purpose of calculating the registration fee and
computed in accordance with Rule 457(f), based on the average of the bid
and asked prices of the common stock of Continental Bank ("Continental")
on June 26, 1997 as reported on the OTC Bulletin Board ($31.50) and the
maximum number of such shares (1,013,909) that may be exchanged for the
securities being registered, which was calculated by multiplying the
number of outstanding shares of Continental on June 26, 1997 (921,735) by
1.1.
4. Fee previously paid with the Registrant's filing of the Form S-4 on July
2, 1997.
5. This Registration Statement also covers preferred share purchase rights
issued under the Stockholder Protection Rights Agreement between Reliance
Bancorp, Inc. and Registrar and Transfer Co., as Rights Agent, dated as of
September 18, 1996, which are currently transferable with and only with
the shares of common stock registered hereby.
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 become effective in accordance with Section 8(a) of the Securities Act of
1933 or until the Registration Statement shall become effective on such date as
the Commission, acting pursuant to Section 8(a), may determine.
<PAGE>
CONTINENTAL BANK
PROXY STATEMENT
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 25, 1997
----------------------------
RELIANCE BANCORP, INC.
PROSPECTUS
----------------------------
This Proxy Statement-Prospectus is being furnished to the holders of
common stock, par value $5.00 per share ("Continental Common Stock"), of
Continental Bank ("Continental") in connection with the solicitation of proxies
by the Board of Directors of Continental (the "Continental Board") for use at a
special meeting of Continental's stockholders to be held at 3:30 p.m. on
September 25, 1997, at the principal office of Continental, 118 Seventh Street,
Garden City, New York, and at any adjournment or postponement thereof (the
"Special Meeting").
At the Special Meeting, holders of Continental Common Stock will
consider and vote upon a proposal to approve the Agreement and Plan of Merger,
dated as of May 3, 1997 and amended as of July 1, 1997 (as
amended, the "Merger Agreement"), by and among Reliance Bancorp, Inc., a
Delaware corporation ("Reliance"), Reliance Federal Savings Bank, a federally
chartered savings bank and wholly-owned subsidiary of Reliance ("Reliance
Bank"), and Continental, pursuant to which Continental will merge with and into
Reliance Bank (the "Merger"), with Reliance Bank surviving the Merger.
The Merger Agreement provides that, upon consummation of the Merger,
each outstanding share of Continental Common Stock will, with certain
exceptions, become and be converted into the right to receive 1.1
shares of common stock, par value $0.01 per share, of Reliance ("Reliance Common
Stock"), together with the related preferred share purchase right ("Reliance
Right") issued pursuant to the Stockholder Protection Rights Agreement (the
"Rights Agreement"), dated as of September 18, 1996, between Reliance and
Registrar and Transfer Co., as Rights Agent (the "Merger Consideration"). Under
the terms of the Merger Agreement, cash will be paid in lieu of fractional
shares of Reliance Common Stock.
Each of the stockholders of Continental entitled to vote at the
Special Meeting will also consider and vote upon a proposal to authorize the
Board of Directors to vote upon such other business as may properly come before
the Special Meeting, including, without limitation, a motion to adjourn the
Special Meeting to another time or place for the purpose of soliciting
additional proxies (the "Additional Proposal"). See "ADDITIONAL PROPOSAL."
This Proxy Statement-Prospectus also constitutes a prospectus of
Reliance with respect to the shares of Reliance Common Stock to be issued in
exchange for shares of Continental Common Stock upon consummation of the Merger
pursuant to the terms of the Merger Agreement (the "Merger Shares").
For a description of the Merger Agreement, which is included in its
entirety as Appendix A to this Proxy Statement-Prospectus, see "THE MERGER."
The shares of Reliance Common Stock are currently, and the Merger
Shares will be, traded in the over-the-counter market and included for quotation
on the National Market System of the Nasdaq Stock Market (the "Nasdaq National
Market"). The shares of Continental Common Stock are currently quoted on the OTC
<PAGE>
Bulletin Board. The last reported sale price per
share of Reliance Common Stock as reported on the Nasdaq National Market on May
2, 1997, the last business day preceding public announcement of the signing of
the Merger Agreement, was $24.00 and on AUGUST 20, 1997 was $30.25. The last
reported sale price per share of Continental Common Stock, as reported on the
OTC Bulletin Board on May 2, 1997, was $27.88, and on AUGUST 20, 1997 was
$31.25.
This Proxy Statement-Prospectus and the accompanying proxy card are
first being mailed to stockholders of Continental on or about AUGUST 25, 1997.
INVESTMENT IN RELIANCE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING
- ----------------------------------------------------------------------------
LOSS OF PRINCIPAL OR INVESTED AMOUNT.
- -------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF RELIANCE COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
------------------------------
THE DATE OF THIS PROXY STATEMENT-PROSPECTUS IS AUGUST 22, 1997.
2
<PAGE>
AVAILABLE INFORMATION
Reliance and Continental are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission") and
with the Federal Deposit Insurance Corporation (the "FDIC"), respectively.
Copies of Reliance's reports, proxy statements and other information
can be obtained, upon payment of prescribed fees, from the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, such reports, proxy statements and other information
can be inspected at the Commission's facilities referred to above and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. If available, such information may also be accessed through the
Commission's Electronic Data, Gathering, Analysis and Retrieval System via
electronic means, including the Commission's website on the Internet
(http://www.sec.gov).
Copies of Continental's reports, proxy statements and other
information can be obtained, upon payment of prescribed fees, from the FDIC at
the Registration and Disclosure Section of the FDIC at 550 17th Street, N.W.,
Washington, D.C. 20429.
The shares of Reliance Common Stock are included for quotation on
the Nasdaq National Market, and such reports, proxy statements and other
information concerning Reliance are available for inspection and copying at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
Reliance has filed with the Commission a Registration Statement on
Form S-4 (together with any amendments thereto, the "Reliance Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Merger Shares. This Proxy Statement-Prospectus does not
contain all of the information set forth in the Reliance Registration Statement
and the exhibits thereto. Such additional information may be obtained from the
Commission's principal office in Washington, D.C. Statements contained in this
Proxy Statement-Prospectus or in any document incorporated by reference in this
Proxy Statement-Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Reliance Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
THIS PROXY STATEMENT-PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING
STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
BUSINESS OF RELIANCE FOLLOWING THE CONSUMMATION OF THE MERGER, INCLUDING
STATEMENTS RELATING TO THE COST SAVINGS AND REVENUE ENHANCEMENTS THAT ARE
EXPECTED TO BE REALIZED FROM THE MERGER. SEE "SUMMARY," "THE MERGER-- BACKGROUND
OF AND REASONS FOR THE MERGER-- RELIANCE'S REASONS FOR THE MERGER" AND
"UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION."
FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) EXPECTED COST SAVINGS OR REVENUE ENHANCEMENTS FROM
THE MERGER CAN NOT BE FULLY REALIZED; (2) DEPOSIT ATTRITION, CUSTOMER LOSS OR
REVENUE LOSS FOLLOWING THE MERGER IS GREATER THAN EXPECTED; (3) COMPETITIVE
PRESSURE IN THE BANKING AND FINANCIAL SERVICES INDUSTRY INCREASES SIGNIFICANTLY;
(4) CHANGES IN THE INTEREST RATE ENVIRONMENT
3
<PAGE>
REDUCE MARGINS; AND (5) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR IN THE
STATE OF NEW YORK, ARE LESS FAVORABLE THAN EXPECTED.
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS RELATING TO
RELIANCE BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH
DOCUMENTS (EXCLUDING CERTAIN EXHIBITS THERETO) WILL BE FURNISHED WITHOUT CHARGE
TO ANY PERSON TO WHOM THIS PROXY STATEMENT-PROSPECTUS IS DELIVERED, UPON WRITTEN
OR ORAL REQUEST OF SUCH PERSON, DIRECTED TO INVESTOR RELATIONS DEPARTMENT, 585
STEWART AVENUE, GARDEN CITY, NEW YORK 11530, TELEPHONE NUMBER (516) 222-9300. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
SEPTEMBER 18, 1997.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS
RELATING TO RELIANCE AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY RELIANCE, AND ALL
INFORMATION RELATING TO CONTINENTAL AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY
CONTINENTAL.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS
IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES
MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY RELIANCE OR CONTINENTAL. THIS PROXY
STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF RELIANCE OR CONTINENTAL SINCE
THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
4
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Reliance (File
No. 0-23126) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement-Prospectus:
1. Reliance's Annual Report on Form 10-K for the year ended
June 30, 1996;
2. Reliance's Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1996, December 31, 1996 and March 31,
1997;
3. Reliance's Current Reports on Form 8-K, dated March 19,
1997, April 4, 1997 , May 3, 1997 and August 11, 1997; and -
4. The description of Reliance Common Stock, set forth in
Reliance's Registration Statement on Form 8-A dated December
22, 1993, and the description of Reliance's Preferred Share
Purchase Rights, set forth in Reliance's Registration
Statement on Form 8-A dated September 27, 1996, and any
amendment or report filed for the purpose of updating any
such description.
All documents filed by Reliance with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Proxy Statement-Prospectus and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement-Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement-Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement-Prospectus.
FOR INFORMATION ON HOW TO OBTAIN COPIES OF THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE, SEE "AVAILABLE INFORMATION."
INFORMATION RELATING TO CONTINENTAL
The Continental 1996 Annual Report to Shareholders, which includes
the Continental Annual Report on Form F-2 for the year ended December 31, 1996
(without the exhibits thereto) (the "Continental Annual Report") and
Continental's Quarterly Reports on Form F-4 for the quarters ended March 31,
1997 and June 30, 1997, appear as Appendices D , E and F, respectively, to this
Proxy Statement-Prospectus. The foregoing documents attached as Appendices
hereto are hereby incorporated by reference into this Proxy StatementProspectus.
Notwithstanding any statement to the contrary contained in any of the foregoing
documents, no effect shall be given to any incorporation by reference provided
for therein, and any such documents or information so incorporated shall not be
deemed a part hereof or thereof.
5
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
<S> <C>
AVAILABLE INFORMATION...........................................................................................................3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................................................................5
INFORMATION RELATING TO CONTINENTAL.............................................................................................5
SUMMARY ....................................................................................................................9
Parties to the Merger...............................................................................................9
The Special Meeting................................................................................................10
Reasons for the Merger; Recommendation of Board of Directors of Continental........................................10
Effects of the Merger..............................................................................................11
Effective Date and Time............................................................................................11
Merger Consideration...............................................................................................11
Opinion of Continental's Financial Advisor.........................................................................12
Conditions; Regulatory Approvals...................................................................................12
Certain Federal Income Tax Considerations..........................................................................12
Accounting Treatment...............................................................................................13
Nasdaq Listing.....................................................................................................13
Dissenters' Rights.................................................................................................13
Termination .......................................................................................................13
Termination Fee....................................................................................................14
Interests of Certain Persons in the Merger.........................................................................14
Management of Reliance and Reliance Bank After the Merger..........................................................15
Stock Option Agreement.............................................................................................15
Certain Differences in Stockholders' Rights........................................................................16
COMPARATIVE STOCK PRICE AND DIVIDEND INFORMATION...............................................................................17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA.................................................................................18
Reliance -- Historical.............................................................................................19
Continental -- Historical..........................................................................................22
SELECTED COMBINED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA..............................................................24
COMPARATIVE PER SHARE DATA.....................................................................................................26
THE SPECIAL MEETING............................................................................................................27
THE MERGER ...................................................................................................................28
Parties to the Merger..............................................................................................28
Effects of the Merger..............................................................................................29
Effective Date and Time............................................................................................30
Merger Consideration...............................................................................................30
Background of and Reasons for the Merger...........................................................................31
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Opinion of Continental's Financial Advisor.........................................................................33
Procedures for Exchange of Continental Common Stock Certificates...................................................38
Regulatory Approvals...............................................................................................40
Conditions to the Consummation of the Merger.......................................................................41
Representations and Warranties.....................................................................................42
Conduct of Business Pending the Merger.............................................................................42
No Solicitation....................................................................................................45
Amendment and Waiver...............................................................................................46
Price-Based Termination............................................................................................46
Termination .......................................................................................................48
Termination Fee....................................................................................................49
Expenses .......................................................................................................49
Material Federal Income Tax Consequences...........................................................................50
Accounting Treatment...............................................................................................52
Dissenters' Rights.................................................................................................52
Interests of Certain Persons in the Merger.........................................................................53
Effect on Continental Employee Benefit Plans.......................................................................55
Management of Reliance and Reliance Bank After the Merger..........................................................56
CERTAIN RELATED TRANSACTIONS...................................................................................................56
Stock Option Agreement.............................................................................................56
Resales of Reliance Common Stock...................................................................................58
ADDITIONAL PROPOSAL............................................................................................................59
BENEFICIAL OWNERSHIP OF RELIANCE COMMON STOCK..................................................................................60
Principal Security Ownership.......................................................................................60
Directors and Executive Officers...................................................................................61
BENEFICIAL OWNERSHIP OF CONTINENTAL COMMON STOCK...............................................................................63
Principal Security Ownership.......................................................................................63
Directors and Executive Officers...................................................................................64
CERTAIN REGULATORY CONSIDERATIONS..............................................................................................65
General .......................................................................................................65
Business Activities of Federal Savings Associations................................................................65
Restrictions on Payment of Dividends...............................................................................65
Capital Requirements...............................................................................................66
Prompt Corrective Regulatory Action................................................................................67
Impact of Recent Legislation.......................................................................................68
Transactions with Related Parties..................................................................................69
Federal Home Loan Bank System......................................................................................70
Other Regulation Applicable to Federal Savings Associations........................................................70
Holding Company Regulation.........................................................................................71
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL INFORMATION.................................................................................73
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DESCRIPTION OF RELIANCE CAPITAL STOCK..........................................................................................79
General .......................................................................................................79
Reliance Common Stock..............................................................................................79
Stockholder Protection Rights Plan.................................................................................80
Reliance Preferred Stock...........................................................................................81
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS...................................................................................81
Special Meetings of Stockholders...................................................................................81
Stockholder Action by Written Consent..............................................................................82
Stockholder Nominations and Proposals for Business.................................................................82
Removal of Directors...............................................................................................82
Voting Rights......................................................................................................82
Amendment of Certificate of Incorporation/Organization Certificate.................................................83
Amendment of Bylaws................................................................................................83
Limitation of Director and Officer Liability.......................................................................83
Indemnification of Directors and Officers..........................................................................84
Required Vote for Authorization of Certain Actions.................................................................84
Restrictions on Business Combinations Involving Interested Stockholders............................................85
Appraisal Rights...................................................................................................85
Evaluation of Certain Offers.......................................................................................86
Rights Plans.......................................................................................................86
Inspection Rights..................................................................................................88
LEGAL MATTERS..................................................................................................................88
EXPERTS ...................................................................................................................88
STOCKHOLDER PROPOSALS..........................................................................................................89
APPENDICES
A. Merger Agreement............................................................................................A-1
B. Stock Option Agreement .....................................................................................B-1
C. Opinion of Continental's Financial Advisor .................................................................C-1
D. Continental Form F-2 and Annual Report for the Year Ended December 31, 1996 ...............................D-1
E. Continental Quarterly Report on Form F-4 for the Quarter Ended March 31, 1997...............................E-1
F. Continental Quarterly Report on Form F-4 for Quarter Ended June 30, 1997....................................F-1
G. New York Banking Law Section 6022 ........................................................................ G-1
</TABLE>
8
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE DESCRIPTION
OF ALL MATERIAL FACTS REGARDING RELIANCE, CONTINENTAL AND THE MATTERS TO BE
CONSIDERED AT THE SPECIAL MEETING AND IS QUALIFIED IN ALL RESPECTS BY THE
INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT-PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS REFERRED TO
HEREIN.
PARTIES TO THE MERGER
RELIANCE AND RELIANCE BANK. Reliance is a Delaware corporation
organized on November 16, 1993 and is the holding company for Reliance Bank. The
principal business of Reliance is the operation of its wholly-owned subsidiary,
Reliance Bank, a federally-chartered savings bank. Reliance Bank's principal
business is attracting retail deposits from the general public and investing
those deposits, together with funds generated from operations, principal
repayments and borrowings, primarily in one- to four-family mortgage,
multi-family and consumer loans (primarily home equity lines of credit, home
equity loans, auto and guaranteed student loans) and, to a lesser extent,
commercial real estate and construction loans. In the past, Reliance Bank has
also invested in loans secured by cooperative units and commercial loans, but in
recent years Reliance Bank has discontinued its origination activities in these
areas. In addition, during periods in which the demand for loans that meet
Reliance Bank's underwriting, investment and interest rate risk standards are
lower than the amount of funds available for investment, Reliance Bank invests
in mortgage-backed and mortgage-related securities and securities issued by the
U.S. Government and Federal agencies and other investments permitted by federal
laws and regulations. Reliance Bank's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed and investment
securities, Federal Home Loan Bank of New York ("FHLB-NY") advances and reverse
repurchase agreements. At June 30, 1997, Reliance had total consolidated assets
of $1.98 billion, deposits of $1.4 billion and stockholders' equity of $162.7
million. As of June 30, 1997, Reliance Bank had 28 retail banking office
locations with seven in Queens County, New York, 12 in Nassau County, New York
and nine in Suffolk County, New York. The principal executive offices of
Reliance are located at 585 Stewart Avenue, Garden City, New York 11530, and its
telephone number is (516) 222-9300. Reliance Bank's deposits are insured by the
Savings Association Insurance Fund (the "SAIF") of the FDIC. Upon consummation
of the Merger, Reliance intends to continue all of its current business
operations, as well as seek to increase its commercial and asset-based lending
and check cashing operations. See "AVAILABLE INFORMATION," "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" AND "INFORMATION RELATING TO CONTINENTAL."
CONTINENTAL. Continental is a New York State-chartered commercial
bank that was founded in 1974. Continental offers business and personal checking
accounts, N.O.W. and money market accounts, savings and time deposit accounts
and grants secured and unsecured loans to individuals, partnerships and
corporations and originates loans through the Small Business Administration
("SBA") under the 7A and 504 program. Continental also invests in various types
of securities and assets including, but not limited to, mortgage-backed
securities insured or guaranteed by the United States or agencies thereof.
Continental funds its lending and investment activities primarily from deposits
received at its various branch locations, repayment of principal and interest on
loans and securities, borrowings from the FHLB-NY and borrowings available under
agreements to repurchase securities with primary dealers. At June 30, 1997,
Continental had total assets of $177.3 million, deposits of $136.2 million and
stockholders' equity of $13.4 million. As of June 30, 1997, Continental
conducted its retail banking activities through its main office located in
Garden City, New York, through its branch office located in North Babylon,
Suffolk County, New York, and through a commercial lending facility in New York,
New York. Continental also operates five Money Center check cashing facilities
in New York, New York. The principal executive offices of Continental are
located at 118 Seventh Street,
9
<PAGE>
Garden City, New York 11530, and its telephone number is (516) 741-2400.
Continental's deposits are insured by the Bank Insurance Fund (the "BIF") of the
FDIC.
10
<PAGE>
See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "INFORMATION
RELATING TO CONTINENTAL," "THE MERGER -- Parties to the Merger," "SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA," "CERTAIN REGULATORY CONSIDERATIONS" and
"UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION."
THE SPECIAL MEETING
The Special Meeting will be held at 3:30 p.m., on September
25, 1997 at the principal office of Continental, 118 Seventh Street, Garden
City, New York. The purpose of the Special Meeting is to consider and vote upon
a proposal to approve the Merger Agreement and a proposal to authorize the
Continental Board, in its discretion, to vote upon such other matters as may
properly be brought before the Special Meeting and any adjournment or
postponement thereof including, without limitation, a motion to adjourn the
Special Meeting to another time or place for the purpose of soliciting
additional proxies in order to approve the Merger Agreement, or otherwise.
Only holders of record of Continental Common Stock at the
close of business on August 18, 1997 (the "Record Date") will be entitled to
vote at the Special Meeting with each entitled to one vote per share. The
affirmative vote of the holders of two-thirds of the aggregate outstanding
shares of Continental Common Stock on the Record Date is required to approve the
Merger Agreement. As of the Record Date, there were 921,735
shares of Continental Common Stock outstanding and entitled to be voted at the
Special Meeting.
The affirmative vote of two-thirds of the aggregate
outstanding shares of Continental Common Stock on the Record Date is required in
order to approve and adopt the Merger Agreement. In addition, assuming the
existence of a quorum, the affirmative vote of a majority of the votes present
in person or by proxy and entitled to vote at the Special Meeting is required to
approve the Additional Proposal. A failure to return a properly executed proxy
card or to vote in person or abstaining from voting will have the same effect as
a vote against the Merger Agreement. An abstention, with respect to the
Additional Proposal, will have the effect of a vote against the Additional
Proposal. Broker non-votes will not be counted as having been voted in person or
by proxy at the Special Meeting and will have the same effect as a vote against
the Merger Agreement. In contrast, shares underlying broker non-votes will have
no effect on the vote on the Additional Proposal.
As of June 30, 1997, Continental's directors and executive
officers (and their affiliates) (14 persons) beneficially own and have the
power to vote 160,082 shares of Continental Common Stock. Such shares of
Continental Common Stock, which Continental's directors and executive officers
(and their affiliates) have the right to vote, represent approximately 17.37%
of the outstanding shares of Continental Common Stock that may be voted at the
Special Meeting. Such persons have agreed to vote, or direct the voting of, all
such shares in favor of the Merger Agreement and for the Additional Proposal (as
defined below). As of June 30, 1997, certain major shareholders of Continental
who are not directors or officers or affiliates of directors or officers of
Continental beneficially own and have the power to vote 126,824 shares of
Continental Common Stock. Such shares of Continental Common Stock represent
approximately 13.76% of the outstanding shares of Continental Common Stock that
may be voted at the Special Meeting. Such persons have agreed to vote, or direct
the voting of, all such shares, in favor of the Merger Agreement and for the
Additional Proposal. As of June 30, 1997, Reliance, its subsidiaries and the
directors and executive officers of Reliance, beneficially owned no shares of
Continental Common Stock. See "THE SPECIAL MEETING."
REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF DIRECTORS OF CONTINENTAL
11
<PAGE>
RELIANCE. THE RELIANCE BOARD HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT. Stockholders of Reliance are not required to approve the
Merger, and, therefore, there will be no special meeting of Reliance
stockholders for that purpose. The Reliance Board believes the Merger will
result in the addition of a well-suited and positioned banking institution to
Reliance's existing organization. See "THE MERGER-- Background of and Reasons
for the Merger-- Reliance's Reasons for the Merger."
CONTINENTAL. THE CONTINENTAL BOARD HAS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AND HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS
OF CONTINENTAL AND ITS STOCKHOLDERS. THE CONTINENTAL BOARD, THEREFORE,
UNANIMOUSLY RECOMMENDS THAT CONTINENTAL'S STOCKHOLDERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT. The Continental Board believes that the Merger will provide
significant value to Continental stockholders and also enable them to
participate in the opportunities for growth that the Continental Board believes
the Merger makes possible. See "THE SPECIAL MEETING -- Recommendation of the
Board of Directors" and "THE MERGER -- Background of and Reasons for the Merger
- -- Continental's Reasons for the Merger."
EFFECTS OF THE MERGER
Pursuant to the Merger Agreement, at the Effective Time (as
defined below), Continental will be merged with and into Reliance Bank with
Reliance Bank being the surviving corporation, and Continental
stockholders will receive the consideration described in "THE MERGER -- Merger
Consideration" and "-- Effects of the Merger." For information on how
Continental stockholders will be able to exchange certificates representing
shares of Continental Common Stock for new certificates representing the shares
of Reliance Common Stock to be issued to them, see "THE MERGER -- Procedures for
Exchange of Continental Common Stock Certificates." Each outstanding share of
Reliance Common Stock at the Effective Time shall remain outstanding and
unchanged as a result of the Merger.
EFFECTIVE DATE AND TIME
The Merger will become effective at the date (the "Effective
Date") and time (the "Effective Time") set forth in the articles of combination
that will be filed with the Office of Thrift Supervision (the "OTS") in
accordance with applicable law . The articles of combination will be filed on a
date (the "Closing Date") that is not earlier than the later of (i) October 12,
1997, or (ii) the last business day of the month in which the expiration of
the last applicable waiting period related to regulatory approval has occurred
and after satisfaction or waiver of certain conditions to the Merger specified
in the Merger Agreement. The Merger will be effective as of the close of
business on the Closing Date, unless another date or time is agreed to by
Reliance and Continental. See "THE MERGER -- Effective Date and Time."
MERGER CONSIDERATION
The Merger Agreement provides that the aggregate consideration
payable to holders of Continental Common Stock in the Merger will consist of 1.1
shares of Reliance Common Stock per share of Continental Common Stock. Upon
consummation of the Merger, each share of Continental Common Stock (with certain
exceptions), will be converted in the Merger into the right to receive 1.1
shares of Reliance Common Stock, together with the related Reliance Right issued
pursuant to the Rights Agreement.
If Reliance effects a stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares
prior to the Effective Time, an appropriate adjustment to the consideration will
be made.
No fractional shares of Reliance Common Stock will be issued
in connection with the Merger and cash will be paid in lieu thereof.
12
<PAGE>
Upon consummation of the Merger, any shares of Continental
Common Stock that are owned by Continental as treasury stock or that are held
directly or indirectly by Reliance (other than in a fiduciary capacity or in
satisfaction of a debt previously contracted) will be canceled and retired and
cease to exist, and no payment will be made with respect thereto. In addition,
shares of Continental Common Stock with respect to which dissenters' rights have
been asserted and not withdrawn will not be converted into Reliance Common Stock
as provided in the Merger Agreement. See "-- Dissenters' Rights." For certain
information concerning the historical market prices of Continental Common Stock
and Reliance Common Stock, see "COMPARATIVE STOCK PRICE AND DIVIDEND
INFORMATION."
CONTINENTAL STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE
ENCLOSED PROXY AND SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL A
CONTINENTAL STOCKHOLDER HAS RECEIVED THE LETTER OF TRANSMITTAL AND RELATED
FORMS.
OPINION OF CONTINENTAL'S FINANCIAL ADVISOR
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") has
served as financial advisor to Continental in connection with the Merger and has
rendered an opinion to the Continental Board that, as of the date of this Proxy
Statement-Prospectus, the consideration to be received by the holders of shares
of Continental Common Stock pursuant to the Merger Agreement was fair, from a
financial point of view, to such stockholders. For additional information, see
"THE MERGER -- Opinion of Continental's Financial Advisor -- Continental." The
opinion of Sandler O'Neill is attached as Appendix C to this Proxy
Statement-Prospectus. Stockholders are urged to read such opinion in its
entirety for a description of the procedures followed, assumptions made, matters
considered and qualifications of the review undertaken by Sandler O'Neill in
connection therewith.
Under an agreement with Sandler O'Neill, Continental will pay
Sandler O'Neill a transaction fee in connection with the Merger, a substantial
portion of which is contingent upon consummation of the Merger. Continental will
pay Sandler O'Neill a transaction fee based upon a formula related to the
aggregate purchase price in the Merger, which equaled approximately $360,000 (at
the time the Merger Agreement was executed), of which 25% has been paid and 75%
will be paid upon consummation of the Merger.
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is subject to various conditions,
including receipt of the approval of Continental's stockholders solicited
hereby, receipt of the necessary regulatory approvals, receipt of opinions of
counsel regarding certain tax aspects of the Merger and satisfaction of other
customary closing conditions.
The regulatory approvals and consents necessary to consummate
the Merger include the approvals of the OTS and the New York State Banking
Department (the "Banking Department"). Applications were filed on June 25 and
June 26, 1997. Such applications are currently under review. THERE CAN BE NO
ASSURANCE THAT SUCH REGULATORY APPROVALS WILL BE OBTAINED, AND, IF THE MERGER IS
APPROVED, THERE CAN BE NO ASSURANCE AS TO THE DATE OF ANY SUCH APPROVAL. THERE
CAN ALSO BE NO ASSURANCE THAT ANY SUCH APPROVALS WILL NOT CONTAIN A CONDITION OR
REQUIREMENT WHICH CAUSES SUCH APPROVALS TO FAIL TO SATISFY THE CONDITIONS SET
FORTH IN THE MERGER AGREEMENT, WHICH ARE DESCRIBED UNDER "THE MERGER --
REGULATORY APPROVALS" AND "--CONDITIONS TO THE CONSUMMATION OF THE MERGER."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
It is intended that the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). Consummation of the Merger is conditioned
upon, among other things, receipt by Reliance of an opinion of Thacher Proffitt
& Wood and the receipt by
13
<PAGE>
Continental of an opinion of Muldoon, Murphy & Faucette, each dated as of the
Effective Date, substantially to such effect. In general, no gain or loss will
be recognized by Reliance, Reliance Bank or Continental as a result of the
Merger, and, except to the extent of any cash received in lieu of a fractional
share interest in Reliance Common Stock, no gain or loss will be recognized by
holders of Continental Common Stock. See "THE MERGER -- Material Federal Income
Tax Consequences."
ACCOUNTING TREATMENT
Reliance will treat the Merger as a purchase for accounting
purposes. See "THE MERGER -- Accounting Treatment."
NASDAQ LISTING
The Reliance Common Stock is currently included for quotation
on the Nasdaq National Market. The Continental Common Stock is currently quoted
on the OTC Bulletin Board, which is a quotation service provided by The Nasdaq
Stock Market, Inc. It is a condition to consummation of the Merger that the
Reliance Common Stock to be issued to the stockholders of Continental pursuant
to the Merger Agreement will be included for quotation on the Nasdaq National
Market.
DISSENTERS' RIGHTS
Holders of Continental Common Stock who deliver a written
objection to the Merger to the Secretary of Continental before the vote on the
adoption of the Merger Agreement at the Special Meeting and otherwise
comply with the additional requirements of Section 6022 of the New York Banking
Law (the "NYBL") will be entitled to dissenters' rights in connection with the
Merger. Any shares of Continental Common Stock as to which the holder thereof
shall have exercised and perfected dissenters' rights shall not be converted
into the right to receive the Merger Consideration, and the holder shall receive
a cash payment pursuant to Section 6022 of the NYBL. A copy of Section 6022 of
the NYBL is attached to this Proxy Statement-Prospectus as Appendix G. See
"THE SPECIAL MEETING" and "THE MERGER -- Dissenters' Rights."
TERMINATION
The Merger Agreement may be terminated, and the Merger
abandoned, at or prior to the Effective Time, under certain specified
circumstances, including, without limitation, pursuant to a price-based
termination provision. Specifically, under the price based termination
provision, the Merger Agreement may be terminated by Continental at any time
during the five-day period commencing with the day on which the last of the
required regulatory approvals for the Merger is obtained (the "Valuation Date"),
but only if : (i) the average of the mean between the closing high bid and low
asked prices of a share of Reliance Common Stock over a designated period
immediately preceding the Valuation Date ("Reliance Market Value") is less than
$19.20 (subject to adjustment under certain circumstances) ("Initial Reliance
Market Value") and (ii) the quotient obtained by dividing the Reliance Market
Value on the Valuation Date by the Initial Reliance Market Value is less than
the number obtained by subtracting 0.15 from the quotient obtained by dividing
the weighted average common stock price of a group of other financial
institution holding companies over a designated period ending on the Valuation
Date by $26.93, the weighted average common stock price of such group on May 2,
1997; provided, however, that, upon the receipt of any such notice of
termination, Reliance shall have the option for a period of seven days to
increase the consideration to be received by the holders of Continental Common
Stock in accordance with a formula set forth in the Merger Agreement. See "THE
MERGER -- Price-Based Termination" and "-- Termination."
14
<PAGE>
Prior to making any decision to terminate (or allow the
termination of) the Merger Agreement, each of the Continental Board and the
Reliance Board would consult with its respective 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 the stockholders of
Continental.
TERMINATION FEE
In recognition of the efforts and expenses of, and other
opportunities foregone by Reliance while structuring the Merger, the Merger
Agreement provides that Continental shall, in certain circumstances involving an
attempt by a third party to acquire Continental, pay to Reliance a termination
fee of $350,000 in cash. See "THE MERGER -- Termination Fee."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Continental's management and the
Continental Board may be deemed to have certain interests in the Merger that are
in addition to their interests, if any, as stockholders generally, including the
interests described below. The Continental Board was aware of these interests
and considered them, among other things, in approving the Merger Agreement and
the transactions contemplated thereby. These interests include, among others,
provisions in the Merger Agreement relating to indemnification and maintenance
of director and officer liability insurance coverage. These interests also
relate to certain benefits available as a result of a change in control of
Continental, including the payment of cash severance benefits under existing
employment and severance agreements, the cash payout of existing phantom stock
awards currently held by certain officers and other cash bonus payments that
will be paid to retain certain individuals summarized below and described in
"The Merger-- Interests of Certain Persons in the Merger." No officer, employee
or director of Continental has entered into any agreement with Reliance to
continue in Reliance's employ following consummation of the Merger.
Pursuant to the Merger Agreement, Reliance has agreed that,
for a period of six years following the Effective Date (or until the final
disposition of any claims made during that time period), it will indemnify the
present and former directors, officers, employees and agents of Continental
against costs and expenses incurred in connection with any claim arising out of
matters existing or occurring at or prior to the Effective Time. Reliance has
also agreed that, for a period of six years after the Effective Time, it will,
subject to certain limitations, purchase and maintain directors' and officers'
liability insurance at Continental's current level and scope; provided, however,
that in no event will Reliance be obligated to expend, in order to maintain or
provide such insurance coverage, any premium for such six year period
aggregating in excess of $180,000.
In connection with the Merger, Continental Chairman Irwin
Nelson, in recognition of his leadership, performance and valued service, will
receive a retention/incentive bonus equal to $120,000 to be paid at the
Effective Time contingent on his continued service until the Effective Time.
In connection with the Merger and pursuant to the employment
agreement between Continental and Mr. John P. Sullivan ("Employment Agreement"),
Mr. Sullivan, who will be resigning his position as President and Chief
Executive Officer of Continental at the Effective Time, will be paid a cash
severance benefit of $575,692.
In addition, pursuant to the employment agreement between
Continental and Mr. Gerald J. Grossman, President of Continental Business Credit
and Senior Vice President of Continental, if Mr. Grossman voluntarily resigns
from his positions with Continental and its subsidiary following the Effective
Time, he will receive a cash severance payment equal to $100,000. Reliance has
agreed to honor the terms of Mr. Grossman's employment agreement.
15
<PAGE>
Also, in connection with the Merger, existing Continental
phantom stock awards will be cashed out at the Reliance Market Value multiplied
by 1.1. Each phantom stock award represents a right to receive a cash payment
following vesting or a change in control of Continental equivalent in value to
one share of common stock of Continental. John P. Sullivan, Thomas R. Cangemi
and Peter D. McCarthy hold 45,600, 5,000 and 3,000 phantom stock awards,
respectively. Assuming a market price of Reliance Common Stock equal to $30.25
per share (the closing price of Reliance Common Stock on August 20, 1997, the
latest practicable trading date prior to the mailing of this Proxy
Statement-Prospectus), the amounts payable to Messrs. Sullivan, Cangemi and
McCarthy due to the cash-out of their respective phantom stock awards would be
equal to $1,517,300, $166,400 and $99,800, respectively.
Additionally, pursuant to preexisting severance arrangements
between certain officers and Continental, such officers will receive cash
payments equal to the amount of their current monthly salary for a specified
number of months. At the Effective Time, Mr. Cangemi will resign from his
position as Senior Vice President and Chief Financial Officer of Continental and
will, pursuant to a preexisting severance arrangement, receive approximately
$60,000. In addition, Messrs. Riley and McCarthy, if terminated, would be
entitled to receive cash payments equal to approximately $40,000 and $28,000,
respectively.
Continental has also committed to pay certain officers
incentive/retention bonuses designed to reward such individuals for their valued
service and provide an incentive for such officers to remain with Continental
through the Effective Date of the Merger. Incentive/retention bonuses will be
paid to 11 individuals. Messrs. Grossman, Cangemi, McCarthy and Riley will
receive incentive/retention bonuses equal to $100,000, $75,000, $50,000 and
$25,000, respectively.
Payments made under the Employment Agreement with Mr. Sullivan
in the event of a change in control could result in the imposition of an excise
tax under Section 4999 of the Code. In the event that such an excise
tax is payable to the Internal Revenue Service (the "IRS"), the Employment
Agreement provides that Mr. Sullivan will be indemnified for such amounts and
for any additional income and employment taxes imposed as a result of such
indemnification and such amounts will be withheld from payments made to Mr.
Sullivan under the Employment Agreement. Under the Code, Reliance will not be
able to deduct part of the payments and the indemnification payments.
Finally, Continental maintains a severance policy for the
benefit of full-time employees, other than those officers discussed above, which
in the event of termination pays a full-time employee a severance amount based
upon such employee's position, salary and length of service. See "THE MERGER --
Interests of Certain Persons in the Merger."
MANAGEMENT OF RELIANCE AND RELIANCE BANK AFTER THE MERGER
The Merger Agreement provides that, at the Effective Time, the
directors and officers of Reliance Bank shall consist of the directors and
officers of Reliance Bank immediately prior to the Effective Time of the Merger.
The directors and officers of Reliance at the Effective Time shall consist of
the directors and officers of Reliance immediately prior to the Effective Time.
See "THE MERGER -- Management of Reliance and Reliance Bank
After the Merger."
STOCK OPTION AGREEMENT
As a condition to Reliance entering into the Merger Agreement,
Reliance required that Continental also enter into a Stock Option Agreement,
dated as of May 3, 1997 (the "Stock Option Agreement"), pursuant to which
Continental granted Reliance an option (the "Option"), exercisable upon the
occurrence of certain events
16
<PAGE>
(none of which has occurred, to the best of Reliance's and Continental's
knowledge, as of the date hereof), to purchase up to 183,425 shares of
Continental Common Stock (representing approximately 19.9% of the outstanding
shares of Continental Common Stock on May 3, 1997), at an exercise price of
$22.00 per share, subject to adjustment in certain circumstances and subject to
termination within certain periods.
The Stock Option Agreement is intended to increase the
likelihood that the Merger will be consummated in accordance with the terms of
the Merger Agreement. Certain aspects of the Stock Option Agreement may have the
effect of discouraging persons who might now or prior to the consummation of the
Merger be interested in acquiring all of or a significant interest in
Continental from considering or proposing such an acquisition, even if such
persons were prepared to pay a higher price per share for the Continental Common
Stock than the value per share contemplated by the Merger Agreement. The
acquisition of Continental or an interest in Continental, or an agreement to do
either, could cause the Option to become exercisable. The existence of such
Option could significantly increase the cost to a potential acquiror of
acquiring Continental compared to its cost had the Stock Option Agreement not
been entered into. Such increased costs might discourage a potential acquiror
from considering or proposing an acquisition or might result in a potential
acquiror proposing to pay a lower per share price to acquire Continental than it
might otherwise have proposed to pay. The management of Continental believes
that the exercise of the Option is likely to deter any acquiror of Continental
from accounting for any acquisition of Continental using the
pooling-of-interests accounting method for a period of two years. The inability
to use the pooling-of-interests accounting method could discourage or preclude
an acquisition by other banking organizations during that period.
A copy of the Stock Option Agreement is attached as Appendix B
to this Proxy Statement-Prospectus. A description of the Stock Option Agreement,
including a description of the events which will result in the Option becoming
exercisable, is set forth under "CERTAIN RELATED TRANSACTIONS -- Stock Option
Agreement -- Terms of Stock Option Agreement."
CERTAIN DIFFERENCES IN STOCKHOLDERS' RIGHTS
At the Effective Time, stockholders of Continental who receive
shares of Reliance Common Stock will become stockholders of Reliance, and their
rights as stockholders of Reliance will be determined by the
Delaware General Corporation Law ("DGCL") and by Reliance's Certificate of
Incorporation and Bylaws. The rights of Continental stockholders are currently
governed by the NYBL and by Continental's Amended Organization Certificate and
Bylaws. The rights of Reliance stockholders differ from the rights of
Continental stockholders with respect to certain important matters, including:
the ability of stockholders to call special meetings of stockholders; the
ability of stockholders to take action by written consent; appraisal rights; the
vote required for certain actions; statutory and other restrictions on certain
business combinations; limitations of director and officer liability; the
removal of directors; indemnification of directors and officers; and the
provisions of Reliance's Rights Agreement. For a summary of these differences,
see "COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS."
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COMPARATIVE STOCK PRICE AND DIVIDEND INFORMATION
The shares of Reliance Common Stock are included for quotation
in the Nasdaq National Market (symbol: "RELY"), and the shares of Continental
Common Stock are quoted on the OTC Bulletin Board (symbol: "COBG"). The
following table sets forth the high and low sale prices of shares of Reliance
Common Stock and Continental Common Stock as reported on the Nasdaq National
Market and OTC Bulletin Board, respectively, and the quarterly cash dividends
per share declared, for the periods indicated.
<TABLE>
<CAPTION>
RELIANCE CONTINENTAL
COMMON STOCK COMMON STOCK
------------------------- -----------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS(1)
---- --- --------- ---- --- ------------
1995
<S> <C> <C> <C> <C> <C> <C>
Quarter ended March 31 ............. $12.88 $10.38 $0.10 $15.00 $11.00 $0.10
Quarter ended June 30 .............. 14.38 11.75 0.10 14.50 11.00 --
Quarter ended September 30 ......... 14.75 13.19 0.12 14.50 14.13 --
Quarter ended December 31 .......... 15.25 13.13 0.12 15.00 15.00 --
1996
Quarter ended March 31 ............. 16.13 14.13 0.12 15.25 14.00 0.12
Quarter ended June 30 .............. 16.50 14.50 0.12 13.50 13.00 --
Quarter ended September 30 ......... 19.50 15.63 0.14 13.00 11.00 --
Quarter ended December 31 .......... 19.50 17.50 0.14 15.00 12.00 --
1997
Quarter ended March 31 ............. 25.38 18.63 0.16 20.63 14.00 --
Quarter ended June 30 .............. 29.44 22.00 0.16 30.00 20.25 --
Quarter ended September 30
(through August 20) ................. 30.25 27.69 -- 31.25 28.50 --
</TABLE>
- --------------------
(1) Pursuant to the Merger Agreement, Continental shall not, without the prior
written consent of Reliance, declare or pay any dividend on the Continental
Common Stock, except that if, under certain circumstances, the Merger has
not been completed prior to September 30, 1997, Continental may pay a
dividend with respect to the quarter ended September 30, 1997 in an amount
not to exceed $0.18 per share. See "THE MERGER -- Conduct of Business
Pending the Merger."
The following table sets forth the last reported sale price per
share of Reliance Common Stock and Continental Common Stock on (i) May 2, 1997,
the last business day preceding public announcement of the signing of the Merger
Agreement; and (ii) August 20, 1997, the last practicable date prior to the
mailing of this Proxy Statement-Prospectus.
RELIANCE CONTINENTAL
COMMON STOCK COMMON STOCK
------------ ------------
May 2, 1997 ................... $ 24.00 $ 27.88
August 20, 1997 ............... $ 30.25 $ 31.25
CONTINENTAL AND RELIANCE STOCKHOLDERS ARE ADVISED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR RELIANCE COMMON STOCK AND CONTINENTAL COMMON
STOCK. The market price of Reliance Common Stock will
18
<PAGE>
fluctuate between the date of this Proxy Statement-Prospectus and the Effective
Date. No assurance can be given concerning the market price of Reliance Common
Stock before or after the Effective Date.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected historical
consolidated financial information (unaudited) for Reliance for the five years
ended June 30, 1997 and Continental for the five years ended December 31, 1996
and the 12 months ended June 30, 1997 and 1996. The financial information for
Continental for the 12 month periods ended June 30, 1997 and 1996 has been
presented to coincide with the reporting period for Reliance. Following the
Merger, the combined company's fiscal year, like that of Reliance, will end on
June 30. The tables have been derived from, and should be read in conjunction
with, the historical financial statements of Reliance and Continental, including
the related notes thereto, incorporated by reference in or accompanying this
Proxy Statement-Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "INFORMATION RELATING TO CONTINENTAL." The financial information
for the 12 month period ended June 30, 1997 for Continental reflects, in the
opinion of the management of Continental, all adjustments necessary for a fair
presentation of such information. Results for this period are not necessarily
indicative of the results which may be expected for the full year or any other
interim period.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
RELIANCE -- HISTORICAL
<TABLE>
<CAPTION>
AT JUNE 30,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
SELECTED FINANCIAL DATA:
<S> <C> <C> <C> <C> <C>
Total assets .................................. $1,976,764 $1,782,550 $931,436 $830,501 $736,276
Loans receivable, net ......................... 909,321 817,746 332,080 330,720 365,913
Debt and equity securities
available-for-sale ........................ 26,909 13,271 23,880 37,588 --
Debt and equity securities held-
to-maturity ............................... 46,026 48,330 23,890 39,492 38,819
Mortgage-backed securities
held-to-maturity .......................... 159,356 184,492 413,762 394,199 304,490
Mortgage-backed securities
available-for-sale ........................ 721,819 591,740 104,453 -- --
Excess of cost over fair value
of net assets acquired .................... 45,463 49,429 -- -- --
Real estate owned, net ........................ 450 1,564 1,558 2,911 3,909
Deposits ...................................... 1,436,037 1,345,626 670,317 587,221 600,278
FHLB advances ................................. 40,000 3,000 40,000 78,000 65,000
Securities sold under
agreements to repurchase .................. 311,913 263,160 57,035 -- --
Total stockholders' equity(1) ................. 162,670 153,619 153,733 157,851 61,412
</TABLE>
(SEE FOOTNOTES ON PAGE 21)
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
RELIANCE -- HISTORICAL
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Interest income ............................................. $133,289 $100,372 $ 61,260 $ 47,224 $ 48,178
Interest expense ............................................ 71,653 52,985 28,361 20,024 21,322
-------- -------- -------- -------- --------
Net interest income ......................................... 61,636 47,387 32,899 27,200 26,856
Less provision for loan losses .............................. 950 725 400 393 234
-------- -------- -------- -------- --------
Net interest income after provision for loan losses ......... 60,686 46,662 32,499 26,807 26,622
-------- -------- -------- -------- --------
Non-interest income:
Loan fees and service charges ............................... 683 826 269 260 234
Other operating income ...................................... 2,557 1,606 841 859 960
Net gain on securities ...................................... 172 678 147 -- --
-------- -------- -------- -------- --------
Total non-interest income ................. 3,412 3,110 1,257 1,119 1,194
-------- -------- -------- -------- --------
Non-interest expense:
Compensation and benefits ................................... 16,509 13,395 9,562 7,068 6,534
Occupancy and equipment ..................................... 5,719 4,481 2,462 2,336 2,252
Federal deposit insurance premiums .......................... 1,813 2,399 1,376 1,374 820
Advertising ................................................. 1,168 1,152 1,158 670 658
Other operating expenses .................................... 5,778 4,169 3,039 2,366 2,078
-------- -------- -------- -------- --------
Total general and administrative expenses ................... 30,987 25,596 17,597 13,814 12,342
Real estate operations, net ................................. 383 579 (385) 1,080 3,598
Amortization of excess of cost over fair value
of net assets acquired .................................... 3,404 1,928 -- -- --
SAIF recapitalization charge ................................ 8,250 -- -- -- --
-------- -------- -------- -------- --------
Total non-interest expense .................................. 43,024 28,103 17,212 14,894 15,940
-------- -------- -------- -------- --------
Income before income taxes .................................. 21,074 21,669 16,544 13,032 11,876
Income tax expense .......................................... 10,138 9,946 6,842 5,538 5,243
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principle ...................................... 10,936 11,723 9,702 7,494 6,633
Cumulative effect of change in accounting
principle(2) ............................................. -- -- -- 1,200 --
-------- -------- -------- -------- --------
Net income .......................................... $ 10,936 $ 11,723 $ 9,702 $ 8,694 $ 6,633
======== ======== ======== ======== ========
Net income per common share(3)
Primary ............................................... $ 1.24 $ 1.31 $ 1.03 $ 0.22 N/A
Fully diluted ............................................... $ 1.21 $ 1.31 $ 1.03 $ 0.22 N/A
</TABLE>
(SEE FOOTNOTES ON PAGE 21)
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
RELIANCE -- HISTORICAL
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
<S> <C> <C> <C> <C> <C>
Return on average assets (2)..................................... 0.58% 0.83% 1.08% 1.15% 0.97%
Return on average stockholders' equity(2)(4)..................... 7.02 7.58 6.17 9.82 11.19
Return on average tangible stockholders' equity(2)(4)............ 10.10 9.18 6.17 9.82 11.19
Average stockholders' equity to average assets................... 8.24 10.92 17.60 11.68 8.65
Stockholders' equity to total assets............................. 8.23 8.62 16.51 19.01 8.34
Tangible stockholders' equity to tangible assets................. 6.07 6.01 16.51 19.01 8.34
Core deposits to total deposits.................................. 37.40 41.68 36.12 49.08 47.92
Net interest spread.............................................. 3.22 3.17 3.11 3.36 3.77
Net interest margin(5)........................................... 3.47 3.52 3.77 3.69 4.03
Operating expense to average assets(6)........................... 1.66 1.81 1.97 1.82 1.80
Operating income to average assets(7)............................ 0.17 0.16 0.14 0.15 0.17
Average interest-earning assets to average interest-
bearing liabilities.............................................. 1.06x 1.09x 1.20x 1.12x 1.08x
ASSET QUALITY RATIOS:
Non-performing loans to total loans(8)........................... 1.61% 1.58% 1.10% 1.08% 1.43%
Non-performing loans to total assets............................. 0.75 0.73 0.39 0.43 0.72
Non-performing assets to total assets(9)......................... 0.77 0.82 0.56 0.78 1.25
Allowance for loan losses to total loans......................... 0.57 0.55 0.52 0.43 0.37
Allowance for loan losses to non-performing
loans.......................................................... 35.18 34.63 47.10 39.38 25.52
OTHER DATA:
Book value per share............................................. $ 18.54 $ 16.83 $ 16.37 $ 15.19 N/A
Tangible book value per share.................................... $ 13.35 $ 11.41 $ 16.37 $ 15.19 N/A
Number of deposit accounts....................................... 164,121 164,368 68,617 63,416 67,143
Full-service banking offices..................................... 28 28 11 11 11
</TABLE>
- --------------------------------
(1) For 1993, amount represents only retained earnings, substantially
restricted, and at June 30, 1997, 1996, 1995 and 1994, amounts include
retained earnings of $89.7 million, $84.0 million, $76.2 million and $70.1
million, respectively, substantially restricted.
(2) Reflects the cumulative effect of Reliance's adoption of Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes," in
the fiscal year ended June 30, 1994.
(3) Earnings per share for fiscal year ended 1994 is based on net income from
March 31, 1994 to June 30, 1994. Reliance became the holding company for
Reliance Bank on March 31, 1994, in connection with conversion of Reliance
Bank from the mutual to stock form. Accordingly, earnings per share is not
presented for 1993.
(4) For purposes of these calculations, average equity and average tangible
equity exclude the effect of changes in the unrealized appreciation
(depreciation) on securities available-for-sale, net of taxes.
(5) Calculation is based upon net interest income before provision for loan
losses divided by average interest-earning assets.
(6) Operating expense represents total non-interest expense less real estate
operations, net, amortization of excess of cost over fair value of net
assets acquired and SAIF recapitalization charge.
(7) Operating income represents total non-interest income less net gains on
sale of debt and equity and mortgage-backed securities.
(8) Non-performing loans consist of all loans 90 days or more past due and any
other loans, or any portion thereof, that have been determined to be
doubtful of collection.
(9) Non-performing assets consist of non-performing loans and real estate
owned, net.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
CONTINENTAL -- HISTORICAL
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
SELECTED FINANCIAL DATA:
<S> <C> <C> <C> <C> <C> <C>
Total assets....................................... $ 177,311 $ 142,708 $ 131,882 $ 124,961 $ 98,288 $ 111,629
Cash and cash equivalents.......................... 10,296 31,197 29,279 22,097 15,756 16,384
Loans, net......................................... 79,722 77,653 56,442 57,895 61,296 69,347
Debt and equity securities available-for-sale...... 79,348 26,242 22,322 4,715 -- --
Debt and equity securities held-to-maturity........ 1,623 396 17,102 36,112 16,807 21,285
Deposits........................................... 136,165 127,453 119,493 115,277 89,623 103,176
FHLB advances...................................... 24,800 -- -- -- -- --
Total stockholders' equity......................... 13,429 12,118 9,576 8,703 8,321 8,082
</TABLE>
<TABLE>
<CAPTION>
FOR THE 12 MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ..................................... $ 12,442 $ 9,832 $ 10,528 $ 9,493 $ 7,438 $ 6,998 $ 8,131
Interest expense .................................... 5,271 4,237 4,448 3,953 2,304 1,840 2,771
-------- -------- -------- -------- -------- -------- --------
Net interest income ................................. 7,171 5,595 6,080 5,540 5,134 5,158 5,360
Provision for loan losses (1) ....................... 1,330 600 1,450 600 800 1,275 1,010
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision for loan
losses ............................................ 5,841 4,995 4,630 4,940 4,334 3,883 4,350
-------- -------- -------- -------- -------- -------- --------
Other income ........................................ 4,072 3,422 3,699 2,750 899 1,002 1,007
Other expenses (1) .................................. 8,534 6,912 8,627 6,553 4,375 4,743 4,330
-------- -------- -------- -------- -------- -------- --------
Income (Loss) before income taxes and
cumulative effect of accounting change(1 ........... 1,379 1,505 (298) 1.137 858 142 1,027
Provision (Benefit) for income taxes ................ 598 670 (113) 499 357 51 412
-------- -------- -------- -------- -------- -------- --------
Income (Loss) before cumulative effect
of change in accounting for income taxes ........... 781 835 (185) 638 501 91 615
Cumulative effect of change in accounting for
income taxes ....................................... -- -- -- -- -- 150 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) (1) ............................... $ 781 $ 835 $ (185) $ 638 $ 501 $ 241 $ 615
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share before
cumulative effect of accounting change(1) .......... $ 0.99 $ 1.21 $ (0.26) $ 0.92 $ 0.73 $ 0.13 $ 0.89
Accounting change per share ......................... -- -- -- -- -- 0.22 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per common share(1) ............... $ 0.99 $ 1.21 $ (0.26) $ 0.92 $ 0.73 $ 0.35 $ 0.89
======== ======== ======== ======== ======== ======== ========
</TABLE>
(SEE FOOTNOTE ON FOLLOWING PAGE)
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
CONTINENTAL -- HISTORICAL
<TABLE>
<CAPTION>
AT OR FOR THE
12 MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
<S> <C> <C> <C> <C> <C> <C> <C>
Return on average assets (1) ............................. 0.50% 0.63% (0.13)% 0.51% 0.47% 0.24% 0.59%
Return on average stockholders' equity (1) ............... 6.72 8.97 (1.81) 7.07 5.90 2.89 7.81
Return on average tangible stockholders' equity(1) ....... 8.11 11.59 (2.27) 9.30 5.90 2.89 7.81
Average stockholders' equity to average assets ........... 7.49 7.06 7.36 7.15 8.10 8.42 7.65
Stockholders' equity to total assets ..................... 7.57 7.05 8.49 7.26 6.96 8.47 7.24
Tangible stockholders' equity to tangible assets ......... 6.45 5.61 7.16 5.72 6.96 8.47 7.24
Core deposits to total deposits .......................... 44.34 45.68 46.09 44.42 48.32 54.76 52.32
Net interest rate spread ................................. 4.18 4.02 4.08 4.17 4.62 5.07 4.68
Net interest margin ...................................... 5.08 4.81 4.89 5.01 5.43 5.72 5.65
Operating expenses to average assets(1) .................. 5.50 5.24 6.23 5.12 4.05 4.69 4.14
Other income to average assets ........................... 2.62 2.59 2.67 2.18 0.85 0.99 0.96
ASSET QUALITY RATIOS:
Non-performing loans to total loans ...................... 3.71 2.10 3.33 2.78 3.82 3.85 1.69
Non-performing loans to total assets ..................... 1.73 1.07 1.88 1.23 1.82 2.47 1.72
Non-performing assets to total assets .................... 1.73 1.52 1.88 1.23 1.82 2.47 1.72
Allowance for loan losses to total loans ................. 3.29 2.60 3.14 3.05 2.53 2.66 2.62
Allowance for loan losses to non-performing assets ....... 88.59 87.26 94.03 109.82 66.24 69.11 97.39
OTHER DATA:
Book value per share ..................................... $ 14.57 $ 14.07 $ 13.15 $ 13.85 $ 12.59 $ 13.24 $ 14.14
Tangible book value per share ............................ 12.41 11.03 10.93 10.73 12.59 13.24 14.14
Cash dividends paid ...................................... -- 0.12 0.12 0.10 -- -- --
Stock dividend ........................................... -- -- -- -- 10.00% 10.00% 10.00%
</TABLE>
- ------------------------------------------------------
(1) In 1996, at the time of the restructuring, Continental recorded charges of
$2.2 million pre-tax of which $900,000 represented increases to the loan
loss provision and $1.3 million represented charges primarily for employee
termination, and related costs of $490,000, loss on the sales of securities
of $289,000, a charge of $225,000 to eliminate certain back office
functions and $250,000 in settlement of a lawsuit. The after-tax impact of
the charges was approximately $1.3 million.
25
<PAGE>
SELECTED COMBINED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following tables set forth certain selected consolidated
condensed financial information for Reliance and Continental on an unaudited pro
forma combined basis giving effect to the Merger as if the Merger had become
effective on June 30, 1997, in the case of the statement of financial condition
data presented, and as if the Merger had become effective at July 1, 1996 in the
case of the statement of operations data presented. The pro forma information in
the tables assumes that the Merger is accounted for using the purchase method of
accounting. See "THE MERGER -- Accounting Treatment." Financial information for
the year ended June 30, 1997 combine Reliance and Continental with Continental's
results presented to coincide with the reporting period of Reliance. These
tables should be read in conjunction with, and are qualified in their entirety
by, the historical financial statements, including the notes thereto, of
Reliance and Continental incorporated by reference herein or accompanying this
Proxy Statement-Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "INFORMATION RELATING TO CONTINENTAL."
The pro forma condensed combined financial statements do not
give effect to the anticipated cost savings and revenue enhancement
opportunities that could result from the Merger, or expenses associated with
management severance, retention/incentive bonus or phantom stock award payments,
and do not purport to be indicative of the combined financial position or
results of operations of future periods or indicative of the results that would
have occurred had the Merger been consummated on June 30, 1997 or at the
beginning of the period indicated. See "UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL INFORMATION."
AT JUNE 30, 1997
----------------
(IN THOUSANDS)
SELECTED STATEMENT OF FINANCIAL CONDITION DATA:
Total assets................................................. $2,164,762
Debt and equity securities available-for-sale................ 106,257
Debt and equity securities held-to-maturity.................. 47,649
Mortgage-backed securities held-to-maturity.................. 159,356
Mortgage-backed securities available-for-sale................ 721,819
Loans receivable, net........................................ 989,043
Real estate owned, net....................................... 450
Excess of cost over fair value of net assets acquired........ 61,674
Deposits..................................................... 1,572,202
Borrowed funds............................................... 376,713
Stockholders' equity......................................... 186,623
26
<PAGE>
SELECTED COMBINED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA - CONTINUED
FOR THE YEAR ENDED
JUNE 30, 1997
------------------
(IN THOUSANDS)
SELECTED STATEMENTS OF OPERATIONS DATA:
Interest income ................................................. $145,510
Interest expense ................................................ 76,924
--------
Net interest income ............................................. 68,586
Provision for loan losses ....................................... 2,280
--------
Net interest income after provision for loan losses ............. 66,306
Non-interest income ............................................. 7,484
Non-interest expense ............................................ 52,517
--------
Income before income taxes ...................................... 21,273
Income taxes .................................................... 10,168
--------
Net income ...................................................... $ 11,105
========
Fully diluted weighted average number of common stock and common
stock equivalents outstanding ......................... 10,058
AT OR FOR
THE YEAR ENDED
JUNE 30, 1997 (1)
-----------------
PER COMMON SHARE DATA:
Primary earnings per common share ............................. $ 1.13
Fully diluted earnings per common share ....................... 1.10
Cash dividends declared ....................................... 0.60
Book value .................................................... 19.06
Tangible book value ........................................... 12.76
AT OR FOR
THE YEAR ENDED
JUNE 30, 1997 (1)
-----------------
SELECTED FINANCIAL RATIOS:
Return on average assets ......................................... 0.55%
Return on average stockholders' equity ........................... 6.30
Average stockholders' equity to average assets ................... 8.65
Stockholders' equity to total assets ............................. 8.62
Operating expense to average assets (2) .......................... 1.94
Average tangible stockholders' equity to average
tangible assets ................................................ 5.70
- --------------------
(1) Per Common Share Data and Selected Financial Ratios for this period are
only presented for data relating to the pro forma combined condensed
consolidated statement of operations, as the Merger was assumed to be
consummated on June 30, 1997. Average assets and average stockholders'
equity for this period were calculated assuming the Merger was consummated
at the beginning of the period presented.
(2) Operating expense represents total non-interest expense less real estate
operations, net, amortization of excess of cost over fair value of net
assets acquired and SAIF recapitalization charge.
27
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth for Reliance Common Stock and
Continental Common Stock certain historical, pro forma and pro forma equivalent
per share financial information. The pro forma and pro forma equivalent per
share information gives effect to the Merger as if the Merger had been effective
on June 30, 1997, in the case of the book value data presented, and as if the
Merger had become effective at July 1, 1996, in the case of the net income and
dividends declared data presented. The pro forma data in the tables assumes
that the Merger is accounted for using the purchase method of accounting. See
"THE MERGER -- Accounting Treatment." The information presented herein is based
on, qualified in its entirety by, and should be read in conjunction with, the
historical financial statements, including the notes thereto, of Reliance and
Continental incorporated by reference herein or accompanying this Proxy
Statement-Prospectus and the pro forma financial information, including the
notes thereto, appearing elsewhere in this Proxy Statement-Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "INFORMATION RELATING TO
CONTINENTAL" and "UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
INFORMATION." The pro forma and equivalent pro forma per share data in the
following tables are presented for comparative purposes only and are not
necessarily indicative of what the combined financial position or results of
operations would have been had the Merger been consummated during the periods or
as of the date for which such pro forma tables are presented.
AT OR FOR THE YEAR
OR 12 MONTHS ENDED
JUNE 30, 1997
------------------
NET INCOME PER SHARE(1):
Reliance .......................................... $ 1.21
Continental ....................................... 0.99
Reliance Pro Forma ................................ 1.10
Continental Pro Forma Equivalent .................. 1.21
CASH DIVIDENDS DECLARED PER SHARE(2):
Reliance .......................................... 0.60
Continental ....................................... --
Reliance Pro Forma ................................ 0.60
Continental Pro Forma Equivalent .................. 0.66
BOOK VALUE PER SHARE AT PERIOD END (3):
Stated:
Reliance .......................................... 18.54
Continental ....................................... 14.57
Reliance Pro Forma ................................ 19.06
Continental Pro Forma Equivalent .................. 20.97
Tangible:
Reliance .......................................... 13.35
Continental ....................................... 12.41
Reliance Pro Forma ................................ 12.76
Continental Pro Forma Equivalent .................. 14.04
- --------------------
(1) Reliance pro forma net income per share data is calculated using historical
income information for Reliance and Continental divided by the average pro
forma shares of the combined entity. The average pro forma shares of the
combined entity have been calculated by combining Reliance's historical
average shares with the historical average shares of Continental as
adjusted by the Exchange Ratio of 1.1. The Continental pro forma equivalent
income per share amounts are computed by multiplying the Reliance pro forma
amounts by the Exchange Ratio of 1.1 (see "THE MERGER-- Merger
Consideration").
(2) Reliance pro forma cash dividends per share represent historical cash
dividends declared by Reliance and assumes no changes in cash dividends
declared per share. Continental pro forma equivalent cash dividends per
share represent such amounts multiplied by the Exchange Ratio of 1.1.
(3) Reliance pro forma stated and tangible book value per share amounts are
based on the historical total stockholders' equity of the combined entity
divided by the total pro forma common shares of the combined entity based
on the Exchange Ratio of 1.1. The Continental pro forma equivalent stated
book value and tangible book value per share amounts are computed by
multiplying the Reliance pro forma amounts by the Exchange Ratio of 1.1.
28
<PAGE>
THE SPECIAL MEETING
GENERAL. Each copy of this Proxy Statement-Prospectus mailed
to holders of Continental Common Stock is accompanied by a proxy card furnished
in connection with the Continental Board's solicitation of proxies for use at
the Special Meeting. The Special Meeting is scheduled to be held on September
25, 1997, at 3:30 p.m. at the principal office of Continental, 118 Seventh
Street, Garden City, New York. At the Special Meeting, Continental stockholders
will consider and vote upon (i) a proposal to approve the Merger Agreement and
(ii) the Additional Proposal. See "ADDITIONAL PROPOSAL."
HOLDERS OF CONTINENTAL COMMON STOCK ARE REQUESTED TO PROMPTLY
COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT TO CONTINENTAL
IN THE ENCLOSED POSTAGE-PAID, ADDRESSED ENVELOPE.
CONTINENTAL STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK
CERTIFICATES WITH THEIR PROXY CARDS.
RECOMMENDATION OF THE BOARD OF DIRECTORS. The Continental
Board has unanimously approved the Merger Agreement and has determined that the
Merger is in the best interests of Continental and its stockholders. The
Continental Board therefore unanimously recommends that Continental's
stockholders vote FOR approval of the Merger Agreement and the Additional
Proposal.
See "THE MERGER -- Background of and Reasons for the Merger
- -- Continental's Reasons for the Merger."
RECORD DATE. The Continental Board has fixed the close of
business on August 18, 1997 as the record date for the determination of
holders of Continental Common Stock entitled to receive notice of and to vote at
the Special Meeting. Only holders of record of Continental Common Stock at the
close of business on the Record Date are entitled to receive notice of and to
vote at the Special Meeting.
VOTING AND SOLICITATION OF PROXIES. Continental stockholders
will be entitled to one vote for each share of Continental Common Stock held of
record as of the close of business on the Record Date on each matter to be voted
upon at the Special Meeting. The presence in person or by proxy of the holders
of at least a majority of the total number of outstanding shares of Continental
Common Stock on the Record Date is necessary to constitute a quorum at the
Special Meeting.
The shares of Continental Common Stock represented by properly
executed proxies received at or prior to the Special Meeting and not
subsequently revoked prior to the vote at the Special Meeting will be voted as
directed in such proxies. IF INSTRUCTIONS ARE NOT GIVEN, SHARES REPRESENTED BY
PROPERLY EXECUTED PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND FOR THE ADDITIONAL PROPOSAL. However, no proxy which is voted
against the proposal to approve the Merger Agreement will be voted in favor of
the Additional Proposal by the proxies pursuant to such discretion.
Any holder of Continental Common Stock who has executed and
delivered a proxy may revoke it at any time before it is voted by attending the
Special Meeting and voting in person or by giving notice of revocation in
writing or submitting a signed proxy card bearing a later date to Continental,
at its main office located at 118 Seventh Street, Garden City, New York,
provided that such notice or proxy card is actually received by Continental
before the vote of stockholders. A proxy will not be revoked by death or
supervening incapacity of the stockholder executing the proxy unless, before the
vote, notice of such death or incapacity is filed with the Corporate Secretary
or other person responsible for tabulating votes on behalf of Continental.
The cost of soliciting proxies from holders of Continental
Common Stock in the form enclosed herewith will be borne by Continental. Such
solicitation will be made by mail but also may be made by telephone or in
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person by the directors, officers and employees of Continental (who will receive
no additional compensation for doing so). Continental has retained Kissel-Blake,
Inc., a proxy solicitation firm, to assist in such solicitation. The fee to be
paid to such firm is not expected to exceed $15,000, plus reasonable
out-of-pocket costs and expenses authorized by Continental. In addition,
Continental will make arrangements with brokerage firms and other custodians,
nominees and fiduciaries to send proxy materials to their principals and will
reimburse such parties for their expenses in doing so.
A representative of Continental's independent auditors, Arthur
Andersen LLP, will be present at the Special Meeting.
VOTE REQUIRED. The affirmative vote of two-thirds of the
aggregate outstanding shares of Continental Common Stock on the Record Date is
required in order to approve and adopt the Merger Agreement. In addition,
assuming the existence of a quorum, the affirmative vote of a majority of the
votes present in person or by proxy and entitled to vote at the Special Meeting
is required to approve the Additional Proposal. A failure to return a properly
executed proxy card or to vote in person or abstaining from voting will have the
same effect as a vote against the Merger Agreement. An abstention, with respect
to the Additional Proposal, will have the effect of a vote against the
Additional Proposal. Broker non-votes will not be counted as having been voted
in person or by proxy at the Special Meeting and will have the same effect as a
vote against the Merger Agreement. In contrast, shares underlying broker
non-votes will have no effect on the vote on the Additional Proposal. As of the
Record Date, there were a total of 921,735 shares of Continental Common Stock
outstanding and entitled to be voted at the Special Meeting.
As of June 30, 1997, Continental's directors and executive
officers (and their affiliates) (14 persons) beneficially own and have the
power to vote 160,082 shares of Continental Common Stock. Such shares of
Continental Common Stock represent approximately 17.37% of the outstanding
Continental Common Stock which may be voted at the Special Meeting. Such persons
have agreed to vote, or direct the voting of, all such shares, in favor of the
Merger Agreement and for the Additional Proposal. As of June 30, 1997, certain
major shareholders of Continental who are not directors or officers or
affiliates of directors or officers of Continental beneficially own and have the
power to vote 126,824 shares of Continental Common Stock. Such shares of
Continental Common Stock represent approximately 13.76% of the outstanding
Continental Common Stock which may be voted at the Special Meeting. Such persons
have agreed to vote, or direct the voting of, all such shares, in favor of the
Merger Agreement and for the Additional Proposal. As of June 30, 1997,
Reliance, its subsidiaries, and the directors and executive officers of
Reliance, beneficially owned no shares of Continental Common Stock.
THE MERGER
THE FOLLOWING INFORMATION, INSOFAR AS IT RELATES TO MATTERS
CONTAINED IN THE MERGER AGREEMENT OR THE STOCK OPTION AGREEMENT, IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT AND THE STOCK OPTION
AGREEMENT, WHICH ARE ATTACHED HERETO AS APPENDIX A AND APPENDIX B, RESPECTIVELY,
AND ARE INCORPORATED HEREIN BY REFERENCE. CONTINENTAL STOCKHOLDERS ARE URGED TO
READ THE MERGER AGREEMENT AND THE STOCK OPTION AGREEMENT IN THEIR ENTIRETY.
PARTIES TO THE MERGER
RELIANCE AND RELIANCE BANK. Reliance is a Delaware corporation
organized on November 16, 1993 and is the holding company for Reliance Bank. The
principal business of Reliance is the operation of its wholly-owned subsidiary,
Reliance Bank, a federally-chartered savings bank. Reliance Bank's principal
business is attracting retail deposits from the general public and investing
those deposits, together with funds generated from operations, principal
repayments and borrowings, primarily in one- to four-family mortgage,
multi-family and consumer loans (primarily home equity lines of credit, home
equity loans, auto and guaranteed student loans) and, to a lesser extent,
commercial real estate and construction loans. In the past, Reliance Bank has
also
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invested in loans secured by cooperative units and commercial loans, but in
recent years Reliance Bank has discontinued its origination activities in these
areas. In addition, during periods in which the demand for loans that meet
Reliance Bank's underwriting, investment and interest rate risk standards are
lower than the amount of funds available for investment, Reliance Bank invests
in mortgage-backed and mortgage-related securities and securities issued by the
U.S. Government and Federal agencies and other investments permitted by federal
laws and regulations. Reliance Bank's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed and investment
securities, FHLB-NY advances and reverse repurchase agreements. At June 30,
1997, Reliance had total consolidated assets of $1.98 billion, deposits of
$1.4 billion and stockholders' equity of $162.7 million. As of June 30,
1997, Reliance Bank had 28 retail banking office locations with seven in Queens
County, New York, twelve in Nassau County, New York and nine in Suffolk County,
New York. The principal executive offices of Reliance are located at 585 Stewart
Avenue, Garden City, New York 11530, and its telephone number is (516) 222-9300.
Reliance Bank's deposits are insured by the SAIF of the FDIC. Upon consummation
of the Merger, Reliance intends to continue all of its current business
operations, as well as seek to increase its commercial and asset-based lending
and check cashing operations. See "AVAILABLE INFORMATION," "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "INFORMATION RELATING TO CONTINENTAL."
CONTINENTAL. Continental is a New York State-chartered
commercial bank that was founded in 1974. Continental offers business and
personal checking accounts, N.O.W. and money market accounts, savings and time
deposit accounts and grants secured and unsecured loans to individuals,
partnerships and corporations and originates loans through the SBA under the 7A
and 504 program. Continental also invests in various types of securities and
assets including, but not limited to, mortgage-backed securities insured or
guaranteed by the United States or agencies thereof. Continental funds its
lending and investment activities primarily from deposits received at its
various branch locations, repayment of principal and interest on loans and
securities, borrowings from the FHLB-NY and borrowings available under
agreements to repurchase securities with primary dealers. At June 30, 1997,
Continental had total assets of $177.3 million, deposits of $136.2 million
and stockholders' equity of $13.4 million. As of June 30, 1997, Continental
conducted its retail banking activities through its main office located in
Garden City, New York, through its branch office located in North Babylon,
Suffolk County, New York, and through a commercial lending facility in New York,
New York. Continental also operates five Money Center check cashing facilities
in New York, New York. The principal executive offices of Continental are
located at 118 Seventh Street, Garden City, New York 11530, and its telephone
number is (516) 741-2400. Continental's deposits are insured by the BIF of the
FDIC.
See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"INFORMATION RELATING TO CONTINENTAL," "THE MERGER-- Parties to the Merger,"
"SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA," "CERTAIN REGULATORY
CONSIDERATIONS" and "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION."
EFFECTS OF THE MERGER
Pursuant to the terms of the Merger Agreement, subject to the
satisfaction or waiver (where permissible) of certain conditions, including,
among other things, the receipt of all necessary regulatory approvals, the
expiration of all waiting periods in respect thereof, the approval of the Merger
Agreement by the requisite vote of the stockholders of Continental, Continental
will be merged with and into Reliance Bank, with Reliance Bank being the
surviving corporation. Continental stockholders will receive the consideration
described below in "-- Merger Consideration." Upon consummation of the Merger,
the separate corporate existence of Continental shall terminate.
Each outstanding share of Reliance Common Stock at the
Effective Time will remain outstanding and unchanged as a result of the Merger.
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EFFECTIVE DATE AND TIME
The Merger will become effective at the date and time set
forth in the articles of combination that will be filed with the OTS in
accordance with applicable law. The articles of combination will be filed not
later than the Closing Date, which will be on a date that is not earlier than
the later of (i) October 12, 1997, or (ii) the last business day of a month in
which the expiration of the last applicable waiting period in connection with
approvals of governmental authorities shall occur and all conditions to the
consummation of the Merger Agreement are satisfied or waived, and will be
effective as of the close of business on such date, unless another date or time
is agreed to in writing by Reliance and Continental. See "-- Conditions to the
Consummation of the Merger." It is expected that a period of time will elapse
between the Special Meeting and the Effective Time while the parties seek to
obtain the regulatory approvals required to consummate the Merger. There can be
no assurance that such regulatory approvals will be obtained, and, if obtained,
there can be no assurance as to the date of any such approval. There can also be
no assurance that any such approvals will not contain a condition or requirement
which causes such approvals to fail to satisfy the conditions set forth in the
Merger Agreement. There can likewise be no assurance that the United States
Department of Justice or the New York State Attorney General will not challenge
the Merger or, if such a challenge is made, as to the result thereof. See "--
Regulatory Approvals."
MERGER CONSIDERATION
GENERAL. The Merger Agreement provides that the aggregate
consideration payable to holders of Continental Common Stock in the Merger will
consist of 1.1 shares of Reliance Common Stock per share of Continental Common
Stock. Upon consummation of the Merger, each share of Continental Common Stock
(with certain exceptions) will be converted into 1.1 shares of Reliance Common
Stock, together with the related Reliance Right issued pursuant to the Rights
Agreement. The Merger Agreement provides that cash will be paid in lieu of
fractional shares of Reliance Common Stock.
MISCELLANEOUS. If Reliance effects a stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares prior to the Effective Time, an appropriate adjustment to the
consideration will be made.
Upon consummation of the Merger, any shares of Continental
Common Stock that are owned by Continental as treasury stock or that are held
directly or indirectly by Reliance (other than in a fiduciary capacity or in
satisfaction of a debt previously contracted) will be canceled and retired and
cease to exist, and no payment will be made with respect thereto. As of August
1, 1997, neither Continental nor Reliance owned any such shares. In addition,
shares of Continental Common Stock with respect to which dissenters' rights have
been asserted and not withdrawn will not be converted into Reliance Common Stock
as provided in the Merger Agreement. For certain information concerning the
historical market prices of Continental Common Stock and Reliance Common Stock,
see "COMPARATIVE STOCK PRICE AND DIVIDEND INFORMATION."
DISSENTING STOCKHOLDERS. Holders of Continental Common Stock
who deliver a written objection to the Merger to the Secretary of Continental
before the vote on the adoption of the Merger Agreement at the Special Meeting
and otherwise comply with the additional requirements of Section 6022 of the
NYBL will be entitled to dissenters' rights in connection with the Merger. Any
shares of Continental Common Stock as to which the holder thereof shall have
exercised and perfected dissenters' rights shall not be converted into the
right to receive the Merger Consideration, and the holder shall receive a cash
payment pursuant to Section 6022 of the NYBL. See "-- Dissenters' Rights."
CONTINENTAL STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH
THE ENCLOSED PROXY AND SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL A
CONTINENTAL STOCKHOLDER HAS RECEIVED THE LETTER OF TRANSMITTAL AND RELATED
FORMS.
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BACKGROUND OF AND REASONS FOR THE MERGER
A special meeting of the Reliance Board and the Board of
Directors of Reliance Bank was held on Saturday, May 3, 1997, attended by
representatives of Keefe, Bruyette & Woods, Inc. ("Keefe, Bruyette") and
Reliance's counsel. At the meeting there was before the Reliance Board and the
Board of Directors of Reliance Bank a proposal to authorize the President and
Chief Executive Officer of Reliance and Reliance Bank to finalize a definitive
agreement for the Merger of Continental with Reliance Bank on the terms
presented at the meeting, which proposal was unanimously approved by the
Reliance Board and the Board of Directors of Reliance Bank.
On Saturday, May 3, 1997, the Continental Board held a special
meeting with representatives of Sandler O'Neill and Continental's counsel to
further consider the Reliance proposal and its alternatives. Sandler O'Neill
rendered its opinion that, as of such date, the consideration to be received in
the Merger by the holders of Continental Common Stock was fair to the holders
thereof from a financial point of view. After an extensive discussion, the
Continental Board unanimously determined, based on the consideration of the
various factors discussed below, to accept the Reliance proposal.
CONTINENTAL'S REASONS FOR THE MERGER. Since it was chartered
as a New York State-chartered commercial bank in 1974, Continental has sought to
enhance profitability and remain competitive while responding to significant
changes in the banking industry, including enhanced regulatory scrutiny,
intensifying competition and consolidation. The management of Continental and
the Continental Board have focused on the changes in the industry and sought to
best position Continental and its stockholders. On October 11, 1996, the
Continental Board appointed Mr. John P. Sullivan as President and Chief
Executive Officer. Under Mr. Sullivan's direction, Continental launched a
strategic management reorganization and restructuring plan focused on improving
stockholder value, which was designed to improve asset quality, reduce future
operating costs and enhance net interest income while attempting to optimize the
management of Continental's capital. The effect was to reposition Continental to
enhance profitability and build stockholder value by implementing its
organization and restructuring plan.
While the performance of Continental was improving
significantly as a result of the restructuring that had taken place, management
and the Continental Board remained cognizant of competitive pressures and other
market factors that could impede Continental's ability to continue to maximize
stockholder value. In March 1997, the Executive Committee met with Sandler
O'Neill & Partners, L.P. to discuss Continental's business plan and how current
industry and market factors affected it. Following that meeting, the Executive
Committee recommended to the Continental Board that the Continental Board engage
Sandler O'Neill as a strategic advisor. On March 19, 1997, the Continental Board
entered into a financial advisory agreement with Sandler O'Neill covering
advisory services to assess Continental's available strategic alternatives and
help implement a plan to enhance or maximize shareholder value, including
through the possible sale of Continental. After reviewing available strategic
alternatives with Sandler O'Neill, the Continental Board determined that given
the extraordinary competition in Continental's market area, Continental's
current capital levels which could support new growth and the risk involved in
entering new product lines and/or market areas to increase profitability,
Continental should consider a strategic alliance with another banking
institution as a means to maximize stockholder value.
In early April, the Continental Board executed a
confidentiality agreement with a savings and loan holding company that had
expressed significant interest in acquiring Continental. The Executive Committee
considered the informal expression of interest from that potential acquirer and
authorized Sandler O'Neill to pursue further discussions with that company as
well as three other potential acquirers that the Executive Committee believed
were likely to be interested in Continental, particularly given its branch
locations and its current loan portfolio and product lines.
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Continental received indications of interest from two of the
four companies that Sandler O'Neill had approached. Reliance offered to acquire
all of the outstanding shares of Continental at a range of $25.00 -$27.00 per
share, to be paid in part cash and part Reliance stock, subject to due
diligence. Another savings and loan holding company expressed an interest in a
range of value between $25.00 - $28.00 per share to be paid in cash, subject to
due diligence. The Executive Committee was told that the first company with whom
they had spoken submitted no indication of interest. The second company
contacted suggested it would need more time to consider whether to proceed with
an expression of interest. After being given additional time, the second company
expressed interest at a price below the value of the expression of interest
received from Reliance and the other potential acquirer. The Executive Committee
approved the commencement of due diligence by the two companies that had given
expressions of interest.
On April 30, 1997, upon the completion of their due diligence,
Reliance submitted a firm offer to acquire Continental's outstanding common
stock in exchange for 1.1 shares of Reliance Common Stock for each share of
Continental Common Stock outstanding. The other company which had expressed
interest chose not to perform due diligence and did not make an offer. At such
time a presentation was made to the Continental Board by legal counsel regarding
the Continental Board's fiduciary duties. Sandler O'Neill made a detailed
presentation to the Continental Board. The information, both oral and written,
provided to the Continental Board by Sandler O'Neill, which was considered by
the Continental Board in deciding to recommend the Merger to stockholders, is
summarized below and elsewhere in this Proxy Statement-Prospectus.
Sandler O'Neill's presentation included a review of the
specific terms of the Reliance proposal, a pro forma analysis of the proposed
transaction, a projected earnings analysis if Continental remained independent,
including an in depth discussion of Continental's valuation on a current basis
and an on-going basis and, in this regard, used sensitivity analysis to
illustrate the effects that changes in underlying assumptions would have and
discussed those changes with the Continental Board. Sandler O'Neill also showed
historical stock pricing for Reliance and an analysis of numerous other recent
transactions involving thrift and bank institutions of a similar size and
involving thrift and bank institutions in the mid-Atlantic region. Additionally,
Sandler O'Neill reviewed with the Continental Board the financial profile of the
pro forma company with regard to its earnings potential, capital and financial
prospects. In considering the proposal, of particular importance to the
Continental Board was the all stock nature of the transaction, given that the
exchange of Continental stock for Reliance stock would not be a taxable
transaction for Continental stockholders, provided that the stock of Reliance
was not sold by the stockholder following consummation of the Merger. Sandler
O'Neill stated that in its opinion, the proposed Merger was fair, from a
financial point of view, to Continental's stockholders. The Continental Board
considered the positive aspects of Reliance's offer and that the other potential
acquirers approached had declined to proceed with firm offers. Based upon the
information available to the Continental Board, including the information
provided by Sandler O'Neill, the Continental Board determined the Reliance offer
should be pursued and authorized management to pursue further negotiations with
Reliance, including the drafting of a definitive agreement.
On May 3, 1997, the Continental Board met to consider the
terms of a definitive agreement. Presentations were made by Sandler O'Neill and
Continental's legal counsel. The Continental Board reviewed the terms of the
Merger Agreement and the Stock Option Agreement. Sandler O'Neill's updated
presentations included an analysis of Reliance's past and likely future
operating results. Sandler O'Neill provided a written opinion that the
consideration to be received in the Merger was fair, from a financial point of
view, to Continental stockholders. Following Sandler O'Neill's presentation, and
discussions with Sandler O'Neill, during which the Continental Board asked
questions related to Sandler O'Neill's presentation and fairness opinion, the
Continental Board determined that the proposal submitted by Reliance provided an
attractive investment for Continental's stockholders, and unanimously approved
the Merger Agreement and Stock Option Agreement and authorized their
execution and recommended approval of those agreements by stockholders. The
agreements were then executed and a press release was issued on May 5, 1997.
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RELIANCE'S REASONS FOR THE MERGER. The Reliance Board has
unanimously approved and adopted the Merger Agreement. In negotiating the terms
of the Merger and in approving the Merger Agreement, the Reliance Board
considered a number of factors including, without limitation, the following:
(i) the Merger Consideration to be paid to
the Continental stockholders in relation to the market
value, book value and earnings per share of the Continental
Common Stock;
(ii) the Reliance Board's review, based in
part on presentations by Keefe, Bruyette, its financial
advisor, and management, of the business, operations and
financial condition of Continental, the prospects of the
combined institution, and the increased market presence,
economies of scale, cost savings opportunities and enhanced
opportunities for growth made possible by the Merger;
(iii) the Reliance Board's recognition of
the complementary nature of the markets served and products
offered by Reliance and Continental and expectation that the
Merger would leverage its capital and add strength to its
capital base, provide it with opportunities for additional
growth while further enhancing its market presence in Long
Island;
(iv) the impact of the Merger on depositors,
employees, customers and communities served by Reliance and
Continental;
(v) the expectation that the Merger will
generally be a tax-free transaction to Reliance and that the
Merger will be accounted for under the purchase method of
accounting. See "--Material Federal Income Tax Consequences"
and "--Accounting Treatment;" and
(vi) the terms of the Merger Agreement, the
Stock Option Agreement and the other documents executed in
connection with the Merger.
The Reliance Board did not assign any specific or relative
weights to the factors under consideration.
OPINION OF CONTINENTAL'S FINANCIAL ADVISOR
Pursuant to a letter agreement dated as of March 19, 1997 (the
"Sandler O'Neill Agreement"), Continental retained Sandler O'Neill as an
independent financial advisor to, among other things, assist Continental in its
analysis of the various strategic alternatives available to it, including merger
and acquisition transactions. Sandler O'Neill is a nationally recognized
investment banking firm whose principal business specialty is banks and savings
institutions and, in this connection, is regularly engaged in the valuation of
such businesses and their securities in connection with mergers and acquisitions
and other corporate transactions.
Pursuant to the terms of the Sandler O'Neill Agreement,
Sandler O'Neill acted as financial advisor to Continental in connection with the
Merger. In connection therewith, at the May 3, 1997 meeting at which the
Continental Board approved and adopted the Merger Agreement, Sandler O'Neill
delivered an oral opinion to the Continental Board which was subsequently
confirmed in writing that the consideration to be received by the holders of
shares of Continental Common Stock pursuant to the Merger Agreement was fair,
from a financial point of view, to such stockholders. Sandler O'Neill has also
delivered to the Continental Board a written opinion (the "Sandler O'Neill
Fairness Opinion") dated the date of this Proxy Statement-Prospectus which is
substantially identical to the May 3, 1997 opinion. THE FULL TEXT OF THE SANDLER
O'NEILL FAIRNESS OPINION, WHICH SETS FORTH THE PROCEDURES FOLLOWED, ASSUMPTIONS
MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT-PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. THE DESCRIPTION OF SUCH OPINION SET FORTH
HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX C. HOLDERS OF
CONTINENTAL COMMON STOCK ARE URGED TO READ THE SANDLER O'NEILL FAIRNESS OPINION
IN ITS ENTIRETY IN CONNECTION WITH THEIR CONSIDERATION OF THE PROPOSED MERGER.
THE SANDLER O'NEILL FAIRNESS OPINION SHOULD NOT BE CONSTRUED
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BY THE HOLDERS OF SHARES OF CONTINENTAL COMMON STOCK AS A RECOMMENDATION AS TO
HOW THEY SHOULD VOTE AT THE SPECIAL MEETING.
In connection with rendering its opinion dated May 3, 1997,
Sandler O'Neill performed a variety of financial analyses. The following is a
summary of such analyses, but does not purport to be a complete description of
Sandler O'Neill's analyses. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not necessarily susceptible to a
partial analysis or summary description. Sandler O'Neill believes that its
analyses must be considered as a whole and that selecting portions of such
analyses and the factors considered therein, without considering all factors and
analyses, could create an incomplete view of the analyses and processes
underlying the Sandler O'Neill Fairness Opinion. In performing its analyses,
Sandler O'Neill made numerous assumptions with respect to industry performance,
business and economic conditions and various other matters, many of which cannot
be predicted and are beyond the control of Reliance, Continental and Sandler
O'Neill. Any estimates contained in Sandler O'Neill analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates. Estimates on the values of companies do not
purport to be appraisals of or necessarily reflect the prices at which companies
or their securities may actually be sold. Because such estimates are inherently
subject to uncertainty, none of Reliance, Continental or Sandler O'Neill assumes
responsibility for the accuracy.
STOCK TRADING HISTORY. Sandler O'Neill examined the history of
the trading prices and the volume of the Continental Common Stock and the
Reliance Common Stock, and the relationship between the movements in the prices
of the Continental Common Stock and the Reliance Common Stock, respectively, to
movements in certain stock indices, including the Standard & Poor's 500 Index,
the NASDAQ Banking Index and composite groups of publicly traded "pink sheet"
commercial banks (in the case of Continental) and publicly traded savings
institutions (in the case of Reliance) in geographic proximity and of similar
asset size to Continental and Reliance, respectively.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES. In preparing
its presentation, Sandler O'Neill used publicly-available information to compare
selected financial and market trading information, including book value,
tangible book value, earnings, asset quality ratios, loan loss reserve levels,
profitability and capital adequacy, of Continental and two different groups of
selected commercial banks. The first group consisted of Continental and the
following ten (10) publicly-traded commercial banks (the "Regional Bank Group")
which operate in the same general geographic region as Continental and had
assets of from $111 million to $182 million: Smithtown Bancorp Inc., CCFNB
Bancorp Inc., Orrstown Financial Services, Tower Bancorp Inc., Shore Bancshares
Inc., Evans Bancorp Inc., Dimeco Inc., Cardinal Bancorp Inc., Capital Bank N.A.,
and First Lehigh Corp. Sandler O'Neill also compared Continental to a group of
eleven (11) publicly-traded commercial banks of asset size from $103 million to
$190 million which were considered to be highly-valued (the "HighlyValued
Group") by investors. The Highly-Valued Group was comprised of: United Security
Bank N.A., Community Bankshares, Inc., Four Oaks Bank & Trust Co., Orrstown
Financial Services, Plumas Bank, Bank of Tidewater, Bank of Petaluma, Vintage
Bank, First Lehigh Corp., Bay Area Bancshares and Commerce National Bank. The
analysis compared publicly-available year-end financial information as of and
for the years ending December 31, 1991 through December 31, 1996 or, in cases
where March 1997 information was available, information for the 12 months ended
March 31, 1997. The following comparisons are based upon the December 31, 1996
financial information or, if available, the March 31, 1997 information. The data
described below with respect to the Regional Bank Group and the Highly-Valued
Group consists of the median data for such groups.
The total assets of Continental were approximately $173
million, compared to approximately $144 million for the Regional Bank Group and
approximately $148 million for the Highly-Valued Group. The annual growth rate
of assets for Continental was 32%, compared to a growth rate of approximately 8%
for the Regional Bank Group and approximately 16% for the Highly-Valued Group.
The total equity of Continental was approximately $12.3 million, compared to
approximately $15.2 million for the Regional Bank Group and approximately $12.4
million for the Highly-Valued Group. The tangible equity to total assets ratio
was 5.93% for Continental, compared to 11.00% for the Regional Bank Group and
9.37% for the Highly-Valued Group. The intangible assets to total equity ratio
was 16.43% for Continental, compared to 0% for both the Regional Bank Group and
the Highly-Valued Group. The net loans to assets ratio for Continental was
approximately 46%, compared to approximately 65% for the
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Regional Bank Group and approximately 67% for the Highly-Valued Group.
Continental had a gross loans-to-total-deposits ratio of approximately 62%,
compared Regional Bank Group and approximately 77% for the Highly-Valued Group.
The total borrowings to total assets ratio for Continental was approximately
14%, compared to approximately 2% for the Regional Bank Group and approximately
0% for the Highly-Valued Group. The ratio of non-performing loans to total
assets for Continental was 1.62%, compared to 0.56% for the Regional Bank Group
and 0.14% for the Highly-Valued Group. The ratio of non-performing assets to
total assets for Continental was 1.62%, compared to .69% for the Regional Bank
Group and .32% for the Highly-Valued Group. The ratio of loan loss reserves to
gross loans was 3.19% for Continental, compared to 1.49% for the Regional Bank
Group and 1.38% for the Highly Valued Group. The ratio of non-interest income
to average assets was 2.71% for Continental, compared to .69% for the Regional
Bank Group and .84% for the Highly-Valued Group. The ratio of non-interest
expense to average assets was 5.14% for Continental, compared to 3.13% for the
Regional Bank Group and 3.43% for the Highly-Valued Group. The efficiency ratio
of Confidential was approximately 69%, compared to 64% for the Regional Bank
Group and approximately 59% for the Highly-Valued Group. The overhead ratio of
Continental was approximately 51%, compared to 58% for the Regional Bank Group
and approximately 51% for the Highly-Valued Group. The net interest margin was
5.26% for Continental, compared to 4.74% for the Regional Bank Group and 5.58%
for the Highly-Valued Group. The return on average equity for Continental was
2.8%, compared to 11.53% for the Regional Bank Group and 14.91% for the
Highly-Valued Group. The price to tangible book value for Continental was
approximately 243%, compared to 139% for the Regional Bank Group and
approximately 160% for the Highly-Valued Group. The price to earnings per share
multiple for Continental was 117.4x, compared to 12.5x for the Regional Bank
Group and 12.5x for the Highly-Valued Group.
Sandler O'Neill also used publicly-available information to
perform a similar comparison of selected financial and market trading
information for Reliance and two different groups of selected savings
institutions. The first group consisted of Reliance and the following ten (10)
publicly-traded savings institutions (the "Regional Thrift Group") which operate
in the same general geographic region as Reliance and have assets from $1.2
billion to $3.2 billion: New York Bancorp Inc., Greater New York Savings Bank,
Commonwealth Bancorp Inc., ML Bancorp Inc., Haven Bancorp Inc., JSB Financial
Inc., WSFS Financial Corporation, Queens County Bancorp, Ocean Financial Corp.
and Dime Community Bancorp. Sandler O'Neill also compared Reliance to a group of
eleven (11) publicly-traded savings institutions of asset size from $650 million
to $2.8 billion which were considered to be highly-valued (the "Highly-Valued
Thrift Group") by investors. The Highly-Valued Group was comprised of:
BankAtlantic Bancorp, Inc., Ocwen Financial Corporation, InterWest Bancorp Inc.,
WSFS Financial Corporation, Magna Bancorp Inc., First Federal Financial
Services, First Essex Bancorp Inc., Dime Financial Corp., North American Savings
Bank, Great Southern Bancorp Inc., and Home Federal Bancorp. The analysis
compared publicly available year-end financial information as of and for the
years ending December 31, 1991 through December 31, 1995 and the last TWELVE
months ended March 31, 1997 or, in cases where March 1997 information was not
available, information for the last twelve months ended December 31, 1996. The
following comparisons are based upon the last TWELVE months ended March 31, 1997
financial information or, if not available, the December 31, 1996 information.
The data described below with respect to the Regional Thrift Group and the
Highly-Valued Thrift Group consists of the median data for such groups.
The total assets of Reliance were approximately $1.93 billion,
compared to approximately $1.73 billion for the Regional Thrift Group and
approximately $1.08 billion for the Highly-Valued Thrift Group. The annual
growth rate of assets for Reliance was approximately 10%, compared to a growth
rate of approximately 13% for the Regional Thrift Group and approximately 14%
for the Highly-Valued Thrift Group. The total equity of Reliance was
approximately $155 million, compared to approximately $206 million for the
Regional Thrift Group and approximately $83 million for the Highly-Valued Thrift
Group. The tangible equity to total assets ratio was 5.77% for Reliance,
compared to 7.35% for the Regional Thrift Group and 6.92% for the HighlyValued
Thrift Group. The intangible assets to total equity ratio was 29.89% for
Reliance, compared to .41% for the Regional Thrift Group and 3.43% for the
Highly-Valued Group. The net loans to total assets ratio for Reliance was
approximately 45%, compared to approximately 52% for the Regional Thrift Group
and approximately 65% for the Highly-Valued Thrift Group. The cash and
securities to total assets ratio was approximately 51% for Reliance compared to
approximately 44% for the Regional Thrift Group and approximately 27% for the
Highly-Valued Thrift Group. Total deposits were approximately $1.40 billion for
Reliance, compared to approximately $1.14 billion for the Regional Thrift Group
and approximately $0.69 billion for the Highly-Valued Thrift Group. Reliance had
a gross loans to total deposits ratio of approximately 62%, compared to
approximately 78% for the Regional Thrift Group and approximately 103% for the
Highly-Valued Thrift Group. The total borrowings to total assets ratio for
Reliance
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was approximately 18%, compared to approximately 21% for the Regional Thrift
Group and approximately 26% for the Highly-Valued Thrift Group. The ratio of
non-performing loans to total assets for Reliance was 0.68%, compared to 0.75%
for the Regional Thrift Group and 0.44% for the Highly-Valued Thrift Group. The
ratio of non-performing assets to total assets for Reliance was 0.73%, compared
to 0.84% for the Regional Thrift Group and 0.69% for the Highly-Valued Thrift
Group. The ratio of loan loss reserves to non-performing loans for Reliance was
approximately 38%, compared to 108% for the Regional Thrift Group and
approximately 152% for the Highly-Valued Thrift Group. The ratio of loan loss
reserves to gross loans was .56% for Reliance, compared to 1.01% for the
Regional Thrift Group and 1.11% for the Highly-Valued Group. The net interest
margin of Reliance was 3.50%, compared to 3.56% for the Regional Thrift Group
and 3.69% for the Highly-Valued Thrift Group. The ratio of non-interest income
to average assets for Reliance was 0.18%, compared to 0.42% for the Regional
Thrift Group and 1.29% for the Highly-Valued Thrift Group. The ratio of
non-interest expense to average assets was 1.91% for Reliance, compared to 2.04%
for the Regional Thrift Group and 2.37% for the Highly-Valued Thrift Group. The
efficiency ratio of Reliance was approximately 49%, compared to 52% for the
Regional Thrift Group and approximately 55% for the Highly-Valued Thrift Group.
The overhead ratio of Reliance was approximately 46%, compared to 47% for the
Regional Thrift Group and approximately 43% for the Highly-Valued Thrift Group.
The return on average assets for Reliance was 0.87%, compared to 1.04% for the
Regional Thrift Group and 1.23% for the Highly-Valued Thrift Group. The return
on average equity for Reliance was 10.63%, compared to 9.19% for the Regional
Thrift Group and 16.89% for the Highly-Valued Thrift Group. The price to
tangible book value per share for Reliance was approximately 179%, compared to
146% for the Regional Thrift Group and approximately 194% for the Highly-Valued
Thrift Group. The price to earnings per share multiple for Reliance was 12.0x,
compared to 12.5x for the Regional Thrift Group and 10.5x for the Highly-Valued
Thrift Group.
ANALYSIS OF SELECTED MERGER TRANSACTIONS. Sandler O'Neill
reviewed 31 transactions announced from January 6, 1997 to April 8, 1997
involving commercial banks nationwide as targets with transaction values greater
than $15 million ("Nationwide Transactions"), 4 transactions announced from
January 1, 1997 to March 18, 1997 involving commercial banks in the Mid-Atlantic
region with transaction values greater than $15 million
("Mid-Atlantic Transactions"), 150 transactions announced from January 1, 1996
to March 27, 1997 involving commercial banks nationwide with transaction values
between $10 million and $50 million ("Nationwide Transactions, $10-$50
Million"), and 15 transactions announced from January 1, 1996 to March 18,
1997 involving commercial banks in the Mid-Atlantic region with transaction
values between $10 million and $50 million ("Mid-Atlantic Transactions, $10-$50
Million"). Sandler O'Neill reviewed the ratios of price to earnings, price to
book value, price to tangible book value, price to deposits, price to assets and
deposit premium paid in each such transaction and computed high, low, mean and
median ratios and premiums for the respective groups of transactions. Based upon
the median multiples for Nationwide Transactions, Sandler O'Neill derived an
imputed range of values per share of the Continental Common Stock of $24.07 to
$34.68. Based upon the median multiples for Mid-Atlantic Transactions, Sandler
O'Neill derived an imputed range of values per share of the Continental Common
Stock of $23.18 to $35.76. Based upon the median multiples of Nationwide
Transactions, $10-$50 Million, Sandler O'Neill derived an imputed range of
values per share of the Continental Common Stock of $21.71 to $31.79. Based upon
the median multiples for Mid-Atlantic Transactions, $10-$50 Million, Sandler
O'Neill derived an imputed range of values per share of the Continental Common
Stock of $22.82 to $34.01.
DISCOUNTED DIVIDEND STREAM AND TERMINAL VALUE ANALYSIS.
Sandler O'Neill also performed an analysis which estimated the future stream of
after-tax dividend flows of Continental through 2001 under various
circumstances, assuming Continental performed in accordance with the earnings
forecasts of its management and certain variations thereof (including variations
with respect to the growth rate of assets, net interest spread, non-interest
income, non-interest expense and dividend payout ratio). To approximate the
terminal value of the Continental Common Stock at the end of the five-year
period, Sandler O'Neill applied price-to-earnings multiples ranging from 8x to
17x and applied multiples of tangible book value ranging from 100.0% to 190.0%.
The dividend income streams and terminal values were then discounted to present
values using different discount rates (ranging from 9.0% to 14.0%) chosen to
reflect different assumptions regarding required rates of return
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to holders of prospective buyers of the Continental Common Stock. This analysis,
assuming the current dividend payout ratio, indicated an imputed range of values
per share of the Continental Common Stock of between $11.75 and $30.88 when
applying the price-to-earnings multiples, and an imputed range of values per
share of the Continental Common Stock of between $12.56 and $29.54 when applying
multiples of tangible book value. In connection with its analysis, Sandler
O'Neill extensively used sensitivity analyses to illustrate the effects that
changes in the underlying assumptions would have on the resulting present value,
and discussed these changes with the Continental Board.
In addition, Sandler O'Neill performed an analysis which
estimated the future stream of after-tax dividend flows of Reliance on a pro
forma basis, assuming consummation of the Merger (the "Combined Company")
through 2001 under various circumstances, assuming (i) the operations of the
Combined Company attributable to Continental performed in accordance with the
earnings forecasts of Continental's management and certain variations thereof,
as described in the previous paragraph; (ii) the operations of the Combined
Company attributable to Reliance performed in accordance with the earnings
forecasts of Reliance's management and certain variations thereof (including
variations with respect to the growth rate of assets, net interest spread,
non-interest income, non-interest expense and dividend payout ratio); and (iii)
the Combined Company realized cost savings equal to 38.92% of Continental's
projected non-interest expenses (other than the expense of deposit insurance).
To approximate the terminal value of the Reliance Common Stock at the end of the
five-year period, Sandler O'Neill applied a range of price-to-earnings multiples
and book value multiples. The dividend income streams and terminal values were
then discounted to present values using different discount rates (ranging from
9.0% to 14.0%) chosen to reflect different assumptions regarding required rates
of return to holders or prospective buyers of the Reliance Common Stock. This
analysis, assuming the current dividend payout ratio, indicated that the imputed
range of values of the 1.1 shares of Reliance Common Stock to be received in the
Merger for each share of Continental Common Stock was at the top end of the
imputed range of the values of the shares of Continental Common Stock. In
connection with its analysis, Sandler O'Neill extensively used sensitivity
analyses to illustrate the effect that changes in the underlying assumptions
would have on the resulting present value, and discussed these changes with the
Continental Board.
In connection with rendering its opinion of May 3, 1997,
Sandler O'Neill reviewed, among other things: (i) the Merger Agreement and
exhibits thereto; (ii) the Stock Option Agreement; (iii) Continental's
audited consolidated financial statements and management's discussion and
analysis of the condition and results of operations contained in its Annual
Report on Form F-2 for the year ended December 31, 1996; (iv) Continental's
unaudited consolidated financial statements and management's discussion and
analysis of the financial condition and results of operations contained in its
Quarterly Report on Form F-4 for the quarter ended March 31, 1997; (v)
Reliance's audited consolidated financial statements and management's discussion
and analysis of the financial condition and results of operations contained in
its Annual Report on Form 10-K for the fiscal year ended June 30, 1996; (vi)
Reliance's unaudited consolidated financial statements and management's
discussion and analysis of the financial condition and results of operations
contained in its Quarterly Reports on Form 10-Q for the quarters ended September
30, 1996, December 31, 1996, and March 31, 1997, respectively; (vii) certain
financial analyses and forecasts of Continental prepared by and reviewed with
management of Continental and the views of senior management of Continental
regarding Continental's past and current business operations, results thereof,
financial condition and future prospects; (viii) certain financial analyses and
forecasts of Reliance prepared by and reviewed with management of Reliance and
the views of senior management of Reliance regarding Reliance's past and current
business operations, results thereof, financial condition and future prospects;
(ix) the pro forma impact of the Merger on Reliance; (x) the historical reported
price and trading activity for the Reliance Common Stock and the Continental
Common Stock, including a comparison of certain financial and stock market
information for Reliance and Continental with similar information for certain
other companies, the securities of which are publicly traded; (xi) the
financial terms of recent business combinations in the savings institution and
banking industries; (xii) the current market environment generally and the
banking environment in particular; and (xiii) such other information, financial
studies, analyses and investigations and financial, economic and market criteria
as Sandler O'Neill considered relevant.
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In connection with rendering the Sandler O'Neill Fairness
Opinion, Sandler O'Neill confirmed the appropriateness of its reliance on the
analyses used to render its May 3, 1997 opinion by performing procedures to
update certain of such analyses and by reviewing the assumptions upon which such
analyses were based and the factors considered in connection therewith.
In performing its reviews, Sandler O'Neill assumed and relied
upon, without independent verification, the accuracy and completeness of all the
financial information, analyses and other information reviewed by and discussed
with it, and Sandler O'Neill did not make an independent evaluation or appraisal
of the specific assets, the collateral securing assets or the liabilities of
Reliance or Continental or any of their subsidiaries, or the collectibility of
any such assets (relying, where relevant, on the analyses and estimates of
Reliance and Continental). With respect to the financial projections reviewed
with each company's management, Sandler O'Neill assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the respective managements of the respective future financial
performances of Reliance and Continental and that such performances will be
achieved. Sandler O'Neill also assumed that there has been no material change in
Reliance's or Continental's assets, financial condition, results of operations,
business or prospects since the date of the last financial statements noted
above.
Under the Sandler O'Neill Agreement, Continental will pay
Sandler O'Neill a transaction fee in connection with the Merger, a substantial
portion of which is contingent upon the consummation of the Merger. Under the
terms of the Sandler O'Neill Agreement, Continental will pay Sandler O'Neill a
transaction fee equal to 2.0% on the first $5 million in aggregate purchase
price paid plus 1.5% of the aggregate purchase price in excess of $5 million but
less than $15 million, plus 1.0% of the aggregate purchase price in excess of
$15 million, or approximately $360,000 (based upon the closing price of Reliance
Common Stock at the day of signing), of which 25% was paid upon execution of the
Merger Agreement and 75% will be paid if the Merger is consummated. Continental
has also agreed to reimburse Sandler O'Neill for its reasonable out-of-pocket
expenses incurred in connection with its engagement and to indemnify Sandler
O'Neill and its affiliates and their respective partners, directors, officers,
employees, agents, and controlling persons against certain expenses and
liabilities, including liabilities under securities laws.
We have acted as Continental's financial advisor in connection
with the Merger and will receive a fee for our services, a significant portion
of which is contingent upon consummation of the Merger. We have also provided
and continue to provide general advisory services for Continental and have
received and will continue to receive fees for such services. In the ordinary
course of its business, Sandler O'Neill may actively trade the equity securities
of Continental and Reliance for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
PROCEDURES FOR EXCHANGE OF CONTINENTAL COMMON STOCK CERTIFICATES
As of the Effective Time, Reliance shall deposit, or shall
cause to be deposited, with LaSalle National Bank (the "Exchange Agent"), for
the benefit of the holders of shares of Continental Common Stock, an estimated
amount of cash sufficient to pay the aggregate amount of cash to be paid in lieu
of fractional shares, and Reliance shall reserve for issuance the aggregate
number of shares of Reliance Common Stock to be issued as part of the Merger
Consideration.
The Letter of Transmittal to be mailed within five business
days after the Effective Date will specify that delivery will be effected, and
risk of loss and title to the Continental Common Stock certificates
("Continental Stock Certificates") representing Reliance Common Stock shall
pass, only upon proper delivery of the Continental Stock Certificates to the
Exchange Agent and shall include instructions for use in effecting the surrender
of the Continental Stock Certificates in exchange for certificates evidencing
shares of Reliance Common Stock.
Upon the proper surrender to the Exchange Agent of a
Continental Stock Certificate for cancellation, together with such Letter of
Transmittal, duly executed and completed in accordance with the instructions
thereto, and such other documents as may be reasonably required pursuant to such
instructions, the holder of such Continental Stock Certificate shall be entitled
to receive in exchange therefor the appropriate Merger Consideration. As soon as
practicable, and in no event later than 10 business days after the receipt of
the properly completed Letter of Transmittal and any necessary accompanying
documentation, the Exchange Agent shall distribute Reliance Common Stock and
cash in lieu of fractional shares as provided in the Merger Agreement.
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No dividends or other distributions declared or made after the
Effective Time with respect to Reliance Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Continental
Stock Certificate with respect to the shares of Reliance Common Stock
represented thereby, and no cash payment in lieu of any fractional shares shall
be paid to any such holder, until the holder of such Continental Stock
Certificate shall surrender such certificate. Subject to the effect of escheat,
tax or other applicable laws, following surrender of any such Continental Stock
Certificate, the holder of whole shares of Reliance Common Stock issued in
exchange therefor, will be paid without interest, (i) the amount of any cash
payable with respect to a fractional share of Reliance Common Stock to which
such holder is entitled and the amount of dividends or other distributions with
a record date after the Effective Time and theretofore paid with respect to such
whole shares of Reliance Common Stock, and (ii) at the appropriate payment date,
the amount of dividends or other distributions, with a record date after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such whole shares of Reliance Common Stock.
At the Effective Time, the stock transfer books of Continental
shall be closed, and there shall be no further registration of transfers of
shares of Continental Common Stock thereafter on the records of Continental.
From and after the Effective Time, the holders of certificates representing
shares of Continental Common Stock outstanding immediately prior to the
Effective Time shall cease to have any rights with respect to such shares of
Continental Common Stock, except as otherwise provided herein or by law.
Any portion of the aggregate amount of cash to be paid in lieu
of fractional shares of Reliance Common Stock, or the proceeds of any
investments thereof, that remains unclaimed by the stockholders of Continental
for six (6) months after the Effective Time shall be repaid by the Exchange
Agent to Reliance upon the written request of Reliance. After such request is
made, any stockholders of Continental shall look only to Reliance for payment
and issuance of their Merger Consideration deliverable in respect of each share
of Continental Common Stock such stockholder holds as determined pursuant to the
Merger Agreement without any interest thereon. If outstanding certificates for
shares of Continental Common Stock are not surrendered or the payment for such
shares is not claimed prior to the date on which such payments would otherwise
escheat to or become the property of any governmental unit or agency, the
unclaimed items shall, to the extent permitted by abandoned property and any
other applicable law, become the property of Reliance (and to the extent not in
its possession shall be paid over to it), free and clear of all claims or
interest of any person previously entitled to such claims. Notwithstanding the
foregoing, none of Reliance, Reliance Bank, the Exchange Agent or any other
person shall be liable to any former holder of Continental Common Stock for any
amount delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
Reliance and the Exchange Agent shall be entitled to rely upon
Continental's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Continental Stock Certificate, Reliance and the
Exchange Agent shall be entitled to deposit any consideration represented
thereby in escrow with an independent third party and thereafter be relieved
with respect to any claims thereto.
In the event any Continental Stock Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Continental Stock Certificate to be lost, stolen or
destroyed and, if required by the Exchange Agent, the posting by such person of
a bond in such amount as the Exchange Agent may direct as indemnity against any
claim that may be made against it with respect to such Continental Stock
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Continental Stock Certificate the Merger Consideration deliverable in
respect thereof pursuant to the Merger Agreement.
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REGULATORY APPROVALS
Pursuant to the Bank Merger Act, the Home Owners' Loan Act and
the OTS Regulations promulgated thereunder, the Merger is subject to the
approval of the OTS. Reliance filed an application for approval of the Merger
with the OTS on June 25, 1997. This application is currently under review by the
OTS. There can be no assurance as to the timing of such approval or that the OTS
will approve the Merger. The OTS is required to evaluate the applications by
taking into consideration, among other things, the capital level of the
resulting institution, the financial and managerial resources and future
prospects of the institutions involved, the convenience and needs of the
communities to be served and the conformity of the transaction to applicable
law, regulation and supervisory policies. In addition, the OTS may not approve
any proposed acquisition (i) which would result in a monopoly or which would be
in furtherance of any combination or conspiracy to monopolize or to attempt to
monopolize the savings and loan business in any part of the United States or
(ii) which in any section of the country may have the effect of substantially
lessening competition or tending to create a monopoly or which in any other
manner would be in restraint of trade, unless the OTS finds that the
anti-competitive effects of the proposed acquisition are clearly outweighed in
the public interest by the probable effect of the acquisition in meeting the
convenience and needs of the community to be served. Under the Community
Reinvestment Act of 1977 (the "CRA"), the OTS must take into account Reliance
Bank's record of performance in meeting the credit needs of the entire
community, including low- and moderate-income neighborhoods, served by Reliance
Bank. The OTS also considers, among other things, the fairness and disclosure of
the plan (including compensation to officers, directors and controlling persons
of the disappearing association by the surviving association), the
justification, need for and compensation to be paid to any advisory board, fees
paid to each person or firm rendering legal or other professional services in
connection with a merger and the accounting and tax treatment of the Merger. The
regulations of the OTS also provide for the publication of notice and the
opportunity for public comments relating to the application for approval
discussed above.
In addition, under federal law, a period of 30 days must
expire following approval by the OTS within which period the Department of
Justice may file objections to the Merger under the federal antitrust laws. The
post-approval waiting period may be reduced by the OTS to 15 days, with the
concurrence of the Department of Justice. The Department of Justice could take
such action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Merger unless divestiture of an
acceptable number of branches to a competitively suitable purchaser could be
made. While Reliance believes that the likelihood of such action by the
Department of Justice is remote in this case, there can be no assurance that the
Department of Justice will not initiate such proceeding, or that the Attorney
General of the State of New York will not challenge the Merger, or if such
proceeding is instituted or challenge is made, as to the result thereof.
The Merger is also subject to the prior approval of the
Superintendent of Banks of the State of New York (the "Superintendent") pursuant
to Section 601 of the NYBL. Reliance filed an application for approval of the
Merger with the New York State Banking Department on June 26, 1997. This
application is currently under review by the Banking Department. There can be no
assurance as to the timing of such approval or that the Banking Department will
approve the Merger. In determining whether to approve the application for the
Merger of Continental with and into Reliance Bank, the Superintendent will
consider, among other factors, whether the Merger would be consistent with
adequate or sound banking and would not result in concentration of assets beyond
limits consistent with effective competition, and whether the Merger would
result in such a lessening of competition as to be injurious to the interest of
the public or tend toward monopoly. The Superintendent will also consider the
public interest and the needs and convenience thereof. Further, it is the policy
of the State of New York to ensure the safe and sound conduct of banking
organizations, to conserve assets of banking organizations, to prevent hoarding
of money, to eliminate unsound and destructive competition among banking
organizations and to maintain public confidence in the business of banking and
protect the public interest and the interests of depositors, creditors and
stockholders, and such factors will be considered by the Superintendent in
connection with Reliance Bank's application. The approval of the Superintendent
is also required pursuant to Section 370-a of the NYBL in connection with the
change in control of CBMC, Inc.,
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Continental's licensed check cashing subsidiary, which will become a direct
wholly-owned subsidiary of Reliance Bank upon consummation of the Merger. The
Merger cannot proceed in the absence of the requisite regulatory approvals. See
"-- Conditions to the Consummation of the Merger" and "-- Termination." There
can be no assurance that such regulatory approvals will be obtained, and, if
obtained, there can be no assurance as to the date of any such approval. There
can also be no assurance that any such approvals will not contain a condition or
requirement which causes such approvals to fail to satisfy the conditions set
forth in the Merger Agreement and described below under "-- Conditions to the
Consummation of the Merger."
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Consummation of the Merger is subject to various conditions.
While it is anticipated that all such conditions will be satisfied, there can be
no assurance that all of such conditions will be satisfied or waived.
The respective obligations of Reliance and Continental to
cause the Merger to be consummated are subject to certain conditions, including
the following:
(i) approval of the Merger Agreement by the
requisite vote of Continental's stockholders;
(ii) receipt and effectiveness of all
regulatory or governmental approvals, consents or waivers
required to consummate the Merger and the expiration of all
applicable statutory waiting periods in respect thereof,
receipt of all other consents, waivers and approvals of any
third parties which are necessary to permit the consummation
of the Merger and the other transactions contemplated in the
Merger Agreement, except for those the failure to obtain or
receive would not have a material adverse effect on (x)
Continental and its subsidiaries taken as a whole or (y)
Reliance and its subsidiaries taken as a whole; provided, that
no regulatory approval contains any term or condition which
would have a material adverse effect on (x) Continental and
its subsidiaries taken as a whole or (y) Reliance and its
subsidiaries taken as a whole;
(iii) no party to the Merger Agreement shall
be subject to any order, decree or injunction of a court or
agency of competent jurisdiction which enjoins or prohibits
the consummation of the Merger;
(iv) no statute, rule or regulation shall
have been enacted, entered, promulgated, interpreted, applied
or enforced by any governmental authority which prohibits,
restricts or makes illegal consummation of the Merger;
(v) receipt of a declaration of
effectiveness of the Registration Statement by the Commission
and no proceedings shall be pending or threatened by the
Commission to suspend the effectiveness of the Registration
Statement; and the shares of Reliance Common Stock issuable
pursuant to the Merger Agreement shall have been approved for
listing on the Nasdaq National Market, subject to official
notice of issuance; and receipt of all required approvals by
state securities or "blue sky" authorities with respect to the
transactions contemplated in the Merger Agreement;
(vi) Reliance shall have received the
agreement from each affiliate of Continental with respect to
restrictions on the disposition of shares of Reliance Common
Stock, if any, to be received by such affiliate pursuant to
the Merger, and letters from certain individuals with respect
to settlement of such individuals' rights under the specified
compensation and benefits programs;
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(vii) the representations and warranties of
the other party in the Merger Agreement being true and correct
in all material respects as of the dates specified therein,
and the performance by the other party in all material
respects of all obligations required by the Merger Agreement
to be performed;
(viii) the receipt by Reliance of the
opinion of Thacher Proffitt & Wood, and the receipt by
Continental of the opinion of Muldoon, Murphy & Faucette, each
substantially to the effect that on the basis of the facts,
representations and assumptions set forth in such opinion
which are consistent with the state of facts existing at the
Effective Time, the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section
368(a) of the Code and that, accordingly, no gain or loss will
be recognized by Reliance, Reliance Bank or Continental as a
result of the Merger; and
(ix) the delivery to each of Reliance and
Continental of various letters, certificates and other
documents.
REPRESENTATIONS AND WARRANTIES
Each of Continental and Reliance has made certain
representations and warranties to each other in the Merger Agreement as to,
among other things, the authorization, validity, binding effect and
enforceability of the Merger Agreement, various corporate matters, capital
structure, compliance with laws, absence of material adverse changes, financial
statements, labor matters, employee benefit plans, environmental matters, asset
quality, loan portfolio and allowances for possible loan losses, investment
securities and borrowings, books and records, absence of certain legal
proceedings and regulatory actions and certain fees payable in connection with
the proposed transactions. Continental has also made certain representations and
warranties to Reliance and Reliance Bank with respect to among other things, its
taxes, its deposits, its material agreements, its insurance, its termination
benefits and certain other matters. Reliance has also made representations and
warranties to Continental, with respect to the shares of Reliance Common Stock
to be issued in connection with the Merger. Virtually all of the representations
and warranties of the parties, the accuracy of which is a condition to the
closing of the transactions contemplated by the Merger Agreement, contain
exceptions for any condition, event, change or occurrence that would not have a
material adverse effect on the business, financial condition or results of
operations of the party making such representation or warranty, and its
subsidiaries taken as a whole; PROVIDED that any such effects resulting from any
(i) changes in law, rule or regulation or generally accepted accounting
principles or interpretations thereof that applies to both Reliance and Reliance
Bank, and Continental, as the case may be, or (ii) changes in interest rates,
shall not be considered in determining if a material adverse effect has
occurred). The representations and warranties of the parties do not survive
beyond the Effective Time if the Merger is consummated, and, if the Merger
Agreement is terminated without consummation of the Merger, there will be no
liability on the part of any party for a misrepresentation except that no party
will be relieved from any liability arising out of the willful breach by any
other party of any covenant or willful misrepresentation contained in the Merger
Agreement.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, each of Continental and
Reliance has agreed that during the period from the date of the Merger Agreement
to the Effective Time (except as expressly provided in the Merger Agreement), to
use commercially reasonable efforts to, and shall cause each of its respective
subsidiaries to use commercially reasonable efforts to, (i) conduct its business
in the ordinary and usual course consistent with prudent banking practice, (ii)
maintain and preserve intact its business organization, properties, leases,
employees and advantageous business relationships and retain the services of its
officers and key employees, (iii) take no action that would adversely affect or
delay the ability of Reliance, Reliance Bank or Continental to perform its
covenants and agreements on a timely basis under the Merger Agreement, (iv) take
no action which would adversely affect or delay the ability of Reliance,
Reliance Bank or Continental to obtain any
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necessary approvals, consents or waivers of any governmental authority required
for the transactions contemplated by the Merger Agreement or which would
reasonably be expected to result in any such approvals, consents or waivers
containing any material condition or restriction and (v) take no action that
results in or is reasonably likely to have a material adverse effect on such
party.
In addition, pursuant to the Merger Agreement, during the
period from the date of the Merger Agreement to the Effective Time (except as
otherwise specifically provided in the Merger Agreement), Continental has agreed
that it shall not, and shall not permit any of its subsidiaries to, without the
prior written consent of Reliance, take certain actions, including the
following:
(i) change its corporate structure or amend Continental's
or any of its subsidiaries' charters or bylaws or
similar governing documents;
(ii) issue any shares of capital stock or change the terms
of any outstanding warrants or issue, grant or sell any
warrant, call, commitment, right to purchase or
agreement of any character relating to the authorized
or issued capital stock of Continental, except pursuant
to the Stock Option Agreement; adjust, split, combine
or reclassify any capital stock; make, declare or pay
any dividend or make any other distribution on, or
directly or indirectly redeem, purchase or otherwise
acquire, any shares of its capital stock or any
securities or obligations convertible into or
exchangeable for any shares of its capital stock;
except that, if all of the conditions to the
obligations of the parties set forth in the Merger
Agreement have been satisfied prior to September 30,
1997, but for the delivery of certain certificates and
opinions, as provided in the Merger Agreement, and the
Effective Time shall not have occurred, Continental may
pay a dividend with respect to the quarter ended
September 30, 1997 of Continental, in an amount equal
to no more than $0.18 per share of Continental Common
Stock, subject to Continental's normal procedures on
declaration and payment of dividends;
(iii) other than in the ordinary course of business
consistent with past practice and pursuant to policies
currently in effect, sell, transfer, mortgage, encumber
or otherwise dispose of any material properties, leases
or assets to any individual, corporation or other
entity other than a direct or indirect wholly owned
subsidiary of Continental or cancel, release or assign
any indebtedness of any such person, except pursuant to
contracts or agreements in force at the date of the
Merger Agreement and which have been described to
Reliance;
(iv) except to the extent required by law or specifically
provided in the Merger Agreement, increase the
compensation or fringe benefits of any of its employees
or directors, except for general increases in
compensation for non-officer employees in the ordinary
course of business, consistent with past practice that
do not cause the annualized compensation of
Continental's non-officer employees following such
increase to exceed by more than 5% the total annual
compensation expense of Continental with respect to
such person for the 12-month period ended March 31,
1997 and that do not cause the annual rate of base
salary of any of Continental's non-officer employees to
increase by more than 5% over such person's base salary
at March 31, 1997; pay any pension or retirement
allowance not required under existing plans or
agreements; become a party to, amend or commit to fund
or establish any account or trust related to any
employee benefit plan of Continental for the benefit of
any employee or director; voluntarily accelerate the
vesting of any stock options or other compensation or
benefit; terminate or increase the cost to Continental
or any subsidiary of Continental or any employee
benefit plan of Continental; hire any new employee with
an annual compensation in excess of $35,000 or enter
into any employment contract; or make any discretionary
contribution to any employee benefit plan of
Continental;
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(v) except as contemplated by the Merger Agreement or as
required by certain accounting standards, change
Continental's methods of accounting;
(vi) make any individual investment by purchase of stock or
securities, contributions to capital, property
transfers or purchase of any property or assets of any
individual, corporation or other entity, other than in
the ordinary course of business, consistent with past
practice in individual amounts not to exceed $50,000,
or as permitted by paragraph (vii) below;
(vii) make any investment in any debt security including
mortgage-backed and mortgage-related securities, other
than U.S. government and U.S. government agency
securities with final maturities not greater than five
years, mortgage-backed or mortgage related securities
not considered "high risk" under OTS guidelines or
securities of the FHLB, in each case that are purchased
in the ordinary course of business consistent with past
practice;
(viii) enter into or terminate any contract or agreement, or
make any change in any of its leases or contracts,
other than with respect to those involving aggregate
payments of less than, or the provision of goods or
services with a market value of less than, $20,000 per
annum, other than those covered in paragraph (xi)
below;
(ix) settle any claim, action or proceeding involving any
liability of Continental or any of its subsidiaries for
money damages in excess of $25,000 or which materially
restricts the operations of Continental or any of its
subsidiaries;
(x) waive or release any material right or collateral or
cancel or compromise any extension of credit or other
debt or claim, other than in the ordinary course of
business and in amounts less than $50,000;
(xi) make, renegotiate, renew, increase, extend or purchase
any (a) loan, lease (credit equivalent), advance,
credit enhancement or other extension of credit, or
make any commitment in respect of any of the foregoing,
except (I) in conformity with existing lending
practices in amounts not to exceed $500,000 to any
individual borrower or (II) loans or advances as to
which Continental has a legally binding obligation to
make such loans or advances as of May 3, 1997 and a
description of which has been provided by Continental
to Reliance; PROVIDED, however, that Continental may
not make, renegotiate, renew, increase, extend or
purchase any loan that is underwritten based on either
no or limited verification of income or otherwise
without full documentation customary for such a loan;
or (b) loans, advances or commitments to directors,
officers or other affiliated parties of Continental or
any of its subsidiaries except for renewals of any such
loans referred to in this clause (b) or previously
disclosed by Continental to Reliance;
(xii) acquire or agree to acquire, by merging or
consolidating with, or by purchasing a substantial
equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any
corporation, partnership, association or other business
organization or division thereof or otherwise acquire
or agree to acquire any assets, in each case which are
material, individually or in the aggregate, to
Continental except in satisfaction of debts previously
contracted;
(xiii) incur any additional borrowings beyond those
previously disclosed by Continental to Reliance other
than short-term (six months or less) FHLB borrowings
and reverse repurchase agreements consistent with past
practice, or pledge any of its assets to secure any
borrowings other than as required pursuant to the terms
of borrowings of Continental or any subsidiary in
effect at the date of the Merger Agreement or in
connection with borrowings or reverse
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repurchase agreements permitted by the Merger
Agreement. Deposits shall not be deemed to be
borrowings within the meaning of this paragraph;
(xiv) make any capital expenditure in excess of $20,000 per
expenditure from the date of the Merger Agreement until
the Effective Date other than pursuant to binding
commitments existing on May 3, 1997 or as disclosed by
Continental to Reliance, other than expenditures
necessary to maintain existing assets in good repair or
to make payment of necessary taxes;
(xv) make any investment or commitment to invest in real
estate or in any real estate development project, other
than Small Business Administration 7A Program
guaranteed loans or real estate acquired in
satisfaction of defaulted mortgage loans and
investments or commitments approved by the Continental
Board prior to the date of the Merger Agreement and
disclosed in writing to Reliance;
(xvi) except pursuant to commitments existing at the date of
the Merger Agreement which have been disclosed by
Continental to Reliance, and except for Small Business
Administration 7A Program guaranteed loans, make any
real estate loans secured by undeveloped land or real
estate located outside the State of New York or make
any construction loan;
(xvii) establish or make any commitment relating to the
establishment of any new branch or other office
facilities;
(xviii) organize, capitalize, lend or otherwise invest in
any subsidiary, or invest in or acquire any equity or
voting interest in any firm, corporation or business
enterprise (other than securities of the FHLB that are
purchased in the ordinary course of business consistent
with past practice);
(xix) elect to the Continental Board or to any office any
person who is not a member of the Continental Board or
an officer of Continental as of the date of the Merger
Agreement; or
(xx) agree or make any commitment to take any action that is
prohibited by any of the foregoing paragraphs.
After the date on which all required regulatory approval and
shareholder approvals are received, at the request of Reliance, and after
receipt of written confirmation from Reliance that it is not aware of any fact
or circumstance that would prevent completion of the Merger, and prior to the
Effective Time, Continental shall modify and change its loan, litigation, real
estate valuation policies and practices (including loan classifications and
levels of reserves) and investment and asset/liability management policies and
practices so as to be consistent on a mutually satisfactory basis with those of
Reliance Bank; PROVIDED, that such policies and procedures are not prohibited by
generally accepted accounting principles or all applicable laws and regulations.
NO SOLICITATION
Continental has agreed in the Merger Agreement that neither it
nor any of its subsidiaries nor any of their respective officers and directors
shall, and Continental shall use its best efforts to cause its employees, agents
and representatives not to, (i) initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to stockholders of Continental) with
respect to a merger, consolidation or similar transaction involving, or any
purchase of all or more than 10% of the assets or any equity securities of,
Continental or any of its material subsidiaries (any such proposal or offer, an
"Acquisition Proposal") or, (ii) except to the extent legally required for the
discharge by the Continental Board of its fiduciary duties as advised in writing
by such board's counsel, engage in any negotiations concerning, or provide any
confidential information or data to, or have discussions with, any
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person relating to an Acquisition Proposal, or otherwise facilitate any effort
or attempt to make or implement an Acquisition Proposal. Continental is required
to notify Reliance immediately if any such inquiries, proposals or offers are
received by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with Continental, together
with details as to the identity of the persons making such inquiry, proposal or
offer and the substance thereof.
AMENDMENT AND WAIVER
Prior to the Effective Time, any provision of the Merger
Agreement may be: (i) waived in writing by the party benefitted by the
provision; or (ii) amended or modified at any time (including the structure of
the transaction) by an agreement in writing between the parties except that,
after the vote by the stockholders of Continental, no amendment may be made that
would reduce the Merger Consideration or contravene applicable New York or
federal banking laws, rules and regulations.
PRICE-BASED TERMINATION
The Merger Agreement contains a provision that permits
Continental, by a majority vote of its entire Board of Directors, to terminate
the Merger Agreement if there is a significant and prolonged decline in the per
share market price of Reliance's Common Stock that is not coincidental with a
significant and prolonged decline in the stock prices of certain other financial
institution holding companies, unless Reliance is willing to increase the Merger
Consideration in accordance with a formula provided in the Merger Agreement.
This provision specifically provides that Continental may
terminate the Merger Agreement at any time during the five-day period commencing
with the day (the "Valuation Date") which is the day on which the last of the
required regulatory approvals is obtained, IF BOTH OF THE FOLLOWING CONDITIONS
ARE SATISFIED:
(i) Reliance Market Value is less than $19.20, adjusted
to reflect any stock dividend, reclassification,
recapitalization, split-up, combination, exchange of shares
or similar transaction (the "Initial Reliance Market
Value"); and
(ii) (A) the number obtained by dividing Reliance
Market Value on such Valuation Date by the Initial Reliance
Market Value (the "Reliance Ratio") is less than (B) the
number obtained by dividing the Final Index Price by the
Initial Index Price and subtracting 0.15 from the quotient
in this clause (ii)(B) (the "Index Ratio");
If the Continental Board elects to exercise this termination right, it must give
prompt written notice to Reliance following such election (provided that such
notice of election to terminate may be withdrawn at any time during the five-day
period). During the seven-day period commencing with its receipt of such notice,
Reliance has the option to avoid such termination of the Merger Agreement by
electing to increase the Merger Consideration to an amount equal to the lesser
of (x) a number equal to a fraction, the numerator of which is $19.20 and the
denominator of which is the Reliance Market Value, and (y) a number equal to a
fraction, the numerator of which is the Index Ratio multiplied by 1.1 and the
denominator of which is the Reliance Ratio. If Reliance so elects within such
seven-day period, it must give prompt written notice to Continental of such
election and the adjusted Merger Consideration, whereupon no termination will
have occurred, and the Merger Agreement will otherwise remain in effect in
accordance with its terms (except as the Merger Consideration shall have been so
adjusted).
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The following terms have the meanings indicated below:
"Final Index Price" means the sum of the
Final Prices for each company comprising the Index Group
multiplied by the applicable weighting.
"Final Price," with respect to any company
being a member of the Index Group, means the average of the
daily closing sales prices of a share of common stock of such
company, as reported on the consolidated transaction reporting
system for the market or exchange on which such common stock
is principally traded, during the period of 15 trading days
ending on the Valuation Date.
"Index Group" means the 19 financial
institution holding companies listed below, the common stock
of all of which are publicly traded and as to which there have
not been any publicly announced proposal at any time during
the period beginning on the date of the Merger Agreement and
ending on the Valuation Date for any such company to be
acquired. In the event that the common stock of any such
company ceases to be publicly traded or a proposal to acquire
any such company is announced at any time during the period
beginning on the date of the Merger Agreement and ending on
the Valuation Date, such company shall be removed from the
Index Group, and the weights attributed to the remaining
companies shall be adjusted proportionately for purposes of
determining the Final Index Price and the Initial Index Price.
The 19 financial institution holding companies and the weights
attributed to them are as follows:
HOLDING COMPANY WEIGHTING
--------------- ---------
Commonwealth Bancorp, Inc. 6.56%
Dime Community Bancorp, Inc. 6.09%
Eagle Financial Corp. 3.24%
First Essex Bancorp, Inc. 3.30%
First Indiana Corporation 5.12%
Flushing Financial Corp. 4.02%
Haven Bancorp, Inc. 3.65%
InterWest Bancorp, Inc. 6.25%
Jefferson Savings Bancorp 3.25%
JSB Financial, Inc. 11.00%
Life Bancorp, Inc. 4.89%
Magna Bancorp, Inc. 6.56%
ML Bancorp, Inc. 4.59%
Ocean Financial Corp. 7.18%
PennFed Financial Services Inc. 3.14%
Queens County Bancorp, Inc. 11.07%
SIS Bancorp, Inc. 2.22%
Vermont Financial Services Corp. 4.88%
York Financial Corp. 3.26%
"Initial Index Price" means the sum of each
per share closing price of the common stock of each company
comprising the Index Group multiplied by the applicable
weighting, as such prices are reported on the consolidated
transactions reporting system for the market or exchange on
which such common stock is principally traded on the trading
day immediately preceding the public announcement of the
Merger Agreement. The Initial Index Price as of May 2, 1997
was $26.93.
"Reliance Market Value" means the average of
the mean between the closing high bid and low asked prices of
a share of Reliance Common Stock, as reported on the Nasdaq
National Market, for the 15 consecutive trading days
immediately preceding the Valuation Date.
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If Reliance or any company belonging to the Index Group declares or effects a
stock dividend, reclassification, recapitalization, split-up, combination,
exchange of shares or similar transaction between the date of the Merger
Agreement and the Valuation Date, the prices for the common stock of such
company will be appropriately adjusted for purposes of applying the foregoing
price-based termination option.
Prior to making any decision to terminate (or allow the
termination of) the Merger Agreement, each of the Continental Board and the
Reliance Board would consult with its respective financial and other advisors
and would consider all financial and other information it deemed relevant to its
decision. It is not possible to know whether such termination right will be
triggered until after all required regulatory approvals are obtained. The
Continental Board has made no decision as to whether it would exercise its right
to terminate the Merger Agreement if the termination right has been triggered.
In considering whether to exercise its termination right in such situation, the
Continental Board would, consistent with its fiduciary duties, take into account
all relevant facts and circumstances that exist at such time and would consult
with its financial advisors and legal counsel. Approval of the Merger Agreement
by the stockholders of Continental at the Special Meeting will confer on the
Continental Board the power, consistent with its fiduciary duties, to elect to
consummate the Merger in the event the termination right is triggered whether or
not there is any increase in the Merger Consideration and without any further
action by, or resolicitation of, the stockholders of Continental. Reliance is
under no obligation to increase the Merger Consideration, and there can be no
assurance that Reliance would elect to increase the Merger Consideration if the
Continental Board were to exercise its right to terminate the Merger Agreement
as set forth above. Any such decision would be made by Reliance in consultation
with its investment and legal advisors in light of the circumstances existing at
the time Reliance has the opportunity to make such an election.
TERMINATION
The Merger Agreement may be terminated at any time prior to
the Effective Time, whether before or after its approval by the stockholders of
Continental: (i) by mutual consent of Reliance and Continental if the board of
directors of each so determines by a vote of a majority of the members of its
entire board; (ii) by either Reliance or Continental, if its board of directors
so determines by vote of a majority of the members of its entire board, in the
event (a) the approval of the stockholders of Continental required for the
consummation of the Merger shall not have been obtained or (b) of a material
breach by the other party of any representation, warranty, covenant or agreement
in the Merger Agreement, which is not cured within 25 business days after
written notice of such breach is given to the party committing such breach, or
which breach by its nature cannot be cured prior to March 31, 1998, or any
extension thereof; (iii) by either Reliance or Continental upon written notice
to the other party if either (a) any approval, consent or waiver of a
governmental agency required to permit consummation of the transactions
contemplated by the Merger Agreement shall have been denied or (b) any
governmental authority of competent jurisdiction issues a final, unappealable
order enjoining or otherwise prohibiting the consummation of the transactions
contemplated by the Merger Agreement; or (iv) by either Reliance or Continental
if the board of directors of either so determines by a vote of a majority of the
members of the respective board of directors, in the event the Merger is not
consummated on or before March 31, 1998, unless the failure to consummate the
Merger by such date is due to the breach of any representation, warranty or
covenant contained in the Merger Agreement by the party seeking to terminate the
Merger Agreement.
In the event of termination of the Merger Agreement, the
Merger Agreement shall thereafter become void and, subject to certain specified
provisions of the Merger Agreement dealing with confidentiality of information
and expenses, there shall be no liability on the part of any party hereto or
their respective officers or directors, except that any such termination shall
be without prejudice to the rights of any party arising out of the willful
breach by any other party of any covenant or willful misrepresentation contained
in the Merger Agreement, and except that, in certain limited circumstances, a
termination fee may become payable as described under "-- Termination Fee."
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TERMINATION FEE
In recognition of the efforts, expenses and other
opportunities foregone by Reliance while structuring the Merger, the Merger
Agreement provides that Continental shall, except as described below, pay to
Reliance a termination fee of $350,000 in cash (the "Termination Fee") on demand
if, during a period of eighteen (18) months after the date of the Merger
Agreement but prior to the termination of the Merger Agreement in accordance
with its terms (other than termination by Reliance due to either the failure of
Continental's stockholders to approve the Merger Agreement or the material
breach by Continental of the Merger Agreement), the Merger has not been
completed and any of the following has occurred:
(i) the acquisition by any person other than Reliance or an
affiliate of Reliance of beneficial ownership of 20% or
more of the then outstanding voting power of
Continental;
(ii) Continental or any of its subsidiaries, without having
received Reliance's prior written consent, shall have
entered into an agreement to engage in an Acquisition
Transaction with any person other than Reliance or any
of its subsidiaries or the Continental Board shall have
recommended that the stockholders of Continental
approve or accept any Acquisition Transaction with any
person other than Reliance or any of its subsidiaries;
under the Merger Agreement, an "Acquisition
Transaction" is defined as (a) a merger or
consolidation, or any similar transaction, involving
Continental, (b) a purchase, lease or other acquisition
of all or substantially all of the assets of
Continental or (c) a purchase or other acquisition
(including by way of merger, consolidation, share
exchange or otherwise) of securities representing 20%
or more of the voting power of Continental; provided,
that the term "Acquisition Transaction" does not
include any internal merger or consolidation involving
only Continental and/or its subsidiaries; or
(iii) after a BONA FIDE proposal is made by a third party to
Continental or its stockholders to engage in an
Acquisition Transaction: (a) Continental shall have
willfully breached any covenant or obligation contained
in the Merger Agreement and such breach would entitle
Reliance to terminate the Merger Agreement; (b) the
holders of Continental Common Stock shall not have
approved the Merger Agreement at the Special Meeting or
such meeting shall not have been held or shall have
been canceled prior to termination of the Merger
Agreement; or (c) the Continental Board shall have
withdrawn or modified in a manner adverse to Reliance
the recommendation of the Continental Board with
respect to the Merger Agreement.
Notwithstanding the foregoing, Continental shall not be
obligated to pay to Reliance such termination fee in the event that: (i)
Continental or Reliance validly terminates the Merger Agreement by the mutual
consent of the parties or due to the denial of governmental approvals necessary
to consummate the Merger or the issuance of a final governmental order enjoining
the Merger or (ii) Continental terminates the Merger Agreement due to a material
breach by Reliance of any representation warranty, covenant or agreement
contained in the Merger Agreement or due to a drop in the price of the Reliance
Common Stock, in each case as described in the Merger Agreement. See "--
Price-Based Termination" and "-- Termination."
EXPENSES
All costs and expenses incurred in connection with the Merger
Agreement, the Stock Option Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expense.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW MAY NOT BE
APPLICABLE TO CERTAIN CLASSES OF TAXPAYERS, INCLUDING INSURANCE COMPANIES,
SECURITIES DEALERS, FINANCIAL INSTITUTIONS, TAX EXEMPT ORGANIZATIONS OR TRUSTS,
FOREIGN PERSONS, PERSONS WHO HELD SHARES OF CONTINENTAL COMMON STOCK AS PART OF
A STRADDLE OR CONVERSION TRANSACTION AND PERSONS WHO ACQUIRED SHARES OF
CONTINENTAL COMMON STOCK PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR
RIGHTS OR OTHERWISE AS COMPENSATION. IN ADDITION, THIS DISCUSSION DOES NOT
ADDRESS THE TAX CONSEQUENCES OF TRANSACTIONS EFFECTUATED PRIOR TO OR AFTER THE
MERGER, WHETHER OR NOT SUCH TRANSACTIONS ARE IN CONNECTION WITH THE MERGER,
INCLUDING, WITHOUT LIMITATION, THE EXERCISE OF OPTIONS OR RIGHTS TO PURCHASE
SHARES OF CONTINENTAL COMMON STOCK IN ANTICIPATION OF THE MERGER. CONTINENTAL
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL AND OTHER TAX LAWS.
TAX OPINIONS. It is intended that the Merger will be treated
as a reorganization within the meaning of Section 368(a) of the Code.
Consummation of the Merger is conditioned upon receipt by Reliance of an opinion
of Thacher Proffitt & Wood, and receipt by Continental of an opinion of Muldoon,
Murphy & Faucette (the "Tax Opinions"), dated the Effective Date, substantially
to the effect that, for federal income tax purposes: (i) the Merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code,
(ii) no gain or loss will be recognized by Reliance, Reliance Bank or
Continental as a result of the Merger; (iii) except to the extent of any cash
received in lieu of a fractional share interest in Reliance Common Stock, no
gain or loss will be recognized by holders of Continental Common Stock who
exchange their shares of Continental Common Stock for shares of Reliance Common
Stock pursuant to the Merger; (iv) the tax basis of the shares of Reliance
Common Stock received by each holder of Continental Common Stock who exchanges
shares of Continental Common Stock for shares of Reliance Common Stock in the
Merger will be the same as the tax basis of the shares of Continental Common
Stock surrendered pursuant to the Merger, reduced by any amount allocable to a
fractional share interest in Reliance Common Stock for which cash is received,
and increased by any gain recognized on such exchange and (v) the holding period
of the shares of Reliance Common Stock received by each holder of Continental
Common Stock in the Merger will include the holding period of the shares of
Continental Common Stock exchanged therefor, provided that such stockholder
holds such shares of Continental Common Stock as a capital asset at the
Effective Time.
The Tax Opinions will not be binding on the Internal Revenue
Service (the "IRS"), and there can be no assurance that the IRS will not contest
the conclusions expressed therein. The Tax Opinions may be based in part upon
certain factual assumptions and upon certain representations made, and
certificates delivered, by Reliance, Reliance Bank, Continental and certain of
their respective stockholders, officers and other persons, which representations
and certificates Thacher Proffitt & Wood and Muldoon, Murphy & Faucette will
assume to be true, correct and complete. If such representations or certificates
are inaccurate, the Tax Opinions could be adversely affected.
TAX CONSEQUENCES; GENERAL. The following summary sets forth
certain anticipated material federal income tax consequences of the Merger to
Continental stockholders. The tax treatment of each Continental stockholder will
depend, in part, upon such stockholder's particular situation. This summary is
based on the provisions of the Code, the Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, all as in
effect as of the date hereof. Such laws, regulations or interpretations may
differ at the Effective Time, and relevant facts also may differ.
EXCHANGE OF CONTINENTAL COMMON STOCK FOR RELIANCE COMMON
STOCK. No gain or loss will be recognized by a Continental stockholder by reason
of the receipt of Reliance Common Stock for such stockholder's shares of
Continental Common Stock (except to the extent such a stockholder receives cash
in lieu of a fractional share interest in Reliance Common Stock).
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Such a Continental stockholder's aggregate tax basis in the
Reliance Common Stock received pursuant to the Merger will equal such
stockholder's aggregate tax basis in the shares of Continental Common Stock
exchanged therefor, reduced by any amount allocable to a fractional share
interest in Reliance Common Stock for which cash is received, and increased by
any gain recognized on such exchange. Continental stockholders should consult
their own tax advisors concerning the determination of their basis and holding
period in any particular share in Reliance Common Stock since several methods of
determination may be available.
FRACTIONAL SHARES OF RELIANCE COMMON STOCK. No fractional
shares of Reliance Common Stock will be issued in the Merger; instead, each
Continental stockholder who would otherwise be entitled to a fractional share of
Reliance Common Stock will receive cash in lieu of such fractional share
interest. Such Continental stockholder will be treated, under Section 302 of the
Code, as having received such fractional share ("Hypothetical Fractional Share")
pursuant to the Merger and then as having exchanged such Hypothetical Fractional
Share for cash in a redemption by Reliance ("Hypothetical Redemption"). Under
the principles of Section 302 of the Code, a Continental stockholder will
recognize capital gain rather than dividend income with respect to the cash
received if the Hypothetical Redemption is "not essentially equivalent to a
dividend." In applying the principles of Section 302, the constructive ownership
rules of Section 318 of the Code will apply in comparing a Continental
stockholder's ownership interest in Reliance both immediately after the Merger
(but before the Hypothetical Redemption) and after the Hypothetical Redemption.
Whether the Hypothetical Redemption by Reliance of a
Hypothetical Fractional Share for cash is "not essentially equivalent to a
dividend" with respect to a Continental stockholder will depend upon such
stockholder's particular circumstances. However, the Hypothetical Redemption
must, in any event, result in a "meaningful reduction" in such Continental
stockholder's percentage ownership of Reliance Common Stock. In determining
whether the Hypothetical Redemption by Reliance results in a meaningful
reduction in a Continental stockholder's percentage ownership of Reliance Common
Stock and, therefore, does not have the effect of a distribution of a dividend,
a Continental stockholder should compare his or her share interest in Reliance
(including interests owned actually, hypothetically and constructively)
immediately after the Merger (but before the Hypothetical Redemption) to his or
her share interest after the Hypothetical Redemption. The IRS has indicated, in
Revenue Ruling 76-385, that a stockholder in a publicly-held corporation whose
relative stock interest in the corporation is minimal and who exercises no
"control" over corporate affairs is generally treated as having had a meaningful
reduction in his or her stock after a redemption transaction if his or her
percentage stock ownership in the corporation has been reduced to any extent,
taking into account the stockholder's actual and constructive ownership before
and after the redemption. In Revenue Ruling 76-385, a reduction from 0.0001118
percent to 0.0001081 percent was found to be a meaningful reduction in
stockholdings.
The holding period of Reliance Common Stock received will
include the holding period of the shares of Continental Common Stock exchanged
therefor, provided that such shares of Continental Common Stock were held as a
capital asset as of the Effective Date. Continental stockholders should consult
their own tax advisors concerning the determination of their basis and holding
period in any particular share of Reliance Common Stock since several methods of
determination may be available.
If the Reliance Common Stock represents a capital asset in the
hands of the stockholder, the stockholder will generally recognize capital gain
or loss on such a deemed redemption of the fractional share in an amount
determined by the excess of the amount of cash received therefor and the
stockholder's tax basis in the fractional share. Any such capital gain realized
by an individual taxpayer will qualify for the 20% maximum tax (10% in the case
of individuals in the 15% ordinary income tax bracket) on net capital gains if
the Continental Common Stock exchanged was held for at least 18 months, and for
the 28% maximum tax on net capital gains if such Continental Common Stock was
held for more than one year and less than 18 months.
BACKUP WITHHOLDING. Unless an exemption applies under
applicable law and regulations, the Exchange Agent will be required to withhold
31% of any cash payments to which a non-corporate stockholder or other
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payee is entitled pursuant to the Merger, unless the stockholder or other payee
provides its taxpayer identification number (social security number, employer
identification number or individual taxpayer identification number) and
certifies that such number is correct. Each stockholder and, if applicable, each
other payee must complete and sign the substitute Form W-9 or, if applicable,
the certificate of foreign status on Form W-8, included with the Transmittal
Letter, so as to provide the information and certification necessary to avoid
backup withholding, unless an applicable exemption exists and is established in
a manner satisfactory to Reliance and the Exchange Agent.
ACCOUNTING TREATMENT
Reliance will treat the Merger as a purchase for accounting
purposes.
DISSENTERS' RIGHTS
Any holder of Continental Common Stock entitled to vote on the
Merger who does not vote in favor thereof will be entitled to have his shares
appraised and to receive payment of the fair value of such shares upon
compliance with the provisions of Section 6022 of the NYBL. Failure to comply
strictly with the procedures set forth in that section will cause the
stockholder to lose his dissenters' rights. The following summary of the
provisions of Section 6022 of the NYBL is not intended to be a complete
statement thereof and is qualified in its entirety by reference to the full text
of Section 6022 of the NYBL, which is attached hereto as Appendix G.
Any Continental stockholder electing to exercise appraisal
rights (i) must not vote in favor of the Merger Agreement and (ii) must file
with Continental before or at the Special Meeting (but before the vote on the
Merger Agreement), a written objection to the Merger Agreement and to the
related exchange of Continental Common Stock for Reliance Common Stock,
including a notice of such stockholder's intention to demand payment for such
stockholder's shares of Continental Common Stock if the Merger is consummated.
Neither a vote against the Merger Agreement, a proxy directing such vote, nor an
abstention or a failure to vote will satisfy the requirement that a written
demand for payment be delivered to Continental before the vote on the Merger
Agreement is taken at the Special Meeting. In addition, a vote in favor of the
Merger Agreement shall constitute a waiver of any dissenters' rights pursuant to
the NYBL. A vote against, an abstention or a failure to vote will not constitute
a waiver of such rights.
Each stockholder who has properly filed a written objection
and who did not vote in favor of the Merger Agreement will be notified by
registered mail of the approval of the Merger Agreement within ten days
following the date of such approval by the Continental stockholders. Within
twenty days after the giving of such notice, any Continental stockholder to whom
such notice was required to be given who elects to dissent shall file with
Continental a notice of such election, stating the stockholder's name and
residence address, the number of shares as to which such stockholder dissents
and a demand for payment of fair value for such shares. At the time of filing
the written objection to the Merger Agreement, or within one month thereafter,
objecting stockholders must submit the certificates representing their shares of
Continental Common Stock to Continental or Continental's transfer agent, for
placement of a notation thereon that a notice of election to dissent has been
filed. Any stockholder who fails to submit such stockholder's certificates for
such notation shall, at the option of Continental, exercised by written notice
to such stockholder within 45 days from the date of filing of such notice of
election to dissent, lose such stockholder's dissenter's rights, unless a court,
for good cause shown, shall otherwise direct. A stockholder may not dissent as
to less than all of the shares of Continental Common Stock beneficially owned by
such stockholder. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner held of record
by such nominee or fiduciary.
Upon filing a notice of election to dissent, the dissenting
stockholder will cease to have any of the rights of a stockholder of
Continental, including dividend rights, except the right to be paid the fair
value of such stockholder's shares and such other rights as are granted under
the NYBL. Withdrawal of any notice of election
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to dissent will require the written consent of Continental. If the Merger is not
consummated, a dissenting stockholder will have no right to payment for shares
and will be reinstated with all rights of a stockholder of Continental Common
Stock.
Within seven days after the later of (i) the expiration of the
period within which stockholders may file their written notice of election to
dissent or (ii) the consummation of the Merger, Reliance must make a written
offer by registered mail to all stockholders who have filed such notice of
election to dissent to pay a specified amount, which it considers to be a fair
amount, for each share of Continental Common Stock held by such dissenting
stockholders. If, within 30 days after the making of such offer, any dissenting
stockholder and Reliance agree on the price to be paid for such stockholder's
shares of Continental Common Stock, the agreed upon payment will be made within
60 days of the written offer, upon the surrender of the certificates
representing such shares.
If Reliance does not make a written offer within the seven
day period described above or if the written offer is made by Reliance and
Reliance and the dissenting stockholder do not agree on the price to be paid
within the 30 day period following the written offer, then Reliance may
institute a special court proceeding to determine the rights of dissenting
stockholders and to fix the fair value of shares of Continental Common Stock. If
Reliance does not institute such proceeding, then any dissenting stockholder
who has not accepted an offer must initiate a similar court proceeding within 30
days of the last date on which Reliance could have initiated such a court
proceeding. If any dissenting stockholder does not institute the court
proceeding within the 30 day period, then the dissenting stockholder shall
lose all dissenters' rights unless the court directs otherwise.
The costs, fees and expenses incurred by a dissenting
stockholder may be assessed by the court, in its discretion, against Reliance if
the fair value of the shares as determined by the court materially exceeds the
amount that Reliance offered to pay or, under certain other circumstances,
including a failure by Reliance to follow the provisions of Section 6022 of the
NYBL. The court may, however, in its discretion, assess any of the costs, fees
and expenses incurred by Reliance against dissenting stockholders who are
parties to the proceeding if the court finds that their refusal to accept
Reliance's offer of payment was arbitrary, vexatious or otherwise not in good
faith.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Continental's management and the
Continental Board may be deemed to have interests in the Merger in addition to
their interests, if any, as holders of Continental Common Stock. The Continental
Board was aware of these factors and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby.
INDEMNIFICATION. Reliance has agreed, among other things, that
Reliance shall, from and after the Effective Time through the sixth anniversary
of the Effective Time, indemnify and hold harmless each present and former
director and officer of Continental or its subsidiaries and each officer or
employee of Continental or its subsidiaries that is serving or has served as a
director or trustee of another entity expressly at Continental's request or
direction (each, an "Indemnified Party"), against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities (collectively, "Costs") incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time (including the transactions contemplated by the
Merger Agreement, including the entering into of the Stock Option Agreement),
whether asserted or claimed prior to, at or after the Effective Time, and to
advance any such Costs to each Indemnified Party as they are from time to time
incurred, in each case to the fullest extent then permitted under applicable
law. Reliance has also agreed, among other things, that for a period of six
years after the Effective Time, it will maintain in effect the current policies
of directors' and officers' liability insurance maintained by Continental
(provided that Reliance may substitute therefor policies with reputable and
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financially sound carriers of at least the same coverage and amount containing
terms which are no less advantageous to the beneficiaries thereof); provided,
however, that in no event will Reliance be obligated to expend, in order to
maintain or provide such insurance coverage, any premium for such six year
period aggregating in excess of $180,000.
EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS AND BONUSES.
In connection with the Merger, Continental Chairman Irwin Nelson, in recognition
of his leadership, performance and valued service, will receive a
retention/incentive bonus equal to $120,000 to be paid at the Effective Time
contingent on his continued service until such time.
In addition, Reliance has agreed to honor the Employment
Agreement between Continental and John P. Sullivan, President and Chief
Executive Officer of Continental, effective as of October 11, 1996, amended
effective as of March 14, 1997 and further amended effective as of May 21, 1997.
The Employment Agreement provides for an initial two-year term. Commencing on
the day after the effective date of the Employment Agreement, the Employment
Agreement provides for automatic daily extensions so that the remaining term
will be two years.
Under the Employment Agreement, upon a change in control of
Continental (as defined in the Employment Agreement) followed by the voluntary
or involuntary termination of Mr. Sullivan, he would be entitled to the
following payments and benefits: (i) a lump sum cash payment equal to 130% of
his annual base salary in effect as of the date of his termination multiplied by
the number of years (including fractions) remaining in the term of the
Employment Agreement; (ii) continued insurance benefits for the remaining term
of such agreement; (iii) a lump sum cash payment equal to the present value of
the additional benefits to which he would have been entitled to under
Continental's 401(k) Plan if he had continued working for Continental for the
remaining term of his agreement; and (iv) a lump sum cash payment equal to all
outstanding shares of phantom stock held by Mr. Sullivan (whether or not vested)
on the date of the change of control of Continental, multiplied by the fair
market value of Continental Common Stock on such date.
In connection with the Merger, and as a result of Mr.
Sullivan's prospective loss of office, he will resign from his position with
Continental at the Effective Time, subject to certain conditions discussed
below. As a result, he will be entitled to certain severance benefits under the
Employment Agreement. Based upon Mr. Sullivan's annual compensation, the
aggregate amount of cash severance benefits payable to Mr. Sullivan under his
Employment Agreement is estimated to be $575,692.
Continental also maintains an employment agreement with Mr.
Gerald J. Grossman, President of Continental Business Credit and Senior Vice
President of Continental, effective as of October 31, 1995. The employment
agreement will expire on November 30, 1999 and requires six months' notice if
it will not be renewed by either party. Under such employment agreement, upon a
change in control of Continental (as defined in the employment agreement)
followed by the voluntary termination of Mr. Grossman, he would receive a
severance payment equal to $100,000. Reliance has agreed to honor the terms of
Mr. Grossman's employment agreement.
Certain executive officers of Continental have been awarded
phantom stock awards, which vest over a period of five years, and accelerate
upon a change in control, which will occur upon the consummation of the Merger.
Each phantom stock award represents a right to receive a cash payment following
vesting or a change in control of Continental equivalent in value to one share
of common stock of Continental. Specifically, Messrs. Sullivan, Cangemi and
McCarthy have been awarded 45,600, 5,000 and 3,000 shares of phantom stock,
respectively. Upon consummation of the Merger, each such officer will receive
for each share of phantom stock a cash amount equal to the market value of
Reliance Common Stock, as defined in the Merger Agreement, multiplied by 1.1.
Assuming a market price of Reliance Common Stock of $30.25 per share (the
closing price of Reliance Common Stock on August 20, 1997, the latest
practicable trading date prior to mailing of this Proxy Statement-Prospectus),
Messrs. Sullivan, Cangemi and McCarthy will receive a
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payment as a result of the cash-out of their respective shares of phantom stock
equal to $1,517,300, $166,400 and $99,800, respectively.
Additionally, pursuant to preexisting severance arrangements
between certain officers and Continental, such officers will receive cash
payments equal to the amount of their current monthly salary for a specified
number of months. At the Effective Time, Mr. Cangemi will resign from his
position as Senior Vice President and Chief Financial Officer of Continental and
will, pursuant to a preexisting severance arrangement, receive approximately
$60,000. In addition, Messrs. Riley and McCarthy, if terminated, would be
entitled to receive cash payments equal to approximately $40,000 and $28,000,
respectively.
Continental has also committed to pay certain officers
incentive/retention bonuses designed to reward such individuals for their valued
service and provide an incentive for those employees to remain with Continental
through the Effective Date of the Merger. Incentive/retention bonuses will be
paid to 11 individuals. Messrs. Grossman, Cangemi, McCarthy and Riley will
receive $100,000, $75,000, $50,000 and $25,000, respectively. Two other officers
will be receiving incentive/retention bonuses aggregating $170,000.
Payments made under the Employment Agreement with Mr. Sullivan
in the event of a change in control could result in the imposition of an excise
tax under Section 4999 of the Code. In the event that such an excise tax is
payable to the IRS, the Employment Agreement provides that Mr. Sullivan will be
indemnified for such amounts and for any additional income and employment taxes
imposed as a result of such indemnification and such amounts will be withheld
from payments made to Mr. Sullivan under the Employment Agreement. Under the
Code, Reliance will not be able to deduct part of the payments and the
indemnification payments. The aggregate amount of excise and related federal
taxes that will be imposed is estimated to be $768,000, based upon the
closing price of Reliance Common Stock on August 20, 1997, the latest
practicable trading date prior to the mailing of this Proxy
Statement-Prospectus. The actual amount of any such tax or resulting
indemnification payment will be determined on the basis of circumstances
prevailing at the Effective Time. The aggregate amount of the severance cash
benefits and the cash out of phantom-stock awards that will be payable to Mr.
Sullivan is estimated to be approximately $2.1 million, based on the closing
price of Reliance Common Stock on August 20, 1997, the latest practicable
trading date prior to the mailing of this Proxy StatementProspectus.
Pursuant to the Merger Agreement, all directors and officers
entitled to severance payments, phantom stock payments or bonuses at or after
the Effective Time have agreed to enter into a joint release with Continental,
generally releasing Continental and its successors, including Reliance and
Reliance Bank, from any claims in connection with the payment of such severance
payments, phantom stock or bonuses.
In addition, Continental maintains a severance policy for the
benefit of full-time employees, other than those officers discussed above, which
in the event of termination pays a full-time employee a severance amount based
upon such employee's position, salary and length of service. Additionally,
annual incentive compensation under pre-established incentive plans will be paid
at the Effective Time, which may precede Continental's fiscal year.
SHARE OWNERSHIP. As of the Record Date, directors and
executive officers of Continental and certain of their affiliates owned an
aggregate of 160,082 shares of Continental Common Stock for which they will
receive the Merger Consideration.
EFFECT ON CONTINENTAL EMPLOYEE BENEFIT PLANS
Each person who is employed by Continental immediately prior
to the Effective Time (a "Continental Employee") and whose employment is not
specifically terminated at or prior to the Effective Time shall, at the
Effective Time, become an employee (but not an officer) of Reliance Bank.
Beginning at the Effective Time, each Continental Employee will serve Reliance
Bank in the same capacity in which he or she served Continental
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immediately prior to the Effective Time and upon the same terms and conditions
generally applicable to other employees of Reliance Bank with comparable
positions. If it is not practical to enroll Continental Employees as of the
Effective Time in a particular employee benefit plan or program maintained by
Reliance Bank for its employees (the "Reliance Bank Plans"), Reliance Bank shall
continue any comparable plan or program of Continental in effect immediately
prior to the Effective Time (the "Continental Plans") for a transition period.
During the transition period, Continental Employees shall continue to
participate in any Continental employee benefit plans which are continued, and
all other employees of Reliance Bank will participate only in the employee
benefit plans maintained by Reliance Bank and Reliance, if any.
Reliance and Reliance Bank will amend each of their respective
employee benefit plans and programs, other than any tax-qualified defined
benefit or employee stock ownership plan, to recognize the service of each
Continental Employee with Continental as service with Reliance and Reliance Bank
for purposes of eligibility. Each of Continental's tax-qualified plans will be
amended, to provide that all benefits accrued by employees through the Effective
Time will be fully vested without regard to their length of service.
If Continental Employees become eligible to participate in a
medical, dental or health plan of Reliance or Reliance Bank, Reliance will, to
the extent reasonably practicable without incurring additional premium costs,
cause each such plan to (i) waive any preexisting condition limitations for
conditions covered under the applicable medical, health or dental plans of
Continental and (ii) honor any deductible and out-of-pocket expenses incurred by
the Continental Employees and their beneficiaries under such plans during the
portion of the calendar year prior to such participation. If Continental
Employees become eligible to participate in a life insurance plan maintained by
Reliance or Reliance Bank, Reliance will cause such plan to waive any medical
certification for the Continental Employees up to the amount of coverage the
Continental Employees had under the life insurance plan of Continental (but
subject to any limits on the maximum amount of coverage under the life insurance
plan of Reliance or Reliance Bank).
MANAGEMENT OF RELIANCE AND RELIANCE BANK AFTER THE MERGER
The Merger Agreement provides that, at the Effective Time, the
directors and officers of Reliance Bank shall consist of the directors and
officers of Reliance Bank immediately prior to the Effective Time of the Merger.
The directors and officers of Reliance as of the Effective Time shall consist of
the directors and officers of Reliance immediately prior to the Effective Time.
Reliance does not anticipate any branch closings as a result of the Merger. As
of the date of this Proxy Statement-Prospectus, Reliance intends to retain
substantially all of Continental's employees, with the exception of certain
duplicative positions, which may be eliminated.
CERTAIN RELATED TRANSACTIONS
STOCK OPTION AGREEMENT
GENERAL. As a condition to entering into the Merger Agreement,
Reliance required that Continental enter into the Stock Option Agreement, which
allows Reliance to purchase Continental Common Stock under certain
circumstances. Pursuant to the Stock Option Agreement, Continental granted to
Reliance the Option to purchase 183,425 shares of Continental Common Stock
(representing approximately 19.9% of the issued and outstanding shares of the
Continental Common Stock on May 3,1997) (subject to adjustment such that in no
event may Reliance acquire shares of Continental Common Stock representing more
than 19.9% of the issued and outstanding shares of such stock) at an exercise
price of $22.00 per share (subject to adjustment). The Option may be exercised
only upon the occurrence of certain "Purchase Events" which are described herein
(none of which has occurred to the best of Reliance's or Continental's knowledge
as of the date of this Proxy Statement-Prospectus).
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EFFECT OF STOCK OPTION AGREEMENT. The Stock Option Agreement
is intended to increase the likelihood that the Merger will be consummated in
accordance with the terms of the Merger Agreement. Consequently, certain aspects
of the Stock Option Agreement may have the effect of discouraging persons who
might now or prior to the consummation of the Merger be interested in acquiring
all of or a significant interest in Continental from considering or proposing
such an acquisition, even if such persons were prepared to pay a higher price
per share for the Continental Common Stock than the value per share contemplated
by the Merger Agreement. The acquisition of Continental, a significant portion
of its consolidated assets or an interest in Continental, or an agreement to do
so, could cause the Option to become exercisable. The existence of such Option
could significantly increase the cost to a potential acquirer of acquiring
Continental compared to its cost had the Stock Option Agreement not been
executed. Such increased costs might discourage a potential acquirer from
considering or proposing an acquisition or might result in a potential acquirer
proposing to pay a lower per share price to acquire Continental than it might
otherwise have proposed to pay. The management of Continental believes that the
exercise of the Option is likely to prohibit any acquirer of Continental from
accounting for any acquisition of Continental using the pooling of interests
accounting method for a period of two years. This could discourage or preclude
an acquisition by other banking organizations.
TERMS OF STOCK OPTION AGREEMENT. The following is a brief
summary of certain provisions of the Stock Option Agreement, which is attached
hereto as Appendix B. The following summary is qualified in its entirety by
reference to the Stock Option Agreement.
If Reliance is not in material breach of the Stock Option
Agreement or the Merger Agreement and if no injunction or other court order
against delivery of the shares covered by the Option is in effect, Reliance may
exercise the Option, in whole or in part, at any time and from time to time,
upon the occurrence of any of the following (each a "Purchase Event"):
(i) Without Reliance's prior written consent, Continental
shall have taken certain actions (each an "Acquisition
Transaction") including authorizing, recommending,
proposing or entering into an agreement with any third
party to effect (A) a merger, consolidation or similar
transaction involving Continental or any of its
significant subsidiaries, (B) the sale, lease, exchange
or other disposition of 20% or more of the consolidated
assets or deposits of Continental and its subsidiaries
or (C) the issuance, sale or other disposition by
Continental of 20% or more of the voting power of
Continental or any of its significant subsidiaries,
other than, in the case of (A) or (C), any transaction
in which the voting securities of Continental
outstanding immediately prior thereto continue to
represent at least 65% of the combined voting power of
the voting securities of Continental or of the
surviving entity immediately after the consummation of
such transaction; or
(ii) Any third party shall have acquired, or shall have
acquired the right to acquire, 20% or more of the
voting power of Continental or any of its significant
subsidiaries;
PROVIDED, that the Option will terminate upon the earliest to occur of certain
events, including:
(i) the Effective Time;
(ii) termination of the Merger Agreement in accordance with
the terms thereof prior to the occurrence of a Purchase
Event or a Preliminary Purchase Event (as defined
below) other than a termination thereof by Reliance
under certain circumstances (a "Default Termination");
(iii) 12 months after a Default Termination; or
(iv) 12 months after termination of the Merger Agreement
(other than a Default Termination) following the
occurrence of a Purchase Event or a Preliminary
Purchase Event;
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PROVIDED, FURTHER, however, that any purchase of shares upon exercise of the
Option shall be subject to compliance with applicable law.
The term "Preliminary Purchase Event" means any of the
following events:
(i) Commencement by any third party of a tender offer or
exchange offer to purchase 20% or more of the
outstanding shares of Continental Common Stock (such an
offer being referred to herein as a "Tender Offer" or
an "Exchange Offer," respectively); or
(ii) Failure of the stockholders of Continental to approve
the Merger Agreement, failure of Continental to have
held the Special Meeting or the Continental Board shall
have withdrawn or modified in a manner adverse to
Reliance the recommendation of the Continental Board
with respect to the Merger Agreement, in each case
after public announcement that a third party (A)
proposes to engage in an Acquisition Transaction, (B)
commences a Tender Offer or files a registration
statement with respect to an Exchange Offer or (C)
files an application (or gives notice) under certain
federal statutes relating to the regulation of banks
and other financial institutions or their holding
companies to engage in an Acquisition Transaction; or
(iii) Any third party proposes to Continental or its
stockholders publicly, or in any writing that becomes
publicly disclosed, to engage in an Acquisition
Transaction; or
(iv) After a proposal is made by a third party to
Continental or its stockholders to engage in an
Acquisition Transaction, or such third party states its
intention to Continental to make such a proposal if the
Merger Agreement terminates, Continental willfully
breaches any representation, warranty, covenant or
agreement in the Merger Agreement and such breach would
entitle Reliance to terminate the Merger Agreement.
Continental shall notify Reliance promptly in writing of the
occurrence of any Preliminary Purchase Event or Purchase Event, it being
understood that the giving of such notice by Continental shall not be a
condition to the right of Reliance to exercise the Option.
In the event Reliance wishes to exercise the Option, it shall
send to Continental a written notice (the date of which being herein referred to
as the "Notice Date") specifying (i) the total number of Option shares it
intends to purchase pursuant to such exercise and (ii) a place and date not
earlier than three business days nor later than 15 business days from the Notice
Date for the closing (the "Option Closing") of such purchase; PROVIDED, that the
first notice of exercise shall be sent to Continental within 180 days after the
first Purchase Event of which Reliance has been notified. If prior notification
to or approval of any regulatory authority is required in connection with any
such purchase, Continental shall cooperate with Reliance in the filing of the
required notice of application for approval and the obtaining of such approval,
and the Option Closing shall occur immediately following such regulatory
approvals and any mandatory waiting periods. Any exercise of the Option shall be
deemed to occur on the Notice Date relating thereto.
RESALES OF RELIANCE COMMON STOCK
The shares of Reliance Common Stock issued pursuant to the
Merger Agreement will be freely transferable under the Securities Act except for
shares issued to any stockholder who may be deemed to be an "affiliate" of
Continental for purposes of Rule 145 under the Securities Act as of the date of
the Special Meeting. Affiliates may not sell their shares of Reliance 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 under the Securities Act or another applicable
exemption from the registration requirements of the Securities Act. Persons who
may be deemed to be affiliates of Continental generally include individuals or
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entities that control, are controlled by or are under common control with
Continental and may include certain officers and directors of Continental as
well as principal stockholders of Continental.
Continental agreed in the Merger Agreement to cause each
affiliate of Continental to enter into an agreement with Reliance providing that
such persons will not sell, transfer or otherwise dispose of shares of
Continental Common Stock owned by such person or Reliance Common Stock to be
received by such person in the Merger except in compliance with the applicable
provisions of the Securities Act and the rules and regulations thereunder.
ADDITIONAL PROPOSAL
The Bylaws of Continental require that no business be
transacted and no corporate action be taken at a special meeting of stockholders
other than that stated in the Notice of the Special Meeting. The Continental
Board is not aware of any other business that may properly come before the
Special Meeting. The Continental Board seeks the authorization of the
Continental stockholders, in the event matters incident to the conduct of the
Special Meeting properly come before such meeting, including, without
limitation, a motion to adjourn the Special Meeting to another time or place for
the purpose of soliciting additional proxies in order to approve and adopt the
transactions contemplated by the Merger Agreement, or otherwise. As to all such
matters, the Continental Board intends to direct the voting of such shares in
the manner determined by the board of directors in its discretion, and in the
exercise of its duties and responsibilities, to be in the best interests of
Continental, and its stockholders, taken as a whole. Only proxies marked "FOR"
this proposal will be voted for adjournment, in the event such vote is
necessary.
THE CONTINENTAL BOARD UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE "FOR"
AUTHORIZATION OF ITS BOARD OF DIRECTORS, TO DIRECT THE VOTE OF THE PROXIES UPON
SUCH OTHER MATTERS INCIDENT TO THE CONDUCT OF THE SPECIAL MEETING, AS MAY
PROPERLY COME BEFORE SUCH MEETING, INCLUDING, WITHOUT LIMITATION, A MOTION TO
ADJOURN SUCH MEETING.
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<PAGE>
BENEFICIAL OWNERSHIP OF RELIANCE COMMON STOCK
PRINCIPAL SECURITY OWNERSHIP
As of June 30, 1997 management of Reliance knew of no
person, other than those below, who is the beneficial owner of more than 5% of
Reliance Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS NAME & ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS (1)
- ---------------- -------------------------------------- ------------------------ -------------
<S> <C> <C> <C>
Common Stock Reliance Federal Savings
Bank Employee Stock
Ownership Plan ("ESOP")............... 817,204(2) 9.33%
Marine Midland Bank, as Trustee
One Marine Midland Center, 17th Floor
P.O. Box 4657
Buffalo, NY 14203
</TABLE>
(1) As of May 5, 1997, these were 8,763,369 shares of Reliance Common Stock
outstanding. Percent ownership is based on the most recently reported
number of shares divided by the total number of shares outstanding on this
date.
(2) Shares purchased by the ESOP are held in a suspense account and released
for allocation to participants' accounts annually. The ESOP trustee must
vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Unallocated shares held in the
suspense account will be voted by the ESOP trustee in a manner calculated
to most accurately reflect the instructions it has received from
participants regarding the allocated stock, provided such instructions do
not conflict with the ESOP trustee's fiduciary obligations under the
Employee Retirement Income Security Act of 1974, as amended.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of June
30, 1997 with respect to the beneficial ownership of Reliance Common Stock by
each director of Reliance, the Chief Executive Officer and each of the five most
highly compensated officers of Reliance other than the Chief Executive Officer,
and all of the directors and executive officers of Reliance as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(2)
- -------------- ------------------------ ----------------------- --------
DIRECTORS
<S> <C> <C> <C>
Common Stock Thomas G. Davis, Jr............................................. 70,312 (3)(4) *
Common Stock Donald LaPasta.................................................. 71,934 (3)(4) *
Common Stock Conrad J. Gunther, Jr........................................... 11,044 (3)(4) *
Common Stock Raymond L. Nielsen.............................................. 190,834 (5)(6) 2.01%
Common Stock J. William Newby................................................ 67,065 (3)(4) *
Common Stock Raymond A. Nielsen (7)
President and Chief Executive Officer of Reliance
and Reliance Bank............................................... 167,306 (5)(6)(8)(9) 1.65%
Common Stock Douglas G. LaPasta (10)......................................... 61,245 (3)(4) *
Common Stock Peter F. Neumann ............................................... 80,745 (3)(4) *
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Common Stock Gerald M. Sauvigne
Executive Vice President and Treasurer of
Reliance and Reliance Bank...................................... 77,817 (5)(6)(8)(9) *
Common Stock Robert F. Pelosi
Senior Vice President and Secretary of Reliance
and Reliance Bank............................................... 54,284 (5)(6)(8) *
Common Stock Joseph F. Lavelle
Senior Vice President
Retail Banking of Reliance and Reliance Bank.................... 34,876 (5)(6)(8) *
Common Stock Paul D. Hagan
Senior Vice President and Chief Financial Officer
of Reliance and Reliance Bank................................... 35,286 (6)(8) *
Common Stock John F. Traxler
Vice President and Investment Officer of Reliance
and Reliance Bank............................................... 53,506 (5)(6)(8) *
Common Stock All directors and executive officers as a group (21
persons)........................................................ 1,209,225 (11) 12.65%
</TABLE>
- --------------------------
* Does not exceed 1.0% of Reliance's voting securities.
(1) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting or dispositive power as to shares reported.
(2) For purposes of calculating the aggregate ownership percentage, all
presently exercisable options have been added to the amount of outstanding
common stock as of June 30, 1997.
(3) Includes 7,986 unvested shares awarded each to Messrs. Davis, Donald
LaPasta, Douglas G. LaPasta, Neumann, Newby and 1,242 shares awarded to Mr.
Gunther under the Reliance Federal Savings Bank Recognition and Retention
Plan for Outside Directors (the "DRP"). Although awards granted under the
plan vest at a rate of 20% commencing March 31, 1995 for each participant
except Mr. Gunther whose award begins vesting on June 19, 1997, each
participant presently has voting power as to the shares awarded.
(4) Includes 39,330 options granted to each of Messrs. Davis, Donald LaPasta,
Neumann and Newby, 33,330 granted to Douglas G. LaPasta and 2,242 granted
to Mr. Gunther, under the Reliance Bancorp, Inc. 1994 Stock Option Plan for
Outside Directors (the "1994 Directors' Option Plan") which are
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<PAGE>
currently exercisable. Excludes 4,485 options granted to Mr. Gunther under
the 1994 Directors' Option Plan, which are exercisable at a rate of 50% per
year commencing June 19, 1998. Also includes 6,750 options granted to
Messrs. Davis, Donald LaPasta, Neumann, Newby, Douglas LaPasta and Gunther
under the Reliance Bancorp 1996 Stock Option Plan.
(5) Includes 38,954, 38,954, 9,936, 7,866, 4,968 and 6,210 of unvested shares
awarded to Messrs. R.L. Nielsen, R.A. Nielsen, Sauvigne, Pelosi, Lavelle
and Traxler, respectively, under the Reliance Federal Savings Bank
Recognition and Retention Plan for Officers and Employees (the "MRP"). MRP
awards granted under the plan vest at a rate of 20% per year commencing
March 31, 1995 and November 9, 1995. Each participant presently has voting
power as to the shares awarded.
(6) Includes 63,150, 58,150, 33,534, 23,598, 14,283, 14,283 and 21,735 shares
subject to options granted to Messrs. R.L. Nielsen, R.A. Nielsen, Sauvigne,
Pelosi, Lavelle, Hagan and Traxler, respectively, under the Reliance
Bancorp, Inc. 1994 Incentive Stock Option Plan which are currently
exercisable. Excludes 62,100, 62,100, 22,356, 15,732, 9,522, 9,522 and
14,490, respectively, of shares subject to option which become exercisable
at a rate of 50% per year commencing March 31, 1998.
(7) Raymond A. Nielsen is the son of Raymond L. Nielsen.
(8) Includes 7,880, 7,880, 6,763, 5,330, 3,539 and 6,096 shares awarded to
Messrs. R.A. Nielsen, Sauvigne, Pelosi, Lavelle, Hagan and Traxler,
respectively, under the Reliance Federal Savings Bank Employee Stock
Ownership Plan (the "ESOP").
(9) Includes 10,386 and 635 shares awarded to Messrs. R.A. Nielsen and
Sauvigne, respectively, under the Reliance Federal Savings Bank
Supplemental Executive Retirement Plan.
(10) Douglas G. LaPasta is the nephew of Donald LaPasta.
(11) Excludes a total of 266,961 and 196,200, respectively, shares subject to
options awarded under the 1994 and 1996 Incentive Stock Option Plan, which
are not exercisable within 60 days after May 31, 1997. Includes a total of
369,017 shares awarded under the MRP and DRP, as to which voting may be
directed.
64
<PAGE>
BENEFICIAL OWNERSHIP OF CONTINENTAL COMMON STOCK
PRINCIPAL SECURITY OWNERSHIP
As of June 30, 1997, management of Continental knew of no
person, except as set forth below, who is the beneficial owner of more than 5%
of Continental Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS NAME & ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- -------------------- ---------------------------------- ------------------------ -----------
<S> <C> <C> <C>
Common Stock Pamela Spiegel Sanders............ 63,403 6.88%
375 North Broadway
Jericho, New York 11753
Common Stock Jerry Spiegel..................... 50,989 (1) 5.53%
c/o Jerry Spiegel Associates
375 North Broadway
Jericho, New York 11753
Common Stock Stanley Tulchin................... 170,354 (2) 18.48%
c/o Stanley Tulchin Associates
400 Post Avenue
Westbury, New York 11590
Common Stock Lise Spiegel Wilks................ 63,421 6.88%
375 North Broadway
Jericho, New York 11753
</TABLE>
(1) Includes 3,130 shares which are owned by Emily Spiegel, Mr. Spiegel's wife.
(2) Includes 8,024 shares which are owned by Susan Patricia Tulchin, Mr.
Stanley Tulchin's wife and 40,185 shares owned by Stanley Tulchin as
Trustee under a Voting Trust Agreement dated March 1, 1985 for the benefit
of Norman Tulchin, which agreement is on file with the New York State
Banking Department.
65
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of June
30, 1997 with respect to the beneficial ownership of Continental Common Stock
by each director of Continental, the Chief Executive Officer and each of the
four most highly compensated officers of Continental other than the Chief
Executive Officer, and all of the directors and executive officers of
Continental as a group as of June 30, 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- -------------- -------------------------------------------------------- ----------------------- ---------
DIRECTORS
<S> <C> <C> <C>
Common Stock John P. Bracken......................................... 11,547 1.25%
Common Stock Saul Erdman............................................. 7,985 *
Common Stock Vincent A. Ferragamo.................................... 10,873 1.18%
Common Stock John Livanos............................................ 6,133 *
Common Stock Martin S. Orland........................................ 1,000 *
Common Stock Irwin B. Nelson......................................... 10,591 1.15%
Common Stock Martin J. Simon......................................... 17,463 1.89%
Common Stock Jerry Spiegel........................................... 50,989 5.53%
Common Stock John P. Sullivan
President and Chief Executive Officer of
Continental Bank........................................ 1,000 *
Common Stock Edward V. Walsh, Jr..................................... 32,762 3.55%
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Common Stock Thomas R. Cangemi
Senior Vice President and Chief Financial
Officer of Continental Bank............................. 8,700 *
Common Stock Gerald J. Grossman
Senior Vice President of Continental Bank............... -- --
Common Stock Peter D. McCarthy
Senior Vice President of Continental Bank............... -- --
Common Stock William W. Riley
Senior Vice President of Continental Bank............... 1,039 *
All directors and executive officers as a group
Common Stock (14 persons)............................................ 160,082 17.37%
</TABLE>
- -----------------------
*Less than 1%.
The FDIC Rules and Regulations require Continental's
directors, executive officers and holders of more than 10% of the Continental
Common Stock to file with the FDIC initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of Continental.
Continental believes that during the fiscal year ended December 31, 1996, its
directors, executive officers and holders of more than 10% of the Continental
Common Stock complied with all such filing requirements.
66
<PAGE>
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
Reliance Bank, as a federal savings bank, is subject to
extensive regulation, examination and supervision by the OTS, as its chartering
agency, and by the FDIC, as the insurer of its deposits. Reliance Bank is a
member of the Federal Home Loan Bank ("FHLB") System, and its deposit accounts
are insured up to applicable limits by the SAIF of the FDIC. Reliance, as a
savings and loan holding company, is registered with the OTS and is subject to
OTS regulations, examination, supervision and reporting requirements.
Continental is subject to extensive regulation, examination and supervision by
the Banking Department, as its chartering agency, and by the FDIC, as the
insurer of its deposits.
The earnings of Reliance and Reliance Bank and the earnings of
Continental are affected by general economic conditions, management policies and
the legislative and governmental actions of various federal and
state regulatory authorities, including the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), the OTS, the FDIC and the Banking
Department. Additionally, there are numerous governmental requirements and
regulations that affect the activities of Reliance, Continental and their
respective subsidiaries. Any change in applicable law or regulation might have a
material effect on the business and prospects of Reliance and Continental.
The description of statutory provisions and regulations
applicable to federally chartered savings associations and to savings and loan
holding companies set forth in this document do not purport to be complete
descriptions of such statutes and regulations and their effects on Reliance or
Reliance Bank.
BUSINESS ACTIVITIES OF FEDERAL SAVINGS ASSOCIATIONS
The activities of federally chartered savings associations,
including federal savings banks such as Reliance Bank, are governed by the Home
Owner's Loan Act, as amended (the "HOLA") and, in certain respects, by the
Federal Deposit Insurance Act ("FDI Act"). Under these laws and regulations,
Reliance Bank may invest in mortgage loans secured by residential and commercial
real estate, commercial and consumer loans, certain types of debt securities and
certain other assets. Reliance Bank may also establish service corporations that
may engage in activities not otherwise permissible for Reliance Bank, including
certain real estate equity investments and securities and insurance brokerage.
These investment powers are subject to various limitations, including (a) a
prohibition against the acquisition of any corporate debt security that is not
rated in one of the four highest rating categories, (b) a limit of 400% of an
association's capital on the aggregate amount of loans secured by
non-residential real estate property, (c) a limit of 20% of an association's
assets on commercial loans, (d) a limit of 35% of an association's assets on the
aggregate amount of consumer loans and acquisitions of certain debt instruments,
(e) a limit of 5.0% of total assets on non-conforming loans (loans in excess of
the specific limitations of the HOLA) and (f) a limit of 5% of the greater of 5%
of assets or an association's capital on certain construction loans made for the
purpose of financing what is or is expected to become residential property.
RESTRICTIONS ON PAYMENT OF DIVIDENDS
Reliance is a separate legal entity from Reliance Bank and its
subsidiaries. A substantial portion of the revenues of Reliance (on an
unconsolidated basis) available for payment of dividends to its stockholders
will result from the amounts paid to it, in the form of dividends from Reliance
Bank. The OTS regulations impose limitations upon all capital distributions by
savings associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger and other distributions charged against capital. The 0TS
regulations establish three tiers of institutions, which tiers are based
primarily on an institution's capital level. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised
67
<PAGE>
by the OTS that it is in need of more than normal supervision, could, after
prior notice but without the approval of the OTS, make capital distributions
during a calendar year equal to the greater of: (i) 100% of its net income to
date during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the percentage by which an association's
capital-to-assets ratio exceeds the ratios of its fully phased-in capital
requirements) at the beginning of the calendar year or (ii) 75% of its net
income for the previous four quarters. Any additional capital distribution would
require prior OTS approval. As of June 30, 1997, Reliance Bank was a Tier 1
Association. In the event Reliance Bank's capital fell below its fully-phased in
requirement or the OTS notified Reliance Bank that it was in need of more than
normal supervision, Reliance Bank's ability to make capital distributions could
be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. Furthermore, under the OTS' prompt corrective action
regulations, Reliance Bank would be prohibited from making any capital
distributions if, after the distribution, Reliance Bank would not comply with
applicable minimum capital requirements. See "-- Capital Requirements." At the
time of the conversion to stock form, Reliance Bank was required to establish a
liquidation account in an amount equal to its capital as of June 30, 1993. As
part of the acquisition of Sunrise Bancorp, Inc., Reliance Bank established a
similar liquidation account equal to the remaining liquidation account balance
previously maintained by Sunrise Bancorp, Inc. as a result of its conversion
from mutual to stock form of ownership. The liquidation account is reduced as,
and to the extent that, eligible account holders reduce their qualifying
deposits. In the unlikely event of a complete liquidation of Reliance Bank, each
eligible account holder with a qualifying deposit will be entitled to receive a
distribution from the liquidation account. Reliance Bank may not declare or pay
cash dividends on or repurchase any of its shares of common stock if the effect
thereof would cause stockholders' equity to be reduced below the amount required
for the liquidation account.
CAPITAL REQUIREMENTS
There are no regulatory capital requirements applicable to
Reliance as a savings and loan holding company. With respect to Reliance Bank,
the OTS capital regulations require savings associations to meet three capital
ratios: a 1.5% tangible capital ratio, a 3% leverage (core capital) ratio and an
8% risk-based capital ratio. Core capital is defined as common stockholders'
equity (including retained earnings but excluding net unrealized gains and
losses from available-for-sale debt securities), certain noncumulative perpetual
preferred stock and related surplus, minority interests in equity accounts of
consolidated subsidiaries, less intangibles other than certain qualifying
supervisory intangible assets, certain mortgage servicing rights and certain
other assets as defined by OTS capital regulations. Tangible capital is defined
generally in the same manner as core capital. The OTS regulations also require
that, in meeting the tangible, leverage, and risk-based capital ratios,
institutions must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
The risk-based capital standard for savings associations
requires the maintenance of total capital (which is defined as core capital plus
supplementary capital less certain adjustments) to risk-weighted assets of 8%.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks the OTS believes are
inherent in the type of asset. The components of core capital are equivalent to
those discussed above. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock and
allowance for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of supplementary capital counted
toward total capital cannot exceed 100% of core capital. In addition, certain
assets are required to be deducted from risk-based capital, such as certain
equity investments and construction loans with loan-to-value ratios exceeding
80%.
FDICIA requires that the OTS and other federal banking
agencies revise their risk-based capital standards, with appropriate transition
rules, to ensure that they take into account interest rate risk ("IRR"),
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<PAGE>
concentration of risk and the risks of non-traditional activities. The OTS
adopted regulations, effective January 1, 1994, that set forth the methodology
for calculating an interest rate risk component to be incorporated into the OTS
risk-based capital regulations. The OTS has indefinitely deferred its
requirement of the interest rate risk component in the calculation of an
institution's risk-based capital calculation. The OTS continues to monitor the
IRR of individual institutions and retains the right to impose minimum capital
requirements on individual institutions. Based on Reliance Bank's IRR profile
and the level of interest rates at June 30, 1997, as well as Reliance Bank's
level of risk-based capital at June 30, 1997, management believes that Reliance
Bank does not have a greater than normal level of IRR as measured under the OTS
rule and would not be required to hold capital against its IRR as a result of
the rule.
At June 30, 1997, Reliance Bank met each of its regulatory
capital requirements with a tangible capital ratio of 5.60%, a leverage
capital ratio of 5.60% and a total risk-based capital ratio of 15.16%. The
following table sets forth the regulatory capital calculations of Reliance Bank
at March 31, 1997, calculated in accordance with applicable requirements of the
OTS. At March 31, 1997, Reliance Bank met the capital requirements to be
considered a "well capitalized" institution.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
---------------------------------------------------------------
CAPITAL REQUIREMENT ACTUAL CAPITAL EXCESS CAPITAL
------------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tangible........... $ 28,937 $ 107,967 $ 79,030
Leverage........... 57,874 107,967 50,093
Total Risk-based... 59,670 113,094 53,424
</TABLE>
On a pro forma basis after giving effect to the Merger,
Reliance Bank would continue to meet the capital requirements to be considered a
"well capitalized" institution.
PROMPT CORRECTIVE REGULATORY ACTION
FDICIA establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions. Under this system, the
banking regulators are required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, subject to a narrow
exception, FDICIA requires the applicable banking regulator to appoint a
receiver or conservator for an institution that is critically undercapitalized.
Under the OTS regulations, generally, a federally chartered
savings association is treated as well capitalized if its total risk-based
capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or
greater, its leverage ratio is 5% or greater, and it is not subject to any order
or directive by the OTS to meet a specific capital level. A federally chartered
savings association will be adequately capitalized if its ratio of risk-based
capital to risk-weighted assets is at least 8%, its Tier l risk-based capital
ratio is at least 4%, and its leverage ratio is at least 4% (3% if the
institution receives the highest rating on the CAMEL rating system). A federally
chartered savings association that has a total risk-based capital ratio of less
than 8% or a leverage ratio or a Tier 1 risk-based capital ratio of less than 4%
is considered to be "undercapitalized." A federally chartered savings
association that has a total risk-based capital ratio of less than 6%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio of less than 3% is
considered to be "significantly undercapitalized," and a federally chartered
savings association that has a tangible-capital-to-assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Generally, a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, various
mandatory supervisory actions become immediately applicable to the institution,
including restrictions on growth of assets and on other forms of expansion. The
OTS could also take any one of a number of discretionary supervisory actions,
including the
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<PAGE>
issuance of a capital directive and the replacement of senior
executive officers and directors. As of June 30, 1997 Reliance Bank met the
capital requirements to be considered "well capitalized" by the OTS.
IMPACT OF RECENT LEGISLATION
DEPOSIT INSURANCE - SAIF RECAPITALIZATION. For the first three
calendar quarters of 1996, SAIF-insured institutions paid deposit insurance
assessments at an annual rate of $ 0.23 to $ 0.31 per $100 of deposits. Reliance
Bank paid deposit insurance assessments of $2.3 million for the first three
calendar quarters of 1996. In contrast, BIF-insured institutions that were well
capitalized and without any significant supervisory concerns paid the minimum
annual assessment of $2,000, and all other BIF-insured institutions paid deposit
insurance assessments at annual rates of $0.23 to $0.31 per $100 of deposits.
In response to the SAIF/BIF assessment disparity, the Deposit
Insurance Funds Act of 1996 (the "Funds Act") was enacted into law on September
30, 1996. The Funds Act amended the FDI Act in several ways to recapitalize the
SAIF and reduce the disparity in the assessment rates for the BIF and the SAIF.
The Funds Act authorized the FDIC to impose a special one-time assessment on all
institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. As implemented by the FDIC, institutions with
SAIF-assessable deposits paid a special assessment, subject to adjustment, of
$0.657 per $100 of the institution's SAIF-assessable deposits. The special
assessment was based on the amount of SAIF-assessable deposits held on March 31,
1995. The Funds Act provides that the amount of the special assessment is
deductible for federal income tax purposes for the taxable year in which the
special assessment is paid. Based on the foregoing, the special assessment for
Reliance Bank of $8.25 million (before taxes) was charged against income during
the quarter ended September 30, 1996 and paid in November 1996.
In view of the recapitalization of the SAIF, the FDIC reduced
the assessment rates for SAIF-assessable deposits. For periods beginning on
October 1, 1996 the annual rates were reduced to a range of 18 to 27 basis
points, and beginning on January 1, 1997, the effective annual rates were
reduced to a range of 0 to 27 basis points. The Funds Act also provides that the
FDIC cannot assess regular insurance assessments for an insurance fund unless
required to maintain or to achieve the designated reserve ratio of 1.25% of
insured deposits, except on those of its member institutions that are not
classified as "well capitalized" or that have been found to have "moderately
severe" or "unsatisfactory" financial, operational or compliance weaknesses.
Reliance Bank has not been so classified by the FDIC or the OTS.
In addition, the Funds Act expanded the assessment base to
provide funds for the payments of interest on the bonds issued in the late 1980s
by the Financing Corporation (the "FICO bonds") to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation to include the deposits of both
BIF- and SAIF-insured institutions beginning January 1, 1997. Until December 31,
1999, or such earlier date on which the last savings association ceases to exist
(relative to charter form), the rate of assessment for BIF-assessable deposits
will be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rates of assessment for the payments on the FICO bonds for the semiannual period
beginning on January 1, 1997 was 0.013% for BIF-assessable deposits and 0.0648%
for SAIF-assessable deposits, and for the semiannual period beginning on July 1,
1997 the rates will be 0.0126% and 0.0630%, respectively. Assuming that the
designated reserve ratio is maintained by the SAIF, Reliance Bank, as long as it
maintains its regulatory status, will pay substantially lower regular
assessments compared to those paid by Reliance Bank in recent years. Based on
the foregoing, Reliance Bank's SAIF quarterly assessment rate was 4.5 basis
points for the first calendar quarter of 1997, and Reliance Bank's SAIF
assessment rate for the remainder of 1997 is zero basis points.
The Funds Act also provides for the merger of the BIF and SAIF
on January 1, 1999, with such merger being conditioned upon the prior
elimination of the thrift charter and the development of a new common charter.
The Funds Act required the Secretary of the Treasury to conduct a study of the
relevant factors with respect to the development of a common charter for all
insured depository institutions and the abolition of separate charters for banks
and thrifts and to report the Secretary's conclusions and the findings to the
Congress. The
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<PAGE>
Secretary of the Treasury has recommended to the Congress that the separate
charter for thrifts be eliminated only if other legislation is adopted that
permits bank holding companies to engage in certain non-financial activities.
Absent legislation permitting bank holding companies to engage in such
non-financial activities, the Secretary of the Treasury recommended that the
thrift charter be retained. Several bills to eliminate the federal thrift
charter were introduced in Congress prior to the report by the Secretary of the
Treasury, which include provisions that would (i) apply the restrictions on
activities applicable to "multiple savings and loan building companies" and bank
holding companies to "unitary savings and loan building companies" and (ii)
eliminate the savings association charter and require savings associations to
become banks and simultaneously abolish the OTS and its supervisory role over
savings and loan holding companies. Although no assurances can be given as to
whether legislation will be enacted to eliminate the thrift charter or if
enacted, what powers would be available to Reliance Bank under any new or
revised depository institution charter, Management believes that such
legislation will not significantly affect the core business activities of
Reliance Bank. Management intends to continue to closely monitor such
developments.
RECAPTURE OF BAD DEBT RESERVES. Prior to the enactment of the
Small Business Job Protection Act of 1996 (the "1996 Act"), on August 20, 1996,
thrift institutions such as Reliance Bank, which met certain definitional tests
primarily relating to their assets and the nature of their business, for federal
income tax purposes, were permitted to establish tax reserves for bad debts and
to make annual additions thereto, which additions could be deducted, within
specified limitations, in arriving at their taxable income. Reliance Bank's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interest in real property, could be computed using an amount based on
Reliance Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8.0% of Reliance Bank's taxable income (the "PTI
Method"), computed without regard to this deduction and with additional
modifications and reduced by the amount of any permitted addition to the
non-qualifying reserve. Similar deductions for additions to Reliance Bank's bad
debt reserve were permitted under the New York State Franchise Tax and the New
York City Financial Corporation Tax; however, for purposes of these taxes, the
effective allowable percentage under the PTI method was 32% rather than 8%.
Under the 1996 Act, the PTI Method was repealed and Reliance
Bank, as a "large bank" (one with assets having an adjusted basis of more than
$500 million), will be unable to make additions to its tax bad debt reserve,
will be permitted to deduct bad debts only as they occur and will be required to
recapture (that is, take into taxable income) over a six-year period, beginning
with Reliance Bank's taxable year beginning July 1, 1996, the excess of the
balance of such reserves (other than the supplemental reserve) as of June 30,
1996 over the balance of such reserves as of June 30, 1988. However, under the
1996 Act, such recapture requirements will be suspended for each of the two
successive taxable years beginning July 1, 1996 in which Reliance Bank
originates a minimum amount of certain residential loans during such years that
is not less than the average of the principal amounts of such loans made by
Reliance Bank during its six taxable years preceding July 1, 1996. Since
Reliance Bank has already provided a deferred income tax liability for financial
reporting purposes, at such time as Reliance Bank is required to pay additional
taxes as a result of any such recapture, there will be no adverse impact to
Reliance Bank's financial condition or results of operations from such
recapture.
The New York State and New York City tax laws have been
amended to prevent a similar recapture of Reliance Bank's bad debt reserve, and
to permit continued future use of the bad debt reserve method for purposes of
determining the Reliance Bank's New York State and New York City tax
liabilities, in either case so long as the Reliance Bank continues to satisfy
the New York State and New York City definitional tests related to its assets
and the nature of its business, which are similar to the former federal income
tax tests, discussed above.
TRANSACTIONS WITH RELATED PARTIES
In addition to Sections 23A and 23B of the Federal Reserve Act
("FRA"), which limit Reliance Bank's authority to engage in transactions with
"affiliates" (i.e., any company that controls or is under common control
71
<PAGE>
with an institution, which for Reliance Bank would be Reliance), OTS regulations
prohibit savings associations from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the Bank Holding Company Act ("BHC Act"). Further, no savings
association may purchase the securities of any affiliate other than a
subsidiary.
FEDERAL HOME LOAN BANK SYSTEM
Reliance Bank is a member of the FHLB System, which consists
of 12 regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. Reliance Bank, as a member of the FHLB-NY, is required to
acquire and hold shares of capital stock in FHLB-NY in an amount at least equal
to 1% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, 1% of 30% of total
assets, or 5% of its advances from the FHLB-NY, whichever is greater. Reliance
Bank was in compliance with this requirement with an investment in FHLB-NY stock
at June 30, 1997, of $15.7 million.
For each of the years ended June 30, 1997, 1996 and 1995,
dividends from the FHLB-NY to Reliance Bank amounted to $820,000, $725,000
and $502,000, respectively.
OTHER REGULATION APPLICABLE TO FEDERAL SAVINGS ASSOCIATIONS
QUALIFIED THRIFT LENDER ("QTL") TEST. The HOLA requires
savings associations to meet a QTL test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and
mortgage-related securities) on a monthly basis in 9 out of every 12 months. On
September 30, 1996, as part of the omnibus appropriations bill, Congress enacted
the Economic Growth and Paperwork Reduction Act of 1996 ("Regulatory Paperwork
Reduction Act"), which modified and expanded the investment authority of federal
savings associations. The Regulatory Paperwork Reduction Act also expanded the
definition of "qualified thrift investment" to include, without limit,
education, small business, and credit card loans, and removed the 10% limit on
personal, family, or household loans for purposes of the QTL test. The
legislation also provides that a thrift meets the QTL test if it qualifies as a
domestic building and loan association under the Internal Revenue Code. As of
June 30, 1997, Reliance Bank maintained its portfolio assets in qualified thrift
investments in excess of 85% and had more than 65% of its portfolio assets in
qualified thrift investments for each of the 12 months ending June 30, 1997.
Therefore, Reliance Bank qualified under the QTL test.
A savings association that fails the QTL test and does not
convert to a bank charter generally will be prohibited from: (i) engaging in any
new activity not permissible for a national bank, (ii) paying dividends not
permissible under national bank regulations, (iii) obtaining advances from any
FHLB, and (iv) establishing any new branch office in a location not permissible
for a national bank in the association's home state. In addition, beginning
three years after an association fails the QTL test, the association is
prohibited from engaging in any activity not permissible for a national bank and
must repay any outstanding advances from the FHLB as promptly as possible.
LIQUIDITY. Reliance Bank is required to maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement may be changed from time to time by the
OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions, and is currently 5%.
OTS regulations also require each savings association to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit
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<PAGE>
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet these liquidity requirements. Reliance Bank's
liquidity and short-term liquidity ratios for the year ended June 30, 1997,
averaged 5.29% and 1.65%, respectively. Reliance Bank has never failed to meet
its liquidity requirements.
ASSESSMENTS. Federally chartered savings associations are
required by OTS regulations to pay assessments to the OTS to fund the operations
of the OTS. The general assessment, paid on a semi-annual basis, is computed
upon the federally chartered savings association's total assets, including
consolidated subsidiaries, as reported in the association's latest quarterly
thrift financial report. The assessment recorded by Reliance Bank for the year
ended June 30, 1997 totaled $305,000.
BRANCHING. OTS regulations authorize federally chartered
savings associations to branch nationwide to the extent allowed by federal
statute. This permits federal savings and loan associations to establish
interstate networks and to diversify more easily their loan portfolios and lines
of business geographically. The OTS' authority preempts any state law purporting
to regulate branching by federal savings associations. The branching powers
afforded federal savings associations have been broader than the branching
authority available to national banks and state chartered institutions, which
generally lacked the authority to branch outside their state of domicile.
However, as of June 1, 1997, national banks and state chartered banks and
savings banks gained increased authority under 1995 legislation to establish
interstate branches.
HOLDING COMPANY REGULATION
Reliance is a unitary savings and loan holding company within
the meaning of the HOLA. As such, Reliance is registered with the OTS and is
subject to the OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over Reliance.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to any of a holding
company's subsidiaries which are savings associations. Reliance Bank must notify
the OTS at least 30 days before declaring any dividend to Reliance. Such
notification has been complied with for each dividend declared in 1996 and 1997
to Reliance, for which Reliance Bank has received OTS approval. The OTS has
approved Reliance Bank's declaration and payment of up to $6.7 million of
dividends during 1997.
Because Reliance is a holding company, the rights of Reliance
to participate in any distribution of assets of any subsidiary, including
Reliance Bank, upon its liquidation or reorganization or otherwise (and thus the
ability of Reliance's stockholders to benefit indirectly from such distribution)
would be subject to the prior claims of creditors of that subsidiary, except to
the extent that Reliance itself may be a creditor of that subsidiary with
recognized claims. Claims on Reliance subsidiaries by creditors other than
Reliance will include substantial obligations with respect to deposit
liabilities and purchased funds.
The HOLA prohibits a savings and loan holding company
(directly or indirectly) or through one or more subsidiaries from acquiring
another savings association or holding company thereof without prior written
approval of the OTS; acquiring or retaining, with certain exceptions, more than
5% of a non-subsidiary savings association, a nonsubsidiary holding company, or
a nonsubsidiary company engaged in activities other than those permitted by the
HOLA or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
As a unitary savings and loan holding company, Reliance
generally is not restricted under existing laws as to the types of business
activities in which it may engage; PROVIDED, that Reliance Bank continues to be
a QTL. Upon any non-supervisory acquisition by Reliance of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings association by the OTS, Reliance would become a multiple
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<PAGE>
savings and loan holding company (if the acquired institution is held as a
separate subsidiary) and would be subject to extensive limitations on the types
of business activities in which it could engage. The HOLA limits the activities
of a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS,
and activities authorized by OTS regulations, which activities include mortgage
banking, consumer finance, operation of a trust company. and certain types of
securities brokerage activities.
The OTS is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
associations in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies,
and (ii) the acquisition of a savings association in another state if the laws
of the state of the target savings association specifically permit such
acquisitions. Although the conditions imposed upon acquisitions in those states
that have enacted such legislation vary, many such statutes are of the
"reciprocity" type and a number are limited by regional restrictions, which
require that the acquiring holding company be located (as defined by the
location of its subsidiary savings associations) in a state within a defined
geographic region and that the state in which the acquiring holding company is
located has enacted reciprocal legislation allowing savings associations in the
target state to purchase savings associations in the acquirer's home state on
terms no more restrictive than those imposed by the target state on the
acquirer. Some states authorize acquisition by out-of-state holding companies
only in supervisory cases, and certain states do not authorize interstate
acquisitions under any circumstances.
Under the Change in Bank Control Act and HOLA and 12 C.F.R.
Part 574 promulgated thereunder, OTS approval (or, in certain cases,
non-disapproval) must be obtained before any person may acquire control of a
savings and loan holding company, such as Reliance, or of a savings association,
such as Reliance Bank. Such acquisitions of control may be disapproved if the
OTS determines, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings association or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person. For such purposes, "person" includes an
individual or an entity, and security holdings of persons acting in concert are
aggregated for purposes of applying these provisions. Control is conclusively
presumed to exist if, among other things, a person acquires more than 25% of any
class of voting stock of a savings and loan holding company or controls in any
manner the election of a majority of the directors of the savings and loan
holding company. Control is rebuttably presumed to exist if, among other things,
a person acquires more than 10% of any class of voting stock (or 25% of any
class of stock) of a savings and loan holding company and is subject to any of
certain specified "control factors." The control factors relate to, among other
matters, the percentage of the debt and equity of the savings and loan holding
company owned by the person, agreements giving the person influence over a
material aspect of the operations of the savings and loan holding company and
the number of seats on the board of directors of the savings and loan holding
company held by the person or designees of the person. Subject to rebuttal, a
person also may be deemed to have control of a savings and loan holding company
if such person holds any combination of voting stock and revocable or
irrevocable proxies representing more than 25% of any class of voting stock of
the savings and loan holding company (excluding proxies held in connection with
a solicitation by, or in opposition to, a solicitation on behalf of management,
but including a solicitation in connection with the election of directors) and
the proxies would enable such person to: (i) elect one-third or more directors
of, (ii) cause the stockholders to approve the acquisition or reorganization of,
or (iii) exert a continuing influence on a material aspect of the business
operations of, an association or its holding company. OTS regulations provide an
application procedure to rebut the control presumptions.
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<PAGE>
UNAUDITED PRO FORMA
COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following statements set forth certain selected condensed
financial information for Reliance and Continental on an unaudited pro forma
combined basis giving effect to the Merger as if the Merger had become effective
on June 30, 1997, in the case of the statement of financial condition data
presented, and as if the Merger had become effective at July 1, 1996, in the
case of the statement of operations data presented. The pro forma information in
the statements assumes that the Merger is accounted for using the purchase
method of accounting. See "THE MERGER -- Accounting Treatment." Financial
information for the year ended June 30, 1997 combine Reliance and Continental
with Continental's results presented to coincide with the reporting period of
Reliance. These statements should be read in conjunction with, and are qualified
in their entirety by, the historical financial statements, including the notes
thereto, of Reliance and Continental incorporated by reference herein or
accompanying this Proxy Statement-Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "INFORMATION RELATING TO CONTINENTAL."
The pro forma combined condensed financial statements do not
give effect to the anticipated cost savings and revenue enhancement
opportunities that could result from the Merger, or expenses associated with
management severance, retention/incentive bonus or phantom stock award payments,
and do not purport to be indicative of the combined financial position or
results of operations of future periods or indicative of the results that would
have occurred had the Merger been consummated on June 30, 1997 or at the
beginning of the period indicated.
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<PAGE>
<TABLE>
<CAPTION>
RELIANCE BANCORP, INC. AND CONTINENTAL BANK
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF JUNE 30, 1997
(IN THOUSANDS)
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
RELIANCE CONTINENTAL ADJUSTMENTS COMBINED
-------- ----------- ----------- --------
ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks ............................................ $ 29,565 $ 8,996 $ (3,908)(C) $ 34,653
Money market investments ........................................... 1,100 1,300 -- 2,400
Debt and equity securities held-to-maturity ........................ 46,026 1,623 -- 47,649
Debt and equity securities available-for-sale ...................... 26,909 79,348 -- 106,257
Mortgaged-backed securities available-for-sale ..................... 721,819 -- -- 721,819
Mortgaged-backed securities held-to-maturity ....................... 159,356 -- -- 159,356
Loans receivable ................................................... 914,503 82,439 -- 996,942
Less allowance for loan losses ..................................... 5,182 2,717 -- 7,899
----------- ----------- ----------- -----------
Loans receivable, net .............................................. 909,321 79,722 -- 989,043
Accrued interest receivable, net ................................... 12,040 -- -- 12,040
Office properties and equipment, net ............................... 14,089 2,121 374(D) 16,584
Mortgage servicing rights .......................................... 3,046 -- -- 3,046
Excess of cost over fair value of net assets
acquired and other intangibles ................................... 45,463 1,990 14,221(E) 61,674
Real estate owned, net ............................................. 450 -- -- 450
Prepaid expenses and other assets .................................. 7,580 2,211 -- 9,791
----------- ----------- ----------- -----------
Total Assets ................. $ 1,976,764 $ 177,311 $ 10,687 $ 2,164,762
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits: ......................................................... $ 1,436,037 $ 136,165 $ -- $ 1,572,202
Borrowed funds .................................................... 351,913 24,800 -- 376,713
Accrued expenses and other liabilities ............................ 26,144 2,917 163(D) 29,224
----------- ----------- ----------- -----------
Total Liabilities ............ 1,814,094 163,882 163 1,978,139
----------- ----------- ----------- -----------
Stockholders' Equity
Common stock ...................................................... 108 4,609 (4,609)(L) 108
Additional paid-in capital ........................................ 105,871 6,438 3,766(K)(L) 116,075
Retained earnings ................................................. 89,660 2,245 (2,245)(L) 89,660
Net unrealized appreciation on securities
available-for-sale, net of taxes ................................. 1,705 137 (137)(L) 1,705
Unallocated common stock held by ESOP ............................. (5,382) -- -- (5,382)
Unearned common stock held by RRP ................................. (1,567) -- -- (1,567)
Common stock held by SERP ........................................ (209) -- -- (209)
Treasury stock .................................................... (27,516) -- 13,749(K) (13,767)
----------- ----------- ----------- -----------
Total stockholders' equity ..... 162,670 13,429 10,524 186,623
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity $ 1,976,764 $ 177,311 $ 10,687 $ 2,164,762
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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<PAGE>
RELIANCE BANCORP, INC. AND CONTINENTAL BANK
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 FOR RELIANCE AND
THE TWELVE MONTHS ENDED JUNE 30, 1997 FOR CONTINENTAL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
RELIANCE CONTINENTAL ADJUSTMENTS COMBINED
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Interest income .............................................. $133,289 $ 12,442 $ (221)(F) $145,510
Interest expense ............................................. 71,653 5,271 -- 76,924
-------- -------- -------- --------
Net interest income .......................................... 61,636 7,171 (221) 68,586
Provision for loan losses .................................... 950 1,330 -- 2,280
-------- -------- -------- --------
Net interest income after provision for
loan losses .............................................. 60,686 5,841 (221) 66,306
-------- -------- -------- --------
Non-interest income .......................................... 3,412 4,072 -- 7,484
-------- -------- -------- --------
Non-interest expense:
General and administrative ............................... 30,987 8,534 11 (G) 39,532
Real estate operations, net .............................. 383 -- -- 383
Amortization of excess of cost over
fair value of net assets acquired ...................... 3,404 -- 948 (H) 4,352
SAIF recapitalization charge ............................. 8,250 -- -- 8,250
-------- -------- -------- --------
Total non-interest expense ................................... 43,024 8,534 959 52,517
-------- -------- -------- --------
Income before income taxes ................................... 21,074 1,379 (1,180) 21,273
Income taxes ................................................. 10,138 598 (568)(I) 10,168
-------- -------- -------- --------
Net income ................................................... $ 10,936 $ 781 $ (612) $ 11,105
======== ======== ======== ========
Fully diluted weighted average number
of common stock and common stock equivalents
outstanding during the year .............................. 9,044 789 10,058
Net income per common share:
Primary .................................................. $ 1.24 $ 0.99 $ 1.13
Fully diluted ............................................ $ 1.21 $ 0.99 $ 1.10
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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<PAGE>
RELIANCE BANCORP, INC. AND CONTINENTAL BANK
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Basis of Presentation
The Unaudited Pro Forma Combined Condensed Consolidated
Statement of Financial Condition as of June 30, 1997 has been prepared as if
the Merger had been consummated on that date. The Unaudited Pro Forma Combined
Condensed Consolidated Statement of Operations for the year ended June 30,
1997 for Reliance and 12 months ended June 30, 1997 for Continental was
prepared as if the Merger had been consummated on July 1, 1996. The unaudited
pro forma combined condensed consolidated financial statements are based on the
historical financial statements of Reliance and Continental after giving effect
to the Merger under the purchase method of accounting and the assumptions and
adjustments in the notes that follow.
(B) Assumptions relating to the pro forma adjustments set forth in the
unaudited pro forma combined condensed consolidated financial statements
are summarized as follows:
(i) Securities - Securities were valued at their estimated
fair values as of June 30, 1997. At June 30, 1997, the
carrying value of securities approximated the fair
value.
(ii) Loans - Loans were valued based upon estimated fair
values as of June 30, 1997. At June 30, 1997, the
carrying value of loans approximated the fair value.
(iii) Premises and equipment - Premises and equipment were
recorded at their estimated fair values as of June 30,
1997.
(iv) Certificate accounts - Certificate accounts were valued
based upon interest rates for comparable deposit
liabilities as of June 30, 1997. At June 30, 1997, the
carrying value of certificate accounts approximated the
fair value.
(v) Borrowed funds - Borrowed funds were valued based upon
interest rates for comparable borrowings as of June 30,
1997. As of June 30, 1997, the carrying value of
borrowings approximated the fair value.
(C) The cost to acquire Continental has been allocated as described in the
table below:
<TABLE>
<CAPTION>
<S> <C>
Value of Reliance shares issued to acquire Continental shares............................ $ 23,953
(assumes 921,735 shares of Continental Common Stock multiplied by
1.1 and the price per share of $23.625, the closing average price of
Reliance Common Stock for the five days before and after the
announcement of the Merger)
Acquisition - related costs:
Transaction costs incurred by Reliance.......................................... 1,102
Severance, retention bonuses, option payouts and other
payouts to Continental employees.............................................. 2,806
--------
Total acquisition - related costs........................................................ 3,908
--------
Total costs..................................................................... $ 27,861
========
</TABLE>
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<PAGE>
(D) Purchase accounting adjustments recorded were as follows:
Continental net assets-historical at June 30, 1997........... $ 13,429
Fair value adjustment:
Premises and equipment, net.................................. 374
Tax effect of adjustment:
Deferred tax liability....................................... (163)
--------
Net assets acquired.......................................... $ 13,640
========
(E) Excess of cost over fair value of net assets acquired was calculated as
follows:
Total cost................................................... $ 27,861
Net assets acquired.......................................... (13,640)
--------
Total excess of cost over fair value of net assets acquired
generated from the Continental Bank acquisition............ $ 14,221
========
(F) Amount represents annual interest income foregone of $221,000 for the year
ended June 30, 1997 for cash utilized for transaction costs, based on an
average annual rate of 5.65%.
(G) Amount represents estimated amortization of premium recorded on fixed
assets for the fair value adjustment.
(H) Amortization of the excess of cost over fair value of net assets acquired
is recorded straight-line over fifteen years.
(I) Income tax expense adjustment was based on applying Reliance's actual
effective tax rate of 48.1% to the pro forma adjustments for the year ended
June 30, 1997.
(J) Weighted average number of common and common stock equivalents utilized for
the calculation of earnings per share was 9,044,000, which represented
Reliance's actual for the year ended June 30, 1997 plus 1,014,000 issued to
Continental stockholders under the terms of the Merger Agreement.
(K) Assumes reissuance of Reliance's common stock through its treasury account
with an average cost per share of $13.56. For accounting purposes, the fair
market value of Reliance's common stock was $23.625 per share for
determination of total stock consideration.
(L) Purchase accounting adjustments to eliminate Continental's stockholders'
equity accounts.
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<PAGE>
(M) The following table reflects management's estimate of the continued effect
on earnings for the next five years (beginning with the year of
acquisition) of the amortization of the excess of cost over fair value of
net assets acquired:
Projected future amounts: Excess of cost Net decrease
For the fiscal years ending over fair value of in income
June 30, net assets acquired before taxes
- --------------------------- -------------------- -------------
1998 $ 948 $ 948
1999 948 948
2000 948 948
2001 948 948
2002 948 948
2003 and thereafter 9,481 9,481
--------- ---------
$ 14,221 $ 14,221
========= =========
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<PAGE>
DESCRIPTION OF RELIANCE CAPITAL STOCK
GENERAL
Reliance is authorized to issue 20,000,000 shares of Common
Stock having a par value of $0.01 per share and 4,000,000 shares of Preferred
Stock having a par value of $0.01 per share (the "Reliance Preferred Stock"). As
of June 30, 1997, there were 8,771,369 shares of Reliance Common Stock issued
and outstanding and no shares of Reliance Preferred Stock issued and
outstanding. Each share of the Reliance Common Stock has the same relative
rights as, and is identical in all respects with, each other share of Reliance
Common Stock. The Reliance Board has the power from time to time to issue
additional shares of Reliance Common Stock or preferred stock authorized by
Reliance's Certificate of Incorporation without obtaining approval of Reliance's
stockholders. The rights, qualifications, limitations and restrictions on each
series of preferred stock issued will be determined by the board of directors of
Reliance and approved as required by the DGCL or otherwise, at the time of
issuance and may include, among other things, rights in liquidation, rights to
participating dividends, voting and convertibility to Reliance Common Stock. The
following descriptions of Reliance capital stock are qualified in their entirety
by reference to Reliance's Certificate of Incorporation.
RELIANCE COMMON STOCK
DIVIDENDS. Reliance may pay dividends out of statutory surplus
or from certain net profits if, as and when declared by the Reliance Board. The
payment of dividends by Reliance is subject to limitations that are imposed by
law and applicable regulations. The holders of Reliance Common Stock are
entitled to receive and share equally in such dividends as may be declared by
the Reliance Board out of funds legally available therefor. The holders of
Reliance Preferred Stock that may be issued in the future may have a priority
over the holders of Reliance Common Stock with respect to dividends. See "--
Reliance Preferred Stock" and "CERTAIN REGULATORY CONSIDERATIONS -- Restrictions
on Payment of Dividends."
VOTING RIGHTS. The holders of Reliance Common Stock possess
exclusive voting rights in Reliance. Such holders elect the Reliance Board and
act on such other matters as are required to be presented to them under the DGCL
or Reliance's Certificate of Incorporation or as are otherwise presented to them
by the Reliance Board. Except as discussed in "-- Limitation on Voting Rights,"
each holder of Reliance Common Stock is entitled to one vote per share of
Reliance Common Stock and will not have any right to cumulate votes in the
election of directors. The Reliance Board may provide voting rights for any
newly created series of Reliance Preferred Stock that may be issued in the
future. See "-- Reliance Preferred Stock."
LIMITATION ON VOTING RIGHTS. Reliance's Certificate of
Incorporation provides that in no event shall any record owner of any
outstanding Reliance Common Stock that is beneficially owned, directly or
indirectly, by a person who beneficially owns in excess of 10% of the then
outstanding shares of Reliance Common Stock (the "Limit") be entitled or
permitted to any vote with respect to the shares held in excess of the Limit.
Beneficial ownership is determined pursuant to Rule 13d-3 of the General Rules
and Regulations promulgated pursuant to the Exchange Act and includes shares
beneficially owned by such person or any of such person's affiliates (as defined
in Reliance's Certificate of Incorporation), shares that such person or such
person's affiliates have the right to acquire upon the exercise of conversion
rights or options and shares as to which such person and such person's
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by Reliance Bank's ESOP or, in the case of directors
or officers of Reliance Bank or Reliance, shares beneficially owned by any other
such director or officer or shares that are subject to a publicly solicited
revocable proxy and that are not otherwise beneficially owned, or deemed by
Reliance to be beneficially owned, by such person and such person's affiliates.
Reliance's Certificate of Incorporation further provides that such provision
limiting voting rights may be amended only upon the vote of 80% of the
outstanding shares of voting stock.
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LIQUIDATION RIGHTS. In the event of any liquidation,
dissolution, or winding up of Reliance Bank, Reliance, as a holder of Reliance
Bank's capital stock, would be entitled to receive, after payment or provision
for payment of all debts and liabilities of Reliance Bank (including all deposit
accounts and accrued interest thereon) and after distribution of the balance in
the special liquidation account established for the benefit of certain account
holders of Reliance Bank in connection with its conversion to stock form and the
balance in the special liquidation account established for the benefit of
certain account holders of Sunrise Bancorp, Inc., and its subsidiary, Sunrise
Federal Savings Bank, a banking institution acquired by Reliance in 1996),
all assets of Reliance Bank available for distribution. In the event of
liquidation, dissolution, or winding up of Reliance, the holders of Reliance
Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of Reliance
available for distribution. Holders of Reliance Preferred Stock issued in the
future may have a priority over the holders of Reliance Common Stock in the
event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Reliance Common Stock are
not entitled to preemptive rights with respect to any shares which may be
issued.
ISSUANCE OF STOCK. In certain instances, the issuance of
authorized but unissued shares of Reliance Common Stock or Reliance Preferred
Stock may have an antitakeover effect. The authority of the Reliance Board to
issue Reliance Preferred Stock with rights and privileges, including voting
rights, as it may deem appropriate, may enable the Reliance Board to prevent a
change of control despite a shift in ownership of Reliance Common Stock. In
addition, the Reliance Board's authority to issue additional shares of Reliance
Common Stock may help deter or delay a change of control by increasing the
number of shares needed to gain control.
CERTAIN ANTITAKEOVER PROVISIONS. Reliance's Certificate of
Incorporation and Bylaws contain a number of provisions that may be deemed to
have the effect of discouraging or delaying attempts to gain control of
Reliance, including provisions (i) classifying the Reliance Board into three
classes with each class to serve for three years with one class being elected
annually; (ii) providing the Reliance Board with the exclusive power to fix from
time to time the size of the Reliance Board; (iii) authorizing a majority of the
Reliance Board then in office to fill vacancies in the Reliance Board; (iv)
providing that the directors may be removed only for cause and only by the
affirmative vote of at least 80% of the shares entitled to be voted in the
election of directors; (v) providing that any action required or permitted to be
taken by the stockholders of Reliance may not be effected by a written consent
by such stockholders; (vi) allowing the Reliance Board to give due consideration
to constituencies other than Reliance's stockholders in evaluating acquisition
or merger proposals; (vii) providing that certain of the foregoing provisions
may be amended only by the affirmative vote of at least 80% of the outstanding
stock entitled to vote or a majority vote of the Reliance Board; and (viii)
setting forth specific conditions under which business may be transacted at an
annual meeting of stockholders and persons may be nominated for election as
directors of Reliance at an annual meeting of stockholders.
The foregoing provisions could impede a change of control of
Reliance. In particular, classification of the Reliance Board has the effect of
decreasing the number of directors that could be elected in a single year by any
person who seeks to elect its designees to a majority of the seats on the
Reliance Board. Furthermore, allowing the Reliance Board to consider
non-stockholder constituencies may have the effect of increasing the Reliance
Board discretion to reject acquisition or merger proposals.
STOCKHOLDER PROTECTION RIGHTS PLAN
Reliance maintains a Stockholder Rights Plan (the "Rights
Plan"), which is designed to (i) protect stockholders from attempts to acquire
control of Reliance without the approval of the Reliance Board and (ii) prevent
abusive tactics from potential acquirors that do not treat all stockholders
fairly. See "COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS -- Rights Plans --
Reliance."
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RELIANCE PREFERRED STOCK
As of June 30, 1997, no shares of Reliance Preferred Stock
have been issued by Reliance. Reliance Preferred Stock may be issued with such
preferences and designations as the Reliance Board may determine from time to
time. The Reliance Board may issue, without stockholder approval, Reliance
Preferred Stock with voting, dividend, liquidation, and conversion rights that
could dilute the voting strength of the holders of Reliance Common Stock and may
assist Reliance's management in impeding an unfriendly takeover or an attempted
change in control.
Although Reliance has no arrangements, understandings, or
plans at the present time for the issuance or use of the shares of undesignated
preferred stock (the "Reliance Undesignated Preferred Stock") authorized, the
Reliance Board believes that the availability of such shares will provide
Reliance and Reliance Bank with increased flexibility in structuring possible
future financing and acquisitions and in meeting other corporate needs that may
arise. In the event of a proposed merger, tender offer, or other attempt to gain
control of Reliance of which Reliance management does not approve, the Reliance
Board may be able to authorize the issuance of one or more series of Reliance
Undesignated Preferred Stock with rights and preferences that could impede the
completion of such a hostile transaction. The issuance of Reliance Undesignated
Preferred Stock, therefore, may deter future takeover attempts. The Reliance
Board does not intend to issue any Reliance Undesignated Preferred Stock except
on terms that it deems to be in the best interest of both Reliance Bank's and
Reliance's then existing stockholders.
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS
Reliance is a Delaware corporation incorporated under the
DGCL, and Continental is a New York state-chartered commercial bank organized
under the NYBL. If the Merger is consummated, the holders of Continental Common
Stock, whose rights as stockholders are currently governed by the NYBL,
Continental's Amended Organization Certificate and Continental's Bylaws, will,
upon the exchange of their shares pursuant to the Merger Agreement, become
stockholders of Reliance, and their rights as such will be governed by the DGCL,
Reliance's Certificate of Incorporation and Reliance's Bylaws. The material
differences between the rights of Continental stockholders and the rights of
Reliance stockholders resulting from the differences in their governing
documents and the application of the NYBL or the DGCL thereto are summarized
below.
This summary is not meant to be relied upon as an exhaustive
list of differences or a detailed description of the provisions discussed and is
qualified in its entirety by reference to the NYBL and the governing corporate
documents of Continental and to the DGCL and the governing corporate documents
of Reliance. Copies of such governing corporate documents of Continental and
Reliance are available, without charge, to any person, including any beneficial
owner to whom this Proxy Statement-Prospectus is delivered, by following the
instructions listed under "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "INFORMATION RELATING TO CONTINENTAL."
SPECIAL MEETINGS OF STOCKHOLDERS
RELIANCE. Under Reliance's Bylaws, special meetings of
Reliance stockholders may be called only by the Reliance Board pursuant to a
resolution adopted by a majority of the total number of directors that Reliance
would have if there were no vacancies. At any such special meeting of
stockholders, only such business as shall have been brought before the meeting
by or at the direction of the board of directors of Reliance shall be conducted.
CONTINENTAL. Continental's Bylaws provide that special
meetings of Continental stockholders may be called at any time by the
Continental Board, by one or more stockholders holding at least a majority of
the shares entitled to vote or as otherwise provided by law.
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STOCKHOLDER ACTION BY WRITTEN CONSENT
RELIANCE. Reliance's Bylaws do not permit any stockholder
action by written consent.
CONTINENTAL. Continental's Bylaws provide that any action
required or permitted to be taken at an annual or special meeting of Continental
stockholders may be taken without such a meeting upon written consent, setting
forth the action so taken, signed by the holders of all outstanding shares of
Continental stock entitled to vote thereon.
STOCKHOLDER NOMINATIONS AND PROPOSALS FOR BUSINESS
RELIANCE. Reliance's Bylaws establish procedures that must be
followed for stockholders to nominate individuals to the Reliance Board or to
propose business at an annual meeting of stockholders. In order to nominate
individuals to the Reliance Board, a stockholder must provide timely notice of
such nomination in writing to the Secretary of Reliance. To be timely, such
notice must be delivered or mailed to and received at the principal executive
offices of Reliance not less than 90 days prior to the date of the meeting;
PROVIDED, HOWEVER, that in the event that less than 100 days notice or prior
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder will be timely if received within 10 days of the date on
which notice of the date of the meeting was mailed or disclosed. The
stockholder's notice must set forth (i) certain information as to each person
whom such stockholder proposes to nominate for election as a director and (ii)
as to the stockholder giving the notice, such stockholder's name and address as
they appear on Reliance's books and the class and number of shares of Reliance
capital stock that are beneficially owned by such stockholder.
In order for a stockholder to properly bring business before
an annual meeting, the business must relate to a proper subject matter for
stockholder action, and the stockholder must give timely notice thereof in
writing to the Secretary of Reliance as provided above. Such notice must include
(i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the stockholder's name and address as they appear on Reliance's books, (iii) the
class and number of shares of Reliance capital stock that are beneficially owned
by such stockholder and (iv) any material interest of such stockholder in such
business.
CONTINENTAL. Neither the NYBL nor Continental's Bylaws
contains a procedure for stockholder nominations and proposals.
REMOVAL OF DIRECTORS
RELIANCE. Reliance's Certificate of Incorporation provides
that a director, or the entire board of directors of Reliance, may be removed
only for cause and only by the affirmative vote of the holders of at least 80%
of the voting power of all the then-outstanding shares of capital stock of
Reliance entitled to vote generally in the election of directors, voting
together as a single class.
CONTINENTAL. In accordance with the NYBL, Continental's Bylaws
provide that any or all of the directors may be removed for cause by a majority
of votes cast by stockholders entitled to vote thereon at a meeting of
stockholders.
VOTING RIGHTS
RELIANCE. Under the DGCL, each stockholder is entitled to one
vote for each share of capital stock held by such stockholder, unless the
certificate of incorporation provides otherwise. Reliance's Certificate of
Incorporation provides that record owners of any outstanding Reliance Common
Stock which is beneficially owned (as determined pursuant to Rule 13d-3 of the
Rules and Regulations under the Exchange Act) by a person who, as of any record
date for the determination of stockholders entitled to vote on any matter,
beneficially
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owns in excess of 10% of the then outstanding shares of Reliance Common Stock
(the "Limit"), are not entitled to any vote with respect to the shares held in
excess of the Limit. Reliance's Certificate of Incorporation authorizes the
Board of Directors of Reliance to construe and apply the provisions regarding
the Limit and to make all determinations necessary or desirable to implement
such provisions.
CONTINENTAL. The NYBL provides that stockholders are
entitled to one vote for each share held of record, unless the organization
certificate provides otherwise. Continental's Amended Organization Certificate
does not contain a provision relating to voting rights.
AMENDMENT OF CERTIFICATE OF INCORPORATION/ORGANIZATION CERTIFICATE
RELIANCE. Reliance's Certificate of Incorporation requires the
affirmative vote of the holders of at least 80% of the voting power of all of
the then-outstanding shares of Reliance capital stock entitled to vote generally
in the election of directors, voting together as a single class, to amend or
repeal the provisions of Reliance's Certificate of Incorporation regarding: (i)
the amendment of Reliance's Certificate of Incorporation; (ii) the limitation on
voting rights of Reliance Common Stock; (iii) the prohibition of stockholder
action by written consent; (iv) the calling of special meetings of stockholders;
(v) the number of directors and the classification of the Reliance Board, the
filling of vacancies on the Reliance Board, the removal of directors and the
requirement of advance notice of stockholder nominations for the election of
directors; (vi) the amendment of Reliance's Bylaws; (vii) higher vote
requirements for certain actions; and (viii) director and officer
indemnification.
CONTINENTAL. The NYBL provides that a commercial bank may
amend its organization certificate by the vote of the holders of a majority of
the shares entitled to vote thereon at a meeting of stockholders unless the
organization certificate provides for a higher vote. Continental's Amended
Organization Certificate does not require a higher vote.
AMENDMENT OF BYLAWS
RELIANCE. Reliance's Certificate of Incorporation and Bylaws
provide that Reliance's Bylaws may be amended, altered or repealed by the vote
of a majority of the entire Reliance Board or by the stockholders upon the
affirmative vote of the holders of at least 80% of the voting power of all the
then outstanding shares of Reliance capital stock, voting together as a class.
CONTINENTAL. Continental's Bylaws may be amended by the vote
of the holders of a majority of the shares entitled to vote in an election of
Continental's directors or by the vote of a majority of the entire Continental
Board.
LIMITATION OF DIRECTOR AND OFFICER LIABILITY
RELIANCE. The DGCL permits the inclusion of a provision in the
certificate of incorporation of a Delaware corporation which eliminates or
limits the personal liability of a director of such corporation to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, PROVIDED that such provision does not eliminate or limit the
liability of a director for: (i) any breach of the director's duty of loyalty to
the corporation or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) the
unlawful payment of dividends or unlawful stock purchases or redemptions; or
(iv) any transaction from which the director derived an improper personal
benefit. Reliance's Certificate of Incorporation contains a provision limiting
the liability of its directors to the fullest extent permitted by the DGCL.
CONTINENTAL. Continental's Amended Organization Certificate
provides that no director shall be personally liable to Continental or its
stockholders for monetary damages for breach of fiduciary duty as a
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director; PROVIDED, that, to the extent required by applicable law, director
liability is not eliminated or limited with respect to acts or omissions
committed in bad faith or which were the result of active or deliberate
dishonesty or where the director personally gained a financial profit or other
advantage to which such director was not legally entitled.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
RELIANCE. The DGCL permits a Delaware corporation to indemnify
its directors, officers, employees and agents if such persons have acted in good
faith and in a manner that such persons reasonably believed was in, or not
opposed to, the best interests of the corporation. A Delaware corporation also
may indemnify such individuals with respect to criminal actions or proceedings,
PROVIDED that such individuals had no reasonable cause to believe such conduct
was unlawful. Indemnification shall be made by the corporation only as
authorized in a specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because such
person has met the applicable standard of conduct set forth above.
Reliance's Certificate of Incorporation provides that Reliance
shall indemnify its directors, officers, employees and agents to the fullest
extent authorized by the DGCL against all expense, liability and loss
reasonably incurred or suffered by and such indemnitee in connection therewith;
PROVIDED, HOWEVER, that, except as provided in Reliance's Certificate of
Incorporation with respect to proceedings to enforce rights to indemnification,
Reliance shall indemnify any such indemnitee in connection with a proceeding
initiated by such indemnitee only if such proceeding was authorized by the
Reliance Board. Reliance's Certificate of Incorporation also permits Reliance to
maintain insurance on behalf of any director, officer, employee or agent of
Reliance.
Insofar as indemnification by Reliance for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of Reliance pursuant to the foregoing, the Commission has
taken the position that such indemnification is against public policy and is
therefore unenforceable.
CONTINENTAL. The NYBL permits indemnification of a director or
officer if such person acted in good faith for a purpose that such person
reasonably believed to be in the best interests of the corporation.
Indemnification is also permitted in criminal actions or proceedings if such
person had no reasonable cause to believe that such conduct was unlawful.
Indemnification shall be made by the corporation only as authorized in a
specific case upon a determination that the director or officer has met the
applicable standard of conduct set forth above. The NYBL also requires that (i)
stockholders be notified of any expenses or other amounts paid to a director or
officer by way of indemnification, other than pursuant to a court order or
stockholder action and (ii) the Superintendent be notified of any amounts to be
paid to a director or officer by way of indemnification at least thirty (30)
days prior to such payment.
Continental's Bylaws provide for the indemnification of
Continental's directors, officers and employees to the extent permitted by law
and permit, but do not require, Continental to purchase and maintain insurance
on behalf of any director, officer, employee or agent of Continental.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
RELIANCE. Under the DGCL, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the affirmative
vote of a majority of the outstanding shares of the corporation and any other
affected class of stock. Under Reliance's Certificate of Incorporation, business
combinations involving an Interested Stockholder (as defined below) require the
approval of the holders of at least 80% of Reliance's then outstanding shares of
voting stock, except that such business combinations shall require only the
affirmative vote of a majority of the outstanding shares of Reliance capital
stock entitled to vote if: (i) the business combination has been approved
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by a majority of the disinterested directors of Reliance; or (ii) the business
combination meets certain conditions which are designed to afford the
stockholders a fair price in consideration for their shares.
The term "Interested Stockholder" is defined in Reliance's
Certificate of Incorporation to include any individual, corporation, partnership
or other entity (other than Reliance or a subsidiary of Reliance) which (i)
beneficially owns, directly or indirectly, 10% or more of the outstanding shares
of Reliance voting stock; (ii) is an affiliate (as defined in Rule 12b-2 of the
Rules and Regulations under the Exchange Act) of Reliance and at any time within
the two-year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the outstanding shares of
Reliance voting stock; or (iii) is an assignee or has otherwise succeeded to any
shares of Reliance voting stock which were at any time within the two-year
period immediately prior to the date in question beneficially owned by any
Interested Stockholder if such assignment or succession did not occur in the
course of a public offering within the meaning of the Securities Act.
CONTINENTAL. The NYBL provides that a merger, voluntary
liquidation or sale of assets by a commercial bank must be approved by the vote
of at least two-thirds of the outstanding stock of such commercial bank, except
that approval of a merger by the stockholders of the acquiring entity is not
required if the total assets of the entity being acquired do not exceed 10% of
the total assets of the acquiring entity and the plan of merger does not change
the name or the authorized shares of capital stock of the acquiring entity or
make or require any other change or amendment for which the approval or consent
of stockholders would be required under the NYBL.
RESTRICTIONS ON BUSINESS COMBINATIONS INVOLVING INTERESTED STOCKHOLDERS
RELIANCE. Section 203 of the DGCL provides a corporation shall
not engage in any business combination with any interested stockholder for a
period of three years following the time such stockholder became an "interested
stockholder," unless: (i) prior to such time, the board of directors approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
for purposes of determining the number of shares outstanding those shares owned
by persons who are both directors and officers and shares owned by certain
employee stock plans); or (iii) at or subsequent to such time the business
combination is approved by the board of directors of the corporation and by the
affirmative vote of at least 662/3% of the outstanding voting stock which is not
owned by the interested stockholder. For purposes of Section 203, an "interested
stockholder" means any person (other than the corporation or any majority-owned
subsidiary of the corporation) that owns 15% or more of the outstanding voting
stock of the corporation or is an affiliate or associate of the corporation and
was the owner of 15% or more of the outstanding voting stock of the corporation
at any time within the preceding three-year period. "Business combination" is
broadly defined in Section 203 to cover a wide range of corporate transactions,
including mergers, sales of assets, issuances of stock, transactions with
subsidiaries and receipts of disproportionate financial benefits.
Pursuant to Section 203(b), the foregoing restriction does not
apply in certain situations, and a corporation may elect not to be governed by
Section 203 by adopting an amendment to its bylaws or certificate of
incorporation in accordance with such section . No such amendment has been
adopted by Reliance.
CONTINENTAL. The NYBL does not have an analogous business
combination statute to Section 203 of the DGCL.
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APPRAISAL RIGHTS
RELIANCE. Under the DGCL, appraisal rights are generally
available in connection with a statutory merger or consolidation. Appraisal
rights are not available when a corporation is to be the surviving corporation,
and no vote of its stockholders is required under the DGCL. In addition, unless
otherwise provided in the certificate of incorporation, no appraisal rights are
available to the holders of shares of any class of stock which is either (i)
listed on a national securities exchange or designated as a national market
system security on an inter-dealer quotation system by the National Association
of Securities Dealers, Inc. (the "NASD") or (ii) held of record by more than
2,000 holders, unless such stockholders are required by the terms of the Merger
to accept anything other than: (a) shares of stock of the surviving corporation;
(b) shares of stock of another corporation which are or will be listed on a
national securities exchange or designated as a national market system security
on an inter-dealer quotation system by the NASD or held of record by more than
2,000 holders; (c) cash in lieu of fractional shares of such stock or (d) any
combination thereof. Reliance's Certificate of Incorporation has no provisions
regarding appraisal rights, and Reliance stockholders will not have appraisal
rights in connection with the Merger.
CONTINENTAL. Pursuant to Section 6022 of the NYBL, a
stockholder who is entitled to vote on a merger, consolidation or similar
transaction who does not approve such transaction generally is entitled to
appraisal rights. See "THE MERGER-- Dissenters' Rights."
EVALUATION OF CERTAIN OFFERS
RELIANCE. Reliance's Certificate of Incorporation provides
that the Reliance Board, when evaluating any offer of another entity to make a
tender or exchange offer, merge or consolidate Reliance with another corporation
or entity or purchase or otherwise acquire all or substantially all of the
assets and properties of Reliance, may, in connection with the exercise of its
judgment in determining what is in the best interest of Reliance and its
stockholders, give due consideration to all relevant factors, including, without
limitation, those factors that directors of any subsidiary of Reliance may
consider in evaluating any action that may result in a change in control of the
subsidiary and the social and economic effect of acceptance of such offer on:
(i) Reliance's present and future customers and employees and those of its
subsidiaries; (ii) the communities in which Reliance and its subsidiaries
operate or are located; (iii) the ability of Reliance to fulfill its corporate
objective as a savings and loan holding company under applicable laws and
regulations; and (iv) the ability of Reliance Bank to fulfill the objectives of
a stock form savings bank under applicable statutes and regulations.
The DGCL does not specifically address what factors a board of
directors may consider in exercising its judgment. However, pursuant to case law
interpreting the provisions of the DGCL, the board of directors of a Delaware
corporation, such as Reliance, generally may consider the impact of such a
proposal on Reliance's other constituencies, PROVIDED that doing so bears some
reasonable relationship to general stockholder interests.
CONTINENTAL. Section 7015 of the NYBL provides that, in taking
action, including, without limitation, action which may involve or relate to a
change or potential change in the control of the banking institution, a director
shall be entitled to consider, without limitation, (i) both the long-term and
the short-term interests of the corporation and its shareholders and (ii) the
effects that the corporation's actions may have in the short-term or in the
long-term upon any of the following: (a) the prospects for potential growth,
development, productivity and profitability of the corporation; (b) the
corporation's current employees, (c) the corporation's retired employees and
other beneficiaries receiving or entitled to receive retirement, welfare or
similar benefits from or pursuant to any plan sponsored, or agreement entered
into, by the corporation; (d) the corporation's customers and creditors and (e)
the ability of the corporation to provide, as a going concern, goods, services,
employment opportunities and employment benefits and otherwise to contribute to
the communities in which it does business.
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RIGHTS PLANS
RELIANCE. Reliance maintains a Stockholder Rights Plan, which
is designed to (i) protect stockholders from attempts to acquire control of
Reliance without the approval of the Reliance Board and (ii) prevent abusive
tactics from potential acquirors that do not treat all stockholders fairly.
Under the Rights Plan, each outstanding share of Reliance Common Stock has
attached to it one right (a "Reliance Right") to purchase one one-hundredth of a
share of a series of junior participating preferred stock at an initial exercise
price of $60. The Reliance Rights are not currently exercisable or transferable,
and no separate certificates evidencing such rights will be distributed, unless
certain events occur. The description and terms of the Reliance Rights are set
forth in a Stockholder Protection Rights Agreement, dated as of September 18,
1996, between Reliance and Registrar and Transfer Co. as transfer agent (the
"Rights Agreement").
The Reliance Rights become exercisable on the business day
following the Separation Time, which is defined in the Rights Agreement as the
earlier of the date which is (i) the tenth business day after the date on which
any person or group commences a tender or exchange offer which, if consummated,
would result in such person or group becoming an Acquiring Person, as defined
below, or (ii) the tenth business day after the first date of
public announcement by Reliance that such person or group has become an
Acquiring Person (the "Flip-in Date"); PROVIDED, that if a tender or exchange
offer referred to in clause (i) is canceled, terminated or otherwise withdrawn
prior to the Separation Time without the purchase of any shares of stock
pursuant thereto, such offer shall be deemed to never have been made. An
"Acquiring Person" is any person or group who is the beneficial owner of 10% or
more of the outstanding shares of Reliance Common Stock, but does not include
Reliance, any wholly-owned subsidiary of Reliance or any employee stock
ownership or other employee benefit plan of Reliance or certain other persons as
described in the Rights Agreement. Until the Reliance Rights become exercisable
they will be transferred with and only with Reliance Common Stock.
In the event that prior to the Expiration Time a Flip-in Date
occurs, each Reliance Right shall constitute the right to purchase from
Reliance, upon the exercise thereof in accordance with the terms of the Rights
Agreement, that number of shares of Reliance Common Stock having an aggregate
Market Price (as defined in the Rights Agreement), on the date of the public
announcement of an Acquiring Person's becoming such that gave rise to the
Flip-in Date, equal to twice the Exercise Price for an amount in cash equal to
the then current Exercise Price; provided, however, that any Reliance Rights
beneficially owned by the Acquiring Person or any affiliate or associate thereof
shall become void.
Prior to the Expiration Time, Reliance may not enter into,
consummate or permit to occur a "Flip-over Transaction or Event" (as defined
below) unless it has entered into an agreement with the person engaging in such
Flip-over Transaction or Event (the "Flip-over Entity") as described in the
following paragraph. A "Flip-over Transaction or Event" is defined as one of the
following transactions which occurs after an Acquiring Person gains control of
the Reliance Board: (i) Reliance consolidates or mergers or participates in a
share exchange with any person under certain circumstances; or (ii) Reliance or
one of its subsidiaries sells or otherwise transfers assets aggregating more
than 50% of the assets of Reliance.
Upon a Flip-over Transaction or Event, Reliance must enter
into an agreement with the Flip-over Entity which shall provide that upon
consummation or occurrence of the Flip-over Transaction or Event (i) each
Reliance Right shall thereafter constitute the right to purchase from the
Flip-over Entity, upon exercise thereof in accordance with the terms of the
Rights Agreement, that number of shares of common stock of the Flip-over Entity
having an aggregate market price equal to twice the Exercise Price for an amount
in cash equal to the then-current Exercise Price and (ii) the Flip-over Entity
shall thereafter be liable for, and shall assume, by virtue of such Flipover
Transaction or Event and such agreement, all the obligations and duties of
Reliance pursuant to the Rights Agreement.
After the Reliance Rights become exercisable, under certain
circumstances, Reliance, at its option, may substitute either junior
participating preferred stock or Reliance Preferred Stock in lieu of the
Reliance Common
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Stock so issuable, at a ratio of one one-hundredth of a share of either the
junior participating preferred stock or the Reliance Preferred Stock, as the
case may be to one share of Reliance Common Stock.
The Reliance Board may, at its option, at any time prior to
the close of business on the Flip-in Date, redeem all (but not less than all)
the then-outstanding Reliance Rights at a price of $0.01 per Reliance Right (the
"Redemption Price"). Immediately upon such action of the Reliance Board, the
right to exercise the Reliance Rights will terminate, and each Reliance Right
will thereafter represent only the right to receive the Redemption Price in cash
for each Reliance Right so held.
The Reliance Rights will expire on the earliest of (i) the
date on which the Reliance Board of Directors elects to exchange the outstanding
Reliance Rights for shares of Reliance Common Stock (as described above), (ii)
the close of business on October 3, 2006, (iii) the date on which the Reliance
Rights are redeemed or (iv) upon the Merger of Reliance into another corporation
pursuant to an agreement entered into prior to a Flip-in Date.
The Rights Agreement was not intended to and will not prevent
a takeover of Reliance. However, it may cause substantial dilution to a person
or group that beneficially acquires 10% or more of Reliance Common Stock unless
the Reliance Rights are first redeemed by the Reliance Board of Directors.
Accordingly, the Reliance Rights may result in Reliance being less attractive to
a potential acquiror and, in the event that the existence of the Reliance Rights
did deter certain potential acquirors, such Reliance Rights could result in
holders of Reliance Common Stock receiving less in the event of a takeover. The
Reliance Rights should not interfere with any merger or other business
combination approved by the Reliance Board. Each share of Reliance Common Stock
issued in the Merger will have attached thereto a Reliance Right.
CONTINENTAL. Continental does not have a stockholder rights
plan.
INSPECTION RIGHTS
RELIANCE. Under the DGCL, Reliance stockholders, upon written
demand under oath stating the purpose thereof, have the right, during the usual
hours for business, to inspect, for any purpose reasonably related to such
person's interest as a stockholder, Reliance's stock ledger, a list of its
stockholders and its other books and records and to make copies or extracts
therefrom.
CONTINENTAL. Under the NYBL, any person who has been a
stockholder of record of Continental for at least six months immediately
preceding such person's demand, or any person holding, at least 5% of any class
of the outstanding shares of Continental, or any person duly authorized by such
a 5% stockholder, has the right to examine the minutes of the proceedings of
Continental's stockholders and the record of stockholders and to make extracts
therefrom. Such request must be made in writing at least five (5) days before
the inspection, and any such inspection must be made in person and during usual
business hours.
LEGAL MATTERS
The validity of the Merger Shares and certain other legal
matters will be passed upon for Reliance by Thacher Proffitt & Wood, New York,
New York.
Legal matters in connection with the Merger will be passed
upon for Continental by Muldoon, Murphy & Faucette.
EXPERTS
The consolidated financial statements of Reliance and
subsidiaries as of June 30, 1996 and 1995 and for each of the years in the three
year period ended June 30, 1996, incorporated by reference in Reliance's
Form 10-K for the year ended June 30, 1996 and incorporated by reference into
this Proxy
90
<PAGE>
Statement-Prospectus, have been incorporated by reference herein and
in the Registration Statement of which this Proxy Statement-Prospectus is a part
in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
incorporated by reference in Reliance's 1996 Form 10-K and incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The consolidated financial statements of Continental and
subsidiaries as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996, incorporated herein by reference have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said reports.
STOCKHOLDER PROPOSALS
To be considered for inclusion in Continental's proxy
statement and form of proxy relating to the annual meeting of stockholders to be
held in 1998, if any, a stockholder proposal must be received by the Secretary
of Continental at Continental Bank, 118 Seventh Street, Garden City, New York
11530 by November 26, 1997. Any such proposal will be subject to 17 C.F.R. ss.
240.14a-8 promulgated by the Commission under the Exchange Act.
91
<PAGE>
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF THE 3rd DAY OF MAY, 1997
BY AND AMONG
RELIANCE BANCORP, INC.
RELIANCE FEDERAL SAVINGS BANK
AND
CONTINENTAL BANK
================================================================================
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TABLE OF CONTENTS
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INTRODUCTORY STATEMENT............................................-1-
ARTICLE I
THE MERGER..................................................-1-
Section 1.01 Structure of the Merger...................................................................-1-
Section 1.02 Effect on Outstanding Shares of Continental Common Stock..................................-2-
Section 1.03 [Intentionally omitted]...................................................................-2-
Section 1.04 Exchange Procedures.......................................................................-3-
Section 1.05 Dissenters' Rights........................................................................-5-
Section 1.06 Option Plans and Phantom Stock............................................................-5-
Section 1.07 Directors and Officers of Reliance Bank after Effective Time..............................-6-
Section 1.08 Alternative Structure.....................................................................-6-
ARTICLE II
REPRESENTATIONS AND WARRANTIES........................................-6-
Section 2.01 Disclosure Letters........................................................................-6-
Section 2.02 Standards.................................................................................-6-
Section 2.03 Representations and Warranties of Continental.............................................-7-
Section 2.04 Representations and Warranties of Reliance...............................................-21-
ARTICLE III
CONDUCT PENDING THE MERGER.........................................-32-
Section 3.01 Conduct of Continental's Business Prior to the Effective Time............................-32-
Section 3.02 Forbearance by Continental...............................................................-32-
Section 3.03 Conduct of Reliance's Business Prior to the Effective Time...............................-36-
ARTICLE IV
COVENANTS.................................................-36-
Section 4.01 Acquisition Proposals....................................................................-36-
Section 4.02 Certain Policies of Continental..........................................................-37-
Section 4.03 Employees; Benefit Plans and Programs....................................................-37-
Section 4.04 Access and Information...................................................................-39-
Section 4.05 Certain Filings, Consents and Arrangements...............................................-40-
Section 4.06 Antitakeover Provisions..................................................................-40-
Section 4.07 Additional Agreements....................................................................-40-
Section 4.08 Publicity................................................................................-41-
Section 4.09 Stockholders' Meeting....................................................................-41-
Section 4.10 Proxy; Registration Statement............................................................-41-
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Section 4.11 Registration of Reliance Common Stock....................................................-41-
Section 4.12 Affiliate Letters........................................................................-42-
Section 4.13 Notification of Certain Matters..........................................................-42-
Section 4.14 Indemnification; Directors' and Officers' Insurance......................................-42-
ARTICLE V
CONDITIONS TO CONSUMMATION.........................................-44-
Section 5.01 Conditions to Each Party's Obligations...................................................-44-
Section 5.02 Conditions to the Obligations of Reliance and Reliance Bank Under
this Agreement....................................-45-
Section 5.03 Conditions to the Obligations of Continental.............................................-46-
ARTICLE VI
TERMINATION................................................-48-
Section 6.01 Termination..............................................................................-48-
Section 6.02 Effect of Termination....................................................................-51-
Section 6.03 Third Party Termination Fee..............................................................-51-
ARTICLE VII
CLOSING, EFFECTIVE DATE AND EFFECTIVE TIME.................................-52-
Section 7.01 Effective Date and Effective Time........................................................-52-
Section 7.02 Deliveries at the Closing................................................................-52-
ARTICLE VIII
CERTAIN OTHER MATTERS...........................................-52-
Section 8.01 Certain Definitions; Interpretation......................................................-52-
Section 8.02 Survival.................................................................................-53-
Section 8.03 Waiver; Amendment........................................................................-53-
Section 8.04 Counterparts.............................................................................-53-
Section 8.05 Governing Law............................................................................-53-
Section 8.06 Expenses.................................................................................-53-
Section 8.07 Notices..................................................................................-53-
Section 8.08 Entire Agreement; etc....................................................................-54-
Section 8.09 Assignment...............................................................................-54-
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ii
<PAGE>
-1-
This is an AGREEMENT AND PLAN OF MERGER, dated as of the 3rd day of
May, 1997 (this "Agreement"), by and among RELIANCE BANCORP, INC., a Delaware
corporation ("Reliance"), RELIANCE FEDERAL SAVINGS BANK, a federally chartered
stock savings bank and a wholly owned subsidiary of Reliance ("Reliance Bank"),
and CONTINENTAL BANK, a New York chartered stock commercial bank
("Continental").
INTRODUCTORY STATEMENT
The Board of Directors of each of Reliance, Reliance Bank and
Continental (i) has determined that this Agreement and the transactions
contemplated hereby are in the best interests of Reliance, Reliance Bank and
Continental, respectively, and in the best long-term interests of their
respective stockholders, (ii) has determined that this Agreement and the
transactions contemplated hereby are consistent with, and in furtherance of, its
respective business strategies and (iii) has approved, at meetings of each of
such Boards of Directors, this Agreement.
Concurrently with the execution and delivery of this Agreement, and as
a condition and inducement to Reliance's willingness to enter into this
Agreement, Reliance and Continental have entered into a Stock Option Agreement
(the "Option Agreement") pursuant to which Continental has granted to Reliance
an option to purchase shares of Continental's common stock, par value $5.00 per
share (the "Continental Common Stock"), upon the terms and conditions therein
contained; and certain officers and directors of Continental will each, within
five business days of the date of this Agreement, execute in favor of Reliance a
Letter Agreement in the form annexed as Exhibit A and certain affiliates of
Continental will each, within five business days of the date of this Agreement,
execute in favor of Reliance a Letter Agreement in the form annexed as Exhibit
B.
Reliance and Continental desire to make certain representations,
warranties and agreements in connection with the business combination
transaction provided for herein and to prescribe various conditions to the
transaction.
In consideration of their mutual promises and obligations hereunder,
the parties hereto adopt and make this Agreement and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
ARTICLE I
THE MERGER
SECTION 1.01 STRUCTURE OF THE MERGER. On the Effective Date (as
defined in Section 7.01), Continental will merge with and into Reliance Bank
(the "Merger"), with Reliance Bank being the surviving entity, pursuant to the
provisions of, and with the effect provided in, the rules and regulations of the
Office of Thrift Supervision (the "OTS") and the Banking Law of the State of New
York (the "NYBL") and pursuant to the terms and conditions of an agreement and
plan of merger to be entered into between Reliance Bank and Continental
consistent with the terms of
<PAGE>
-2-
this Agreement and in a form to be mutually agreed upon. The separate corporate
existence of Continental shall thereupon cease. Reliance Bank shall continue to
be governed by the laws of the United States and its name and separate corporate
existence with all of its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger.
SECTION 1.02 EFFECT ON OUTSTANDING SHARES OF CONTINENTAL COMMON STOCK.
(a) By virtue of the Merger, automatically and without any action on
the part of the holder thereof, each share of Continental Common Stock issued
and outstanding at the Effective Time (as defined in Section 7.01) (other than
(i) shares the holder of which (the "Dissenting Stockholder"), pursuant to any
applicable law providing for dissenters' or appraisal rights is entitled to
receive payment in accordance with the provisions of any such law, such holder
to have only the rights provided in any such law (the "Dissenters' Shares"),
(ii) shares held directly or indirectly by Reliance (other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted), and
(iii) shares held as treasury stock of Continental (the "Excluded Shares") shall
become and be converted into the right to receive 1.1 shares of common stock,
par value $.01 per share, of Reliance ("Reliance Common Stock"), together with
the related preferred share purchase right issued pursuant to the Stockholder
Protection Rights Agreement (the "Rights Agreement"), dated as of September 18,
1996, between Reliance and Registrar and Transfer Co., as Rights Agent (the
"Preferred Share Purchase Right"); provided, however, that, notwithstanding any
other provision hereof, no fraction of a whole share of Reliance Common Stock
and no certificates or scrip therefor will be issued in the Merger; instead,
Reliance shall pay to each holder of Continental Common Stock who would
otherwise be entitled to a fractional share an amount in cash, rounded to the
nearest cent, determined by multiplying such fraction by the Reliance Market
Value (as defined below) (collectively, the "Merger Consideration").
(b) If between the date of this Agreement and the Effective Time the
outstanding shares of Reliance Common Stock shall have been changed into a
different number of shares or into a different class, by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares (each, a "Stock Adjustment"), the Merger Consideration shall
be adjusted correspondingly to the extent appropriate to reflect the Stock
Adjustment.
(c) As used herein, "Reliance Market Value" shall be the average of the
mean between the closing high bid and low asked prices of a share of Reliance
Common Stock, as reported on the National Association of Securities Dealers
Automated Quotation System National Market System (the "Nasdaq National
Market"), for the 15 consecutive trading days immediately preceding the day on
which the last of the required regulatory approvals, as contemplated by Section
5.01(b), is obtained (the "Valuation Date").
(d) As of the Effective Time, each Excluded Share, other than
Dissenters' Shares, shall be cancelled and retired and cease to exist, and no
exchange or payment shall be made with respect thereto.
SECTION 1.03 [INTENTIONALLY OMITTED.]
<PAGE>
-3-
SECTION 1.04 EXCHANGE PROCEDURES.
(a) Appropriate transmittal materials (the "Letter of Transmittal")
will be mailed within five business days after the Effective Date to each holder
of record of Continental Common Stock as of the Effective Time. A Letter of
Transmittal will be properly completed only if accompanied by certificates
representing all shares of Continental Common Stock converted thereby.
(b) At and after the Effective Time, each certificate previously
representing shares of Continental Common Stock (except as specifically set
forth in Section 1.02) shall represent only the right to receive the Merger
Consideration (the "Continental Certificates").
(c) Prior to the Effective Time, Reliance shall deposit, or shall cause
to be deposited, with the Exchange Agent, for the benefit of the holders of
shares of Continental Common Stock, for exchange in accordance with this Section
1.04, an estimated amount of cash sufficient to pay the aggregate amount of cash
paid in lieu of fractional shares to be paid pursuant to Section 1.02, and
Reliance shall reserve for issuance with its Transfer Agent and Registrar the
aggregate Merger Consideration to be issued.
(d) The Letter of Transmittal (i) shall specify that delivery shall be
effected, and risk of loss and title to Continental Certificates shall pass,
only upon delivery of Continental Certificates to the Exchange Agent, (ii) shall
be in a form and contain any other provisions as Reliance may reasonably
determine, and (iii) shall include instructions for use in effecting the
surrender of Continental Certificates in exchange for the Merger Consideration.
Upon the proper surrender of Continental Certificates to the Exchange Agent,
together with a properly completed and duly executed Letter of Transmittal, the
holder of such Continental Certificate(s) shall be entitled to receive in
exchange therefor (i) a certificate representing that number of whole shares of
Reliance Common Stock that such holder has the right to receive pursuant to
Article I of this Agreement, and (ii) a check in the amount equal to the cash,
if any, which such holder has the right to receive pursuant to Article I of this
Agreement (for any fractional shares of Reliance Common Stock to which such
holder is entitled to pursuant to Section 1.02 and any dividend or other
distributions to which such holder of Reliance Common Stock is entitled to
pursuant to this Section 1.04). Continental Certificates so surrendered shall
forthwith be cancelled. As soon as practicable, but no later than 10 business
days following receipt of the properly completed Letter of Transmittal and any
necessary accompanying documentation, the Exchange Agent shall distribute
Reliance Common Stock and cash as provided herein. The Exchange Agent shall not
be entitled to vote or exercise any rights of ownership with respect to the
shares of Reliance Common Stock held by it from time to time hereunder, except
that it shall receive and hold all dividends or other distributions paid or
distributed with respect to such shares for the account of the persons entitled
thereto. In the event of a transfer of ownership of any shares of Continental
Common Stock not registered in the transfer records of Continental, the Merger
Consideration shall be issued to the transferee if Continental Certificate(s)
representing such Continental Common Stock are presented to the Exchange Agent,
accompanied by documents sufficient, in the reasonable judgment of Reliance and
the Exchange Agent, (x) to evidence and effect such transfer and (y) to evidence
that any applicable stock transfer taxes have been paid.
<PAGE>
-4-
(e) No dividend or other distributions declared or made after the
Effective Time with respect to Reliance Common Stock shall be remitted to any
person entitled to receive shares of Reliance Common Stock hereunder until such
person surrenders Continental Certificate(s), at which time such dividends shall
be remitted to such persons without interest.
(f) From and after the Effective Time, there shall be no transfers on
the stock transfer records of Continental of any shares of Continental Common
Stock. If, after the Effective Time, Continental Certificates are presented to
Reliance, they shall be cancelled and exchanged for the Merger Consideration
deliverable in respect thereof pursuant to this Agreement in accordance with the
procedures set forth in this Section 1.04.
(g) Any portion of the aggregate amount of cash to be paid in lieu of
fractional shares pursuant to Section 1.02, or the proceeds of any investments
thereof, that remains unclaimed by the stockholders of Continental for six (6)
months after the Effective Time shall be repaid by the Exchange Agent to
Reliance upon the written request of Reliance. After such request is made, any
stockholders of Continental who have not theretofore complied with this Section
1.04 shall look only to Reliance for issuance of their Merger Consideration
deliverable in respect of each share of Continental Common Stock such
stockholder holds as determined pursuant to this Agreement without any interest
thereon. If outstanding certificates for shares of Continental Common Stock are
not surrendered prior to the date on which such payments would otherwise escheat
to or become the property of any governmental unit or agency, the unclaimed
items shall, to the extent permitted by abandoned property and any other
applicable law, become the property of Reliance (and to the extent not in its
possession shall be paid over to it), free and clear of all claims or interest
of any person previously entitled to such claims. Notwithstanding the foregoing,
none of Reliance, Reliance Bank, the Exchange Agent or any other person shall be
liable to any former holder of Continental Common Stock for any amount delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
(h) Reliance and the Exchange Agent shall be entitled to rely upon
Continental's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Continental Certificate, Reliance and the Exchange
Agent shall be entitled to deposit any consideration represented thereby in
escrow with an independent third party and thereafter be relieved with respect
to any claims thereto.
(i) In the event any Continental Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Continental Certificate to be lost, stolen or destroyed and, if
required by the Exchange Agent, the posting by such person of a bond in such
amount as the Exchange Agent may direct as indemnity against any claim that may
be made against it with respect to such Continental Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed Continental
Certificate the Merger Consideration deliverable in respect thereof pursuant to
this Agreement.
<PAGE>
-5-
SECTION 1.05 DISSENTERS' RIGHTS.
(a) Any Dissenting Stockholder who shall be entitled to dissenters'
rights with respect to his or her Dissenters' Shares, as provided in Sections
604 and 6022 of the NYBL, shall not be entitled to the Merger Consideration,
unless and until the holder thereof shall have failed to perfect or shall have
effectively withdrawn or lost such holder's right to dissent from the Merger
under such law, and shall be entitled to receive only the payment to the extent
provided for therein with respect to such Dissenters' Shares.
(b) Continental shall (i) give Reliance prompt written notice of the
receipt of any notice from a stockholder purporting to exercise any dissenters'
rights, (ii) not settle nor offer to settle any demand for payment without the
prior written consent of Reliance and (iii) not waive any failure to comply
strictly with any procedural requirements of Section 6022 of the NYBL.
SECTION 1.06 OPTION PLANS AND PHANTOM STOCK.
(a) Continental shall not seek final approval from the Banking
Department of the State of New York (the "NYBD") for either the Continental Bank
1997 Incentive Stock Option Plan or the Continental Bank 1997 Directors Stock
Option Plan (collectively, the "Continental Option Plans"), or if such
Continental Option Plans have already been submitted to the NYBD for approval,
shall withdraw its request to the NYBD for approval of such plans. In addition,
Continental shall agree that any grants of options to purchase Continental
Common Stock, automatic or otherwise, made under the Continental Option Plans
shall be null and void ab initio.
(b) Each of the "phantom stock units" of Continental Common Stock (the
"Continental Phantom Stock") granted to Mr. John P. Sullivan pursuant to Section
4(c) of the employment agreement by and between Continental and Mr. Sullivan
dated October 11, 1996 (the "Sullivan Employment Agreement"), including those
regranted to Mr. Thomas Cangemi and Mr. Peter McCarthy pursuant to the First
Amendment to the Sullivan Employment Agreement, dated March 14, 1997, shall be
cancelled and replaced with a right to receive an amount per share of
Continental Phantom Stock equal to the Reliance Market Value without adjustment
for interest or otherwise if such amount is paid on a date other than the date
which includes the Effective Time. Prior to the Effective Time, Reliance shall
take all actions necessary to effect such cancellation or replacement. In
consideration for such cancellation, Continental shall pay to Mr. Sullivan, Mr.
Cangemi and Mr. McCarthy an amount (subject to applicable federal, state and
local tax withholding) equal to (i) the Reliance Market Value, multiplied by
(ii) the number of shares of Continental Phantom Stock specified for such
individual in the Continental Disclosure Letter (as defined in Section 2.01).
Continental shall make such payment at the Effective Time to each individual
provided that the individual delivers to Continental his written acceptance of
such payment as full and complete consideration for the cancellation of each
share of Continental Phantom Stock held by him.
SECTION 1.07 DIRECTORS AND OFFICERS OF RELIANCE BANK AFTER EFFECTIVE
TIME. At the Effective Time, the directors and officers of Reliance Bank shall
consist of the Directors and Officers of Reliance Bank serving immediately prior
to the Effective Time.
<PAGE>
-6-
SECTION 1.08 ALTERNATIVE STRUCTURE. Notwithstanding anything to the
contrary contained in this Agreement, prior to the Effective Time, Reliance may
specify that the structure of the transactions contemplated hereby be revised
and Continental, Reliance and Reliance Bank shall enter into such alternative
transactions as Reliance may determine to effect the purposes of this Agreement;
PROVIDED, however, that such revised structure shall not adversely affect the
tax effects or economic benefits of the transactions contemplated hereby to the
holders of Continental Common Stock and shall not materially delay the closing
of the merger (the "Closing"). This Agreement and any related documents shall be
appropriately amended in order to reflect any such revised structure.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.01 DISCLOSURE LETTERS. On or prior to the execution hereof,
Continental and Reliance have delivered to each other a letter (its "Disclosure
Letter") setting forth, among other items, matters, the disclosure of which is
required or appropriate in relation to any or all of its representations and
warranties (and making specific reference to the Section of this Agreement to
which they relate), other than Section 2.03(h); PROVIDED, that (a) no such fact,
circumstance or event is required to be set forth in the Disclosure Letter as an
exception to a representation or warranty if its absence is not reasonably
likely to result in the related representation or warranty being deemed untrue
or incorrect under the standards established by Section 2.02, and (b) the mere
inclusion of an item in the Disclosure Letter shall not be deemed an admission
by a party that such item represents a material exception or that such item is
reasonably likely to result in a Material Adverse Effect (as defined in Section
2.02(b)).
SECTION 2.02 STANDARDS.
(a) No representation or warranty of Continental or Reliance contained
in Section 2.03 or 2.04, respectively, shall be deemed untrue or incorrect, and
no party hereto shall be deemed to have breached a representation or warranty,
on account of the existence of any fact, circumstance or event unless, as a
consequence of such fact, circumstance or event, individually or taken together
with all other facts, circumstances or events inconsistent with any paragraph of
Section 2.03 or 2.04, as applicable, there is reasonably likely to exist a
Material Adverse Effect. Continental's representations, warranties and covenants
contained in this Agreement shall not be deemed to be untrue or breached as a
result of effects arising solely from actions taken in compliance with a written
request of Reliance.
(b) As used in this Agreement, the term "Material Adverse Effect" means
either (i) an effect which is material and adverse to the business, financial
condition or results of operations of Continental or Reliance, as the context
may dictate, and its subsidiaries taken as a whole; PROVIDED, however, that any
such effects resulting from any changes (A) in law, rule or regulation or
generally accepted accounting principles or interpretations thereof that applies
to both Reliance and Reliance Bank or Continental, as the case may be, or (B)
changes in interest rates shall not
<PAGE>
-7-
be considered in determining if a Material Adverse Effect has occurred; or (ii)
the failure of (x) a representation or warranty contained in Section
2.03(a)(iv), 2.03(d), 2.03(h)(iii), 2.04(a)(iv), 2.04(i)(iii) or 2.04(l) to be
true and correct or (y) a representation or warranty contained in the last
sentence of each of Section 2.03(f) or 2.04(f), the second sentence of each of
2.03(g)(i) or 2.04(h)(i) and the first two sentences of each of Section 2.03(b)
or 2.04(b) to be true and correct in all material respects.
(c) For purposes of this Agreement, "knowledge" shall mean, with
respect to a party hereto, actual knowledge of the members of the Board of
Directors of that party, its counsel and any officer of that party with the
title ranking not less than senior vice president.
SECTION 2.03 REPRESENTATIONS AND WARRANTIES OF CONTINENTAL. Subject to
Sections 2.01 and 2.02, Continental represents and warrants to Reliance that,
except as specifically disclosed in the Disclosure Letter of Continental:
(a) ORGANIZATION. (i) Continental is a stock commercial bank duly
organized, validly existing and in good standing under the laws of the State of
New York. Each Subsidiary of Continental is a corporation, limited liability
company or partnership duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation or organization. Each of
Continental and its Subsidiaries has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. As used in this Agreement, unless the context requires otherwise, the
term "Subsidiary" when used with respect to any party means any corporation or
other organization, whether incorporated or unincorporated, which is
consolidated with such party for financial reporting purposes or which is
controlled, directly or indirectly, by such party.
(ii) Continental and each Subsidiary of Continental is duly
qualified and is in good standing to do business in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification necessary.
(iii) The Continental Disclosure Letter sets forth all of the
Subsidiaries of Continental and all entities (whether corporations,
partnerships, or similar organizations), including the corresponding percentage
ownership in which Continental owns, directly or indirectly, 5% or more of the
ownership interests as of the date of this Agreement and indicates for each
Subsidiary, as of such date, its jurisdiction of organization and the
jurisdiction wherein it is qualified to do business. All such Subsidiaries and
ownership interests are in compliance with all applicable laws, rules and
regulations relating to direct investments in equity ownership interests.
Continental owns, either directly or indirectly, all of the outstanding capital
stock of each of its Subsidiaries. No Subsidiary of Continental is an "insured
depositary institution" as defined in the Federal Deposit Insurance Act, as
amended (the "FDIA"), and applicable regulations thereunder. All of the shares
of capital stock of each of the Subsidiaries held by Continental or by another
Subsidiary of Continental are fully paid, nonassessable and not subject to any
preemptive rights and are owned by Continental or a Subsidiary of Continental
free and clear of any claims, liens, encumbrances or restrictions (other than
those imposed by applicable
<PAGE>
-8-
federal and state securities laws) and there are no agreements or understandings
with respect to the voting or disposition of any such shares.
(iv) The deposits of Continental are insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC") to the
extent provided in the FDIA.
(b) CAPITAL STRUCTURE. (i) The authorized capital stock of Continental
consists of 3,000,000 shares of Continental Common Stock. As of the date of this
Agreement: (A) 921,735 shares of Continental Common Stock were issued and
outstanding, (B) no shares of Continental Common Stock were reserved for
issuance and (C) no shares of Continental Common Stock were held by Continental
in its treasury or by its Subsidiaries. All outstanding shares of Continental
Common Stock are validly issued, fully paid and nonassessable and not subject to
any preemptive rights and, with respect to shares held by Continental in its
treasury or by its Subsidiaries, are free and clear of all liens, claims,
encumbrances or restrictions (other than those imposed by applicable federal and
state securities laws) and there are no agreements or understandings with
respect to the voting or disposition of any such shares. The Continental
Disclosure Letter sets forth a complete and accurate list of all Continental
Phantom Stock units that have been issued.
(ii) As of the date of this Agreement, except for this
Agreement, the Option Agreement and as set forth in the Continental Disclosure
Letter, neither Continental nor any of its Subsidiaries has or is bound by any
outstanding options, warrants, calls, rights, convertible securities,
commitments or agreements of any character obligating Continental or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, any additional shares of capital stock of Continental or any of its
Subsidiaries or obligating Continental or any of its Subsidiaries to grant,
extend or enter into any such option, warrant, call, right, convertible
security, commitment or agreement. As of the date hereof, there are no
outstanding contractual obligations of Continental or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of
Continental or any of its Subsidiaries.
(c) AUTHORITY. Continental has all requisite corporate power and
authority to enter into this Agreement and, subject to approval of this
Agreement by the requisite vote of the stockholders of Continental and receipt
of all required regulatory or governmental approvals as contemplated by Section
5.01(b) of this Agreement, to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement, and, subject to the approval of
this Agreement by the stockholders of Continental, the consummation of the
transactions contemplated hereby, have been duly authorized by all necessary
corporate actions on the part of Continental. This Agreement has been duly
executed and delivered by Continental and constitutes a valid and binding
obligation of Continental, enforceable in accordance with its terms subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
and remedies generally and subject, as to enforceability, to general principles
of equity, whether applied in a court of law or a court of equity.
(d) FAIRNESS OPINION. Continental has received the opinion of Sandler
O'Neill & Partners, L.P. to the effect that, as of the date hereof, the Merger
Consideration to be received by the stockholders of Continental is fair, from a
financial point of view, to such stockholders.
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(e) NO VIOLATIONS. Subject to approval of this Agreement by
Continental's stockholders, the execution, delivery and performance of this
Agreement by Continental do not, the execution, delivery and performance of the
Option Agreement by Continental will not and the consummation of the
transactions contemplated hereby or thereby by Continental will not, constitute
(i) a breach or violation of, or a default under, any law, including any
Environmental Law (as defined in Section 2.03(s)), rule or regulation or any
judgment, decree, order, governmental permit or license, or agreement, indenture
or instrument of Continental or any Subsidiary of Continental or to which
Continental or any of its Subsidiaries (or any of their respective properties)
is subject, (ii) a breach or violation of, or a default under, the organization
certificate or articles of incorporation or bylaws of Continental or any
Subsidiary of Continental or (iii) a breach or violation of, or a default under
(or an event which with due notice or lapse of time or both would constitute a
default under), or result in the termination of, accelerate the performance
required by, or result in the creation of any lien, pledge, security interest,
charge or other encumbrance upon any of the properties or assets of Continental
or any Subsidiary of Continental under, any of the terms, conditions or
provisions of any note, bond, indenture, deed of trust, loan agreement or other
agreement, instrument or obligation to which Continental or any Subsidiary of
Continental is a party, or to which any of their respective properties or assets
may be bound or affected; and the consummation of the transactions contemplated
hereby by Continental or, upon its execution and delivery, by the Option
Agreement will not require any approval, consent or waiver under any such law,
rule, regulation, judgment, decree, order, governmental permit or license or the
approval, consent or waiver of any other party to any such agreement, indenture
or instrument, other than (i) the required approvals, consents and waivers
referred to in Section 5.01(b), (ii) the approval of the stockholders of
Continental referred to in Section 2.03(f) (ii), and (iii) such approvals,
consents or waivers as are required under the federal and state securities or
"blue sky" laws in connection with the transactions contemplated by this
Agreement or the Option Agreement.
(f) CONSENTS AND APPROVALS. (i) Except as referred to herein or in
connection, or in compliance, with the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act"), the Securities Act of 1933,
as amended (the "Securities Act"), the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Home Owners' Loan Act of 1933, as amended (the
"HOLA"), the Bank Merger Act, as amended (the "BMA"), the FDIA, the NYBL, the
rules and regulations of the OTS, and the environmental, corporation, securities
or "blue sky" laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any other party is
necessary for the consummation by Continental of the Merger or the other
transactions contemplated by this Agreement. As of the date hereof, Continental
knows of no reason why the approvals, consents and waivers of governmental
authorities referred to in this Section 2.03(f) that are required to be obtained
should not be obtained without the imposition of any condition or restriction
referred to in the last sentence in Section 5.01(b).
(ii) The affirmative vote of the holders of two thirds of the
outstanding shares of Continental entitled to vote on the approval of this
Agreement is the only stockholder vote required for approval of this plan and
confirmation of the Merger and the other transactions contemplated hereby.
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(g) REPORTS. (i) As of their respective dates, neither Continental's
Annual Report on Form F-2 for the fiscal year ended December 31, 1996, nor any
other document filed subsequent to December 31, 1996 under Section 13(a), 13(c),
14 or 15(d) of the Exchange Act, each in the form (including exhibits and any
documents specifically incorporated by reference therein) filed with the FDIC or
the Securities and Exchange Commission (the "SEC") (collectively, "Continental's
Reports"), contained or will contain any untrue statement of a material fact or
omitted or will omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. Each of the balance sheets contained
or incorporated by reference in Continental's Reports (including in each case
any related notes and schedules) fairly presented the financial position of the
entity or entities to which it relates as of its date and each of the statements
of income and of changes in stockholders' equity and of cash flows, contained or
incorporated by reference in Continental's Reports (including in each case any
related notes and schedules), fairly presented the results of operations,
stockholders' equity and cash flows, as the case may be, of the entity or
entities to which it relates for the periods set forth therein (subject, in the
case of unaudited interim statements, to normal year-end audit adjustments that
are not material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein.
(ii) Continental and each of its Subsidiaries have each timely
filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file since December 31, 1992 with (A) the NYBD, (B) the FDIC, (C) the National
Association of Securities Dealers, Inc. (the "NASD"), and (D) any other
self-regulatory organization ("SRO"), and have paid all fees and assessments due
and payable in connection therewith.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
Continental's Reports filed on or prior to the date of this Agreement, true and
complete copies of which have been provided by Continental to Reliance, since
December 31, 1996 (i) Continental and its Subsidiaries have not incurred any
liability, except in the ordinary course of their business consistent with past
practice, (ii) Continental and its Subsidiaries have conducted their respective
businesses only in the ordinary and usual course of such businesses and (iii)
there has not been any condition, event, change or occurrence that, individually
or in the aggregate, has had, or is reasonably likely to have, a Material
Adverse Effect on Continental.
(i) TAXES. All federal, state, local and foreign tax returns required
to be filed by or on behalf of Continental or any of its Subsidiaries have been
timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted, and all other taxes required to be paid by Continental or any
of its Subsidiaries, have been paid in full or adequate provision has been made
for any such taxes on Continental's balance sheet (in accordance with generally
accepted accounting principles). For purposes of this Section 2.03(i), the term
"taxes" shall include all income, franchise, gross receipts, real and personal
property, real property transfer and gains, wage and employment taxes. As of the
date of this Agreement, there
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is no audit examination, deficiency, or refund litigation with respect to any
taxes of Continental or any of its Subsidiaries, and no claim has been made by
any authority in a jurisdiction where Continental or any of its Subsidiaries do
not file tax returns that Continental or any such Subsidiary is subject to
taxation in that jurisdiction. All taxes, interest, additions, and penalties due
with respect to completed and settled examinations or concluded litigation
relating to Continental or any of its Subsidiaries have been paid in full or
adequate provision has been made for any such taxes on Continental's balance
sheet (in accordance with generally accepted accounting principles). Continental
and its Subsidiaries have not executed an extension or waiver of any statute of
limitations on the assessment or collection of any material tax due that is
currently in effect. Continental and each of its Subsidiaries has withheld and
paid all taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party, and Continental and each of its Subsidiaries
has timely complied with all applicable information reporting requirements under
Part III, Subchapter A of Chapter 61 of the Internal Revenue Code of 1986, as
amended (the "Code") and similar applicable state and local information
reporting requirements.
(j) ABSENCE OF CLAIMS. Except as set forth in the Continental
Disclosure Letter, no litigation, proceeding, controversy, claim or action
before any court or governmental agency is pending, against Continental or any
of its Subsidiaries and, to the best of Continental's knowledge, no such
litigation, proceeding, controversy, claim or action has been threatened.
(k) ABSENCE OF REGULATORY ACTIONS. Neither Continental nor any of its
Subsidiaries is a party to any cease and desist order, written agreement or
memorandum of understanding with, or a party to any commitment letter or similar
undertaking to, or is subject to any action, proceeding, order or directive by,
or is a recipient of any extraordinary supervisory letter from, federal or state
governmental authorities charged with the supervision or regulation of
depository institutions or depository institution holding companies or engaged
in the insurance of bank and/or savings and loan deposits (the "Government
Regulators") nor has it been advised by any Government Regulator that it is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such action, proceeding, order, directive, written
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar undertaking.
(l) AGREEMENTS. (i) Except as set forth in the Continental Disclosure
Letter and except for the Option Agreement and arrangements made in the ordinary
course of business, Continental and its Subsidiaries are not bound by any
material contract (as defined in Section 335.312 of the rules and regulations of
the FDIC) to be performed after the date hereof that has not been filed with or
incorporated by reference in Continental's Reports. Except as disclosed in
Continental's Reports filed prior to the date of this Agreement, neither
Continental nor any of its Subsidiaries is a party to an oral or written (A)
consulting agreement (other than data processing, software programming and
licensing contracts entered into in the ordinary course of business) not
terminable on thirty (30) days' or less notice, (B) agreement with any executive
officer or other key employee of Continental or any of its Subsidiaries the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving Continental or any of its
Subsidiaries of the nature contemplated by this Agreement or the Option
Agreement,
<PAGE>
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(C) agreement with respect to any employee or director of Continental or any of
its Subsidiaries providing any term of employment or compensation guarantee
extending for a period longer than sixty (60) days or for the payment of in
excess of $30,000 per annum, (D) agreement or plan, including any stock option
plan, stock appreciation rights plan, phantom stock awards or plans, restricted
stock plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
Option Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement or the
Option Agreement or (E) agreement containing covenants that limit the ability of
Continental or any of its Subsidiaries to compete in any line of business or
with any person, or that involve any restriction on the geographic area in
which, or method by which, Continental (including any successor thereof) or any
of its Subsidiaries may carry on its business (other than as may be required by
law or any regulatory agency).
(ii) Neither Continental nor any of its Subsidiaries is in
default under or in violation of any provision, and is not aware of any fact or
circumstance that would constitute a default or violation, of any note, bond,
indenture, mortgage, deed of trust, loan agreement or other agreement to which
it is a party or by which it is bound or to which any of its respective
properties or assets is subject.
(iii) Continental and each of its Subsidiaries owns or
possesses valid and binding license and other rights to use without payment all
patents, copyrights, trade secrets, trade names, servicemarks and trademarks
used in its businesses and neither Continental nor any of its Subsidiaries has
received any notice of conflict with respect thereto that asserts the right of
others. Each of Continental and its Subsidiaries has performed all the
obligations required to be performed by it and are not in default under any
contact, agreement, arrangement or commitment relating to any of the foregoing.
(m) LABOR MATTERS. Except as set forth in the Continental Disclosure
Letter, neither Continental nor any of its Subsidiaries is or has ever been a
party to, or is or has ever been bound by, any collective bargaining agreement,
contract, or other agreement or understanding with a labor union or labor
organization with respect to its employees, nor is Continental or any of its
Subsidiaries the subject of any proceeding asserting that it has committed an
unfair labor practice or seeking to compel it or any such Subsidiary to bargain
with any labor organization as to wages and conditions of employment, nor is the
management of Continental aware of any strike, other labor dispute or
organizational effort involving Continental or any of its Subsidiaries pending
or threatened. Continental and its Subsidiaries are in compliance with
applicable laws regarding employment of employees and retention of independent
contractors and are in compliance with all applicable employment tax laws.
(n) EMPLOYEE BENEFIT PLANS. The Continental Disclosure Letter contains
a complete and accurate list of all pension, retirement, stock option, stock
purchase, stock ownership, savings, stock appreciation right, profit sharing,
deferred compensation, consulting, bonus, group insurance, severance and other
benefit plans, contracts, agreements, arrangements, including, but not limited
to, "employee benefit plans," as defined in Section 3(3) of the Employee
Retirement
<PAGE>
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Income Security Act of 1974, as amended ("ERISA"), incentive and welfare
policies, contracts, plans and arrangements and all trust agreements related
thereto with respect to any present or former directors, officers, or other
employees of Continental or any of its Subsidiaries (hereinafter referred to
collectively as the "Employee Plans"), except for plans, contracts, agreements
or arrangements involving liability or expenses not exceeding $10,000
individually or in the aggregate. All of the Employee Plans comply in all
material respects with all applicable requirements of ERISA, the Code and other
applicable laws; there has occurred no "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the Code) which is likely to result in
the imposition of any penalties or taxes under Section 502(i) of ERISA or
Section 4975 of the Code upon Continental or any of its Subsidiaries. No
liability to the Pension Benefit Guaranty Corporation has been or is expected by
Continental or any of its Subsidiaries to be incurred with respect to any
Employee Plan which is subject to Title IV of ERISA ("Pension Plan"), or with
respect to any "single-employer plan" (as defined in Section 4001(a) of ERISA)
currently or formerly maintained by Continental or any entity which is
considered one employer with Continental under Section 4001(b)(1) of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). No Pension Plan had an
"accumulated funding deficiency" (as defined in Section 302 of ERISA (whether or
not waived)) as of the last day of the end of the most recent plan year ending
prior to the date hereof; the fair market value of the assets of each Pension
Plan exceeds the present value of the "benefit liabilities" (as defined in
Section 4001(a)(16) of ERISA) under such Pension Plan as of the end of the most
recent plan year with respect to the respective Pension Plan ending prior to the
date hereof, calculated on the basis of the actuarial assumptions used in the
most recent actuarial valuation for such Pension Plan as of the date hereof; and
no notice of a "reportable event" (as defined in Section 4043 of ERISA) for
which the 30-day reporting requirement has not been waived has been required to
be filed for any Pension Plan within the 12-month period ending on the date
hereof. Neither Continental nor any Subsidiary of Continental has provided, or
is required to provide, security to any Pension Plan or to any single-employer
plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code. Neither
Continental, its Subsidiaries, nor any ERISA Affiliate has contributed to any
"multiemployer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980. Except for the Continental Bank 401(k) Plan, each Employee
Plan of Continental or of any of its Subsidiaries which is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the Code (a "Qualified Plan") has received a
favorable determination letter from the Internal Revenue Service (the "IRS") and
Continental and its Subsidiaries are not aware of any circumstances likely to
result in revocation of any such favorable determination letter. Each Qualified
Plan which is an "employee stock ownership plan" (as defined in Section
4975(e)(7) of the Code) has satisfied all of the applicable requirements of
Sections 409 and 4975(e)(7) of the Code and the regulations thereunder in all
material respects and any assets of any such Qualified Plan that are not
allocated to participants' individual accounts are pledged as security for, and
may be applied to satisfy, any securities acquisition indebtedness. There is no
pending or, to the knowledge of Continental, threatened litigation,
administrative action or proceeding relating to any Employee Plan. There has
been no announcement or commitment by Continental or any Subsidiary of
Continental to create an additional Employee Plan, or to amend an Employee Plan
except for amendments required by applicable law which do not materially
increase the cost of such Employee Plan; and except as specifically identified
in the Continental Disclosure Letter, Continental and its Subsidiaries do not
have any obligations for post-retirement or
<PAGE>
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post-employment benefits under any Employee Plan that cannot be amended or
terminated upon no more than sixty (60) days' notice without incurring any
liability thereunder, except for coverage required by Part 6 of Title I of ERISA
or Section 4980B of the Code. With respect to Continental or any of its
Subsidiaries, except as specifically identified in the Continental Disclosure
Letter, the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any payment or series of
payments by Continental or any Subsidiary of Continental to any person which is
an "excess parachute payment" (as defined in Section 280G of the Code), increase
or secure (by way of a trust or other vehicle) any benefits payable under any
Employee Plan other than a Qualified Plan, or except to the extent contemplated
by Sections 1.06 and 4.03 accelerate the time of payment or vesting of any such
benefit. With respect to each Employee Plan, Continental has supplied to
Reliance a true and correct copy of (A) the annual report on the applicable form
of the Form 5500 series filed with the IRS for the most recent three plan years,
(B) such Employee Plan, including amendments thereto, (C) each trust agreement,
insurance contract or other funding arrangement relating to such Employee Plan,
including amendments thereto, (D) the most recent summary plan description and
summary of material modifications thereto for such Employee Plan, including
amendments thereto, if the Employee Plan is subject to Title I of ERISA, (E) the
most recent actuarial report or valuation if such Employee Plan is a Pension
Plan and any subsequent changes to the actuarial assumptions contained therein
and (F) the most recent determination letter issued by the IRS if such Employee
Plan is a Qualified Plan.
(o) TERMINATION BENEFITS. The Continental Disclosure Letter contains a
complete and accurate schedule showing as of the date of this Agreement the
monetary amounts payable, subject to a determination of the Reliance Market
Value, as applicable, and identifying the in-kind benefits due under the
Specified Compensation and Benefit Programs (as defined herein) for each Named
Individual (as defined herein) individually. For purposes hereof, "Specified
Compensation and Benefit Programs" shall include all employment agreements,
change in control agreements, severance or special termination agreements,
severance plans, pension, retirement or deferred compensation plans for
non-employee directors, supplemental executive retirement programs, tax
indemnification agreements, outplacement programs, cash bonus programs, stock
appreciation right, phantom stock or stock unit plan, and health, life,
disability and other insurance or welfare plans, but shall not include any
tax-qualified pension, profit-sharing or employee stock ownership plan. For
purposes hereof, "Named Individual" shall include each non-employee director of
Continental or any of its subsidiaries and each executive officer of
Continental.
(p) TITLE TO ASSETS. Continental and each of its Subsidiaries has good
and marketable title to its properties and assets other than property as to
which it is lessee, in which case the related lease is valid and in full force
and effect. Each lease pursuant to which Continental or any of its Subsidiaries
is lessor is valid and in full force and effect and no lessee under any such
lease is in default or in violation of any provisions of any such lease. All
material tangible properties of Continental and each of its Subsidiaries are in
a good state of maintenance and repair, conform with all applicable ordinances,
regulations and zoning laws and are considered by Continental to be adequate for
the current business of Continental and its Subsidiaries.
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(q) COMPLIANCE WITH LAWS. Continental and each of its Subsidiaries has
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, federal, state, local
and foreign governmental or regulatory bodies that are required in order to
permit it to carry on its business as it is presently conducted; all such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect, and, to the best knowledge of Continental, no suspension or
cancellation of any of them is threatened. Since the date of its incorporation,
the corporate affairs of Continental have not been conducted in violation of any
law, ordinance, regulation, order, writ, rule, decree or approval of any federal
or state regulatory authority having jurisdiction over insured depositary
institutions check cashing services or their holding companies, the SEC, the
NASD, or any other SRO (each, a "Governmental Entity"). The business of
Continental and its Subsidiaries are not being conducted in violation of any
law, ordinance, regulation, order, writ, rule, decree or condition to approval
of any Governmental Entity.
(r) FEES. Other than financial advisory services performed for
Continental by Sandler O'Neill & Partners, L.P., pursuant to an agreement, a
true and complete copy of which has been previously delivered to Reliance,
neither Continental nor any of its Subsidiaries, nor any of their respective
officers, directors, employees or agents, has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions, or finder's fees, and no broker or finder has acted directly or
indirectly for Continental or any Subsidiary of Continental, in connection with
the Agreement or the transactions contemplated hereby.
(s) ENVIRONMENTAL MATTERS. (i) With respect to Continental and each of
its Subsidiaries:
(A) Each of Continental and its Subsidiaries, the
Participation Facilities, and, to Continental's knowledge, the Loan
Properties (each as defined herein) are, and have been, in substantial
compliance with all Environmental Laws (as defined herein);
(B) There is no suit, claim, action, demand,
executive or administrative order, directive, investigation or
proceeding pending or, to Continental's knowledge, threatened, before
any court, governmental agency or board or other forum against it or
any of its Subsidiaries or any current or, to Continental's knowledge,
former Participation Facility (x) for alleged noncompliance (including
by any predecessor) with, or liability under, any Environmental Law or
(y) relating to the Release (as defined herein) into the environment of
any Hazardous Material (as defined herein), whether or not occurring at
or on a site owned, leased or operated by it or any of its Subsidiaries
or any Participation Facility;
(C) To Continental's knowledge, there is no suit,
claim, action, demand, executive or administrative order, directive,
investigation or proceeding pending or threatened, before any court,
governmental agency or board or other forum relating to or against any
Loan Property (or Continental or any of its Subsidiaries in respect of
such Loan Property) (x) relating to alleged noncompliance (including by
any predecessor) with, or liability under, any Environmental Law or (y)
relating to the Release into the
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environment of any Hazardous Material whether or not occurring at or
on a site owned, leased or operated by a Loan Property;
(D) To Continental's knowledge, the properties
currently or formerly owned or operated by Continental or any of its
Subsidiaries (including, without limitation, soil, groundwater or
surface water on, under or adjacent to the properties, and buildings
thereon) do not contain any Hazardous Material other than in compliance
with applicable Environmental Law (PROVIDED, however, that with respect
to properties formerly owned or operated by Continental or any of its
Subsidiaries, such representation is limited to the period Continental
or any such Subsidiary owned or operated such properties);
(E) None of Continental or any of its Subsidiaries
has received any notice, demand letter, executive or administrative
order, directive or request for information from any federal, state,
local or foreign governmental entity or any third party relating to
Hazardous Materials or Remediation (as defined herein) thereof or
indicating that it may be in violation of, or liable under, any
Environmental Law, or any actual or, to Continental's knowledge,
potential administrative or judicial proceedings in connection with any
of the foregoing;
(F) To Continental's knowledge, there are no
underground storage tanks on, in or under any properties currently or
formerly owned or operated by Continental or any of its Subsidiaries,
any Participation Facility or any Loan Property and no underground
storage tanks have been closed or removed from any properties currently
or formerly owned or operated by Continental or any of its
Subsidiaries, any Participation Facility or any Loan Property which are
or have been in the ownership of Continental or any of its
Subsidiaries; and
(G) To Continental's knowledge, during the period of
(l) Continental or any of its Subsidiaries' ownership or operation of
any of their respective current or formerly owned properties, (m)
Continental's or any of its Subsidiaries' participation in the
management of any Participation Facility, or (n) its or any of its
Subsidiaries' holding of a security interest in a Loan Property, there
has been no Release and there is currently no threatened Release of
Hazardous Material in, on, under, affecting or migrating to such
properties. To Continental's knowledge, prior to the period of (x)
Continental's or any of its Subsidiaries' ownership or operation of any
of their respective current properties, (y) Continental's or any of its
Subsidiaries' participation in the management of any Participation
Facility, or (z) Continental's or any of its Subsidiaries' holding of a
security interest in a Loan Property, there was no Release of Hazardous
Material in, on, under, affecting or migrating to any such property,
Participation Facility or Loan Property.
(ii) The following definitions apply for purposes of this
Section 2.03(s): (u) "Loan Property" means any property in which the applicable
party (or a Subsidiary of it) holds a security interest, and, where required by
the context, includes the owner or operator of such property, but only with
respect to such property; (v) "Participation Facility" means any facility in
which the applicable party (or a Subsidiary of it) participates in the
management (including all
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property held as trustee or in any other fiduciary capacity) and, where required
by the context, includes the owner or operator of such property, but only with
respect to such property; (w) "Environmental Law" means (i) any federal, state
or local law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, directive, executive or
administrative order, judgment, decree, injunction, legal requirement or
agreement with any governmental entity, (A) relating to the protection,
preservation or restoration of the environment (which includes, without
limitation, air, water vapor, surface water, groundwater, drinking water supply,
structures, soil, surface land, subsurface land, plant and animal life or any
other natural resource), or to human health or safety as it relates to Hazardous
Materials, or (B) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of, Hazardous Materials, in each case as amended and as now in
effect. The term Environmental Law includes, without limitation, (i) the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act, the Federal Water Pollution
Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the
Federal Resource Conservation and Recovery Act of 1976 (including, but not
limited to, the Hazardous and Solid Waste Amendments thereto and Subtitle I
relating to underground storage tanks), the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, the Federal Occupational Safety and Health Act of 1970 as it
relates to Hazardous Materials, the Federal Hazardous Substances Transportation
Act, the Emergency Planning and Community Right-To-Know Act, the Safe Drinking
Water Act, the Endangered Species Act, the National Environmental Policy Act,
the Rivers and Harbors Appropriation Act or any so-called "Superfund" or
"Superlien" law, each as amended and as now or hereafter in effect, (ii) any
common law or equitable doctrine (including, without limitation, injunctive
relief and tort doctrines such as negligence, nuisance, trespass and strict
liability) that may impose liability or obligations for injuries or damages due
to, or threatened as a result of, the presence of or exposure to any Hazardous
Material and (iii) any state and local laws, statutes, ordinances, rules,
regulations and the like, as well as common law: conditioning transfer of
property upon a negative declaration or other approval of a governmental
authority of the environmental condition of the property; requiring notification
or disclosure of Releases of "Hazardous Substances" or other environmental
condition of the Loan Property to any governmental authority or other person or
entity, whether or not in connection with transfer of title to or interest in
property; imposing conditions or requirements in connection with permits or
other authorization for lawful activity; relating to nuisance, trespass or other
causes of action related to the Loan Property; and relating to wrongful death,
personal injury, or property or other damage in connection with any physical
condition or use of the Loan Property; (x) "Hazardous Material" means any
substance (whether solid, liquid or gas) which is listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, under any Environmental Law, whether by type or by quantity,
including any substance containing any such substance as a component. Hazardous
Material includes, without limitation, any toxic waste, pollutant, contaminant,
hazardous substance, toxic substance, hazardous waste, special waste, extremely
hazardous wastes, or words of similar meanings or regulatory effect under any
Environmental Laws, including, but not limited to, oil or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos-containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyl, flammables and explosives; (y) "Release" of any
Hazardous Material includes, but is
<PAGE>
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not limited to, any release, deposit, discharge, emission, leaking, spilling,
seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping,
disposing or other movement of Hazardous Materials in violation of or requiring
action under any applicable Environmental Law; and (z) "Remediation" includes,
but is not limited to, any response, remedial, removal, or corrective action,
any activity to cleanup, detoxify, decontaminate, contain or otherwise remediate
any Hazardous Material, any actions to prevent, cure or mitigate any Release of
Hazardous Materials, any action to comply with any Environmental Laws or with
any permits issued pursuant thereto, any inspection, investigation, study,
monitoring, assessment, audit, sampling and testing, laboratory or other
analysis, or evaluation relating to any Hazardous Materials.
(t) LOAN PORTFOLIO; ALLOWANCE; ASSET QUALITY. (i) With respect to
each loan owned by Continental or its Subsidiaries in whole or in part (each, a
"Loan"), to the best knowledge of Continental:
(A) the note and the related security documents are
each legal, valid and binding obligations of the maker or obligor
thereof, enforceable against such maker or obligor in accordance with
their terms;
(B) neither Continental nor any of its Subsidiaries
nor any prior holder of a Loan has modified the note or any of the
related security documents in any material respect or satisfied,
cancelled or subordinated the note or any of the related security
documents except as otherwise disclosed by documents in the applicable
Loan file;
(C) Continental or a Subsidiary is the sole holder of
legal and beneficial title to each Loan (or Continental's applicable
participation interest, as applicable), except as otherwise referenced
on the books and records of Continental;
(D) the note and the related security documents,
copies of which are included in the Loan files, are true and correct
copies of the documents they purport to be and have not been suspended,
amended, modified, cancelled or otherwise changed except as otherwise
disclosed by documents in the applicable Loan file;
(E) there is no pending, threatened condemnation
proceeding or similar proceeding affecting the property which serves as
security for a Loan, except as otherwise referenced on the books and
records of Continental;
(F) there is no litigation or proceeding pending,
threatened, relating to the property which serves as security for a
Loan that would have a Material Adverse Effect upon the related Loan;
and
(G) with respect to a Loan held in the form of a
participation, the participation documentation is legal, valid, binding
and enforceable.
(ii) The allowance for possible losses reflected in
Continental's audited statement of condition at December 31, 1996 was, and the
allowance for possible losses shown
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on the balance sheets in Continental's Reports for periods ending after December
31, 1996 will be, adequate, as of the dates thereof, under generally accepted
accounting principles applicable to commercial banks consistently applied, and
since December 31, 1996 no regulatory agency has requested or required that
Continental increase any of such amounts.
(iii) The Continental Disclosure Letter sets forth by category
the amounts of all loans, leases, advances, credit enhancements, other
extensions of credit, commitments and interest-bearing assets of Continental and
its Subsidiaries that have been classified by any bank examiner (whether
regulatory or internal) as "Other Loans Specially Mentioned," "Special Mention,"
"Substandard," "Doubtful," "Loss," "Classified," "Criticized," "Credit Risk
Assets," "Concerned Loans" (in the latter two cases, to the extent available) or
words of similar import, and Continental and its Subsidiaries shall promptly
after the end of any month inform Reliance of any such classification arrived at
any time after the date hereof. The Other Real Estate Owned ("OREO") included in
any non-performing assets of Continental or any of its Subsidiaries is carried
net of reserves at the lower of cost or fair value, less estimated selling
costs, based on current independent appraisals or evaluations or current
management appraisals or evaluations; PROVIDED, however, that "current" shall
mean within the past 12 months.
(u) DEPOSITS. None of the deposits of Continental or any of its
Subsidiaries is a "brokered" deposit.
(v) ANTITAKEOVER PROVISIONS INAPPLICABLE. Continental and its
Subsidiaries have taken all actions required to exempt Continental, the
Agreement and the Merger and the Option Agreement from any provisions of an
antitakeover nature in their organization certificate and bylaws and the
provisions of any federal or state "antitakeover," "fair price," "moratorium,"
"control share acquisition" or similar laws or regulations.
(w) MATERIAL INTERESTS OF CERTAIN PERSONS. Except as disclosed in
Continental's Proxy Statement for its 1997 Annual Meeting of Stockholders, no
officer or director of Continental, or any "associate" (as such term is defined
in Rule 12b-2 under the Exchange Act) of any such officer or director, has any
material interest in any material contract or property (real or personal),
tangible or intangible, used in or pertaining to the business of Continental or
any of its Subsidiaries. No such interest has been created or modified since the
date of the last regulatory examination of Continental.
(x) INSURANCE. Continental and its Subsidiaries are presently insured,
and since December 31, 1994, have been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured. All of the insurance policies and bonds
maintained by Continental and its Subsidiaries are in full force and effect,
Continental and its Subsidiaries are not in default thereunder and all material
claims thereunder have been filed in due and timely fashion.
(y) INVESTMENT SECURITIES; BORROWINGS. (i) Except for investments in
Federal Home Loan Bank ("FHLB") Stock and pledges to secure FHLB borrowings and
reverse repurchase
<PAGE>
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agreements entered into in arms-length transactions pursuant to normal
commercial terms and conditions and entered into in the ordinary course of
business and restrictions that exist for securities to be classified as "held to
maturity," none of the investments reflected in the consolidated balance sheet
of Continental included in Continental's Report on Form F-2 for the year ended
December 31, 1996, and none of the investment securities held by it or any of
its Subsidiaries since December 31, 1996, is subject to any restriction
(contractual or statutory) that would materially impair the ability of the
entity holding such investment freely to dispose of such investment at any time.
(ii) Except as set forth in the Continental Disclosure Letter,
neither Continental nor any Subsidiary is a party to or has agreed to enter into
an exchange-traded or over-the-counter equity, interest rate, foreign exchange
or other swap, forward, future, option, cap, floor or collar or any other
contract that is not included on the consolidated statements of condition and is
a derivative contract (including various combinations thereof) (each, a
"Derivatives Contract") or owns securities that (A) are referred to generically
as "structured notes," "high risk mortgage derivatives," "capped floating rate
notes" or "capped floating rate mortgage derivatives" or (B) are likely to have
changes in value as a result of interest or exchange rate changes that
significantly exceed normal changes in value attributable to interest or
exchange rate changes, except for those Derivatives Contracts and other
instruments legally purchased or entered into in the ordinary course of
business, consistent with safe and sound banking practices and regulatory
guidance, and listed (as of the date hereof) in the Continental Disclosure
Letter or disclosed in Continental's Reports filed on or prior to the date
hereof.
(iii) Set forth in the Continental Disclosure Letter is a true
and correct list of Continental's borrowed funds (excluding deposit accounts) as
of the date hereof.
(z) INDEMNIFICATION. Except as provided in Continental's employment
agreements or the organization certificate or bylaws of Continental, neither
Continental nor any Continental Subsidiary is a party to any indemnification
agreement with any of its present or future directors, officers, employees,
agents or other persons who serve or served in any other capacity with any other
enterprise at the request of Continental (a "Covered Person"), and, except as
set forth in the Continental Disclosure Letter, to the best knowledge of
Continental, there are no claims for which any Covered Person would be entitled
to indemnification under the organization certificate or bylaws of Continental
or any Subsidiary of Continental, applicable law regulation or any
indemnification agreement.
(aa) BOOKS AND RECORDS. The books and records of Continental and its
Subsidiaries have been, and are being, maintained in accordance with applicable
legal and accounting requirements (including generally accepted accounting
principles ("GAAP")), and reflect in all material respects the substance of
events and transactions that should be included therein.
(bb) CORPORATE DOCUMENTS. Continental has delivered to Reliance true
and complete copies of its organization certificate and bylaws. The minute books
of Continental constitute a complete and correct record of all actions taken by
the board of directors of Continental (and each committee thereof) and the
stockholders of Continental. The minute books of each of
<PAGE>
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Continental's Subsidiaries constitutes a complete and correct record of all
actions taken by the respective boards of directors (and each committee thereof)
and the stockholders of each such Subsidiary.
(cc) TAX TREATMENT OF THE MERGER. As of the date hereof, Continental
has no knowledge of any fact or circumstance that would prevent the transactions
contemplated by this Agreement from qualifying as a tax-free reorganization
under the Code.
SECTION 2.04 REPRESENTATIONS AND WARRANTIES OF RELIANCE. Subject to
Sections 2.01 and 2.02, Reliance represents and warrants to Continental that,
except as specifically disclosed in the Disclosure Letter of Reliance:
(a) ORGANIZATION. (i) Reliance is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and is a savings association holding company duly registered with the OTS under
the HOLA. Reliance Bank is a savings bank duly incorporated, validly existing
and in good standing under the laws of the United States of America. Each
Subsidiary of Reliance Bank is a corporation, limited liability company or
partnership duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization. Each of Reliance, Reliance
Bank and Reliance Bank's Subsidiaries has all requisite power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. The only Subsidiary of Reliance is Reliance Bank.
(ii) Reliance, Reliance Bank and each Subsidiary of Reliance
Bank is duly qualified and is in good standing to do business in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification necessary.
(iii) The Reliance Disclosure Letter sets forth all of the
Subsidiaries of Reliance Bank and all entities (whether corporations,
partnerships, or similar organizations), including the corresponding percentage
ownership in which Reliance Bank owns, directly or indirectly, 5% or more of the
ownership interests as of the date of this Agreement and indicates for each
Subsidiary, as of the such date, its jurisdiction of organization and the
jurisdiction wherein it is qualified to do business. All such Subsidiaries and
ownership interests are in compliance with all applicable laws, rules and
regulations relating to direct investments in equity ownership interests.
Reliance Bank owns, either directly or indirectly, all of the outstanding
capital stock of each of its Subsidiaries. No Subsidiary of Reliance Bank is an
"insured depositary institution" as defined in the FDIA, and applicable
regulations thereunder. All of the shares of capital stock of each of the
Subsidiaries held by Reliance Bank or by another Subsidiary of Reliance Bank are
fully paid, nonassessable and not subject to any preemptive rights and are owned
by Reliance Bank or a Subsidiary of Reliance Bank free and clear of any claims,
liens, encumbrances or restrictions (other than those imposed by applicable
federal and state securities laws) and there are no agreements or understandings
with respect to the voting or disposition of any such shares.
(iv) The deposits of Reliance Bank are insured by the Savings
Association Insurance Fund of the FDIC to the extent provided in the FDIA.
<PAGE>
-22-
(b) CAPITAL STRUCTURE. (i) The authorized capital stock of Reliance
consists of 20,000,000 shares of Reliance Common Stock and 4,000,000 shares of
preferred stock, par value $.01 per share (the "Reliance Preferred Stock"). As
of the date of this Agreement, (A) 10,750,820 shares of Reliance Common Stock
were issued and 8,763,369 were outstanding, (B) no shares of Reliance Preferred
Stock were outstanding; (C) no shares of Reliance Preferred Stock were reserved
for issuance and (D) 1,987,451 shares of Reliance Common Stock were held by
Reliance in its treasury or by its subsidiaries. The authorized capital stock of
Reliance Bank consists of 20,000,000 shares of common stock, par value $1.00 per
share and 4,000,000 shares of preferred stock, par value $1.00 per share. As of
the date of this Agreement, 1,000 shares of such common stock were outstanding,
no shares of such preferred stock were outstanding and all outstanding shares of
such common stock were, and as of the Effective Time will be, owned by Reliance.
All outstanding shares of capital stock of Reliance and Reliance Bank are,
validly issued, fully paid and nonassessable and not subject to any preemptive
rights and, with respect to shares held by Reliance in its treasury or by its
Subsidiaries, are free and clear of all liens, encumbrances or restrictions
(other than those imposed by applicable federal or state securities laws) and
there are no agreements or understandings with respect to the voting or
disposition of such shares.
(ii) As of the date of this Agreement, except for this
Agreement, and as set forth in Reliance's Reports (as defined in Section
2.04(h)), neither Reliance nor any of its Subsidiaries has or is bound by any
outstanding options, warrants, calls, rights, convertible securities,
commitments or agreements of any character obligating Reliance or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, any additional shares of capital stock of Reliance or any of its
Subsidiaries or obligating Reliance or any of its Subsidiaries to grant, extend
or enter into any such option, warrant, call, right, convertible security,
commitment or agreement. As of the date hereof, there are no outstanding
contractual obligations of Reliance or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any shares of capital stock of Reliance or any of
its Subsidiaries.
(c) AUTHORITY. Each of Reliance and Reliance Bank has the requisite
corporate power and authority and subject to receipt of all required regulatory
or governmental approvals as contemplated by Section 5.01(b) of this Agreement,
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement, and the consummation of the transactions contemplated hereby,
have been duly authorized by all necessary corporate actions on the part of
Reliance and Reliance Bank. This Agreement has been duly executed and delivered
by Reliance and Reliance Bank and constitutes a valid and binding obligation of
Reliance and Reliance Bank, enforceable in accordance with its terms subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
and remedies generally and subject, as to enforceability, to general principles
of equity, whether applied in a court of law or a court of equity.
(d) [Intentionally Omitted.]
(e) NO VIOLATIONS. The execution, delivery and performance of this
Agreement by Reliance or Reliance Bank do not, and the consummation of the
transactions contemplated hereby will not, constitute (i) a breach or violation
of, or a default under, any law, including any
<PAGE>
-23-
Environmental Law rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of
Reliance or Reliance Bank or to which Reliance or Reliance Bank (or any of their
respective properties) is subject, or enable any person to enjoin the Merger or
the other transactions contemplated hereby, (ii) a breach or violation of, or a
default under, the certificate or articles of incorporation or bylaws of
Reliance or Reliance Bank or (iii) a breach or violation of, or a default under
(or an event which with due notice or lapse of time or both would constitute a
default under), or result in the termination of, accelerate the performance
required by, or result in the creation of any lien, pledge, security interest,
charge or other encumbrance upon any of the properties or assets of Reliance or
Reliance Bank under, any of the terms, conditions or provisions of any note,
bond, indenture, deed of trust, loan agreement or other agreement, instrument or
obligation to which Reliance or Reliance Bank is a party, or to which any of its
respective properties or assets may be bound or affected; and the consummation
of the transactions contemplated hereby will not require any approval, consent
or waiver under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the approval, consent or waiver of any other
party to any such agreement, indenture or instrument, other than the required
approvals, consents and waivers of governmental authorities referred to in
Section 5.01(b). Reliance and Reliance Bank know of no reason why the approvals,
consents and waivers of governmental authorities referred to in Section 5.01(b)
should not be obtained without the imposition of any material conditions or
restrictions.
(f) CONSENTS. Except as referred to herein or in connection, or in
compliance, with the provisions of the HSR Act, the Securities Act, the Exchange
Act, the HOLA, the BMA, the FDIA, the NYBL the rules and regulations of the OTS,
and the environmental, corporation, securities or blue sky laws or regulations
of the various states, no filing or registration with, or authorization, consent
or approval of, any other party is necessary for the consummation by Reliance or
Reliance Bank of the Merger or the other transactions contemplated by this
Agreement. As of the date hereof, Reliance knows of no reason why the approvals,
consents and waivers of governmental authorities referred to in this Section
2.04(f) that are required to be obtained should not be obtained without the
imposition of any material condition or restriction referred to in the last
sentence of Section 5.01(b).
(g) [Intentionally Omitted.]
(h) REPORTS. (i) As of their respective dates, neither Reliance's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996, nor any
other document filed subsequent to June 30, 1996 under Section 13(a), 13(c), 14
or 15(d) of the Exchange Act, each in the form (including exhibits and any
documents specifically incorporated by reference therein) filed with the SEC
(collectively, "Reliance's Reports"), contained or will contain any untrue
statement of a material fact or omitted or will omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading. Each
of the balance sheets contained or incorporated by reference in Reliance's
Reports (including in each case any related notes and schedules) fairly
presented the financial position of the entity or entities to which it relates
as of its date and each of the statements of income and of changes in
stockholders' equity and of cash flows, contained or incorporated by reference
in Reliance's Reports (including in each case any related notes and schedules),
fairly
<PAGE>
-24-
presented the results of operations, stockholders' equity and cash flows, as the
case may be, of the entity or entities to which it relates for the periods set
forth therein (subject, in the case of unaudited interim statements, to normal
year-end audit adjustments that are not material in amount or effect), in each
case in accordance with generally accepted accounting principles consistently
applied during the periods involved, except as may be noted therein.
(ii) Reliance and each of its Subsidiaries have each timely
filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file since December 31, 1992 with (A) the OTS, (B) the SEC, (C) the NASD and (D)
any other self-regulatory organization, and have paid all fees and assessments
due and payable in connection therewith.
(i) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
Reliance's Reports filed on or prior to the date of this Agreement, true and
complete copies of which have been provided by Reliance to Continental, since
June 30, 1996, (i) Reliance and its Subsidiaries have not incurred any
liability, except in the ordinary course of their business consistent with past
practice, (ii) Reliance and its Subsidiaries have conducted their respective
businesses only in the ordinary and usual course of such businesses and (iii)
there has not been any condition, event, change or occurrence that, individually
or in the aggregate, has had, or is reasonably likely to have, a Material
Adverse Effect on Reliance.
(j) ABSENCE OF CLAIMS. Except as set forth in Reliance's Reports, no
litigation, proceeding or controversy claim or action before any court or
governmental agency is pending against Reliance, Reliance Bank or any of its
Subsidiaries, and, to the best of Reliance's knowledge, no such litigation,
proceeding, controversy, claim or action has been threatened.
(k) ABSENCE OF REGULATORY ACTIONS. Neither Reliance, Reliance Bank nor
any of its Subsidiaries is a party to any cease and desist order, written
agreement or memorandum of understanding with, or a party to any commitment
letter or similar written undertaking to, or is subject to any action,
proceeding order or directive by, or is a recipient of any extraordinary
supervisory letter from any Government Regulator, nor has it been advised by any
Government Regulator that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter or similar written undertaking.
(l) RELIANCE COMMON STOCK. The shares of Reliance Common Stock to be
issued pursuant to this Agreement, when issued in accordance with the terms of
this Agreement, will be duly authorized, validly issued, fully paid and
non-assessable and subject to no preemptive rights.
(m) LABOR MATTERS. Neither Reliance, Reliance Bank nor any of its
Subsidiaries is or has ever been a party to, or is or has ever been bound by,
any collective bargaining agreement, contract, or other agreement or
understanding with a labor union or labor organization with respect to its
employees, nor is Reliance, Reliance Bank or any of its Subsidiaries the subject
of any proceeding asserting that it has committed an unfair labor practice or
seeking to compel Reliance, Reliance Bank or any of its Subsidiaries to bargain
with any labor organization as to
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wages and conditions of employment, nor is the management of Reliance aware of
any strike, other labor dispute or organizational effort involving Reliance,
Reliance Bank or any of its Subsidiaries pending or threatened. Reliance,
Reliance Bank and its Subsidiaries are in compliance with applicable laws
regarding employment of employees and retention of independent contractors, and
are in compliance with applicable employment tax laws.
(n) EMPLOYEE BENEFIT PLANS. All pension, retirement, stock option,
stock purchase, stock ownership, savings, stock appreciation right, profit
sharing, deferred compensation, consulting, bonus, group insurance, severance
and other benefit plans, contracts, agreements, arrangements, including, but not
limited to, "employee benefit plans," as defined in Section 3(3) of ERISA,
incentive and welfare policies, contracts, plans and arrangements and all trust
agreements related thereto with respect to any present or former directors,
officers, or other employees of Reliance or any of its Subsidiaries are
hereinafter referred to collectively as the "Reliance Employee Plans". All of
Reliance Employee Plans comply in all material respects with all applicable
requirements of ERISA, the Code and other applicable laws; there has occurred no
"prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of
the Code) which is likely to result in the imposition of any penalties or taxes
under Section 502(i) of ERISA or Section 4975 of the Code upon Reliance or any
of its subsidiaries. No liability, to the Pension Benefit Guaranty Corporation,
has been or is expected by Reliance or any of its Subsidiaries to be incurred
with respect to any Reliance Employee Plan which is subject to Title IV of ERISA
("Reliance Pension Plan"), or with respect to any "single-employer plan" (as
defined in Section 4001(a) of ERISA) currently or formerly maintained by
Reliance or any entity which is considered one employer with Reliance under
Section 4001(b)(1) of ERISA or Section 414 of the Code (an "ERISA Affiliate").
No Reliance Pension Plan had an "accumulated funding deficiency" (as defined in
Section 302 of ERISA (whether or not waived)) as of the last day of the end of
the most recent plan year ending prior to the date hereof; the fair market value
of the assets of each Reliance Pension Plan exceeds the present value of the
"benefit liabilities" (as defined in Section 4001(a)(16) of ERISA) under such
Reliance Pension Plan as of the end of the most recent plan year with respect to
the respective Reliance Pension Plan ending prior to the date hereof, calculated
on the basis of the actuarial assumptions used in the most recent actuarial
valuation for such Reliance Pension Plan as of the date hereof; and no notice of
a "reportable event" (as defined in Section 4043 of ERISA) for which the 30-day
reporting requirement has not been waived has been required to be filed for any
Reliance Pension Plan within the 12-month period ending on the date hereof.
Neither Reliance nor any Subsidiary of Reliance has provided, or is required to
provide, security to any Reliance Pension Plan or to any single-employer plan of
an ERISA Affiliate pursuant to Section 401(a)(29) of the Code. Neither Reliance,
its Subsidiaries, nor any ERISA Affiliate has contributed to any "multiemployer
plan", as defined in Section 3(37) of ERISA, on or after September 26, 1980.
Each Reliance Employee Plan of Reliance or of any of its Subsidiaries which is
an "employee pension benefit plan" (as defined in Section 3(2) of ERISA) and
which is intended to be qualified under Section 401(a) of the Code (a "Reliance
Qualified Plan") has received a favorable determination letter from the IRS and
Reliance and its Subsidiaries are not aware of any circumstances likely to
result in revocation of any such favorable determination letter. There is no
pending or, to the knowledge of Reliance, threatened litigation, administrative
action or proceeding relating to any Reliance Employee Plan.
<PAGE>
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(o) COMPLIANCE WITH LAWS. Reliance, Reliance Bank and each of its
Subsidiaries has all permits, licenses, certificates of authority, orders and
approvals of, and has made all filings, applications and registrations with,
federal, state, local and foreign governmental or regulatory bodies that are
required in order to permit it to carry on its business as it is presently
conducted; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect, and, to the best knowledge of Reliance,
no suspension or cancellation of any of them is threatened. Since the date of
its incorporation, the corporate affairs of Reliance have not been conducted in
violation of any law, ordinance, regulation, order, writ, rule, decree or
approval of any Governmental Entity. The business of Reliance and its
Subsidiaries are not being conducted in violation of any law, ordinance,
regulation, order, writ, rule or decree approval of any Governmental Entity.
(p) FEES. Other than the financial advisory services performed for
Reliance by Keefe, Bruyette & Woods, Inc., pursuant to an agreement, a true and
complete copy of which will be delivered to Continental, neither Reliance,
Reliance Bank nor any of its Subsidiaries, nor any of their respective officers,
directors, employees or agents, has employed any broker or finder or incurred
any liability for any financial advisory fees, brokage fees, commissions, or
finder's fee, and no broker or finder has acted directly or indirectly for the
purchase of any Subsidiary of Reliance, in connection with the Agreement or the
transactions contemplated hereby.
(q) ENVIRONMENTAL MATTERS. (i) With respect to Reliance and each of its
Subsidiaries:
(A) Each of Reliance and its Subsidiaries, the
Participation Facilities, and, to Reliance's knowledge, the Loan
Properties (each as defined herein) are, and have been, in substantial
compliance with all Environmental Laws (as defined herein);
(B) There is no suit, claim, action, demand,
executive or administrative order, directive, investigation or
proceeding pending or, to Reliance's knowledge, threatened, before any
court, governmental agency or board or other forum against it or any of
its Subsidiaries or any current or, to Reliance's knowledge, former
Participation Facility (x) for alleged noncompliance (including by any
predecessor) with, or liability under, any Environmental Law or (y)
relating to the Release (as defined herein) into the environment of any
Hazardous Material (as defined herein), whether or not occurring at or
on a site owned, leased or operated by it or any of its Subsidiaries or
any Participation Facility;
(C) To Reliance's knowledge, there is no suit, claim,
action, demand, executive or administrative order, directive,
investigation or proceeding pending or threatened, before any court,
governmental agency or board or other forum relating to or against any
Loan Property (or Reliance or any of its Subsidiaries in respect of
such Loan Property) (x) relating to alleged noncompliance (including by
any predecessor) with, or liability under, any Environmental Law or (y)
relating to the Release into the environment of any Hazardous Material
whether or not occurring at or on a site owned, leased or operated by a
Loan Property;
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(D) To Reliance's knowledge, the properties currently
or formerly owned or operated by Reliance or any of its Subsidiaries
(including, without limitation, soil, groundwater or surface water on,
under or adjacent to the properties, and buildings thereon) do not
contain any Hazardous Material other than in compliance with applicable
Environmental Law (PROVIDED, however, that with respect to properties
formerly owned or operated by Reliance or any of its Subsidiaries, such
representation is limited to the period Reliance or any such Subsidiary
owned or operated such properties);
(E) None of Reliance or any of its Subsidiaries has
received any notice, demand letter, executive or administrative order,
directive or request for information from any federal, state, local or
foreign governmental entity or any third party relating to Hazardous
Materials or Remediation (as defined herein) thereof or indicating that
it may be in violation of, or liable under, any Environmental Law, or
any actual or, to Reliance's knowledge, potential administrative or
judicial proceedings in connection with any of the foregoing;
(F) To Reliance's knowledge, there are no underground
storage tanks on, in or under any properties currently or formerly
owned or operated by Reliance or any of its Subsidiaries, any
Participation Facility or any Loan Property and no underground storage
tanks have been closed or removed from any properties currently or
formerly owned or operated by Reliance or any of its Subsidiaries, any
Participation Facility or any Loan Property which are or have been in
the ownership of Reliance or any of its Subsidiaries; and
(G) To Reliance's knowledge, during the period of (l)
Reliance or any of its Subsidiaries' ownership or operation of any of
their respective current or formerly owned properties, (m) Reliance's
or any of its Subsidiaries' participation in the management of any
Participation Facility, or (n) its or any of its Subsidiaries' holding
of a security interest in a Loan Property, there has been no Release
and there is currently no threatened Release of Hazardous Material in,
on, under, affecting or migrating to such properties. To Reliance's
knowledge, prior to the period of (x) Reliance's or any of its
Subsidiaries' ownership or operation of any of their respective current
properties, (y) Reliance's or any of its Subsidiaries' participation in
the management of any Participation Facility, or (z) Reliance's or any
of its Subsidiaries' holding of a security interest in a Loan Property,
there was no Release of Hazardous Material in, on, under, affecting or
migrating to any such property, Participation Facility or Loan
Property.
(ii) The following definitions apply for purposes of this
Section 2.04(q): (u) "Loan Property" means any property in which the applicable
party (or a Subsidiary of it) holds a security interest, and, where required by
the context, includes the owner or operator of such property, but only with
respect to such property; (v) "Participation Facility" means any facility in
which the applicable party (or a Subsidiary of it) participates in the
management (including all property held as trustee or in any other fiduciary
capacity) and, where required by the context, includes the owner or operator of
such property, but only with respect to such property; (w) "Environmental Law"
means (i) any federal, state or local law, statute, ordinance, rule, regulation,
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code, license, permit, authorization, approval, consent, legal doctrine, order,
directive, executive or administrative order, judgment, decree, injunction,
legal requirement or agreement with any governmental entity, (A) relating to the
protection, preservation or restoration of the environment (which includes,
without limitation, air, water vapor, surface water, groundwater, drinking water
supply, structures, soil, surface land, subsurface land, plant and animal life
or any other natural resource), or to human health or safety as it relates to
Hazardous Materials, or (B) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of, Hazardous Materials, in each case as amended
and as now in effect. The term Environmental Law includes, without limitation,
(i) the Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water
Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean
Water Act, the Federal Resource Conservation and Recovery Act of 1976
(including, but not limited to, the Hazardous and Solid Waste Amendments thereto
and Subtitle I relating to underground storage tanks), the Federal Solid Waste
Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide,
Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of
1970 as it relates to Hazardous Materials, the Federal Hazardous Substances
Transportation Act, the Emergency Planning and Community Right-To-Know Act, the
Safe Drinking Water Act, the Endangered Species Act, the National Environmental
Policy Act, the Rivers and Harbors Appropriation Act or any so-called
"Superfund" or "Superlien" law, each as amended and as now or hereafter in
effect, (ii) any common law or equitable doctrine (including, without
limitation, injunctive relief and tort doctrines such as negligence, nuisance,
trespass and strict liability) that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Material and (iii) any state and local laws, statutes,
ordinances, rules, regulations and the like, as well as common law: conditioning
transfer of property upon a negative declaration or other approval of a
governmental authority of the environmental condition of the property; requiring
notification or disclosure of Releases of Hazardous Substances or other
environmental condition of the Loan Property to any governmental authority or
other person or entity, whether or not in connection with transfer of title to
or interest in property; imposing conditions or requirements in connection with
permits or other authorization for lawful activity; relating to nuisance,
trespass or other causes of action related to the Loan Property; and relating to
wrongful death, personal injury, or property or other damage in connection with
any physical condition or use of the Loan Property; (x) "Hazardous Material"
means any substance (whether solid, liquid or gas) which is listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any substance containing any such substance as a component.
Hazardous Material includes, without limitation, any toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste, extremely hazardous wastes, or words of similar meanings or regulatory
effect under any Environmental Laws, including, but not limited to, oil or
petroleum or any derivative or by-product thereof, radon, radioactive material,
asbestos, asbestos-containing material, urea formaldehyde foam insulation, lead
and polychlorinated biphenyl, flammables and explosives; (y) "Release" of any
Hazardous Material includes, but is not limited to, any release, deposit,
discharge, emission, leaking, spilling, seeping, migrating, injecting, pumping,
pouring, emptying, escaping, dumping, disposing or other movement of Hazardous
Materials in violation of or requiring action under any applicable Environmental
Law;
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and (z) "Remediation" includes, but is not limited to, any response, remedial,
removal, or corrective action, any activity to cleanup, detoxify, decontaminate,
contain or otherwise remediate any Hazardous Material, any actions to prevent,
cure or mitigate any Release of Hazardous Materials, any action to comply with
any Environmental Laws or with any permits issued pursuant thereto, any
inspection, investigation, study, monitoring, assessment, audit, sampling and
testing, laboratory or other analysis, or evaluation relating to any Hazardous
Materials.
(r) LOAN PORTFOLIO; ALLOWANCE; ASSET QUALITY. (i) With respect to each
loan owned by Reliance, Reliance Bank or its Subsidiaries in whole or in part
(each, a "Loan"), to the best knowledge of Reliance:
(A) the note and the related security documents are
each legal, valid and binding obligations of the maker or obligor
thereof, enforceable against such maker or obligor in accordance with
their terms;
(B) neither Reliance, Reliance Bank nor any of its
Subsidiaries nor any prior holder of a Loan has modified the note or
any of the related security documents in any material respect or
satisfied, cancelled or subordinated the note or any of the related
security documents except as otherwise disclosed by documents in the
applicable Loan file;
(C) Reliance, Reliance Bank or a Subsidiary is the
sole holder of legal and beneficial title to each Loan (or Reliance
Bank's applicable participation interest, as applicable); except as
otherwise referenced on the books and records of Reliance Bank;
(D) the note and the related security documents,
copies of which are included in the Loan files, are true and correct
copies of the documents they purport to be and have not been suspended,
amended, modified, cancelled or otherwise changed except as otherwise
disclosed by documents in the applicable Loan file;
(E) there is no pending, threatened condemnation
proceeding or similar proceeding affecting the property which serves as
security for a Loan; except as otherwise referenced on the books and
records of Reliance Bank;
(F) there is no litigation or proceeding pending,
threatened, relating to the property which serves as security for a
Loan that would have a Material Adverse Effect upon the related Loan;
and
(G) with respect to a Loan held in the form of a
participation, the participation documentation is legal, valid, binding
and enforceable.
(ii) The allowance for possible losses reflected in Reliance's
audited statement of condition at June 30, 1996 was, and the allowance for
possible losses shown on the balance sheets in Reliance's Reports for periods
ending after June 30, 1996 will be, adequate, as of the dates thereof, under
generally accepted accounting principles applicable to federal savings banks
<PAGE>
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consistently applied, and since June 30, 1996, no regulatory agency has
requested or required that Reliance increase any of such amounts.
(iii) The Reliance Disclosure Letter sets forth by type of
loan and category the amounts of all loans, leases, advances, credit
enhancements, other extensions of credit, commitments and interest-bearing
assets of Reliance Bank and its Subsidiaries that have been classified by any
bank examiner (whether regulatory or internal) as "Other Loans Specially
Mentioned," "Special Mention," "Substandard," "Doubtful," "Loss," "Classified,"
"Criticized," "Credit Risk Assets," "Concerned Loans" (in the latter two cases,
to the extent available) or words of similar import, and Reliance Bank and its
Subsidiaries shall promptly after the end of any month inform Continental of any
such classification arrived at any time after the date hereof. The OREO included
in any non-performing assets of Reliance Bank or any of its Subsidiaries is
carried net of reserves at the lower of cost or fair value, less estimated
selling costs, based on current independent or management appraisals or
evaluations; PROVIDED, however, that "current" shall mean within the past 12
months.
(s) INVESTMENT SECURITIES. (i) Except for investments in FHLB Stock and
pledges to secure FHLB borrowings and reverse repurchase agreements entered into
in arms-length transactions pursuant to normal commercial terms and conditions
and entered into in the ordinary course of business and restrictions that exist
for securities to be classified as "held to maturity," none of the investments
reflected in the consolidated balance sheet of Reliance included in Reliance's
Report on Form 10-K for the year ended June 30, 1996, and none of the investment
securities held by it or any of its Subsidiaries since June 30, 1996, is subject
to any restriction (contractual or statutory) that would materially impair the
ability of the entity holding such investment freely to dispose of such
investment at any time.
(ii) Except as set forth in the Reliance Disclosure Letter,
neither Reliance nor any Subsidiary is a party to or has agreed to enter into an
exchange-traded or over-the-counter equity, interest rate, foreign exchange or
other swap, forward, future, option, cap, floor or collar or any other contract
that is not included on the consolidated statements of condition and is a
derivative contract (including various combinations thereof) (each, a
"Derivatives Contract") or owns securities that (A) are referred to generically
as "structured notes," "high risk mortgage derivatives," "capped floating rate
notes" or "capped floating rate mortgage derivatives" or (B) are likely to have
changes in value as a result of interest or exchange rate changes that
significantly exceed normal changes in value attributable to interest or
exchange rate changes, except for those Derivatives Contracts and other
instruments legally purchased or entered into in the ordinary course of
business, consistent with safe and sound banking practices and regulatory
guidance, and listed (as of the date hereof) in the Reliance Disclosure Letter
or disclosed in Reliance's Reports filed on or prior to the date hereof.
(t) REGISTRATION STATEMENT. The information to be supplied by it for
inclusion in (i) the Registration Statement on Form S-4 and/or such other
form(s) as may be appropriate to be filed under the Securities Act, with the SEC
by Reliance for the purpose of, among other things, registering Reliance Common
Stock to be issued to the Stockholders of Continental in the Merger (the
"Registration Statement"), or (ii) the proxy statement to be filed with the FDIC
by Continental
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under the Exchange Act and distributed in connection with Continental's meeting
of its Stockholders to vote upon this Agreement (as amended or supplemented from
time to time, the "Proxy Statement", and together with the prospectus included
in the Registration Statement, as amended or supplemented from time to time, the
"Proxy Statement-Prospectus") will not, at the time such Registration Statement
becomes effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
(u) BOOKS AND RECORDS. The books and records of Reliance and its
Subsidiaries have been, and are being, maintained in accordance with applicable
legal and accounting requirements (including GAAP) and reflect in all material
respects the substance of events and transactions that should be included
therein.
(v) CORPORATE DOCUMENTS. Reliance will deliver to Continental true and
complete copies of its certificate of incorporation and bylaws and of Reliance
Bank's charter and bylaws. The minute books of Reliance and Reliance Bank
constitute a complete and correct record of all actions taken by the respective
boards of directors (and each committee thereof) and the stockholders of
Reliance and Reliance Bank. The minute books of each of Reliance's Subsidiaries
constitutes a complete and correct record of all actions taken by the respective
boards of directors (and each committee thereof) and the stockholders of each
Subsidiary.
(w) BENEFICIAL OWNERSHIP OF CONTINENTAL COMMON STOCK. As of the date
hereof, Reliance does not beneficially own any shares of Continental Common
Stock and, other than as contemplated by the Option Agreement, does not have any
option, warrant or right of any kind to acquire the beneficial ownership of any
shares of Continental Common Stock.
(x) TAX TREATMENT OF THE MERGER. As of the date hereof, Reliance has no
knowledge of any fact or circumstance that would prevent the transactions
contemplated by this Agreement from qualifying as a tax-free reorganization
under the Code.
ARTICLE III
CONDUCT PENDING THE MERGER
SECTION 3.01 CONDUCT OF CONTINENTAL'S BUSINESS PRIOR TO THE EFFECTIVE
TIME. Except as expressly provided in this Agreement, during the period from the
date of this Agreement to the Effective Time, Continental shall use commercially
reasonable efforts to, and shall cause its Subsidiaries to use commercially
reasonable efforts to, (i) conduct its business in the ordinary and usual course
consistent with prudent banking practice; (ii) maintain and preserve intact its
business organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees, (iii)
take no action which would adversely affect or delay the ability of Continental,
Reliance or Reliance Bank to perform its covenants and agreements on a timely
basis under this Agreement, (iv) take no action which would adversely affect or
delay the ability of Continental, Reliance or Reliance Bank to obtain any
necessary
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approvals, consents or waivers of any governmental authority required for the
transactions contemplated hereby or which would reasonably be expected to result
in any such approvals, consents or waivers containing any material condition or
restriction, and (v) take no action that results in or is reasonably likely to
have a Material Adverse Effect on Continental.
SECTION 3.02 FORBEARANCE BY CONTINENTAL. Without limiting the
covenants set forth in Section 3.01 hereof, during the period from the date of
this Agreement to the Effective Time Continental shall not, and shall not permit
any of its Subsidiaries, without the prior written consent of Reliance, which
consent shall not be unreasonably withheld, to:
(a) change its corporate structure from that in effect on the date
hereof, or put into effect any change in any provisions of the organization
certificate or bylaws of Continental, or any similar governing documents of
Continental's Subsidiaries;
(b) issue any shares of capital stock or change the terms of any
outstanding warrants or issue, grant or sell any warrant, call, commitment,
right to purchase or agreement of any character relating to the authorized or
issued capital stock of Continental except pursuant to the Option Agreement;
adjust, split, combine or reclassify any capital stock; make, declare or pay any
dividend or make any other distribution on, or directly or indirectly redeem,
purchase or otherwise acquire, any shares of its capital stock or any securities
or obligations convertible into or exchangeable for any shares of its capital
stock; except that, if all of the conditions to the obligation of Continental,
Reliance and Reliance Bank set forth in Article V hereof have been satisfied
prior to September 30, 1997, but for the delivery of the certificates, opinion
or conditions required by Sections 5.02(c), (d), (e) and (f) (for Reliance and
Reliance Bank) and Section 5.03(c), (d), (e) and (f) (for Continental) and the
Effective Time shall not have occurred, Continental may pay a dividend with
respect to the quarter ended September 30, 1997 of Continental, in an amount
equal to no more than $0.18 per share of Continental Common Stock, subject to
Continental's normal procedures on declaration and payment of dividends, but no
shareholder of Continental shall be entitled to receive dividends on any shares
of Reliance Common Stock received as Merger Consideration with respect to that
quarter.
(c) other than in the ordinary course of business consistent with past
practice and pursuant to policies currently in effect, sell, transfer, mortgage,
encumber or otherwise dispose of any of its material properties, leases or
assets to any individual, corporation or other entity other than a direct or
indirect wholly owned Subsidiary of Continental or cancel, release or assign any
indebtedness of any such person, except pursuant to contracts or agreements in
force at the date of this Agreement and which have been described to Reliance;
(d) except to the extent required by law or specifically provided for
elsewhere herein or in the Continental Disclosure Letter, increase in any manner
the compensation or fringe benefits of any of its employees or directors other
than general increases in compensation for non-officer employees in the ordinary
course of business consistent with past practice that do not cause the
annualized compensation of any of Continental's non-officer employees following
such increase, to exceed by more than 5% the total annual compensation expense
of Continental with respect to such person for the twelve month period ended
March 31, 1997 and that do not cause the annual
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rate of base salary of any of Continental's non-officer employees to increase by
more than 5% over such person's base salary at March 31, 1997, or pay any
pension or retirement allowance not required by any existing plan or agreement
to any such employees or directors, or become a party to, amend or commit itself
to or fund or otherwise establish any trust or account related to any Employee
Plan (as defined in Section 2.03(n)) with or for the benefit of any employee or
director; voluntarily accelerate the vesting of any stock options or other
compensation or benefit; terminate or increase the costs to Continental or any
Subsidiary or any Employee Plan; hire any employee with an annual compensation
in excess of $35,000 or enter into any employment contract; or make any
discretionary contributions to any Employee Plan;
(e) except as contemplated by Section 4.02, change its method of
accounting as in effect at December 31, 1996, except as required by changes in
generally accepted accounting principles as concurred in writing by
Continental's independent auditors;
(f) other than in the ordinary course of business consistent with past
practice in individual amounts not to exceed $50,000 and other than investments
for Continental's portfolio made in accordance with Section 3.02(g), make any
investment either by purchase of stock or securities, contributions to capital,
property transfers, or purchase of any property or assets of any other
individual, corporation or other entity;
(g) make any investment in any debt security, including mortgage-backed
and mortgage related securities, other than US government and US government
agency securities with final maturities not greater than five years,
mortgage-backed or mortgage related securities which would not be considered
"high risk" securities pursuant to Thrift Bulletin Number 52 issued by the OTS
or securities of the FHLB, in each case that are purchased in the ordinary
course of business consistent with past practice;
(h) enter into or terminate any contract or agreement, or make any
change in any of its leases or contracts, other than with respect to those
involving aggregate payments of less than, or the provision of goods or services
with a market value of less than, $20,000 per annum and other than contracts or
agreements covered by Section 3.02(k);
(i) settle any claim, action or proceeding involving any liability of
Continental or any of its Subsidiaries for money damages in excess of $25,000 or
material restrictions upon the operations of Continental or any of its
Subsidiaries;
(j) except in the ordinary course of business and in amounts less than
$50,000, waive or release any material right or collateral or cancel or
compromise any extension of credit or other debt or claim;
(k) make, renegotiate, renew, increase, extend or purchase any (i)
loan, lease (credit equivalent), advance, credit enhancement or other extension
of credit, or make any commitment in respect of any of the foregoing, except (A)
in conformity with existing lending practices in amounts not to exceed $500,000
to any individual borrower or (B) loans or advances as to which Continental has
a legally binding obligation to make such loan or advances as of the date hereof
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and a description of which has been provided by Continental in the Continental
Disclosure Letter; PROVIDED, however, that Continental may not make,
renegotiate, renew, increase, extend or purchase any loan that is underwritten
based on either no or limited verification of income or otherwise without full
documentation customary for such a loan; or (ii) loans, advances or commitments
to directors, officers or other affiliated parties of Continental or any of its
Subsidiaries except for renewals of any such loans referred to in this clause
(ii) or set forth in the Continental Disclosure Letter;
(l) acquire or agree to acquire, by merging or consolidating with, or
by purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets, in each case which are material,
individually or in the aggregate, to Continental except in satisfaction of debts
previously contracted;
(m) incur any additional borrowings beyond those set forth in the
Continental Disclosure Letter other than short-term (six months or less) FHLB
borrowings and reverse repurchase agreements consistent with past practice, or
pledge any of its assets to secure any borrowings other than as required
pursuant to the terms of borrowings of Continental or any Subsidiary in effect
at the date hereof or in connection with borrowings or reverse repurchase
agreements permitted hereunder. Deposits shall not be deemed to be borrowings
within the meaning of this paragraph;
(n) make any capital expenditures in excess of $20,000 per expenditure
from the date of this Agreement until the Effective Date other than pursuant to
binding commitments existing on the date hereof disclosed in the Continental
Disclosure Letter, other than expenditures necessary to maintain existing assets
in good repair or to make payment of necessary taxes;
(o) make any investment or commitment to invest in real estate or in
any real estate development project, other than Small Business Administration 7A
Program guaranteed loans or real estate acquired in satisfaction of defaulted
mortgage loans and investments or commitments approved by the Board of Directors
of Continental prior to the date of this Agreement and disclosed in writing to
Reliance;
(p) except pursuant to commitments existing at the date hereof which
are disclosed in the Continental Disclosure Letter, and except for Small
Business Administration 7A Program guaranteed loans make any real estate loans
secured by undeveloped land or real estate located outside the State of New York
or make any construction loan;
(q) establish or make any commitment relating to the establishment
of any new branch or other office facilities;
(r) organize, capitalize, lend to or otherwise invest in any
Subsidiary, or invest in or acquire any equity or voting interest in any firm,
corporation or business enterprise (other than securities of the FHLB that are
purchased in the ordinary course of business consistent with past practice);
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(s) elect to the Board of Directors of Continental or to any office any
person who is not a member of the Board of Directors of Continental or an
officer of Continental as of the date of this Agreement; or
(t) agree or make any commitment to take any action that is prohibited
by this Section 3.02.
In the event that Reliance does not respond in writing to Continental
within three business days of receipt by Reliance of a written request for
Continental to engage in any of the actions for which Reliance's prior written
consent is required pursuant to this Section 3.02, Reliance shall be deemed to
have consented to such action. Any request by Continental or response thereto by
Reliance shall be made in accordance with the notice provisions of Section 8.07.
The representations, warranties and covenants of Continental shall not
be deemed untrue or incorrect or breached for any purpose as a consequence of
Continental's compliance with this Section 3.02.
SECTION 3.03 CONDUCT OF RELIANCE'S BUSINESS PRIOR TO THE EFFECTIVE
TIME. Except as provided in this Agreement, during the period from the date of
this Agreement to the Effective Time, Reliance shall use commercially reasonable
efforts to, and shall cause its Subsidiaries to use commercially reasonable
efforts to, (i) conduct its business in the ordinary and usual course consistent
with prudent banking practice; (ii) maintain and preserve intact its business
organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees, (iii)
take no action which would adversely affect or delay the ability of Continental,
Reliance or Reliance Bank to perform its covenants and agreements on a timely
basis under this Agreement, (iv) take no action which would adversely affect or
delay the ability of Continental, Reliance or Reliance Bank to obtain any
necessary approvals, consents or waivers of any governmental authority required
for the transactions contemplated hereby or which would reasonably be expected
to result in any such approvals, consents or waivers containing any material
condition or restriction, and (v) take no action that results in or is
reasonably likely to have a Material Adverse Effect on Reliance.
ARTICLE IV
COVENANTS
SECTION 4.01 ACQUISITION PROPOSALS. Continental agrees that neither it
nor any of its Subsidiaries nor any of the respective officers and directors of
Continental or its Subsidiaries shall, and Continental shall direct and use its
best efforts to cause its employees, agents and representatives (including,
without limitation, any investment banker, attorney or accountant retained by it
or any of its Subsidiaries) not to, (a) initiate, solicit or encourage, directly
or indirectly, any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to stockholders of Continental) with
respect to a merger, consolidation or similar transaction involving, or any
purchase of all or more than 10% of the assets or any equity
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securities of, Continental or any of its material Subsidiaries (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal")
or, (b) except to the extent legally required for the discharge by the board of
directors of its fiduciary duties as advised in writing by such board's counsel,
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal. Continental will notify Reliance immediately if any such
inquiries, proposals or offers are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with Continental after the date hereof, and the identity
of the person making such inquiry, proposal or offer and the substance thereof.
Subject to the foregoing, Continental will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. Continental will take
the necessary steps to inform the appropriate individuals or entities referred
to in the first sentence hereof of the obligations undertaken in this Section
4.01. Continental will promptly request each person (other than Reliance) that
has executed a confidentiality agreement prior to the date hereof in connection
with its consideration of a business combination with Continental or any
Subsidiary of Continental to return or destroy all confidential information
previously furnished to such person by or on behalf of Continental or any of its
Subsidiaries.
SECTION 4.02 CERTAIN POLICIES OF CONTINENTAL.
(a) At the request of Reliance, Continental shall modify and change its
loan, litigation, real estate valuation policies and practices (including loan
classifications and levels of reserves) and investment and asset/liability
management policies and practices after the date on which all required
regulatory approval and shareholder approvals are received and after receipt of
written confirmation from Reliance that it is not aware of any fact or
circumstance that would prevent completion of the Merger and prior to the
Effective Time so as to be consistent on a mutually satisfactory basis with
those of Reliance Bank; PROVIDED, that such policies and procedures are not
prohibited by generally accepted accounting principles or all applicable laws
and regulations.
(b) Continental's representations, warranties and covenants contained
in this Agreement shall not be deemed to be untrue or breached in any respect
for any purpose as a consequence of any modifications or changes undertaken
solely on account of this Section 4.02.
SECTION 4.03 EMPLOYEES; BENEFIT PLANS AND PROGRAMS.
(a) Each person who is employed by Continental immediately prior to the
Effective Time (a "Continental Employee") and whose employment is not
specifically terminated at or prior to the Effective Time (a "Continuing
Employee") shall (except as set forth in Schedule 4.03(a) of the Continental
Disclosure Letter), at the Effective Time, become an employee (but not an
officer) of Reliance Bank. Beginning at the Effective Time, except as otherwise
determined by Reliance Bank, each of the Continuing Employees shall serve
Reliance Bank upon the same terms and conditions generally applicable to other
employees of Reliance Bank with comparable positions, with the following special
provisions (including, without limitation, their status as at-will employees
whose terms and conditions of employment are subject to change at any time):
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(i) If it is not practical to enroll Continuing Employees as
of the Effective Time in a particular employee benefit plan or program
maintained by Reliance Bank for its employees (the "Reliance Bank
Plans"), Reliance Bank shall continue any comparable plan or program of
Continental in effect immediately prior to the Effective Time (the
"Continental Plans") for a transition period. During the transition
period, Continuing Employees shall continue to participate in
Continental Plans which are continued, and all other employees of
Reliance Bank will participate only in the comparable Reliance Bank
Plans.
(ii) Reliance and Reliance Bank will amend each of their
respective employee benefit plans and programs, other than any
tax-qualified defined benefit or employee stock ownership plan, to
recognize the service of each Continental Employee with Continental as
service with Reliance and Reliance Bank for purposes of eligibility.
Each of Continental's tax-qualified plans will be amended to provide
that all benefits accrued by Continuing Employees through the Effective
Time will be fully vested without regard to their length of service.
(iii) If Continental Employees become eligible to participate
in a medical, dental or health plan of Reliance or Reliance Bank,
Reliance shall cause, to the extent reasonably practicable without
incurring additional premium costs, such plan to (A) waive any
preexisting condition limitations for conditions covered under the
applicable medical, health or dental plans of Continental and (B) honor
any deductible and out of pocket expenses incurred by the Continental
Employees and their beneficiaries under such plans during the portion
of the calendar year prior to such participation. If Continuing
Continental Employees become eligible to participate in a life
insurance plan maintained by Reliance or Reliance Bank, Reliance shall
cause, to the extent reasonably practicable without incurring
additional premium costs, such plan to waive any medical certification
for the Continental Employees up to the amount of coverage the
Continental Employees had under the life insurance plan of Continental
(but subject to any limits on the maximum amount of coverage under the
life insurance plan of Reliance or Reliance Bank).
(b) Reliance agrees (i) to honor the Specified Compensation and Benefit
Programs, including the change in control provisions of such Programs, between
Continental and each Named Individual as set forth on Schedule 4.03(b) of the
Continental Disclosure Letter and (ii) to the payment of amounts and benefits to
Named Individuals by Continental as of the Effective Time (or such earlier time
as may be agreed to by Continental and Reliance) under the Specified
Compensation and Benefit Programs in such amounts as calculated and disclosed on
Schedule 4.03(b) of the Continental Disclosure Letter.
Notwithstanding any provision in the Sullivan Employment Agreement to
the contrary, payments made pursuant to the Sullivan Employment Agreement as set
forth on Schedule 4.03(b) of the Continental Disclosure Letter shall be final.
There will be no further adjustment to such payments for potential future tax
liabilities or otherwise. In addition, in the event of the death or disability
of Mr. Sullivan on or after the date of this Agreement and prior to the
Effective Time, payments to be made pursuant to the Sullivan Employment
Agreement shall be made either to
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Mr. Sullivan's estate or to Mr. Sullivan at the Effective Time. Continental and
each Named Individual receiving payment under any of the Specified Compensation
and Benefit Programs listed on Schedule 4.03(b) of the Continental Disclosure
Letter shall execute a Joint Release, in the form annexed as Exhibit C (the
"Release"). Reliance agrees to the issuance of such releases by Continental.
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SECTION 4.04 ACCESS AND INFORMATION.
(a) Upon reasonable notice, Continental and Reliance shall (and shall
cause its respective Subsidiaries to) afford to each other and their respective
representatives (including, without limitation, directors, officers and
employees of such party and its affiliates, and counsel, accountants and other
professionals retained) such reasonable access during normal business hours
throughout the period prior to the Effective Time to the books, records
(including, without limitation, tax returns and work papers of independent
auditors), properties, personnel and to such other information as either party
may reasonably request except materials legally privileged or which either party
is prohibited by law from disclosing; PROVIDED, however, that no investigation
pursuant to this Section 4.04 shall affect or be deemed to modify any
representation or warranty made herein. Reliance, Reliance Bank and Continental
will not, and will cause its respective representatives not to, use any
information obtained pursuant to this Section 4.04 for any purpose unrelated to
the consummation of the transactions contemplated by this Agreement. Subject to
the requirements of law, each of Reliance, Reliance Bank and Continental will
keep confidential, and will cause its respective representatives to keep
confidential, all information and documents obtained pursuant to this Section
4.04 unless such information (i) was already known to such party or an affiliate
of such party, other than pursuant to a confidentiality agreement or other
confidential relationship, (ii) becomes available to such party or an affiliate
of such party from other sources not known by such party to be bound by a
confidentiality obligation or agreement, (iii) is disclosed with the prior
written approval of the other party or (iv) is or becomes readily ascertainable
from published information or trade sources. In the event that this Agreement is
terminated or the transactions contemplated by this Agreement shall otherwise
fail to be consummated, each party shall promptly cause all copies of documents
or extracts thereof containing information and data as to another party hereto
(or an affiliate of any party hereto) to be returned to the party which
furnished the same.
(b) During the period of time beginning on the day the last approval of
a governmental authority is obtained and continuing to the Effective Time,
including weekends and holidays, Continental shall provide Reliance Bank and its
authorized agents and representatives full access to Continental's offices after
normal business hours for the purpose of installing necessary wiring and
equipment to be utilized by Reliance Bank after the Effective Time; PROVIDED,
that:
(i) reasonable advance notice of each entry shall be given to
Continental, and Continental approves of each entry, which approval
shall not be unreasonably withheld;
(ii) Continental shall have the right to have its employees
or contractors present to inspect the work being done;
(iii) to the extent practicable, such work shall be done in a
manner that will not interfere with Continental's business conducted at
the branch;
(iv) all such work shall be done in compliance with all
applicable laws and government regulation, and Reliance Bank shall be
responsible for the procurement, at
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Reliance Bank's expense, of all required governmental or
administrative permits and approvals;
(v) Reliance Bank shall maintain appropriate insurance
satisfactory to Continental in connection with any work done by
Reliance Bank's agents and representatives pursuant to this Section
4.04;
(vi) Reliance Bank shall reimburse Continental for any
material out-of-pocket costs or expenses incurred by Continental
in connection with this undertaking; and
(vii) if this Agreement is terminated in accordance with
Article VI hereof, Reliance Bank, within a reasonable time period and
at its sole cost and expense, will restore such offices to their
condition prior to the commencement of any such installation.
SECTION 4.05 CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. Reliance,
Reliance Bank and Continental shall (a) as soon as practicable (and in any event
within 45 days after the date hereof) make (or cause to be made) any filings and
applications and provide any notices, required to be filed or provided in order
to obtain all approvals, consents and waivers of governmental authorities and
third parties necessary or appropriate for the consummation of the transactions
contemplated hereby or by the Option Agreement, (b) cooperate with one another
(i) in promptly determining what filings and notices are required to be made or
approvals, consents or waivers are required to be obtained under any relevant
federal, state or foreign law or regulation or under any relevant agreement or
other document and (ii) in promptly making any such filings and notices,
furnishing information required in connection therewith and seeking timely to
obtain any such approvals, consents or waivers and (c) deliver to the other
copies of the publicly available portions of all such filings, notices and
applications promptly after they are filed.
SECTION 4.06 ANTITAKEOVER PROVISIONS. Continental and its Subsidiaries
shall take all steps (i) to exempt or continue to exempt Continental, the
Agreement, the Merger and the Option Agreement from any provisions of an
antitakeover nature in Continental's or its Subsidiaries' organization
certificates and bylaws and the provisions of any federal or state antitakeover
laws, and (ii) upon the request of Reliance, to assist in any challenge by
Reliance to the applicability to the Agreement, the Merger or the Option
Agreement of any state antitakeover law.
SECTION 4.07 ADDITIONAL AGREEMENTS. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as expeditiously as
possible, including using efforts to obtain all necessary actions or
non-actions, extensions, waivers, consents and approvals from all applicable
governmental entities, effecting all necessary registrations, applications and
filings (including, without limitation, filings under any applicable state
securities laws) and obtaining any required contractual consents and regulatory
approvals.
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SECTION 4.08 PUBLICITY. The initial press release announcing this
Agreement shall be a joint press release and thereafter Continental and Reliance
shall consult with each other in issuing any press releases or otherwise making
public statements with respect to the acquisition contemplated hereby and in
making any filings with any governmental entity or with any national securities
exchange with respect thereto.
SECTION 4.09 STOCKHOLDERS' MEETING. Continental shall take all action
necessary, in accordance with applicable law and its corporate documents, to
convene a meeting of its stockholders (the "Stockholder Meeting") as promptly as
practicable for the purpose of considering and voting on approval and adoption
of the transactions provided for in this Agreement. Except to the extent legally
required for the discharge by the board of directors of its fiduciary duties as
advised in writing by such board's counsel, the board of directors of
Continental shall (a) recommend at the Stockholder Meeting that the stockholders
vote in favor of and approve the transactions provided for in this Agreement,
and (b) use its best efforts to solicit such approvals. In exercising its
fiduciary duties, the board of directors of Continental may take into account
the fairness opinion to be rendered by Sandler O'Neill & Partners, L.P.
SECTION 4.10 PROXY; REGISTRATION STATEMENT. As soon as practicable
after the date hereof, Reliance and Continental shall cooperate with respect to
the preparation of a Proxy StatementProspectus for the purpose of taking
stockholder action on the Merger and this Agreement, file the Proxy
Statement-Prospectus with the SEC and the FDIC, respond to comments of the staff
of the SEC and the FDIC and promptly thereafter mail the Proxy
Statement-Prospectus to all holders of record (as of the applicable record date)
of shares of voting stock. Reliance and Continental each represents and
covenants to the other party that the Proxy Statement-Prospectus and any
amendment or supplement thereto, with respect to the information pertaining to
it or its subsidiaries at the date of mailing to its stockholders and the date
of its meeting of its stockholders to be held in connection with the Merger,
will be in compliance with the Exchange Act and all relevant rules and
regulations of the SEC and the FDIC and will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Continental, in consultation with
Reliance, shall employ professional proxy solicitors to assist it in contacting
stockholders in connection with soliciting votes on the Merger.
SECTION 4.11 REGISTRATION OF RELIANCE COMMON STOCK.
(a) Reliance shall, as promptly as practicable following the
preparation thereof (and in any event within 60 days hereof), file a
Registration Statement on Form S-4 (including any pre-effective or
post-effective amendments or supplements thereto) with the SEC under the
Securities Act in connection with the transactions contemplated by this
Agreement, and Reliance and Continental shall use all reasonable efforts to have
the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing. Reliance will advise Continental
promptly after Reliance receives notice of the time when the Registration
Statement has become effective or any supplement or amendment has been filed, of
the issuance of any stop order or the suspension of the qualification of the
shares of capital stock issuable pursuant to the Registration Statement, or the
initiation or threat of any proceeding for any such purpose, or of
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any request by the SEC for the amendment or supplement of the Registration
Statement or for additional information. Reliance will provide Continental with
as many copies of such Registration Statement and all amendments thereto
promptly upon the filing thereof as Continental may reasonably request.
(b) Reliance shall use its best efforts to obtain, prior to the
effective date of the Registration Statement, all necessary state securities
laws or "blue sky" permits and approvals required to carry out the transactions
contemplated by this Agreement.
(c) Reliance shall use its best efforts to list, prior to the Effective
Time, on the Nasdaq National Market, or such other market on which shares of
Reliance shall then be trading, subject only to official notice of issuance, the
shares of Reliance Common Stock to be issued by Reliance in exchange for the
shares of Continental Common Stock.
SECTION 4.12 AFFILIATE LETTERS. No later than the tenth business day
following the mailing of the Proxy Statement-Prospectus referred to in Section
4.10, Continental shall deliver to Reliance, after consultation with legal
counsel, a list of the names and addresses of those persons it deems to be
"Affiliates" of Continental within the meaning of Rule 145 promulgated under the
Securities Act and a letter in the form attached hereto as Exhibit D restricting
the disposition of shares of Reliance Common Stock to be received by such
Affiliate in exchange for such Affiliate's shares of Continental Common Stock.
SECTION 4.13 NOTIFICATION OF CERTAIN MATTERS. Each party shall give
prompt notice to the others of: (a) any event or notice of, or other
communication relating to, a default or event that, with notice or lapse of time
or both, would become a default, received by it or any of its Subsidiaries
subsequent to the date of this Agreement and prior to the Effective Time, under
any contract material to the financial condition, properties, businesses or
results of operations of Continental and its Subsidiaries taken as a whole to
which Continental or any Subsidiary is a party or is subject; and (b) any event,
condition, change or occurrence which individually or in the aggregate has, or
which, so far as reasonably can be foreseen at the time of its occurrence, is
reasonably likely to result in a Material Adverse Event. Each of Continental and
Reliance shall give prompt notice to the other party of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement.
SECTION 4.14 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
(a) From and after the Effective Time through the sixth anniversary of
the Effective Date, Reliance agrees to indemnify and hold harmless each present
and former director and officer of Continental or its Subsidiaries and each
officer or employee of Continental or its Subsidiaries that is serving or has
served as a director or trustee of another entity expressly at Continental's
request or direction (each, an "Indemnified Party"), against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages or liabilities (collectively, "Costs") incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of matters existing or
occurring at or
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prior to the Effective Time (including the transactions contemplated by this
Agreement, including the entering into of the Option Agreement), whether
asserted or claimed prior to, at or after the Effective Time, and to advance any
such Costs to each Indemnified Party as they are from time to time incurred, in
each case to the fullest extent then permitted under applicable law.
(b) Any Indemnified Party wishing to claim indemnification under
Section 4.14(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Reliance thereof, but the failure to so
notify shall not relieve Reliance of any liability it may have hereunder to such
Indemnified Party if such failure does not materially and substantially
prejudice the indemnifying party. In the event of any such claim, action, suit,
proceeding or investigation, (i) Reliance shall have the right to assume the
defense thereof with counsel reasonably acceptable to the Indemnified Party and
Reliance shall not be liable to such Indemnified Party for any legal expenses of
other counsel subsequently incurred by such Indemnified Party in connection with
the defense thereof, except that if Reliance does not elect to assume such
defense within a reasonable time or counsel for the Indemnified Party at any
time advises that there are issues that raise conflicts of interest between
Reliance and the Indemnified Party, the Indemnified Party may retain counsel
satisfactory to such Indemnified Party, and Reliance shall remain responsible
for the reasonable fees and expenses of such counsel as set forth above, to be
paid promptly as statements therefor are received; PROVIDED, however, that
Reliance shall be obligated pursuant to this paragraph (b) to pay for only one
firm of counsel for all Indemnified Parties in any one jurisdiction with respect
to any given claim, action, suit, proceeding or investigation unless the use of
one counsel for such Indemnified Parties would present such counsel with a
conflict of interest; (ii) the Indemnified Party will reasonably cooperate in
the defense of any such matter; and (iii) Reliance shall not be liable for any
settlement effected by an Indemnified Party without its prior written consent,
which consent may not be withheld unless such settlement is unreasonable in
light of such claims, actions, suits, proceedings or investigations against, or
defenses available to, such Indemnified Party.
(c) Reliance shall pay all reasonable Costs, including attorneys' fees,
that may be incurred by any Indemnified Party in successfully enforcing the
indemnity and other obligations provided for in this Section 4.14 to the fullest
extent permitted under applicable law. The rights of each Indemnified Party
hereunder shall be in addition to any other rights such Indemnified Party may
have under applicable law.
(d) For a period of six years after the Effective Time, Reliance shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by Continental (provided that Reliance
may substitute therefor policies with reputable and financially sound carriers
of at least the same coverage and amount containing terms which are no less
advantageous to the beneficiaries thereof); PROVIDED, however, that in no event
shall Reliance be obligated to expend, in order to maintain or provide insurance
coverage pursuant to this Section 4.14(d), any premiums, in the aggregate for
such six year period, in excess of $180,000 (the "Maximum Amount"); PROVIDED,
further, that if the amount of the annual premiums necessary to maintain or
procure such insurance coverage exceeds the Maximum Amount, Reliance shall
maintain the most advantageous policies of directors' and officers' insurance
obtainable for an annual premium equal to the Maximum Amount; and PROVIDED,
further, that officers and directors
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of Continental may be required to make application and provide customary
representations and warranties to Reliance's insurance carrier for the purpose
of obtaining such insurance.
ARTICLE V
CONDITIONS TO CONSUMMATION
SECTION 5.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of each party to effect the Merger shall be subject to the
fulfillment of the following conditions:
(a) this Agreement shall have been approved by the requisite vote of
Continental's stockholders in accordance with applicable law;
(b) all necessary regulatory or governmental approvals, consents or
waivers required to consummate the transactions contemplated hereby shall have
been obtained and shall remain in full force and effect and all statutory
waiting periods in respect thereof shall have expired; and all other consents,
waivers and approvals of any third parties which are necessary to permit the
consummation of the Merger and the other transactions contemplated hereby shall
have been obtained or made except for those the failure to obtain would not have
a Material Adverse Effect (i) on Continental and its subsidiaries taken as a
whole or (ii) on Reliance and its Subsidiaries taken as a whole. None of the
approvals or waivers referred to herein shall contain any term or condition
which would have a Material Adverse Effect on (x) Continental and its
Subsidiaries taken as a whole or (y) Reliance and its Subsidiaries taken as a
whole;
(c) no party hereto shall be subject to any order, decree or injunction
of a court or agency of competent jurisdiction which enjoins or prohibits the
consummation of the Merger;
(d) no statute, rule or regulation, shall have been enacted, entered,
promulgated, interpreted, applied or enforced by any governmental authority
which prohibits, restricts or makes illegal consummation of the Merger;
(e) the Registration Statement shall have been declared effective by
the SEC and no proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; all required approvals by state
securities or "blue sky" authorities with respect to the transactions
contemplated by this Agreement shall have been obtained;
(f) Reliance shall have received the agreement referred to in Section
4.12 from each affiliate of Continental; and
(g) Reliance shall have received all state securities laws and "blue
sky" permits and other authorizations necessary to consummate the transactions
contemplated hereby.
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SECTION 5.02 CONDITIONS TO THE OBLIGATIONS OF RELIANCE AND RELIANCE
BANK UNDER THIS AGREEMENT. The obligations of Reliance and Reliance Bank to
effect the Merger shall be further subject to the satisfaction of the following
additional conditions, any one or more of which may be waived by Reliance:
(a) each of the obligations of Continental required to be performed by
it at or prior to the Closing pursuant to the terms of this Agreement shall have
been duly performed and complied with in all material respects and the
representations and warranties of Continental contained in this Agreement shall
be true and correct, subject to Sections 2.01 and 2.02, as of the date of this
Agreement and as of the Effective Time as though made at and as of the Effective
Time (except as to any representation or warranty which specifically relates to
an earlier date). Reliance shall have received a certificate to the foregoing
effect signed by the president and the chief financial or principal accounting
officer of Continental;
(b) all action required to be taken by, or on the part of, Continental
to authorize the execution, delivery and performance of this Agreement and the
consummation by Continental of the transactions contemplated hereby shall have
been duly and validly taken by the Board of Directors and stockholders of
Continental, and Reliance shall have received certified copies of the
resolutions evidencing such authorization;
(c) Reliance shall have received certificates (such certificates to be
dated as of a day as close as practicable to the date of the Closing) from
appropriate authorities as to the good standing of Continental;
(d) Reliance shall have received an opinion of Thacher Proffitt & Wood,
counsel to Reliance, dated as of the Effective Date in form and substance
customary in transactions of the type contemplated hereby, and reasonably
satisfactory to Reliance, substantially to the effect that on the basis of the
facts, representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the Effective Time, the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code and that accordingly:
(i) No gain or loss will be recognized by Reliance, Reliance
Bank or Continental as a result of the Merger;
(ii) Except to the extent of any cash received in lieu of a
fractional share interest in Reliance Common Stock, no gain or loss
will be recognized by the stockholders of Continental who exchange
their Continental Stock for Reliance Common Stock pursuant to the
Merger;
(iii) The tax basis of Reliance Common Stock received by
stockholders who exchange their Continental Common Stock for Reliance
Common Stock in the Merger will be the same as the tax basis of
Continental Common Stock surrendered pursuant to the Merger, reduced by
any amount allocable to a fractional share interest for which cash is
received and increased by any gain recognized on the exchange; and
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(iv) The holding period of Reliance Stock received by each
stockholder in the Merger will include the holding period of
Continental Common Stock exchanged therefor, provided that such
stockholder held such Continental Common Stock as a capital asset on
the date of the Merger.
Such opinion may be based on, in addition to the review of such matters
of fact and law as Thacher Proffitt & Wood considers appropriate, (i)
representations made at the request of Thacher Proffitt & Wood by Reliance,
Reliance Bank, Continental, stockholders of Reliance or Continental, or any
combination of such persons and (ii) certificates provided at the request of
Thacher Proffitt & Wood by officers of Reliance, Reliance Bank, Continental and
other appropriate persons;
(e) Continental shall have caused to be delivered to Reliance "cold
comfort" letters or letters of procedures from Continental's independent
certified public accountants, dated (i) the date of the mailing of the Proxy
Statement to Continental's stockholders and (ii) a date not earlier than five
business days preceding the date of the Closing and addressed to Reliance,
concerning such matters as are customarily covered in transactions of the type
contemplated hereby; and
(f) Each Named Individual receiving payment under any of the Specified
Compensation and Benefit Programs referred to in Section 4.03(b) shall have
executed and delivered to Reliance a Release.
SECTION 5.03 CONDITIONS TO THE OBLIGATIONS OF CONTINENTAL. The
obligations of Continental to effect the Merger shall be further subject to the
satisfaction of the following additional conditions, any one or more of which
may be waived by Continental:
(a) each of the obligations of Reliance and Reliance Bank,
respectively, required to be performed by it at or prior to the Closing pursuant
to the terms of this Agreement shall have been duly performed and complied with
in all material respects and the representations and warranties of Reliance and
Reliance Bank contained in this Agreement shall be true and correct, subject to
Sections 2.01 and 2.02, as of the date of this Agreement and as of the Effective
Time as though made at and as of the Effective Time (except as to any
representation or warranty which specifically relates to an earlier date).
Continental shall have received a certificate to the foregoing effect signed by
the president and the chief financial officer of Reliance;
(b) all action required to be taken by, or on the part of, Reliance and
Reliance Bank to authorize the execution, delivery and performance of this
Agreement and the consummation by Reliance and Reliance Bank of the transactions
contemplated hereby shall have been duly and validly taken by the Board of
Directors of Reliance, and Continental shall have received certified copies of
the resolutions evidencing such authorization;
(c) Continental shall have received certificates (such certificates to
be dated as of a day as close as practicable to the date of the Closing) from
appropriate authorities as to the good standing of Reliance and corporate
existence of Reliance Bank;
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(d) Continental shall have received an opinion of Muldoon, Murphy &
Faucette, counsel to Continental, dated as of the Effective Date, in form and
substance customary in transactions of the type contemplated hereby, and
reasonably satisfactory to Continental, substantially to the effect that on the
basis of the facts, representations and assumptions set forth in such opinion
which are consistent with the state of facts existing at the Effective Time, the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and that accordingly:
(i) No gain or loss will be recognized by Reliance,
Reliance Bank or Continental as a result of the Merger;
(ii) Except to the extent of any cash received in
lieu of a fractional share interest in Reliance Common Stock,
no gain or loss will be recognized by the stockholders of
Continental who exchange their Continental Common Stock for
Reliance Common Stock pursuant to the Merger;
(iii) The tax basis of Reliance Stock received by
stockholders who exchange their Continental Common Stock for
Reliance Common Stock in the Merger will be the same as the
tax basis of Continental Common Stock surrendered pursuant to
the Merger, reduced by any amount allocable to a fractional
share interest for which cash is received and increased by any
gain recognized on the exchange;
(iv) The holding period of Reliance Stock received by
each stockholder in the Merger will include the holding period
of Continental Common Stock exchanged therefor, provided that
such stockholder held such Continental Common Stock as a
capital asset on the date of the Merger;
Such opinion may be based on, in addition to the review of such matters
of fact and law as Muldoon, Murphy & Faucette considers appropriate, (i)
representations made at the request of Muldoon, Murphy & Faucette by Reliance,
Reliance Bank, Continental, stockholders of Reliance or Continental, or any
combination of such persons and (ii) certificates provided at the request of
Muldoon, Murphy & Faucette by officers of Reliance, Reliance Bank, Continental
and other appropriate persons;
(e) Reliance shall have caused to be delivered to Continental "cold
comfort" letters or letters of procedures from Reliance's independent certified
public accountants, dated (i) the date of the mailing of the Proxy
Statement-Prospectus to Continental's stockholders and (ii) a date not earlier
than five business days preceding the date of the Closing and addressed to
Continental, concerning such matters as are the customarily covered in
transactions of the type contemplated hereby; and
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(f) Reliance shall have caused to be listed on the Nasdaq National
Market, or on such other market on which shares of Reliance Common Stock shall
then be trading, subject only to official notice of issuance, the shares of
Reliance Common Stock to be issued by Reliance in exchange for the shares of
Continental Common Stock.
ARTICLE VI
TERMINATION
SECTION 6.01 TERMINATION. This Agreement may be terminated, and the
Merger abandoned, at or prior to the Effective Date, either before or after its
approval by the stockholders of Continental and Reliance:
(a) by the mutual consent of Reliance and Continental, if the board of
directors of each so determines by vote of a majority of the members of its
entire board;
(b) by Reliance or Continental, if its board of directors so determines
by vote of a majority of the members of its entire board, in the event of (i)
the failure of the stockholders of Continental to approve the Agreement at its
meeting called to consider such approval; PROVIDED, however, that Continental or
Reliance, as the case may be, shall only be entitled to terminate the Agreement
pursuant to this clause (i) if it has complied in all material respects with its
obligations under Sections 4.09 and 4.10, or (ii) a material breach by the other
party hereto of any representation, warranty, covenant or agreement contained
herein which causes the conditions set forth in Section 5.02(a) (in the case of
termination by Reliance) and Section 5.03(a) (in the case of the termination by
Continental) not to be satisfied and such breach is not cured within 25 business
days after written notice of such breach is given to the party committing such
breach by the other party; or which breach is not capable of being cured by the
date set forth in Section 6.01(d) or any extension thereof;
(c) by Reliance or Continental by written notice to the other party if
either (i) any approval, consent or waiver of a governmental agency required to
permit consummation of the transactions contemplated hereby shall have been
denied or (ii) any governmental authority of competent jurisdiction shall have
issued a final, unappealable order enjoining or otherwise prohibiting
consummation of the transactions contemplated by this Agreement;
(d) by Reliance or Continental, if its board of directors so determines
by vote of a majority of the members of its entire board, in the event that the
Merger is not consummated by March 31, 1998, unless the failure to so consummate
by such time is due to the breach of any representation, warranty or covenant
contained in this Agreement by the party seeking to terminate.
<PAGE>
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(e) by Continental, if its board of directors so determines by a
majority vote of members of its entire board, at any time during the five-day
period commencing with the Valuation Date, if both of the following conditions
are satisfied:
(i) Reliance Market Value is less than $19.20,
adjusted as indicated in the last sentence of this Section
6.01(e) (the "Initial Reliance Market Value"); and
(ii) (A) the number obtained by dividing Reliance
Market Value on such Valuation Date by the Initial Reliance
Market Value (the "Reliance Ratio") is less than (B) the
number obtained by dividing the Final Index Price by the
Initial Index Price and subtracting 0.15 from the quotient in
this clause (ii)(B) (the "Index Ratio");
SUBJECT, HOWEVER, to the following three sentences: (1) if Continental elects to
exercise its termination right pursuant to this Section 6.01(e), it shall give
prompt written notice to Reliance (PROVIDED, FURTHER, THAT such notice of
election to terminate may be withdrawn at any time during the five-day period);
(2) for a period of seven days commencing with its receipt of such notice,
Reliance shall have the option to increase the consideration to be received by
the holders of Continental Common Stock hereunder, by adjusting the Merger
Consideration to equal the lesser of (x) a number equal to a fraction, the
numerator of which is $19.20 and the denominator of which is the Reliance Market
Value, and (y) a number equal to a fraction, the numerator of which is the Index
Ratio multiplied by 1.1 and the denominator of which is Reliance Ratio; and (3)
if Reliance so elects it shall give prompt written notice to Continental of such
election and the adjusted Merger Consideration, whereupon no termination shall
have occurred pursuant to this Section 6.01(e) and this Agreement shall remain
in effect in accordance with its terms (except as the Merger Consideration shall
have been so adjusted).
For purposes of this Section 6.01(e), the following terms shall have
the meanings indicated below:
"Final Index Price" means the sum of the Final Prices for each
company comprising the Index Group multiplied by the applicable
weighting.
"Final Price," with respect to any company being a member of
the Index Group, means the average of the daily closing sales prices of
a share of common stock of such company, as reported on the
consolidated transaction reporting system for the market or exchange on
which such common stock is principally traded, during the period of 15
trading days ending on the Valuation Date, adjusted as indicated in the
last sentence of this Section 6.01(e).
"Index Group" means the 19 financial institution holding
companies listed below, the common stock of all of which are publicly
traded and as to which there have not been any publicly announced
proposal at any time during the period beginning on the date of
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this Agreement and ending on the Valuation Date for any such company to
be acquired. In the event that the common stock of any such company
ceases to be publicly traded or a proposal to acquire any such company
is announced at any time during the period beginning on the date of
this Agreement and ending on the Valuation Date, such company shall be
removed from the Index Group, and the weights attributed to the
remaining companies shall be adjusted proportionately for purposes of
determining the Final Index Price and the Initial Index Price. The 19
financial institution holding companies and the weights attributed to
them are as follows:
HOLDING COMPANY WEIGHTING
Commonwealth Bancorp, Inc. 6.56%
Dime Community Bancorp, Inc. 6.09%
Eagle Financial Corp. 3.24%
First Essex Bancorp, Inc. 3.30%
First Indiana Corporation 5.12%
Flushing Financial Corp. 4.02%
Haven Bancorp, Inc. 3.65%
InterWest Bancorp, Inc. 6.25%
Jefferson Savings Bancorp 3.25%
JSB Financial, Inc. 11.00%
Life Bancorp, Inc. 4.89%
Magna Bancorp, Inc. 6.56%
ML Bancorp, Inc. 4.59%
Ocean Financial Corp. 7.18%
PennFed Financial Services Inc. 3.14%
Queens County Bancorp, Inc. 11.07%
SIS Bancorp, Inc. 2.22%
Vermont Financial Services Corp. 4.88%
York Financial Corp. 3.26%
"Initial Index Price" means the sum of each per share closing
price of the common stock of each company comprising the Index Group
multiplied by the applicable weighting, as such prices are reported on
the consolidated transactions reporting system for the market or
exchange on which such common stock is principally traded on the
trading day immediately preceding the public announcement of this
Agreement.
"Reliance Market Value" shall have the meaning set forth in
Section 1.02(c) hereof.
"Valuation Date" means the Valuation Date, as defined in
Section 1.02(c) hereof.
If Reliance or any company belonging to the Index Group declares or effects a
stock dividend, reclassification, recapitalization, split-up, combination,
exchange of shares or similar transaction between the date of this Agreement and
the Valuation Date, the prices for the common stock of
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such company shall be appropriately adjusted, in the manner specified in Section
1.02(b) of this Agreement, for the purposes of applying this Section 6.01(e).
SECTION 6.02 EFFECT OF TERMINATION. In the event of the termination of
this Agreement by either Reliance or Continental, as provided above, this
Agreement shall thereafter become void and, subject to the provisions of Section
8.02, there shall be no liability on the part of any party hereto or their
respective officers or directors, except that any such termination shall be
without prejudice to the rights of any party hereto arising out of the willful
breach by any other party of any covenant or willful misrepresentation contained
in this Agreement.
SECTION 6.03 THIRD PARTY TERMINATION FEE. In recognition of the
efforts, expenses and other opportunities foregone by Reliance while structuring
the Merger, the parties agree that Continental shall pay to Reliance the
termination fee of three hundred fifty thousand dollars ($350,000) in cash on
demand if, during a period of eighteen (18) months after the date hereof but
prior to the termination of this Agreement in accordance with its terms
(provided the Agreement is not terminated by Reliance pursuant to Section
6.01(b)), any of the following occurs:
(a) the acquisition by any person other than Reliance or an affiliate
of Reliance of beneficial ownership of 20% or more of the then outstanding
voting power of Continental;
(b) Continental or any of its Subsidiaries, without having received
Reliance's prior written consent, shall have entered into an agreement to engage
in an Acquisition Transaction (as defined herein) with any person (the term
"person" for purposes of this Section 6.03 having the meaning assigned thereto
in Sections 3(a)(9) and 13(d)(3) of the Exchange Act and the rules and
regulations thereunder) other than Reliance or any of its Subsidiaries or the
Board of Directors of Continental shall have recommended that the stockholders
of Continental approve or accept any Acquisition Transaction with any person
other than Reliance or any of its Subsidiaries. For purposes of this Agreement,
"Acquisition Transaction" shall mean (x) a merger or consolidation, or any
similar transaction, involving Continental, (y) a purchase, lease or other
acquisition of all or substantially all of the assets of Continental or (z) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 20% or more of the voting
power of Continental; PROVIDED, that the term "Acquisition Transaction" does not
include any internal merger or consolidation involving only Continental and/or
its Subsidiaries; or
(c) after a BONA FIDE proposal is made by a third party to Continental
or its stockholders to engage in an Acquisition Transaction, (i) Continental
shall have willfully breached any covenant or obligation contained in the
Agreement and such breach would entitle Reliance to terminate the Agreement or
(ii) the holders of Continental Common Stock shall not have approved the
Agreement at the meeting of such stockholders held for the purpose of voting on
the Agreement, or such meeting shall not have been held or shall have been
canceled prior to termination of the Agreement or (iii) Continental's board of
directors shall have withdrawn or modified in a manner adverse to Reliance the
recommendation of Continental's board of directors with respect to the
Agreement.
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Notwithstanding the foregoing, Continental shall not be obligated to
pay to Reliance such termination fees in the event that (i) Continental or
Reliance validly terminates this Agreement pursuant to Section 6.01(a) or
6.01(c) or (ii) Continental terminates this Agreement pursuant to Section
6.01(b)(ii) or 6.01(e).
ARTICLE VII
CLOSING, EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.01 EFFECTIVE DATE AND EFFECTIVE TIME. The closing of the
transactions contemplated hereby shall take place at the offices of Reliance,
585 Stewart Avenue, Garden City, New York 11530, on such date (the "Closing
Date") and at such time as Reliance reasonably selects that is not earlier than
the later of (a) October 12, 1997 or (b) the last business day of the month in
which the expiration of the last applicable waiting period in connection with
approvals of governmental authorities shall occur and all conditions to the
consummation of this Agreement are satisfied or waived, or on such earlier, or
such other date as may be agreed by the parties. On the Closing Date, Reliance
Bank and Continental shall execute articles of merger in accordance with all
appropriate legal requirements and shall be filed as required by law, and the
Merger provided for herein shall become effective upon such filing or on such
date as may be specified in such articles of merger. The date of such filing or
such later effective date is herein called the "Effective Date." The "Effective
Time" of the Merger shall be as set forth in such articles of merger.
SECTION 7.02 DELIVERIES AT THE CLOSING. Subject to the provisions of
Articles V and VI, on the Closing Date there shall be delivered to Reliance and
Continental the documents and instruments required to be delivered under Article
V.
ARTICLE VIII
CERTAIN OTHER MATTERS
SECTION 8.01 CERTAIN DEFINITIONS; INTERPRETATION. As used in this
Agreement, the following terms shall have the meanings indicated:
"material" means material to Reliance or Continental (as the case may
be) and its respective subsidiaries, taken as a whole.
"person" includes an individual, corporation, limited liability
company, partnership, association, trust or unincorporated organization.
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of, Exhibit or Schedule to, this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for ease of
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reference only and shall not affect the meaning or interpretation of this
Agreement. Whenever the words "include", "includes", or "including" are used in
this Agreement, they shall be deemed followed by the words "without limitation."
Any singular term in this Agreement shall be deemed to include the plural, and
any plural term the singular. Any reference to gender in this Agreement shall be
deemed to any other gender.
SECTION 8.02 SURVIVAL. Only those agreements and covenants of the
parties that are by their terms applicable in whole or in part after the
Effective Time, including Sections 4.03, 4.04(a), 4.14 and 8.06 of this
Agreement, shall survive the Effective Time. All other representations,
warranties, agreements and covenants shall be deemed to be conditions of the
Agreement and shall not survive the Effective Time. If the Agreement shall be
terminated, the agreements of the parties in the last three sentences of Section
4.04, Section 6.03 and Section 8.06 shall survive such termination.
SECTION 8.03 WAIVER; AMENDMENT. Prior to the Effective Time, any
provision of this Agreement may be: (i) waived in writing by the party
benefitted by the provision; or (ii) amended or modified at any time (including
the structure of the transaction) by an agreement in writing between the parties
hereto except that, after the vote by the stockholders of Continental or
Reliance, no amendment may be made that would reduce the Merger Consideration or
contravene applicable New York or federal banking laws, rules and regulations.
SECTION 8.04 COUNTERPARTS. This Agreement may be executed in
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
SECTION 8.05 GOVERNING LAW. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of New York, without
regard to conflicts of laws principles.
SECTION 8.06 EXPENSES. Each party hereto will bear all expenses
incurred by it in connection with this Agreement and the transactions
contemplated hereby.
SECTION 8.07 NOTICES. All notices, requests, acknowledgements and
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, overnight courier or
facsimile transmission (confirmed in writing) to such party at its address or
facsimile number set forth below or such other address or facsimile transmission
as such party may specify by notice to the other party hereto.
<PAGE>
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If to Continental, to:
Continental Bank
118 7th Street
Garden City, New York 11530-0899
Facsimile: (516) 741-0667
Attention: John P. Sullivan
President and Chief Executive Officer
With copies to:
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, NW
Washington, DC 20016
Facsimile: (202) 966-9409
Attention: Douglas P. Faucette, Esq.
If to Reliance or Reliance Bank, to:
Reliance Bancorp, Inc.
585 Stewart Avenue
Garden City, New York 11530
Facsimile: (516) 222-1805
Attention: Raymond A. Nielsen
President and Chief Executive Officer
With copies to:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Facsimile: (212) 912-7751
Attention: Omer S. J. Williams, Esq.
SECTION 8.08 ENTIRE AGREEMENT; ETC. This Agreement, together with the
Option Agreement and the Disclosure Letters represents the entire understanding
of the parties hereto with reference to the transactions contemplated hereby and
supersedes any and all other oral or written agreements heretofore made. All
terms and provisions of the Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
Except for Section 4.14, nothing in this Agreement is intended to confer upon
any other person any rights or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 8.09 ASSIGNMENT. This Agreement may not be assigned by any
party hereto without the written consent of the other parties.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
RELIANCE BANCORP, INC.
By: /s/ Raymond A. Nielsen
------------------------------------------
Raymond A. Nielsen
President and Chief Executive Officer
RELIANCE FEDERAL SAVINGS BANK
By: /s/ Raymond A. Nielsen
------------------------------------------
Raymond A. Nielsen
President and Chief Executive Officer
CONTINENTAL BANK
By: /s/ John P. Sullivan
------------------------------------------
John P. Sullivan
President and Chief Executive Officer
<PAGE>
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FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER
BETWEEN RELIANCE BANCORP, INC., RELIANCE FEDERAL SAVINGS BANK
AND CONTINENTAL BANK
The Agreement and Plan of Merger between Reliance Bancorp, Inc.,
Reliance Federal Savings Bank and Continental Bank dated May 3, 1997
("Agreement"), shall be amended as follows, effective as of May 3, 1997:
FIRST. Section 1.06 of the Agreement shall be amended by replacing
subsection (b) it in its entirety with the following:
(b) The "phantom stock units" of Continental Common Stock (the
"Continental Phantom Stock") granted pursuant to Section 4(c) of the
employment agreement by and between Continental and John P. Sullivan
dated October 11, 1996 (the "Sullivan Employment Agreement"), as
amended pursuant to the First Amendment to the Sullivan Employment
Agreement, dated March 14, 1997, and further amended pursuant to the
Second Amendment to the Sullivan Employment Agreement, dated May 21,
1997, which include 45,600 shares of Continental Phantom Stock granted
to Mr. Sullivan, 5,000 shares of Continental Phantom Stock granted to
Mr. Thomas Cangemi and 3,000 shares of Continental Phantom Stock
granted to Mr. Peter McCarthy, shall be canceled and replaced with a
right to receive an amount per share of Continental Phantom Stock equal
to the Reliance Market Value multiplied by 1.1, without adjustment for
interest or otherwise if such amount is paid on a date other than the
date which includes the Effective Time. Prior to the Effective Time,
Continental shall take all actions necessary to effect such
cancellation or replacement. In consideration for such cancellation,
Continental shall pay to Mr. Sullivan, Mr. Cangemi and Mr. McCarthy an
amount (subject to applicable federal, state and local tax withholding)
equal to (i) the Reliance Market Value multiplied by 1.1, without
adjustment for interest or otherwise if such amount is paid on a date
other than the date which includes the Effective Time, multiplied by
(ii) the number of shares of Continental Phantom Stock specified for
each such individual as designated above. Continental shall make such
payment at the Effective Time to each individual provided that the
individual delivers to Continental his written acceptance of such
payment as full and complete consideration for the cancellation of each
share of Continental Phantom Stock held by him.
SECOND. Except as expressly amended herein, the Agreement shall remain
in full force and effect.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers as of the 1st day of
July, 1997.
RELIANCE BANCORP, INC.
By: /s/ Raymond A. Nielsen
-------------------------------
Raymond A. Nielsen
President and Chief Executive Officer
RELIANCE FEDERAL SAVINGS BANK
By: /s/ Raymond A. Nielsen
------------------------------
Raymond A. Nielsen
President and Chief Executive Officer
CONTINENTAL BANK
By: /s/ John P. Sullivan
-----------------------------
John P. Sullivan
President and Chief Executive Officer
<PAGE>
APPENDIX B
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND
MAY BE SUBJECT TO TRANSFER RESTRICTIONS
UNDER FEDERAL AND STATE BANKING LAW
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of May 3, 1997 (the
"Agreement"), by and between CONTINENTAL BANK, a New York chartered stock
commercial bank ("Issuer"), and RELIANCE BANCORP, INC., a Delaware corporation
("Grantee").
RECITALS
A. THE PLAN. Grantee and Issuer have entered into an
Agreement and Plan of Merger, dated as of May 3, 1997 (the "Plan"), providing
for, among other things, the merger of Issuer with and into a wholly-owned
subsidiary of Grantee, with such subsidiary being the surviving corporation.
B. CONDITION TO PLAN. As a condition and an inducement to
Grantee's execution and delivery of the Plan, Grantee has required that Issuer
agree, and Issuer has agreed, to grant Grantee the Option (as hereinafter
defined).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Plan, and intending to be legally bound hereby, Issuer and Grantee agree as
follows:
1. DEFINED TERMS. Capitalized terms which are used but not
defined herein shall have the meanings ascribed to such terms in the Plan.
2. GRANT OF OPTION. Subject to the terms and conditions set
forth herein, Issuer hereby grants to Grantee an irrevocable option (the
"Option") to purchase up to 183,425 shares of common stock, par value $5.00 per
share ("Issuer Common Stock"), of Issuer (as adjusted as set forth herein, the
"Option Shares," which shall include the Option Shares before and after any
transfer of such Option Shares, but in no event shall the number of Option
Shares for which this Option is exercisable exceed 19.9% of the issued and
outstanding shares of Issuer Common Stock), at a purchase price per Option Share
(as adjusted as set forth herein, the "Purchase Price") equal to $22.00.
3. EXERCISE OF OPTION.
(a) Provided that (i) Grantee or Holder (as hereinafter
defined), as applicable, shall not be in material breach of the agreements or
covenants contained in this Agreement or the Plan, and (ii) no preliminary or
permanent injunction or other order against the delivery of shares covered by
the Option issued by any court of competent jurisdiction in the United States
shall be in effect, the Holder may exercise the Option, in whole or in part, at
any time and from time to
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<PAGE>
time, following the occurrence of a Purchase Event (as hereinafter defined);
PROVIDED, that the Option shall terminate and be of no further force or effect
upon the earliest to occur of (A) the Effective Time, (B) termination of the
Plan in accordance with the terms thereof prior to the occurrence of a Purchase
Event or a Preliminary Purchase Event other than a termination thereof by
Grantee pursuant to Section 6.01(b)(ii) of the Plan (a termination of the Plan
by Grantee pursuant to Section 6.01(b)(ii) of the Plan, being referred to herein
as a "Default Termination"), (C) 12 months after a Default Termination or (D) 12
months after termination of the Plan (other than a Default Termination)
following the occurrence of a Purchase Event or a Preliminary Purchase Event;
PROVIDED, HOWEVER, that any purchase of shares upon exercise of the Option shall
be subject to compliance with applicable law. The term "Holder" shall mean the
holder or holders of the Option from time to time, and which initially is
Grantee. The rights set forth in Section 8 of this Agreement shall terminate
when the right to exercise the Option terminates (other than as a result of a
complete exercise of the Option) as set forth herein.
(b) As used herein, a "Purchase Event" means any of the
following events:
(i) Without Grantee's prior written consent, Issuer
shall have recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose, or Issuer shall have
entered into an agreement with any person (other than Grantee or any
subsidiary of Grantee) to effect (A) a merger, consolidation or similar
transaction involving Issuer or any of its significant subsidiaries,
(B) the disposition, by sale, lease, exchange or otherwise, of assets
or deposits of Issuer or any of its significant subsidiaries
representing in either case 20% or more of the consolidated assets or
deposits of Issuer and its subsidiaries or (C) the issuance, sale or
other disposition by Issuer of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
representing 20% or more of the voting power of Issuer or any of its
significant subsidiaries, other than, in the case of (A) or (C), any
transaction involving Issuer or any of its significant subsidiaries in
which the voting securities of Issuer outstanding immediately prior
thereto continue to represent (by either remaining outstanding or being
converted into the voting securities of the surviving entity of any
such transaction) at least 65% of the combined voting power of the
voting securities of the Issuer or the surviving entity outstanding
immediately after the consummation of such transaction (PROVIDED, any
such transaction is not violative of the Plan) (each of (A), (B) or
(C), an "Acquisition Transaction"); or
(ii) Any person (other than Grantee or any subsidiary
of Grantee) shall have acquired beneficial ownership (as such term is
defined in Rule 13d-3, promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of, or the right to acquire
beneficial ownership of, or any "group" (as such term is defined in
Section 13(d)(3) of the Exchange Act), other than a group of which
Grantee or any subsidiary of Grantee is a member, shall have been
formed which beneficially owns or has the right to acquire beneficial
ownership of, 20% or more of the voting power of Issuer or any of its
significant subsidiaries.
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<PAGE>
(c) As used herein, a "Preliminary Purchase Event" means any
of the following events:
(i) Any person (other than Grantee or any subsidiary
of Grantee) shall have commenced (as such term is defined in Rule
14d-2, promulgated under the Exchange Act) or shall have filed a
registration statement under the Securities Act of 1933 as amended,
(the "Securities Act"), with respect to, a tender offer or exchange
offer to purchase any shares of Issuer Common Stock such that, upon
consummation of such offer, such person would own or control 20% or
more of the then outstanding shares of Issuer Common Stock (such an
offer being referred to herein as a "Tender Offer" or an "Exchange
Offer," respectively); or
(ii) The stockholders of Issuer shall not have
approved the Plan by the requisite vote at the meeting of the
stockholders of the Issuer required to be called to approve the Plan
(the "Issuer Meeting"), the Issuer Meeting shall not have been held or
shall have been canceled prior to termination of the Plan or Issuer's
Board of Directors shall have withdrawn or modified in a manner adverse
to Grantee the recommendation of Issuer's Board of Directors with
respect to the Plan, in each case after it shall have been publicly
announced that any person (other than Grantee or any subsidiary of
Grantee) shall have (A) made, or disclosed an intention to make, a bona
fide proposal to engage in an Acquisition Transaction, (B) commenced a
Tender Offer or filed a registration statement under the Securities Act
with respect to an Exchange Offer or (C) filed an application (or given
a notice), whether in draft or final form, under the Home Owners' Loan
Act of 1933, as amended ("HOLA"), the Bank Holding Company Act, as
amended (the "BHC Act"), the Bank Merger Act, as amended (the"BMA") or
the Change in Bank Control Act of 1978, as amended ("CBCA"), for
approval to engage in an Acquisition Transaction; or
(iii) Any person (other than Grantee or any
subsidiary of Grantee) shall have made a bona fide proposal to Issuer
or its stockholders by public announcement, or written communication
that is or becomes the subject of public disclosure, to engage in an
Acquisition Transaction; or
(iv) After a proposal is made by a third party to
Issuer or its stockholders to engage in an Acquisition Transaction, or
such third party states its intention to the Issuer to make such a
proposal if the Plan terminates, and thereafter Issuer shall have
willfully breached any representation, warranty, covenant or agreement
contained in the Plan and such breach would entitle Grantee to
terminate the Plan under Section 6.01(b) thereof (without regard to the
cure period provided for therein unless such cure is promptly effected
without jeopardizing consummation of the Merger pursuant to the terms
of the Plan).
As used in this Agreement, the term "person" shall have the
meaning specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
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<PAGE>
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Preliminary Purchase Event or Purchase Event, it being
understood that the giving of such notice by Issuer shall not be a condition to
the right of Holder to exercise the Option.
(e) In the event Holder wishes to exercise the Option, it
shall send to Issuer a written notice (the date of which being herein referred
to as the "Notice Date") specifying (i) the total number of Option Shares it
intends to purchase pursuant to such exercise and (ii) a place and date not
earlier than three business days nor later than 15 business days from the Notice
Date for the closing (the "Closing") of such purchase (the "Closing Date");
PROVIDED, that the first notice of exercise shall be sent to Issuer within 180
days after the first Purchase Event of which Grantee has been notified. If prior
notification to or approval of any Regulatory Authority is required in
connection with any such purchase, Issuer shall cooperate with the Holder in the
filing of the required notice of application for approval and the obtaining of
such approval, and the Closing shall occur immediately following such regulatory
approvals and any mandatory waiting periods. Any exercise of the Option shall be
deemed to occur on the Notice Date relating thereto.
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On each Closing Date, Holder shall (i) pay to Issuer, in
immediately available funds by wire transfer to a bank account designated by
Issuer, an amount equal to the Purchase Price multiplied by the number of Option
Shares to be purchased on such Closing Date and (ii) present and surrender this
Agreement to the Issuer at the address of the Issuer specified in Section 12(f)
of this Agreement.
(b) At each Closing, simultaneously with the delivery of
immediately available funds and surrender of this Agreement as provided in
Section 4(a) of this Agreement, (i) Issuer shall deliver to Holder (A) a
certificate or certificates representing the Option Shares to be purchased at
such Closing, which Option Shares shall be free and clear of all liens and
encumbrances and subject to no preemptive rights, and (B) if the Option is
exercised in part only, an executed new agreement with the same terms as this
Agreement evidencing the right to purchase the balance of the shares of Issuer
Common Stock purchasable hereunder, and (ii) Holder shall deliver to Issuer a
letter agreeing that Holder shall not offer to sell or otherwise dispose of such
Option Shares in violation of applicable federal and state law or of the
provisions of this Agreement.
(c) In addition to any other legend that is required by
applicable law, certificates for the Option Shares delivered at each Closing
shall be endorsed with a restrictive legend which shall read substantially as
follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND PURSUANT
TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF MAY 3, 1997. A COPY OF SUCH
AGREEMENT WILL BE PROVIDED
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<PAGE>
TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN
REQUEST THEREFOR.
It is understood and agreed that the portion of the above legend relating to the
Securities Act shall be removed by delivery of substitute certificate(s) without
such legend if Holder shall have delivered to Issuer a copy of a letter from the
staff of the Securities Exchange Commission (the "SEC"), or an opinion of
counsel in form and substance reasonably satisfactory to Issuer and its counsel,
to the effect that such legend is not required for purposes of the Securities
Act.
(d) Upon the giving by Holder to Issuer of the written notice
of exercise of the Option provided for under Section 3(e) of this Agreement, the
tender of the applicable purchase price in immediately available funds and the
tender of this Agreement to Issuer, Holder shall be deemed to be the holder of
record of the shares of Issuer Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be closed or
that certificates representing such shares of Issuer Common Stock shall not then
be actually delivered to Holder. Issuer shall pay all expenses, and any and all
United States federal, state and local taxes and other charges that may be
payable in connection with the preparation, issuance and delivery of stock
certificates under this Section 4 in the name of Holder or its assignee,
transferee or designee.
(e) Issuer agrees (i) that it shall at all times maintain,
free from preemptive rights, sufficient authorized but unissued or treasury
shares of Issuer Common Stock so that the Option may be exercised without
additional authorization of Issuer Common Stock after giving effect to all other
options, warrants, convertible securities and other rights to purchase Issuer
Common Stock, (ii) that it will not, by charter amendment or through
reorganization, consolidation, merger, dissolution or sale of assets, or by any
other voluntary act, avoid or seek to avoid the observance or performance of any
of the covenants, stipulations or conditions to be observed or performed
hereunder by Issuer, (iii) promptly to take all action as may from time to time
be required (including (A) complying with all premerger notification, reporting
and waiting period requirements and (B) in the event prior approval of or notice
to any Regulatory Authority is necessary before the Option may be exercised,
cooperating fully with Holder in preparing such applications or notices and
providing such information to such Regulatory Authority as it may require) in
order to permit Holder to exercise the Option and Issuer duly and effectively to
issue shares of the Issuer Common Stock pursuant hereto and (iv) promptly to
take all action provided herein to protect the rights of Holder against
dilution.
5. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby
represents and warrants to Grantee (and Holder, if different than Grantee) as
follows:
(a) CORPORATE AUTHORITY. Issuer has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby; the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of
Issuer, and no other corporate proceedings on the part of Issuer are
necessary
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to authorize this Agreement or to consummate the transactions
contemplated by this Agreement. This Agreement has been duly and
validly executed and delivered by Issuer.
(b) BENEFICIAL OWNERSHIP. To the best knowledge of Issuer, as
of the date of this Agreement, no person or group has beneficial
ownership of more than 18.48% of the issued and outstanding shares of
Issuer Common Stock.
(c) SHARES RESERVED FOR ISSUANCE; CAPITAL STOCK. Issuer has
taken all necessary corporate action to authorize and reserve and
permit it to issue, and at all times from the date hereof through the
termination of this Agreement in accordance with its terms, will have
reserved for issuance upon the exercise of the Option, that number of
shares of Issuer Common Stock equal to the maximum number of shares of
Issuer Common Stock at any time and from time to time purchasable upon
exercise of the Option, and all such shares, upon issuance pursuant to
the Option, will be duly authorized, validly issued, fully paid and
nonassessable, and will be delivered free and clear of all claims,
liens, encumbrances and security interests (other than those created by
this Agreement) and not subject to any preemptive rights.
(d) NO VIOLATIONS. The execution, delivery and performance of
this Agreement does not and will not, and the consummation by Issuer of
any of the transactions contemplated hereby will not, constitute or
result in (i) a breach or violation of, or a default under, its
certificate of incorporation or bylaws, or the comparable governing
instruments of any of its subsidiaries, or (ii) a breach or violation
of, or a default under, any agreement, lease, contract, note, mortgage,
indenture, arrangement or other obligation of it or any of its
subsidiaries (with or without the giving of notice, the lapse of time
or both) or under any law, rule, ordinance or regulation or judgment,
decree, order, award or governmental or non-governmental permit or
license to which it or any of its subsidiaries is subject, that would,
in any case, give any other person the ability to prevent or enjoin
Issuer's performance under this Agreement in any material respect.
6. REPRESENTATIONS AND WARRANTIES OF GRANTEE. Grantee hereby
represents and warrants to Issuer that Grantee has full corporate power and
authority to enter into this Agreement and, subject to obtaining the approvals
referred to in this Agreement, to consummate the transactions contemplated by
this Agreement; the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Grantee; and this Agreement has
been duly executed and delivered by Grantee.
7. ADJUSTMENT UPON CHANGES IN ISSUER CAPITALIZATION, ETC.
(a) In the event of any change in Issuer Common Stock by
reason of a stock dividend, stock split, split-up, recapitalization,
combination, exchange of shares, or similar transaction, the type and number of
shares or securities subject to the Option, and the Purchase Price therefor,
shall be adjusted appropriately, and proper provision shall be made in the
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agreements governing any such transaction so that Holder shall receive, upon
exercise of the Option, the number and class of shares or other securities or
property that Holder would have received in respect of Issuer Common Stock if
the Option had been exercised immediately prior to such event, or the record
date therefor, as applicable. If any additional shares of Issuer Common Stock
are issued after the date of this Agreement (other than pursuant to an event
described in the first sentence of this Section 7(a), upon exercise of any
option to purchase Issuer Common Stock outstanding on the date hereof or upon
conversion into Issuer Common Stock of any convertible security of Issuer
outstanding on the date hereof), the number of shares of Issuer Common Stock
subject to the Option shall be adjusted so that, after such issuance, it,
together with any shares of Issuer Common Stock previously issued pursuant
hereto, equals 19.9% of the number of shares of Issuer Common Stock then issued
and outstanding, without giving effect to any shares subject to or issued
pursuant to the Option. No provision of this Section 7 shall be deemed to affect
or change, or constitute authorization for any violation of, any of the
covenants or representations in the Plan.
(b) In the event that Issuer shall enter into an agreement (i)
to consolidate with or merge into any person, other than Grantee or one of its
subsidiaries, and Issuer shall not be the continuing or surviving corporation of
such consolidation or merger, (ii) to permit any person, other than Grantee or
one of its subsidiaries, to merge into Issuer and Issuer shall be the continuing
or surviving corporation, but, in connection with such merger, the then
outstanding shares of Issuer Common Stock shall be changed into or exchanged for
stock or other securities of Issuer or any other person or cash or any other
property, or the outstanding shares of Issuer Common Stock immediately prior to
such merger shall after such merger represent less than 50% of the outstanding
shares and share equivalents of the merged company, or (iii) to sell or
otherwise transfer all or substantially all of its assets or deposits to any
person, other than Grantee or one of its subsidiaries, then, and in each such
case, the agreement governing such transaction shall make proper provisions so
that the Option shall, upon the consummation of any such transaction and upon
the terms and conditions set forth herein, be converted into, or exchanged for,
an option (the "Substitute Option"), at the election of Holder, of either (A)
the Acquiring Corporation (as hereinafter defined), (B) any person that controls
the Acquiring Corporation or (C) in the case of a merger described in clause
(ii), Issuer (such person being referred to as "Substitute Option Issuer").
(c) The Substitute Option shall have the same terms as the
Option, PROVIDED, that, if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to Holder. Substitute Option Issuer shall also
enter into an agreement with Holder in substantially the same form as this
Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number
of shares of Substitute Common Stock (as hereinafter defined) as is equal to the
Assigned Value (as hereinafter defined) multiplied by the number of shares of
Issuer Common Stock for which the Option was theretofore exercisable, divided by
the Average Price (as hereinafter defined). The exercise price of the Substitute
Option per share of Substitute Common Stock (the "Substitute Option Price")
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shall then be equal to the Purchase Price multiplied by a fraction in which the
numerator is the number of shares of Issuer Common Stock for which the Option
was theretofore exercisable and the denominator is the number of shares of the
Substitute Common Stock for which the Substitute Option is exercisable.
(e) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (A) the
continuing or surviving corporation of a consolidation or merger with
Issuer (if other than Issuer), (B) Issuer in a merger in which Issuer
is the continuing or surviving person, or (C) the transferee of all or
substantially all of Issuer's assets (or a substantial part of the
assets of its subsidiaries taken as a whole).
(ii) "Substitute Common Stock" shall mean the shares
of capital stock (or similar equity interest) with the greatest voting
power in respect of the election of directors (or persons similarly
responsible for the direction of the business and affairs) of the
Substitute Option Issuer.
(iii) "Assigned Value" shall mean the highest of (A)
the price per share of Issuer Common Stock at which a Tender Offer or
an Exchange Offer therefor has been made, (B) the price per share of
Issuer Common Stock to be paid by any third party pursuant to an
agreement with Issuer, (C) the highest closing price for shares of
Issuer Common Stock within the six-month period immediately preceding
the consolidation, merger or sale in question and (D) in the event of a
sale of all or substantially all of Issuer's assets or deposits, an
amount equal to (x) the sum of the price paid in such sale for such
assets (and/or deposits) and the current market value of the remaining
assets of Issuer, as determined by a nationally recognized investment
banking firm selected by Holder, divided by (y) the number of shares of
Issuer Common Stock outstanding at such time. In the event that a
Tender Offer or an Exchange Offer is made for Issuer Common Stock or an
agreement is entered into for a merger or consolidation involving
consideration other than cash, the value of the securities or other
property issuable or deliverable in exchange for Issuer Common Stock
shall be determined by a nationally recognized investment banking firm
selected by Holder.
(iv) "Average Price" shall mean the average closing
price of a share of Substitute Common Stock for the one year
immediately preceding the consolidation, merger or sale in question,
but in no event higher than the closing price of the shares of
Substitute Common Stock on the day preceding such consolidation, merger
or sale; PROVIDED, that, if Issuer is the issuer of the Substitute
Option, the Average Price shall be computed with respect to a share of
common stock issued by Issuer, the person merging into Issuer or by any
company which controls such person, as Holder may elect.
(f) In no event, pursuant to any of the foregoing paragraphs,
shall the Substitute Option be exercisable for more than 19.9% of the aggregate
of the shares of Substitute Common
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Stock outstanding prior to exercise of the Substitute Option. In the event that
the Substitute Option would be exercisable for more than 19.9% of the aggregate
of the shares of Substitute Common Stock but for the limitation in the first
sentence of this Section 7(f), Substitute Option Issuer shall make a cash
payment to Holder equal to the excess of (i) the value of the Substitute Option
without giving effect to the limitation in the first sentence of this Section
7(f) over (ii) the value of the Substitute Option after giving effect to the
limitation in the first sentence of this Section 7(f). This difference in value
shall be determined by a nationally recognized investment banking firm selected
by Holder.
(g) Issuer shall not enter into any transaction described in
Section 7(b) of this Agreement unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder and take all other actions that may be necessary so that the
provisions of this Section 7 are given full force and effect (including, without
limitation, any action that may be necessary so that the holders of the other
shares of common stock issued by Substitute Option Issuer are not entitled to
exercise any rights by reason of the issuance or exercise of the Substitute
Option and the shares of Substitute Common Stock are otherwise in no way
distinguishable from or have lesser economic value (other than any diminution in
value resulting from the fact that the shares Substitute Common Stock are
restricted securities, as defined in Rule 144, promulgated under the Securities
Act ("Rule 144"), or any successor provision) than other shares of common stock
issued by Substitute Option Issuer).
8. REPURCHASE AT THE OPTION OF HOLDER.
(a) Subject to the last sentence of Section 3(a) of this
Agreement, at the request of Holder at any time commencing upon the first
occurrence of a Repurchase Event (as defined in Section 8(d) hereof) and ending
12 months immediately thereafter, Issuer shall repurchase from Holder (i) the
Option and (ii) all shares of Issuer Common Stock purchased by Holder pursuant
hereto with respect to which Holder then has beneficial ownership. The date on
which Holder exercises its rights under this Section 8 is referred to as the
"Request Date." Such repurchase shall be at an aggregate price (the "Section 8
Repurchase Consideration") equal to the sum of:
(i) The aggregate Purchase Price paid by Holder for
any shares of Issuer Common Stock acquired pursuant to the Option with
respect to which Holder then has beneficial ownership;
(ii) The excess, if any, of (A) the Applicable Price
(as defined below) for each share of Issuer Common Stock over (B) the
Purchase Price (subject to adjustment pursuant to Section 7 of this
Agreement), multiplied by the number of shares of Issuer Common Stock
with respect to which the Option has not been exercised; and
(iii) The excess, if any, of the Applicable Price
over the Purchase Price (subject to adjustment pursuant to Section 7 of
this Agreement) paid (or, in the case of Option Shares with respect to
which the Option has been exercised but the Closing Date has not
occurred, payable) by Holder for each share of Issuer Common Stock with
respect
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to which the Option has been exercised and with respect to which Holder
then has beneficial ownership, multiplied by the number of such shares.
(b) If Holder exercises its rights under this Section 8,
Issuer shall, within 10 business days after the Request Date, pay the Section 8
Repurchase Consideration to Holder in immediately available funds, and
contemporaneously with such payment, Holder shall surrender to Issuer the Option
and the certificates evidencing the shares of Issuer Common Stock purchased
thereunder with respect to which Holder then has beneficial ownership, and
Holder shall warrant that it has sole record and beneficial ownership of such
shares and that the same are then free and clear of all Liens. Notwithstanding
the foregoing, to the extent that prior notification to or approval of any
Regulatory Authority is required in connection with the payment of all or any
portion of the Section 8 Repurchase Consideration, Holder shall have the ongoing
option to revoke its request for repurchase pursuant to this Section 8, in whole
or in part, or to require that Issuer deliver from time to time that portion of
the Section 8 Repurchase Consideration that it is not then so prohibited from
paying and promptly file the required notice or application for approval and
expeditiously process the same (and each party shall cooperate with the other in
the filing of any such notice or application and the obtaining of any such
approval). If any Regulatory Authority disapproves of any part of Issuer's
proposed repurchase pursuant to this Section 8, Issuer shall promptly give
notice of such fact to Holder. If any Regulatory Authority prohibits the
repurchase in part but not in whole, then Holder shall have the right (i) to
revoke the repurchase request or (ii) to the extent permitted by such Regulatory
Authority, determine whether the repurchase should apply to the Option and/or
Option Shares and to what extent to each, and Holder shall thereupon have the
right to exercise the Option as to the number of Option Shares for which the
Option was exercisable at the Request Date less the number of shares covered by
the Option in respect of which payment has been made pursuant to Section
8(a)(ii) of this Agreement. Holder shall notify Issuer of its determination
under the preceding sentence within five business days of receipt of notice of
disapproval of the repurchase.
Notwithstanding anything herein to the contrary, all of
Holder's rights under this Section 8 shall terminate on the date of termination
of this Option pursuant to Section 3(a) of this Agreement.
(c) For purposes of this Agreement, the "Applicable Price"
means the highest of (i) the highest price per share of Issuer Common Stock paid
for any such share by the person or groups described in Section 8(d)(i) hereof,
(ii) the price per share of Issuer Common Stock received by holders of Issuer
Common Stock in connection with any merger, sale or other business combination
transaction described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii) of this
Agreement, or (iii) the highest closing sales price per share of Issuer Common
Stock quoted on the Nasdaq (or if Issuer Common Stock is not quoted on the
Nasdaq, the highest bid price per share as quoted on the principal trading
market or securities exchange on which such shares are traded as reported by a
recognized source chosen by Holder) during the 40 business days preceding the
Request Date; PROVIDED, HOWEVER, that in the event of a sale of less than all of
Issuer's assets, the Applicable Price shall be the sum of the price paid in such
sale for such assets and the current market value of the remaining assets of
Issuer as determined by a nationally recognized investment banking firm
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selected by Holder, divided by the number of shares of the Issuer Common Stock
outstanding at the time of such sale. If the consideration to be offered, paid
or received pursuant to either of the foregoing clauses (i) or (ii) shall be
other than in cash, the value of such consideration shall be determined in good
faith by an independent nationally recognized investment banking firm selected
by Holder and reasonably acceptable to Issuer, which determination shall be
conclusive for all purposes of this Agreement.
(d) As used herein, "Repurchase Event" shall occur if (i) any
person (other than Grantee or any subsidiary of Grantee) shall have acquired
beneficial ownership of (as such term is defined in Rule 13d-3, promulgated
under the Exchange Act), or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under the Exchange Act) shall have been formed
which beneficially owns or has the right to acquire beneficial ownership of, 50%
or more of the then outstanding shares of Issuer Common Stock, or (ii) any of
the transactions described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii) of this
Agreement shall be consummated.
9. REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS. Issuer shall, subject to the
conditions of Section 9(c) of this Agreement, if requested by any Holder,
including Grantee and any permitted transferee ("Selling Shareholder"), as
expeditiously as possible, prepare and file a registration statement under the
Securities Act if such registration is necessary in order to permit the sale or
other disposition of any or all shares of Issuer Common Stock or other
securities that have been acquired by or are issuable to the Selling Shareholder
upon exercise of the Option in accordance with the intended method of sale or
other disposition stated by the Selling Shareholder in such request, including
without limitation a "shelf" registration statement under Rule 415, promulgated
under the Securities Act, or any successor provision, and Issuer shall use its
best efforts to qualify such shares or other securities for sale under any
applicable state securities laws.
(b) ADDITIONAL REGISTRATION RIGHTS. If Issuer at any time
after the exercise of the Option proposes to register any shares of Issuer
Common Stock under the Securities Act in connection with an underwritten public
offering of such Issuer Common Stock, Issuer will promptly give written notice
to the Selling Shareholders of its intention to do so and, upon the written
request of any Selling Shareholder given within 30 days after receipt of any
such notice (which request shall specify the number of shares of Issuer Common
Stock intended to be included in such underwritten public offering by the
Selling Shareholder), Issuer will cause all such shares for which a Selling
Shareholder requests participation in such registration, to be so registered and
included in such underwritten public offering; PROVIDED, HOWEVER, that Issuer
may elect to not cause some or all of such shares to be so registered (i) if the
underwriters in the Public Offering in good faith object for valid business
reasons, or (ii) in the case of a registration solely to implement an employee
benefit plan or a registration filed on Form S-4 of the Securities Act or any
successor Form; PROVIDED, FURTHER, HOWEVER, that such election pursuant to (i)
may only be made once. If some, but not all the shares of Issuer Common Stock,
with respect to which Issuer shall have received requests for registration
pursuant to this Section 9(b), shall be excluded from such registration, Issuer
shall make appropriate allocation of shares to be registered among the
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Selling Shareholders desiring to register their shares PRO RATA in the
proportion that the number of shares requested to be registered by each such
Selling Shareholder bears to the total number of shares requested to be
registered by all such Selling Shareholders then desiring to have Issuer Common
Stock registered for sale.
(c) CONDITIONS TO REQUIRED REGISTRATION. Issuer shall use all
reasonable efforts to cause each registration statement referred to in Section
9(a) of this Agreement to become effective and to obtain all consents or waivers
of other parties which are required therefor and to keep such registration
statement effective, PROVIDED, HOWEVER, that Issuer may delay any registration
of Option Shares required pursuant to Section 9(a) of this Agreement for a
period not exceeding 90 days provided Issuer shall in good faith determine that
any such registration would adversely affect an offering or contemplated
offering of other securities by Issuer, and Issuer shall not be required to
register Option Shares under the Securities Act pursuant to Section 9(a) hereof:
(i) Prior to the earliest of (A) termination of the
Plan pursuant to Article VI thereof, (B) failure to obtain the
requisite stockholder approval pursuant to Section 6.01(b) of the Plan,
and (C) a Purchase Event or a Preliminary Purchase Event;
(ii) On more than one occasion during any calendar
year;
(iii) Within 90 days after the effective date of a
registration referred to in Section 9(b) of this Agreement pursuant to
which the Selling Shareholder or Selling Shareholders concerned were
afforded the opportunity to register such shares under the Securities
Act and such shares were registered as requested; and
(iv) Unless a request therefor is made to Issuer by
Selling Shareholders that hold at least 25% or more of the aggregate
number of Option Shares (including shares of Issuer Common Stock
issuable upon exercise of the Option) then outstanding.
In addition to the foregoing, Issuer shall not be required to
maintain the effectiveness of any registration statement after the expiration of
nine months from the effective date of such registration statement. Issuer shall
use all reasonable efforts to make any filings, and take all steps, under all
applicable state securities laws to the extent necessary to permit the sale or
other disposition of the Option Shares so registered in accordance with the
intended method of distribution for such shares; PROVIDED, HOWEVER, that Issuer
shall not be required to consent to general jurisdiction or qualify to do
business in any state where it is not otherwise required to so consent to such
jurisdiction or to so qualify to do business.
(d) EXPENSES. Except where applicable state law prohibits such
payments, Issuer will pay all expenses (including without limitation
registration fees, qualification fees, blue sky fees and expenses (including the
fees and expenses of counsel), legal expenses, including the reasonable fees and
expenses of one counsel to the holders whose Option Shares are being registered,
printing expenses and the costs of special audits or "cold comfort" letters,
expenses of underwriters, excluding discounts and commissions but including
liability insurance if Issuer so
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desires or the underwriters so require, and the reasonable fees and expenses of
any necessary special experts) in connection with each registration pursuant to
Section 9(a) or 9(b) of this Agreement (including the related offerings and
sales by holders of Option Shares) and all other qualifications, notifications
or exemptions pursuant to Section 9(a) or 9(b) of this Agreement.
(e) INDEMNIFICATION. In connection with any registration under
Section 9(a) or 9(b) of this Agreement, Issuer hereby indemnifies the Selling
Shareholders, and each underwriter thereof, including each person, if any, who
controls such holder or underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, losses, claims, damages and liabilities
caused by any untrue, or alleged untrue, statement of a material fact contained
in any registration statement or prospectus or notification or offering circular
(including any amendments or supplements thereto) or any preliminary prospectus,
or caused by any omission, or alleged omission, to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such expenses, losses, claims, damages or
liabilities of such indemnified party are caused by any untrue statement or
alleged untrue statement that was included by Issuer in any such registration
statement or prospectus or notification or offering circular (including any
amendments or supplements thereto) in reliance upon and in conformity with,
information furnished in writing to Issuer by such indemnified party expressly
for use therein, and Issuer and each officer, director and controlling person of
Issuer shall be indemnified by such Selling Shareholders, or by such
underwriter, as the case may be, for all such expenses, losses, claims, damages
and liabilities caused by any untrue, or alleged untrue, statement, that was
included by Issuer in any such registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto) in reliance upon, and in conformity with, information furnished in
writing to Issuer by such holder or such underwriter, as the case may be,
expressly for such use.
Promptly upon receipt by a party indemnified under this
Section 9(e) of notice of the commencement of any action against such
indemnified party in respect of which indemnity or reimbursement may be sought
against any indemnifying party under this Section 9(e), such indemnified party
shall notify the indemnifying party in writing of the commencement of such
action, but the failure so to notify the indemnifying party shall not relieve it
of any liability which it may otherwise have to any indemnified party under this
Section 9(e). In case notice of commencement of any such action shall be given
to the indemnifying party as above PROVIDED, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel (other than reasonable costs of investigation)
shall be paid by the indemnified party unless (i) the indemnifying party either
agrees to pay the same, (ii) the indemnifying party fails to assume the defense
of such action with counsel satisfactory to the indemnified party, or (iii) the
indemnified party has been advised by counsel that one or more legal defenses
may be available to the indemnifying party that may be contrary to the interest
of the indemnified party, in which case the indemnifying party shall be entitled
to assume the defense of such action notwithstanding its obligation to bear fees
and expenses of such
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counsel. No indemnifying party shall be liable for any settlement entered into
without its consent, which consent may not be unreasonably withheld.
If the indemnification provided for in this Section 9(e) is
unavailable to a party otherwise entitled to be indemnified in respect of any
expenses, losses, claims, damages or liabilities referred to herein, then the
indemnifying party, in lieu of indemnifying such party otherwise entitled to be
indemnified, shall contribute to the amount paid or payable by such party to be
indemnified as a result of such expenses, losses, claims, damages or liabilities
in such proportion as is appropriate to reflect the relative benefits received
by Issuer, the Selling Shareholders and the underwriters from the offering of
the securities and also the relative fault of Issuer, the Selling Shareholders
and the underwriters in connection with the statements or omissions which
resulted in such expenses, losses, claims, damages or liabilities, as well as
any other relevant equitable considerations. The amount paid or payable by a
party as a result of the expenses, losses, claims, damages and liabilities
referred to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim; PROVIDED, HOWEVER, that in no case shall any Selling
Shareholder be responsible, in the aggregate, for any amount in excess of the
net offering proceeds attributable to its Option Shares included in the
offering. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. Any
obligation by any holder to indemnify shall be several and not joint with other
holders.
In connection with any registration pursuant to Section 9(a)
or 9(b) of this Agreement, Issuer and each Selling Shareholder (other than
Grantee) shall enter into an agreement containing the indemnification provisions
of Section 9(e) of this Agreement.
(f) MISCELLANEOUS REPORTING. Issuer shall comply with all
reporting requirements and will do all such other things as may be necessary to
permit the expeditious sale at any time of any Option Shares by the Selling
Shareholders thereof in accordance with and to the extent permitted by any rule
or regulation promulgated by the SEC from time to time, including, without
limitation, Rule 144. Issuer shall at its expense provide the Selling
Shareholders with any information necessary in connection with the completion
and filing of any reports or forms required to be filed by them under the
Securities Act or the Exchange Act, or required pursuant to any state securities
laws or the rules of any stock exchange.
(g) ISSUE TAXES. Issuer will pay all stamp taxes in connection
with the issuance and the sale of the Option Shares and in connection with the
exercise of the Option, and will save the Selling Shareholders harmless, without
limitation as to time, against any and all liabilities, with respect to all such
taxes.
10. QUOTATION; LISTING. If Issuer Common Stock or any other
securities to be acquired in connection with the exercise of the Option are then
authorized for quotation or trading or listing on the Nasdaq or any securities
exchange, Issuer, upon the request of Holder, will promptly file an application,
if required, to authorize for quotation or trading or listing the shares
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of Issuer Common Stock or other securities to be acquired upon exercise of the
Option on the Nasdaq or such other securities exchange and will use its best
efforts to obtain approval, if required, of such quotation or listing as soon as
practicable.
11. DIVISION OF OPTION. This Agreement (and the Option granted
hereby) are exchangeable, without expense, at the option of Holder, upon
presentation and surrender of this Agreement at the principal office of Issuer
for other Agreements providing for Options of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Issuer Common Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any other Agreements and related Options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon receipt by
Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction
or mutilation of this Agreement, and (in the case of loss, theft or destruction)
of reasonably satisfactory indemnification, and upon surrender and cancellation
of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement
of like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer, whether
or not the Agreement so lost, stolen, destroyed or mutilated shall at any time
be enforceable by anyone.
12. MISCELLANEOUS.
(a) EXPENSES. Each of the parties hereto shall bear and pay
all costs and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
(b) WAIVER AND AMENDMENT. Any provision of this Agreement may
be waived at any time by the party that is entitled to the benefits of such
provision. This Agreement may not be modified, amended, altered or supplemented
except upon the execution and delivery of a written agreement executed by the
parties hereto.
(c) ENTIRE AGREEMENT: NO THIRD-PARTY BENEFICIARIES;
SEVERABILITY. This Agreement, together with the Plan and the other documents and
instruments referred to herein and therein, between Grantee and Issuer (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and (ii) is not intended to confer upon any person other
than the parties hereto (other than the indemnified parties under Section 9(e)
of this Agreement and any transferees of the Option Shares or any permitted
transferee of this Agreement pursuant to Section 12(h) of this Agreement) any
rights or remedies hereunder. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or Regulatory
Authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated. If
for any reason such court or Regulatory Authority determines that the Option
does not permit Holder to acquire, or does not require Issuer to repurchase, the
full number of shares of Issuer Common Stock as provided in Section 3 of this
Agreement (as may be adjusted
-15-
<PAGE>
herein), it is the express intention of Issuer to allow Holder to acquire or to
require Issuer to repurchase such lesser number of shares as may be permissible
without any amendment or modification hereof.
(d) GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of New York without regard to
any applicable conflicts of law rules.
(e) DESCRIPTIVE HEADINGS. The descriptive headings contained
herein are for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
(f) NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to the parties at the addresses set forth in the Plan (or at
such other address for a party as shall be specified by like notice).
(g) COUNTERPARTS. This Agreement and any amendments hereto may
be executed in two counterparts, each of which shall be considered one and the
same agreement and shall become effective when both counterparts have been
signed, it being understood that both parties need not sign the same
counterpart.
(h) ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder or under the Option shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other party, except that Holder may assign this
Agreement to a wholly-owned subsidiary of Holder and Holder may assign its
rights hereunder in whole or in part after the occurrence of a Purchase Event.
Subject to the preceding sentence, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns.
(i) FURTHER ASSURANCES. In the event of any exercise of the
Option by the Holder, Issuer, and the Holder shall execute and deliver all other
documents and instruments and take all other action that may be reasonably
necessary in order to consummate the transactions provided for by such exercise.
(j) SPECIFIC PERFORMANCE. The parties hereto agree that this
Agreement may be enforced by either party through specific performance,
injunctive relief and other equitable relief. Both parties further agree to
waive any requirement for the securing or posting of any bond in connection with
the obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any failure
to perform this Agreement.
-16-
<PAGE>
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock
Option Agreement to be signed by their respective officers thereunto duly
authorized, all as of the day and year first written above.
CONTINENTAL BANK
By:/s/ John P. Sullivan
------------------------------------------
John P. Sullivan
President and Chief Executive Officer
RELIANCE BANCORP, INC.
By:/s/ Raymond A. Nielsen
------------------------------------------
Raymond A. Nielsen
President and Chief Executive Officer
-17-
<PAGE>
APPENDIX C
August 22, 1997
Board of Directors
Continental Bank
118 Seventh Street
Garden City, New York 11530
Ladies and Gentlemen:
Continental Bank ("Continental"), Reliance Bancorp, Inc.
("Reliance") and Reliance Federal Savings Bank ("Reliance Bank") have entered
into an Agreement and Plan of Merger, dated as of May 3, 1997 (the "Agreement"),
pursuant to which Continental will be merged with and into Reliance Bank (the
"Merger"). Upon consummation of the Merger, each outstanding share of
Continental common stock, par value $5.00 per share (the "Continental Shares"),
other than certain Continental Shares specified in the Agreement, will be
converted into the right to receive 1.10 shares (the "Exchange Ratio") of common
stock, par value $.01 per share, of Reliance together with the related
preferred share purchase right issued pursuant to the Stockholder Protection
Rights Agreement of Reliance dated September 18, 1996 (the "Reliance Shares"),
subject to possible adjustment as set forth in the Agreement. The terms and
conditions of the Merger are more fully set forth in the Agreement. You have
requested our opinion as to the fairness, from a financial point of view, of the
Exchange Ratio to the holders of Continental Shares.
Sandler O'Neill & Partners, L.P., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions and other corporate
transactions. In connection with this opinion, we have reviewed, among other
things: (i) the Agreement and exhibits thereto; (ii) the Stock Option Agreement,
dated as of May 3, 1997, by and between Reliance and Continental; (iii) the
Proxy Statement-Prospectus dated as of the date hereof; (iv) Reliance's audited
consolidated financial statements and management's discussion and analysis of
the financial condition and results of operations contained in its Annual Report
on Form 10-K for the fiscal year ended June 30, 1996; (v) Continental's audited
consolidated financial statements and management's discussion and analysis of
the financial condition and results of operations contained in its Annual Report
on Form F-2 for the year ended December 31, 1996; (vi) Reliance's unaudited
consolidated financial statements and management's discussion and analysis of
the financial condition and results of operations contained in its Quarterly
Reports on Form 10-Q for the quarters ended September 30, 1996, December 31,
1996, and March 31, 1997, respectively; (vii) Reliance's unaudited summary
financial information for the fourth quarter and fiscal year ended June 30, 1997
contained in Reliance's Form 8-K dated July 24, 1997; (viii) Continental's
unaudited consolidated financial statements and management's discussion and
analysis of the financial condition and results of operations contained in its
Quarterly Reports on Form F-4 for the quarters ended March 31, 1997 and June 30,
1997; (ix) certain financial analyses and forecasts of Continental prepared by
and reviewed with management of Continental and
<PAGE>
Board of Directors
Continental Bank
August 22, 1997
Page C2
the views of senior management of Continental regarding Continental's past and
current business operations, results thereof, financial condition and future
prospects; (x) certain financial analyses and forecasts of Reliance prepared by
and reviewed with management of Reliance and the views of senior management of
Reliance regarding Reliance's past and current business operations, results
thereof, financial condition and future prospects; (xi) the pro forma impact of
the Merger on Reliance; (xii) the historical reported price and trading activity
for Reliance's and Continental's common stock, including a comparison of certain
financial and stock market information for Reliance and Continental with similar
information for certain other companies the securities of which are publicly
traded; (xiii) the financial terms of recent business combinations in the
savings institution and banking industries; (xiv) the current market
environment generally and the banking environment in particular; and (xv) such
other information, financial studies, analyses and investigations and financial,
economic and market criteria as we considered relevant.
In performing our review, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all the financial
information, analyses and other information reviewed by and discussed with us,
and we did not make an independent evaluation or appraisal of the specific
assets, the collateral securing assets or the liabilities of Reliance or
Continental or any of their subsidiaries, or the collectibility of any such
assets (relying, where relevant, on the analyses and estimates of Reliance and
Continental). With respect to the financial projections reviewed with
management, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of the respective future financial performances of
Reliance and Continental and that such performances will be achieved. We have
also assumed that there has been no material change in Reliance's or
Continental's assets, financial condition, results of operations, business or
prospects since the date of the last financial statements for each entity noted
above. We have assumed that Continental and Reliance will remain as going
concerns for all periods relevant to our analyses and that the conditions
precedent in the Agreement are not waived.
Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. We have not undertaken to reaffirm
or revise this opinion or otherwise comment upon events occurring after the date
hereof.
We have acted as Continental's financial advisor in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon consummation of the Merger. We have also provided and
continue to provide general financial advisory services for Continental and have
received and will continue to receive fees for such services.
<PAGE>
Board of Directors
Continental Bank
August 22, 1997
Page C3
In the ordinary course of our business, we may actively trade the
equity securities of Reliance and Continental for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or short
position in such securities.
Our opinion is directed to the Board of Directors of Continental and
does not constitute a recommendation to any stockholder of Continental as to how
such stockholder should vote at the special meeting of stockholders called to
consider and vote upon the Merger.
Our opinion is not to be quoted or referred to, in whole or in part, in
a registration statement, prospectus, proxy statement or in any other document,
nor shall this opinion be used for any other purposes, without Sandler O'Neill's
prior written consent.
Based upon and subject to the foregoing, it is our opinion that the
Exchange Ratio is fair, from a financial point of view, to the holders of
Continental Shares.
Very truly yours,
Sandler O'Neill & Partners, L.P.
<PAGE>
APPENDIX D
ANNUAL REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FORM F-2
For Fiscal Year Ended December 31, 1996 F.D.I.C. CERTIFICATE # 21723-9
I.R.S. EMPLOYER IDENTIFICATION # 11-232890-7
CONTINENTAL BANK
118 SEVENTH STREET
GARDEN CITY, NY 11530
(516) 741-2400
SECURITIES REGISTERED UNDER SECTION 12 (b) OF THE ACT: NONE
NAME OF EXCHANGE ON WHICH REGISTERED: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CAPITAL STOCK (COMMON) $5.00 PAR VALUE
INDICATED BY CHECK MARK WHETHER THE BANK (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE BANK WAS REQUIRED TO
FILE SUCH REQUIREMENTS FOR THE PAST 90 DAYS).
YES X NO
--- ---
SHARES OUTSTANDING AS OF MARCH 14, 1997 - 921,735 SHARES
AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE BANK -
$15,189,000 AT MARCH 14, 1997.
<PAGE>
ITEM 1- BUSINESS DESCRIPTION
The Continental Bank (thereafter referred to as the "Bank") is a New York State
chartered commercial bank that was founded in 1974. The Bank's main office is
located in Garden City, New York, where it is the only independent commercial
bank. Business is also conducted through its branch office located in North
Babylon, Suffolk County.
The Bank provides a wide range of banking services in western Nassau County and
the south-western part of Suffolk County, both on Long Island. Specifically, it
offers business and personal checking accounts, N.O.W. and money market
accounts, savings and time deposit accounts and grants secured and unsecured
loans to individuals, partnerships and corporations and originates loans through
the Small Business Administration "SBA" under the 7A and 504 program. It also
provides for the issuance of travelers checks, the leasing of safe deposit
boxes, direct deposit of Federal government checks and the issuance of money
orders. The Bank offers credit card services as a participant in the merchants
program for Master Charge and Visa credit cards in addition to payroll servicing
and bond coupon collection services. The Bank also invests various types of
securities and assets including, but not limited to, mortgage-backed securities
insured or guaranteed by the United States or agencies thereof. The Bank funds
its lending and investment activities primarily from deposits received at its
various branch locations, repayment of principal and interest on loans and
securities, borrowings from the Federal Home Loan Bank of New York (the "FHLB")
and borrowings available under agreements to repurchase securities with primary
dealers.
The Bank has been, and intend to continue to be, a community-orientated
financial institution offering a variety of financial services to meet the needs
of the communities it serves. Banking on Long Island continues to become
increasingly competitive, and faces significant competition both in originating
loans and in attracting deposits. The Bank's market area has a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. There are branches of a
number of thrift institutions as well as numerous branches of major commercial
banks in the immediate areas serviced by our two (2) offices. The Bank is
committed to maintaining a competitive position in the communities it serves.
Competition has also increased as a result of the lifting of restrictions on the
interstate operations of financial institutions.
The Bank maintains account relationships with U.S. Government Agencies,
municipalities and local school districts, as well as with individuals,
partnerships, and corporations. The Towns of Babylon and Hempstead, both
municipalities located in south-western Suffolk County and central Nassau County
have historically been significant depositors of the Bank. Municipalities with
deposits in excess of insured amounts are fully collateralized by the Bank. The
liquidity position of the Bank is maintained to more than adequately provide for
fluctuations in deposit levels.
The Bank does not engage in international banking, except for the issuance of
foreign drafts and the exchange of small amounts of cash and currency through a
correspondent bank. The Bank has no deposits from, nor has deposited any of its
own funds in foreign banks or foreign countries. In that regard, there is no
future intention of doing so, with the exception of issuing letters of credit on
behalf of the Bank's customers in favor of foreign shippers. Compliance with
Federal, State, and local regulations governing the discharge of materials into
the environment has had no material effect on the capital expenditure, earnings,
or competitive position of the Bank.
1
<PAGE>
RECENT DEVELOPMENTS
MANAGEMENT REORGANIZATION AND RESTRUCTURING PLAN
In the fourth quarter of 1996, the Bank launched a strategic management
reorganization and restructuring plan focusing on improving shareholder value
designed to improve asset quality, reduce future operating costs and enhance net
interest income while attempting to optimize the management of the Bank's
capital. As a result, special charges were taken in 1996 totaling $2.2 million
pre-tax, with an after tax impact of $1.3 million, consequently the Bank
reporting a net loss of $185,055, or $(0.26) per share.
The initial phase of the plan included the sale of the remaining shares
available under the rights plan which was completed in the month of December
1996. The offering of 230,525 shares of common stock in 1996 resulted in net
proceeds of approximately $2.9 million of additional capital to the Bank. The
finalizing of the rights offering in late 1996 and the increased level of
resulting capital played an integral role in the roll-out of the restructuring
plan and post-restructuring the Bank remains "well-capitalized" under all
regulatory requirements.
Included in the $2.2 million of pre-tax special charges was an increase of
$900,000 to the Bank's allowance for loan losses, a $289,000 loss realized on
the repositioning and sale of certain investment securities, employee
termination and related costs of approximately $490,000 and a charge of $250,000
attributable to a negotiated settlement of a lawsuit brought against the Bank in
prior years by a former depositor, as a result of an operational/forgery claim.
Additionally, the Bank plans to eliminate certain of the Bank's in-house
processing functions and facilities and utilize outside servicers to provide
these functions to the Bank. As a result of this decision, the Bank recorded a
$225,000 charge of which the significant components of the costs associated with
this charge, were $151,000 relating principally to the write off of the carrying
value of software, hardware, other equipment utilized by these processing
functions and prepaid maintenance and estimated costs of $74,000 for certain
severance and benefit payments for planned employee terminations.
The restructuring plan is expected to be substantially completed prior to the
end of 1997 and the Bank believes the provisions recorded are adequate to cover
the costs associated with the plan.
FORMATION OF SUBSIDIARY, CBMC, INC. d/b/a MONEY CENTERS
On February 16, 1995, the Bank announced the formation of a wholly-owned
subsidiary, CBMC, Inc. d/b/a/ Money Centers ("CBMC"). The Bank made an initial
capital contribution to this subsidiary of $2 million. On April 24, 1995, CBMC,
Inc. acquired certain assets related to five stores operated by Money Centers,
Inc., for $2,000,000. In addition, the Company assumed certain leases related to
those five stores. The transaction was accounted for as a purchase. The purchase
price was allocated primarily to the franchise rights associated with operating
the stores, certain furniture, fixtures and equipment and the value of the
operating leases assumed. CBMC Inc. offers check cashing services plus other
services including, money orders, lottery tickets, payment of utility bills,
money transfers, tokens and public assistance services.
FORMATION OF SUBSIDIARY, CBC OF NEW YORK, INC. d/b/a CONTINENTAL BUSINESS CREDIT
In December 1995, the Bank announced the formation of a finance subsidiary, CBC
of New York, Inc. ("CBC"). CBC specializes in commercial finance transactions
focusing in the area of asset based lending to small and medium sized
businesses.
2
<PAGE>
EMPLOYEES
As of December 31, 1996, the Bank seventy-eight (78) full time employees.
The employees are not represented by a collective bargaining unit, and the Bank
considers its relationship with its employees to be good.
ITEM 2 - PROPERTIES
The following are the locations of the banking offices and subsidiary locations
and a brief description of the general character:
1. Main office - located at 118 Seventh Street, Garden City, New York, offers
normal banking functions in addition to housing executive offices and the
internal audit department.
2. North Babylon - located at 1383 Deer Park Avenue, North Babylon, New York,
offers normal banking functions. The Bank purchased these premises in
August 1989.
In addition, the Bank maintains a non-banking operations center at 44N Jefryn
Boulevard, Deer Park, New York which houses credit administration, loan,
bookkeeping, operation administration and accounting departments.
The following are locations of CBMC, Inc. and CBC of New York locations and a
brief description of the general character.
CBMC, Inc.
1. Main office- located at 115 W. 23rd Street, New York, New York
2. 412 W. 36th Street, New York, New York
3. 334 9th Avenue, New York, New York
4. 224 10th Avenue, New York, New York
5. 224 Varick Street, New York, New York
CBC of New York
1. Main office- located at 60 East 42nd Street, New York, New York
Each of the locations of CBMC, Inc. offers normal check cashing services.
CBC of New York offers normal financing functions for asset based lending in
addition to housing executive offices.
The Bank and subsidiaries are obligated under non-cancelable operating leases
covering bank premises and equipment, to pay minimum annual rental of:
1997 618,000
1998 599,000
1999 284,000
2000 269,000
2001 & Thereafter 1,020,000
---------
Total $2,790,000
3
<PAGE>
The leases covering bank premises contain renewal options at higher rates. In
September 1988, the Bank entered into a ten year operating lease agreement for
the main office facility located in Garden City. The lease term commenced on
January 1, 1989, and requires minimum annual lease payments, (included in the
table above) of approximately $190,000 with annual rent escalations of 5%
beginning in year three of the lease term. The agreement also provides the Bank
with options to renew the lease agreement for an additional twenty-year term.
ITEM 3- LEGAL MATTERS AND PROCEEDINGS
In November 1996, the Bank settled for $250,000 a lawsuit brought against the
Bank by a former depositor in 1990, as a result of an operational/forgery claim.
During 1995, the Bank settled a lawsuit commenced by the government of the
United States of America for $400,000. The plaintiff claimed that the Bank and
various other defendants conspired to defraud the government and that it
sustained losses as a result of the Bank's alleged failure to properly disclose
and service a loan extended to a borrower by the Economic Development
Administration, and the Bank's alleged violation of a certain participation. The
$400,000 payment represents full settlement of this matter and is included in
the Consolidated Statement of Earnings under litigation settlement and related
expenses.
The Bank is involved in other lawsuits during the normal course of business.
Management does not expect the outcome of these matters to have a material
effect on the Consolidated Financial Statements.
ITEM 4- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item can be found in the 1996 proxy statement,
specifically on pages 2 through 4.
PART II
-------
ITEM 5- MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
5A) The information required by Section A of this item can be found in the
1996 Annual Report, specifically on page 1.
5B) As of March 14, 1997, the Bank had 407 holders of record of common stock
securities.
5C) The information required by Section C of this item can be found in the
1996 Annual Report, in Note 8, which is on page 20 and attached schedule
A.
ITEM 6- SELECTED FINANCIAL DATA (SEE SCHEDULE A ATTACHED)
4
<PAGE>
ITEM 7- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Refer to Management's Discussion and Analysis of Results of Operations and
Financial Conditions, 1996 Annual Report to Shareholders, pages 6 through 9 and
schedules A through E attached.
ITEM 8- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
8A) The financial statements included on pages 10 through 24 of annual
shareholders' report for the year ended December 31, 1996, are
incorporated herein by reference.
8B,C,D) Each of these sections is not applicable to our institution.
5
<PAGE>
PART III
--------
ITEM 9- DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK
All of the information regarding the directors that is required in each section
of Item 9 can be found in the enclosed 1996 proxy statement specifically on
pages 2 through 7. The following is a background description for each of the
principal officers of the Bank:
JOHN P. SULLIVAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AGE: 40
John P. Sullivan was elected President and Chief Executive Officer of the Bank
in October 1996. Mr. Sullivan comes to Continental as a seasoned Chief Executive
with extensive experience and a diverse background in all facets of financial
management. Prior to joining Continental Bank, Mr. Sullivan was Director,
President and Chief Operating Officer of River Bank America/East River Savings
Bank. Prior to his position at River Bank, from 1992 to 1995, Mr. Sullivan
served as Director, President and Chief Executive Officer of Hamilton Bancorp
and Hamilton Federal Savings, F.A. From 1986 to 1992, Mr. Sullivan served as a
First Senior Vice President for Crossland Savings, FSB. Mr. Sullivan is a
Certified Public Accountant formerly with KPMG Peat Marwick and a graduate of
Niagara University.
THOMAS R. CANGEMI
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
AGE: 29
Thomas R. Cangemi, was elected Senior Vice President and Chief Financial Officer
in December 1996. Mr. Cangemi comes to Continental with an extensive background
in financial management and strong ties within the local banking community, most
recently serving as Vice President and Chief Financial Officer of Sunrise
Bancorp, Inc. and Sunrise Federal Savings Bank from 1993 to 1996, and prior to
that with KPMG Peat Marwick from 1990 to 1993, serving banks and other financial
institutions. Mr. Cangemi is a Certified Public Accountant and a graduate of
Dowling College.
PETER D. MC CARTHY
SENIOR VICE PRESIDENT, OPERATIONS OFFICER
AGE: 44
Peter D. McCarthy, was elected Senior Vice President and Operations Officer in
December 1996. Mr. McCarthy arrives with over twenty years of banking experience
with a diverse background in bank operations. From 1982 to 1988 Mr. McCarthy
served as Vice/President /District Manager of the Bank of New York's Long Island
operations, from 1988 to 1992 served as Vice President/Regional Manager with
CrossLand Federal Savings Bank and most recently as First Vice
President/Regional Manager with Citizens First National Bank in New Jersey from
1993 to 1996.
WILLIAM W. RILEY
SENIOR VICE PRESIDENT AND SENIOR LENDING OFFICER
AGE: 57
William W. Riley joined the Bank as Senior Vice President and Senior Lending
Officer in October 1995. Prior to his appointment, he had been working for the
Bank on a consulting basis and was in charge of asset recovery. He previously
served as Senior Vice President and Senior Loan Officer at Apple Bank for 6
years after serving as Senior Vice President at Long Island Trust Company for 18
years. He is a graduate of Stonier Graduate School of Banking.
6
<PAGE>
ITEM 10- MANAGEMENT REMUNERATION AND TRANSACTIONS
The information required to be furnished by Item 10 can be found in the enclosed
1996 proxy statement, pages 2 through 4.
PART IV
-------
ITEM 11- EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM F-3
(A) FINANCIAL STATEMENTS
Listed below are the financial statements and schedules filed as part of this
report. Those items preceded by ** appear in the 1996 Annual Report attached
hereto.
** (1) Report of Independent Public Accountants
** (2) Statements of Financial Condition at December 31, 1996 and 1995
** (3) Statements of Earnings of the three years in the period ended
December 31, 1996.
** (4) Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1996.
** (5) Statements of Cash Flows for each of the three years in the period
ended December 31, 1996.
** (6) Notes to Financial Statements
** (7) Schedule I - U.S. Treasury Securities, Obligations of Other U.S.
Government Agencies and Corporations Obligations of States and
Political Subdivisions, and Other Bonds, Notes and Debentures (See
Note 4 to Financial Statements)
** (8) Schedule II - Loans to Officers, Directors, Principal Security
Holders, and any Associates of the Foregoing Persons. (See Note 5
to Financial Statements)
** (9) Schedule III - Loans (See Note 5 to Financial Statements)
** (10) Schedule IV - Bank Premises and Equipment (See Note 7 to Financial
Statements)
(11) Schedule V - Investments in Income from Dividends, and Equity in
Earnings or Losses of Subsidiaries and Associated Companies (Not
applicable)
** (12) Schedule VI - Allowance for Possible Loan Losses (See Note 6 to
Financial Statements)
(B) Reports on Form F-3
NONE
7
<PAGE>
(C) Exhibits
(1) Employment Agreement, as amended between Continental Bank and John
P. Sullivan, President and Chief Executive Officer.
(2) Employment Agreement between Continental Bank and Gerald J.
Grossman Senior Vice President of the Bank and President of
Continental Business Credit.
(3) Employment Agreement between Continental Bank and John K. Holland
the former Executive Vice President and Chief Operating Officer.
(4) Consulting Agreement between Continental Bank and Edward F. McAdams
the former President and Chief Executive Officer.
(5) Employee Severance Compensation Plan.
8
<PAGE>
<TABLE>
ITEM 6- SELECTED FINANCIAL DATA
FIVE YEAR CONSOLIDATED SUMMARY
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, except share amounts) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
<S> <C> <C> <C> <C> <C>
Total assets $ 142,708 $ 131,882 $ 124,961 $ 98,288 $ 111,629
Cash and cash equivalents 31,197 29,279 22,097 15,756 16,384
Investment securities (1) 26,638 39,424 40,827 16,807 21,285
Loans receivable, net 77,653 56,442 57,895 61,296 69,347
Total deposits 127,453 119,493 115,277 89,623 103,176
Stockholders' equity 12,118 9,576 8,703 8,321 8,082
======================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
Interest income $ 10,528 $ 9,493 $ 7,438 $ 6,998 $ 8,131
Interest expense 4,448 3,953 2,304 1,840 2,771
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 6,080 5,540 5,134 5,158 5,360
Provision for loan losses (2) 1,450 600 800 1,275 1,010
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,630 4,940 4,334 3,883 4,350
Other income 3,699 2,750 899 1,002 1,007
Other expenses (2) 8,627 6,553 4,375 4,743 4,330
- ----------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and cumulative
effect of accounting change (298) 1,137 858 142 1,027
(Benefit) provision for income taxes (113) 499 357 51 412
- ----------------------------------------------------------------------------------------------------------------------
(Loss) income before cumulative effect of change
in accounting for income taxes (185) 638 501 91 615
Cumulative effect to January 1, 1993 of change
in accounting for income taxes - - - 150 -
- ----------------------------------------------------------------------------------------------------------------------
Net (loss) income (2) $ (185) $ 638 $ 501 $ 241 $ 615
======================================================================================================================
Net (loss) income per common share before
cumulative effect of accounting change ($ 0.26) $ 0.92 $ 0.73 $ 0.13 $ 0.89
Accounting change per share $ - $ - $ - $ 0.22 $ -
- ----------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share ($ 0.26) $ 0.92 $ 0.73 $ 0.35 $ 0.89
======================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Equity to assets at period end 8.49% 7.26% 6.96% 8.47% 7.24%
Regulatory capital ratios:
Risk-based 11.60% 11.45% 13.42% 13.22% 12.00%
Tier 1 risk-based 10.33% 10.20% 12.17% 11.97% 10.80%
Leverage 7.07% 5.89% 8.20% 8.26% 8.10%
Net interest rate spread 4.08% 4.17% 4.62% 5.07% 4.68%
Net interest margin 4.89% 5.01% 5.43% 5.72% 5.65%
Return on average assets (2) (0.13)% 0.51% 0.47% 0.24% 0.59%
Return on average stockholders' equity (2) (1.81)% 7.07% 5.90% 2.89% 7.81%
Non-performing assets to total assets 1.88% 1.23% 1.82% 2.47% 1.72%
Allowance for loan losses to total loans 3.14% 3.05% 2.53% 2.66% 2.62%
Allowance for loan losses to non-performing assets 94.03% 109.82% 66.24% 69.11% 97.39%
Book value per share $ 13.15 $ 13.85 $ 12.59 $ 13.24 $ 14.14
Tangible book value per share $ 10.93 $ 10.73 $ 12.59 $ 13.24 $ 14.14
Cash dividends paid $ 0.12 $ 0.10 $ - $ - $ -
Stock dividend - - 10.00% 10.00% 10.00%
======================================================================================================================
</TABLE>
(1) Includes investments available for sale and FHLB stock.
(2) In 1996, the Bank recorded special charges of $2.2 million pre-tax of which
$900,000 represented increases to the loan loss provision and $1.3 million
representing special charges primarily for employee termination and related
costs of $490,000, loss on the sales of securities of $289,000, a charge of
$225,000 to eliminate certain back office functions and $250,000 in
settlement of a lawsuit. The after-tax impact of the special charges was
approximately $1.3 million.
SCHEDULE A
<PAGE>
<TABLE>
ITEM 7- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Distribution of Average Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential
- --------------------------------------------------------------------------------------------------------------------------
The distribution of average assets, liabilities and stockholders' equity for the years ended December 31, 1996
and 1995 is as follows (Dollars In Thousands):
<CAPTION>
For the Twelve Months Ended December 31,
----------------------------------------------------------------
1996 1995
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- -------- ------ --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets:
Money market investments $ 10,866 $ 573 5.28% $ 10,569 $ 630 5.96%
Investment securities 42,476 2,733 6.43% 42,232 2,679 6.34%
Loans 70,936 7,222 10.18% 57,819 6,185 10.70%
--------- -------- ------ --------- -------- ------
Total earning assets 124,278 10,529 8.47% 110,620 9,494 8.58%
-------- --------
Non-interest earning assets 14,228 15,421
--------- ---------
Total assets $ 138,506 $ 126,041
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Money Market and NOW accounts $ 33,481 1,227 3.66% $ 29,302 825 2.82%
Certificates of Deposits 67,768 3,221 4.75% 60,384 3,128 5.18%
--------- -------- ------ -------- -------- ------
101,249 4,448 4.39% 89,686 3,953 4.41%
Non-interest bearing demand 25,594 24,459
Other liabilities 1,466 2,878
Stockholders' equity 10,197 9,018
--------- --------
Total liabilities and equity $ 138,506 $126,041
========= ========
Net interest income $ 6,081 $ 5,541
======== ========
Net interest spread 4.08% 4.17%
====== ======
Net interest margin 4.89% 5.01%
====== ======
</TABLE>
SCHEDULE B
<PAGE>
<TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
- --------------------------------------------------------------------------------
INTEREST RATES AND INTEREST DIFFERENTIAL
- --------------------------------------------
A summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates are as follows (In Thousands):
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to: Increase (Decrease) Due to:
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Federal Funds Sold $ 17 $ (74) $ (57) $ 2 $ 174 $ 176
Investment Securities 15 39 54 980 241 1,221
Loans 1,404 (367) 1,037 (87) 746 659
----------------------------- -----------------------------
Total Interest Earning Assets $ 1,436 $ (402) $ 1,034 $ 895 $ 1,161 $ 2,056
============================= =============================
INTEREST PAID ON:
Money Market and NOW Accounts $ 118 $ 284 $ 402 $ 109 $ 115 $ 224
Time and Savings Deposits 382 (289) 93 530 895 1,425
----------------------------- -----------------------------
Total Interest Bearing Liabilities $ 500 $ (5) $ 495 $ 639 $ 1,010 $ 1,649
============================= =============================
</TABLE>
The change in interest due to both rate and volume has been allocated to rate.
SCHEDULE B2
<PAGE>
<TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTMENT PORTFOLIO
- ------------------------
The carrying amounts of investment securities at December 31, 1996 and 1995 are
as follows:
<CAPTION>
1996 1996
Available for Sale Held to Maturity
--------------------------------------------------
Estimated Amortized
Market Value Cost
--------------------------------------------------
(In Thousands)
<S> <C> <C>
U.S. Treasury and other
U.S. Government Agencies $ 26,237 $ --
Other debt secutities 5 --
--------------------------------------------------
Total $ 26,242 $ --
==================================================
<CAPTION>
1995 1995
Available for Sale Held to Maturity
--------------------------------------------------
Estimated Amortized
Market Value Cost
--------------------------------------------------
(In Thousands)
<S> <C> <C>
U.S. Treasury and other
U.S. Government Agencies $ 22,321 $ 17,097
Other debt secutities -- 5
--------------------------------------------------
Total $ 22,321 $ 17,102
==================================================
</TABLE>
SCHEDULE C1
<PAGE>
<TABLE>
The maturities of investment securities at December 31, 1996 and the weighted
average yields of such securities, are as follows (In Thousands):
<CAPTION>
Available for Sale Due within Due after 1 year Due after 5 years
- ------------------
(Estimated Market Value) 1 Year or Less Through 5 Years Through 10 Years
-------------- --------------- ----------------
Amount Yield Amount Amount Yield
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government Agencies $ 3,099 5.26% $ - $ 5,172 6.81%
---------------------------------------------------------------------------------
Total $ 3,099 $ - $ 5,172
=================================================================================
</TABLE>
The above investment maturities schedule does not include $17,971 of
mortgage-backed securities of U.S. Government Agencies available for sale, since
the return of principal on these investments cannot be accurately determined.
SCHEDULE C2
<PAGE>
<TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOAN PORTFOLIO
- --------------
The Bank's loan portfolio consisted of the following at December 31, (In
Thousands):
<CAPTION>
1996 1995
Amount Amount
--------------------------------------------
<S> <C> <C>
Commercial, financial and
agricultural $ 43,030 $ 23,222
Real estate - mortgage 32,359 30,261
Installment 4,447 3,988
Other 445 755
--------------------------------------------
$ 80,281 $ 58,226
============================================
</TABLE>
<TABLE>
The maturities of commercial, financial and agricultural loans outstanding as of
December 31, 1996 are as follows:
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years
--------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Commercial, financial
and agricultural $ 40,971 $ 23,472 $ 10,946
============================================
Loans maturing after one year with:
Fixed interest rates $ 19,367
Variable interest rates 15,051
-----------
$ 34,418
===========
</TABLE>
SCHEDULE D1
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOAN PORTFOLIO
- --------------
The Bank's past due, restructured and non-accrual loans at December 31, 1996 and
1995 are summarized as follows (In Thousands):
1996 1995
Amount Amount
------ ------
Accruing loans past due
90 days or more $ - $ -
Restructured loans $ 25 $ 35
Non-accrual loans $ 2,678 $ 1,619
Additional interest income
which would have been
recorded during the year
under original terms $ 230 $ 131
Interest income recorded
during the year $ - $ 34
Loans are considered for non-accrual status upon reaching 90 days past due or
earlier at management's discretion. Management also reviews the status of the
underlying collateral, the financial strength of any guarantors, and the
progress of collection proceedings. All interest accrued and unpaid at the time
a loan is placed in non-accrual status is reversed out of income. Interest
income on these loans is only recognized on a cash basis.
SCHEDULE D2
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOAN PORTFOLIO
- --------------
A summary of the Bank's allowance for loan losses for the years ended December
31, 1996 and 1995 is as follows (In Thousands):
1996 1995
---------- ----------
Balance at beginning of period $ 1,778 $ 1,503
Charge-offs:
Commercial, financial
and agricultural 124 122
Real Estate-Commercial Mortgage 578 274
Installment 32 73
---------- ----------
734 469
Recoveries:
Commercial, financial
and agricultural 16 122
Real Estate-Commercial Mortgage 2 18
Installment 6 4
Credit cards and related plans - -
---------- ----------
24 144
---------- ----------
Net Charge-offs 710 325
Provision for Loan Losses (1) 1,450 600
---------- ----------
Balance at end of period $ 2,518 $ 1,778
========== ==========
Ratio of net charge-offs during
the period to average loans
outstanding 1.00% 0.56%
(1) The provision for loan losses and the related balance in the allowance for
loan losses is based upon periodic evaluations of the loan portfolio by
management. Criteria such as customers' financial statements, ratios, cash
flow, net worth and collateral position, as well as economic conditions
are relevant factors used by management in these evaluations.
SCHEDULE D3
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOAN PORTFOLIO
The allocation of the allowance for loan losses at December 31, 1996 and 1995 is
as follows (In Thousands):
1996 1995
--------------------- --------------------
Amount % Amount %
--------------------- --------------------
Commercial, financial and
agricultural $ 1,277 50.8% $ 321 21.5%
Real estate - mortgage 1,126 44.7% 1,039 69.1%
Installment 104 4.1% 41 2.7%
Other 11 0.4% 102 6.8%
--------------------- --------------------
$ 2,518 100.0% $ 1,503 100.0%
===================== ====================
SCHEDULE D4
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPOSITS
- -------------
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1996, are summarized as follows:
Amount
----------
(In Thousands)
3 months or less $ 3,260
Over 3 through 6 months 602
Over 6 through 12 months 723
Over 12 months 607
----------
$ 5,192
==========
RETURN ON EQUITY AND ASSETS
- -------------------------------
The following table shows consolidated operating and capital ratios of the Bank
for each of the last two years:
Year Ended
December 31,
------------------------
1996 1995
------------------------
Return on Average Assets (0.13)% 0.51%
Return on Average Stockholders' Equity (1.81)% 7.07%
Equity to Assets Ratio 8.49% 7.26%
SCHEDULE E
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 26, 1997.
CONTINENTAL BANK
By: /s/ THOMAS R. CANGEMI
---------------------
Thomas R. Cangemi
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securties Exchange of 1934, this Report has
been signed below by the following persons on behalf of the Company and in the
capacities indicated on March 26, 1997.
Signature Tile
--------- ----
/s/ JOHN P. SULLIVAN President and Chief Executive Officer
- ------------------------- (Principal Executive Officer) and Director
John P. Sullivan
/s/ THOMAS R. CANGEMI Senior Vice President and Chief Financial
- ------------------------- Officer (Principal Financial and Accounting
Thomas R. Cangemi Officer)
/s/ IRWIN B. NELSON Chairman of the Board of Directors
- -------------------------
Irwin B. Nelson
/s/ SAUL ERDMAN Director
- -------------------------
Saul Erdman
/s/ DR. VINCENT FERRAGAMO Director
- -------------------------
Dr. Vincent Ferragamo
/s/ JOHN LIVANOS Director
- -------------------------
John Livanos
/s/ MARTIN J. SIMON Director
- -------------------------
Martin J. Simon
/s/ JERRY SPIEGEL Director
- -------------------------
Jerry Spiegel
<PAGE>
CONTINENTAL BANK
1996 ANNUAL REPORT
<PAGE>
BUSINESS DESCRIPTION
CONTINENTAL BANK IS A NEW YORK STATE CHARTERED COMMERCIAL BANK, FOUNDED IN 1974.
THE BANK IS SUPERVISED AND REGULATED BY THE NEW YORK STATE BANKING DEPARTMENT
AND THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THE BANK OFFERS A WIDE RANGE OF BANKING SERVICES TO INDIVIDUALS, BUSINESSES AND
MUNICIPALITIES IN BOTH NASSAU AND SUFFOLK COUNTIES.
CUSTOMERS' DEPOSITS ARE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
TABLE OF CONTENTS
Financial Highlights 1
To Our Stockholders 2
Five Year Consolidated Summary 5
Management's Discussion And Analysis
of Results of Operations and
Financial Condition 6
Statements of Financial Condition 10
Statements of Operations 11
Statements of Changes in
Stockholders' Equity 12
Statements of Cash Flows 13
Notes to Consolidated Financial Statements 14
Report of Independent Public Accountants 24
Corporate Data IBC
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 142,708,000 $ 131,882,000 $ 124,961,000 $ 98,288,000 $ 111,629,000
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits $ 127,453,000 $ 119,493,000 $ 115,277,000 $ 89,623,000 $ 103,176,000
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 12,118,000 $ 9,576,000 $ 8,703,000 $ 8,321,000 $ 8,082,000
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 14,227,000 $ 12,244,000 $ 8,337,000 $ 8,000,000 $ 9,139,000
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income (1) $ (185,000) $ 638,000 $ 501,000 $ 241,000 $ 615,000
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding (2) 711,578 691,210 691,210 691,210 691,210
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share (1) $ (0.26) $ 0.92 $ 0.73 $ 0.35 $ 0.89
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Return on average assets (1) (0.13)% 0.51% 0.47% 0.24% 0.59%
- ----------------------------------------------------------------------------------------------------------------------------
Return on average
stockholders' equity (1) (1.81)% 7.07% 5.90% 2.89% 7.81%
============================================================================================================================
</TABLE>
(1) In 1996, the Bank recorded special charges of $2.2 million pre-tax of
which $900,000 represented increases to the loan loss provision and $1.3
million representing special charges primarily for employee termination
and related costs of $490,000, loss on the sales of securities of
$289,000, a charge of $225,000 to eliminate certain back office functions
and $250,000 in settlement of a law suit. The after-tax impact of the
special charges was approximately $1.3 million.
(2) Gives retroactive effect to all stock dividends declared through
March 13, 1996.
The Capital Stock of the Bank is traded very infrequently on the
over-the-counter market, or on a private-trade basis. Therefore, the Bank
believes that the Bid and Asked price quotations from publicly available sources
may not accurately reflect market value. During the last six months of 1996, the
Bank received notice from its stock transfer agent of very few transfers of Bank
stock, some of which may not have involved arm's-length sales.
This probably does not represent all transfers of Bank stock because not all
transfers involve transfers of record ownership. Because of the infrequency of
trades, the Bank does not believe its stock has a readily ascertainable market
value. At December 31, 1996, there were 407 stockholders of record of the
Company's Common Stock.
<TABLE>
<CAPTION>
TOTAL ASSETS STOCKHOLDERS' EQUITY OPERATING REVENUES
(in millions) (in millions) (in millions)
<S> <C> <C>
[GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED]
</TABLE>
Bar graph showing total assets (in millions)
1992: $111.6
1993: $ 98.3
1994: $125.0
1995: $131.9
1996: $142.7
Bar graph showing Stockholders' equity (in millions)
1992: $ 8.1
1993: $ 8.3
1994: $ 8.7
1995: $ 9.6
1996: $12.1
Bar graph showing Operating revenues (in millions)
1992: $ 9.1
1993: $ 8.0
1994: $ 8.3
1995: $12.2
1996: $14.2
ONE
<PAGE>
TO OUR STOCKHOLDERS
Though we've met success and stand solidly strong, change is the one constant
element that drives companies to remain competitive in today's fast-paced
business environment. Over the past year, we took significant steps to implement
and execute substantial positive change throughout your organization. In October
1996, the Board of Directors appointed Mr. John P. Sullivan as President and
Chief Executive Officer of the Bank. A seasoned Chief Executive, Mr. Sullivan
comes to Continental with a wealth of experience in all facets of banking,
business and financial management and serves as a tremendous role model in the
Garden City community where your bank is headquartered and where he resides with
his family. With a proven track record of delivering superior shareholder value
in turnaround and restructuring situations, we look forward toward his vision
and leadership to lead Continental to its primary objective of increasing
profitability and building shareholder value.
Shortly after the arrival of our new President and Chief Executive Officer, the
Bank launched a strategic management reorganization and restructuring plan
focusing on improving shareholder value designed to improve asset quality,
reduce future operating costs and enhance net interest income while attempting
to optimize the management of the Bank's capital. As a result, special charges
were taken in 1996 totaling $2.2 million pre-tax, with an after tax impact of
$1.3 million, consequently the Bank reporting a net loss of $185,055, or $(0.26)
per share.
While these results are not typical of our past performance, they are indicative
of our commitment to reposition Continental to enhance profitability and build
shareholder value. It is anticipated that the reorganization and restructuring
plan will offer immediate positive pay-back to our future earnings.
[PIE CHART OF DEPOSIT MIX
TIME AND SAVINGS 53.9%
TRANSACTION ACCOUNTS 46.1%]
[CAPTION]
ALTHOUGH OUR REORGANIZATION AND RESTRUCTURING EARMARKED A MAJOR
INITIATIVE TOWARD POSITIVE CHANGE, WE HAVE OVER THE PAST FEW YEARS, BUILT OUR
FRANCHISE ON THAT VERY FOUNDATION.]
DETAILS OF THE 1996 RESTRUCTURING PLAN
COMPLETION OF RIGHTS OFFERING
The initial phase of the plan included the sale of the remaining shares
available under the rights plan which was completed in the month of December
1996. The offering of 230,525 shares of common stock in 1996 resulted in net
proceeds of approximately $2.9 million of additional capital to the Bank. The
finalizing of the rights offering in late 1996 and the increased level of
resulting capital played an integral role in the roll-out of the restructuring
plan and post-restructuring, the Bank remains "well-capitalized" under all
regulatory requirements. We thank our existing shareholders for their
participation in the offering and continued support and welcome our new
shareholders to Continental.
FOCUS ON ASSET QUALITY
We performed an extensive review of the Bank's existing loan portfolio and
related allowance for loan losses. As a result of this review, the Bank
increased the allowance for loan losses by $900,000. This charge was incurred in
addition to the $550,000 provision provided during 1996. We anticipate to
utilize the established allowance to more aggressively address loan work out
issues and focus on reducing the overall level of non-performing assets.
SECURITIES REPOSITIONING AND SALES STRATEGY
We reviewed the Bank's investment securities portfolio and instituted a
repositioning and sales strategy. We reclassified our entire investment
securities held to maturity portfolio to the available for sale portfolio and
sold a substantial portion of the securities and reinvested the proceeds into
higher yielding mortgage-backed securities. This step will enhance our future
earnings, increase our flexibility in the available for sale portfolio while
assisting management in evaluating market opportunities while managing the
Bank's exposure to interest rate risk and asset sensitivity.
COST CONTAINMENT AND EXPENSE CONTROL
We spent a considerable amount of time analyzing our existing operations and
decided to eliminate certain of the Bank's in-house processing functions and
facilities and utilize outside servicers to provide these functions to the Bank.
We negotiated a settlement for $250,000 to settle a lawsuit brought against
TWO
<PAGE>
the Bank in 1990 by a former depositor, as a result of an operational/forgery
claim and initiated several programs to reduce our overall operating expenses to
come more in line with the Bank's peer groups.
Personnel reductions in other areas are being made to eliminate certain
positions within the Bank. Accordingly, the Bank provided for these planned
terminations, severance and other employee related costs associated with its
reorganization and restructuring plan in the fourth quarter of 1996.
[CAPTION]
THROUGH ITS INVESTMENT IN TRADITIONAL AND NON-TRADITIONAL FINANCIAL RELATED
BUSINESSES AND PROGRAMS, CONTINENTAL CONTINUES TO WIDEN ITS ARRAY OF PRODUCTS
AND SERVICES IT PROVIDES TO ITS CUSTOMERS.
RECENT DEVELOPMENTS
Although our reorganization and restructuring earmarked a major initiative
toward positive change, we have over the past few years, built our franchise on
that very foundation. Through its investment in traditional and non-traditional
financial related businesses and programs, Continental continues to widen its
array of products and services it provides to its customers.
MONEY CENTERS
Our check cashing subsidiary CBMC, Inc. D/B/A "Money Centers", continues to
deliver rewarding returns to the Bank. A consistent source of fee income, Money
Centers with five prominent locations in the borough of Manhattan, offers
customers check cashing, money order, wire transfer and other fee based
transaction services. We are extremely pleased with the acquisition of Money
Centers and the direction of its contribution to the Bank and has performed as
planned. We believe that past changes in the banking industry de-emphasizing
transaction-based services opened a window of opportunity for the check cashing
industry. With a consistent source of fee income and an extraordinary historic
low level of returned checks and shortages, Money Centers enhances the Bank with
strong cash earnings and increased growth in operating cash flows. Operating
cash flow is a fundamental operating measure our management uses to gauge the
effectiveness of Money Centers performance. This is measured by Money Centers
earnings before interest, taxes, depreciation and amortization (EBITDA). In
1996, Money Centers EBITDA increased 38.3% to $1.0 million from the $723,000
reported in 1995.
Near the end of 1996, management initiated certain actions to improve future
performance of Money Centers. These included controlling operating costs, cash
management initiatives, improved centralization of management and a focus on
enhancing the attractiveness of the branches to offer a more inviting
atmosphere. We believe these changes will continue to improve Money Centers
contribution to the Bank.
CONTINENTAL BUSINESS CREDIT
We are extremely proud to report the progress of Continental Business Credit
("CBC"). Formed in the late fall of 1995, CBC specializes in receivable and
other asset based financing activities primarily servicing middle-market
companies located in the New York Metropolitan area. Under the direction of
Gerald J. Grossman, President of CBC and a veteran commercial financier, CBC has
made substantial progress since its formation. In January 1996, CBC proudly
announced to the Bank the origination of its first credit and at year end,
exceeded our initial projections by reporting over $15 million of new business.
Most importantly, this explosive growth was achieved at relatively break
even-levels with prudent underwriting standards demonstrated. As we enter into
1997, our outlook for CBC is quite promising. With the continued demand for
alternative financing expanding in middle-market companies, which we believe is
underserviced by our larger competitors, we look forward to yet another
successful year of quality growth.
SBA PROGRAM
Continental continues to focus on its commitment to its community by offering a
diverse array of financial services. Notably our SBA lending department, with a
group of loan experts who facilitate quick loan approvals for qualified loan
applicants, we continue to deliver in serving our community. Introduced in 1995
and recognized in 1995 as the #1 SBA lender on Long Island,
THREE
<PAGE>
A LOOK AHEAD
Continental has originated over $12.0 million of SBA loans since the
introduction of the program to our customers and continues to be a leader in the
community in providing these services.
[PIE CHART OF SOURCES OF INCOME]
INTEREST OF LOANS 50.8%
INVESTMENT SECURITIES & FEDERAL FUNDS SOLD 23.2%
FEE INCOME FROM MONEY CENTERS 18.6%
OTHER 7.4%
[CAPTION]
WHILE THESE RESULTS ARE NOT TYPICAL OF OUR PAST PERFORMANCE, THEY ARE INDICATIVE
OF OUR COMMITMENT TO REPOSITION CONTINENTAL TO ENHANCE PROFITABILITY AND BUILD
SHAREHOLDER VALUE.
FINANCIAL SUMMARY
Excluding the impact of the special charges, the Bank's earnings for 1996 were
$1,061,000 or, $1.49 per share. In comparison to 1995, excluding a litigation
settlement and related expenses incurred in 1995 of $487,000, earnings were
$908,000 or $1.31 per share. The improvement in earnings is in large part due to
the increase in net interest income, primarily attributable to loan growth of
$15 million experienced in 1996 originated through Continental Business Credit,
and an increase in other income due primarily to an increase in fee income
earned from the operations of Money Centers. These increases were offset in
part, by the operational overhead costs associated with the formation of
Continental Business Credit, which began its operations in January 1996 as well
as a full year of operational overhead costs associated with Money Centers,
which were only reflected for eight months during 1995.
MANAGEMENT TEAM CHANGES
Continental has made numerous changes streamlining our operations and bringing a
wealth of banking experience to our management team. We strive for betterment,
in addition to the appointment of our new President and Chief Executive Officer,
the Bank has made additional management changes to achieve just that. In
December 1996, the Board of Directors appointed Thomas R. Cangemi as Senior Vice
President and Chief Financial Officer, Peter D. McCarthy as Senior Vice
President and Operations Officer and in January 1997, Ralph Walther joined the
Bank as Vice President and Controller. Their shared vision coupled with the
existing depth within the organization will assist us in focusing our primary
objective of increasing profitability and building shareholder value.
LOOKING AHEAD
As we move forward into 1997 we look ahead in anticipation of the immediate
positive pay-back from our reorganization and restructuring plan. We will
continue to focus on credit risk and improved asset quality, stringent adherence
to cost containment and prudent leverage of the Bank's capital. Together with
strong management and a healthy capital position we will carry out our
commitment.
IN CONCLUSION
We are committed to provide the utmost quality services to our customers and
value to our stockholders while serving our communities. The dedication of our
management team, employees and knowledge and guidance of our Board of Directors
will enable the Bank to achieve quality growth. We thank you for your continued
support.
/s/ Irwin B. Nelson
Irwin B. Nelson
CHAIRMAN OF THE BOARD
/s/ John P. Sullivan
John P. Sullivan
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
FOUR
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL BANK
FIVE YEAR CONSOLIDATED SUMMARY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31,
Total assets $142,708 $131,882 $124,961 $98,288 $111,629
Cash and cash equivalents 31,197 29,279 22,097 15,756 16,384
Investment securities (1) 26,638 39,424 40,827 16,807 21,285
Loans receivable, net 77,653 56,442 57,895 61,296 69,347
Total deposits 127,453 119,493 115,277 89,623 103,176
Stockholders' equity 12,118 9,576 8,703 8,321 8,082
For the Year Ended December 31,
Interest income $ 10,528 $ 9,493 $ 7,438 $ 6,998 $ 8,131
Interest expense 4,448 3,953 2,304 1,840 2,771
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 6,080 5,540 5,134 5,158 5,360
Provision for loan losses (2) 1,450 600 800 1,275 1,010
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,630 4,940 4,334 3,883 4,350
Other income 3,699 2,750 899 1,002 1,007
Other expenses (2) 8,627 6,553 4,375 4,743 4,330
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and cumulative
effect of accounting change (298) 1,137 858 142 1,027
(Benefit) provision for income taxes (113) 499 357 51 412
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income before cumulative effect of change
in accounting for income taxes (185) 638 501 91 615
Cumulative effect to January 1, 1993 of change
in accounting for income taxes -- -- -- 150 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income (2) $ (185) $ 638 $ 501 $ 241 $ 615
====================================================================================================================================
Net (loss) income per common share before
cumulative effect of accounting change $ (0.26) $ 0.92 $ 0.73 $ 0.13 $ 0.89
Accounting change per share $ -- $ -- $ -- $ 0.22 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share $ (0.26) $ 0.92 $ 0.73 $ 0.35 $ 0.89
====================================================================================================================================
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Equity to assets at period end 8.49% 7.26% 6.96% 8.47% 7.24%
Regulatory capital ratios:
Risk-based 11.60% 11.45% 13.42% 13.22% 12.00%
Tier 1 risk-based 10.33% 10.20% 12.17% 11.97% 10.80%
Leverage 7.07% 5.89% 8.20% 8.26% 8.10%
Net interest rate spread 4.08% 4.17% 4.62% 5.07% 4.68%
Net interest margin 4.89% 5.01% 5.43% 5.72% 5.65%
Return on average assets (2) (0.13)% 0.51% 0.47% 0.24% 0.59%
Return on average stockholders' equity (2) (1.81)% 7.07% 5.90% 2.89% 7.81%
Non-performing assets to total assets 1.88% 1.23% 1.82% 2.47% 1.72%
Allowance for loan losses to total loans 3.14% 3.05% 2.53% 2.66% 2.62%
Allowance for loan losses to non-performing assets 94.03% 109.82% 66.24% 69.11% 97.39%
Book value per share $ 13.15 $ 13.85 $ 12.59 $ 13.24 $ 14.14
Tangible book value per share $ 10.93 $ 10.73 $ 12.59 $ 13.24 $ 14.14
Cash dividends paid $ 0.12 $ 0.10 $ -- $ -- $ --
Stock dividend -- -- 10.00% 10.00% 10.00%
====================================================================================================================================
</TABLE>
(1) Includes investments available for sale and FHLB stock.
(2) In 1996, the Bank recorded special charges of $2.2 million pre-tax of
which $900,000 represented increases to the loan loss provision and $1.3
million representing special charges primarily for employee termination
and related costs of $490,000, loss on the sales of securities of
$289,000, a charge of $225,000 to eliminate certain back office functions
and $250,000 in settlement of a lawsuit. The after-tax impact of the
special charges was approximately $1.3 million.
FIVE
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
GENERAL
The performance for 1996 was substantially influenced by the Bank's strategic
management reorganization and restructuring plan launched in the fourth quarter
of 1996. As a direct result of this initiative, special charges were taken in
the fourth quarter totaling $2.2 million pre-tax, with an after tax impact of
$1.3 million. Excluding the impact of the special charges, the Bank's earnings
in 1996 were $1,061,000 or, $1.49 per share. In comparison to 1995, excluding a
litigation settlement and related expenses incurred in 1995 of $487,000,
earnings were $908,000 or $1.31 per share and $501,337 or $0.73 per share for
1994.
See Special Charges in Management's Discussion and Analysis of Results of
Operations and Financial Condition and Note 3 to the Consolidated Financial
Statements for further discussion of the impact of special charges on the Bank.
NET INTEREST INCOME
The earnings of the Bank depend greatly on the Bank's level of net interest
income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of loans, mortgage-backed
securities, investment securities and federal funds sold and the interest paid
on interest-bearing liabilities consisting primarily of deposits and borrowed
funds. Net interest income is a function of the Bank's interest rate spread,
which is the difference between the yield earned on interest-earning assets and
the average cost of interest-bearing liabilities.
Net interest income for 1996 was $6,080,000 compared to $5,540,000 for 1995 and
$5,134,000 for 1994. The increase in net interest income in 1996 in comparison
to 1995 is primarily due to an increase in the average balance of
interest-earning assets to $124.3 million for 1996 from $110.6 million for the
same period in 1995 and $94.5 million for 1994. This increase was offset in
part, by a decrease in the average yield on interest-earning assets to 8.47% for
1996 from 8.58% in 1995. The increase in the average balance of interest-earning
assets in 1996 as compared to 1995 was primarily due to loan growth of
approximately $15 million experienced in 1996 originated through the Bank's
subsidiary Continental Business Credit, which specializes in receivable and
other asset based financing and net loan growth in the Bank's loan portfolio.
The increase in the average balance of interest-earning assets experienced in
1995 as compared to 1994 was primarily due to an increase of $17.0 million in
the average balance of investment securities.
Consequently, the Bank experienced an increase in the average balance of
interest-bearing deposits to fund the growth within the loan portfolio and
investment portfolio for 1996 and 1995, respectively. The Bank's net interest
rate spread for 1996 was 4.08% compared to 4.17% in 1995 and 4.62% in 1994.
OTHER INCOME
Other income increased $948,600 or 34.5% in 1996 compared to 1995, and
$1,851,000, or 208.5% in 1995 over the 1994 period. The major components of
other income is fee income from Money Centers, the Bank's check cashing
subsidiary, service charges on deposit accounts and other service charges. The
increase in other income for 1996 was due primarily to an increase in Bank
service fees on deposits of $99,000 and an increase of $926,000 in fee income
earned from the operations of the Bank's check cashing subsidiary Money Centers,
which began its operations during the second quarter of fiscal 1995. The
increase in fee income from Money Centers was due in part to the operations of
the subsidiary reflected for only eight months in 1995 as compared to the full
year operations in 1996. The increase in other income in 1995 as compared to
1994 was due primarily to the acquisition of Money Centers in 1995.
OTHER EXPENSES
Other expenses excluding special charges taken in 1996, totaled $7.4 million for
1996, an increase of 21.5% over the $6.1 million recorded in 1995, excluding a
litigation settlement and related expenses incurred in 1995 of $487,000. These
increases were primarily attributable to operational overhead costs associated
with the formation of Continental Business Credit, which began its operations in
January 1996 as well as a full year of operational overhead costs associated
with Money Centers which were only reflected for eight months during 1995. The
major components of other expenses are salaries and employee benefits,
occupancy, depreciation and amortization and other expenses. The litigation
charge incurred in 1995 related to a settlement of an on-going litigation that
commenced in 1987 by the Unites States Government for a loan granted in 1979.
Salaries and employee benefits increased by $714,000, or 23.1% in 1996 compared
to 1995, and $899,000, or
SIX
<PAGE>
41.0% compared to 1994. Occupancy expense increased $191,000, or 20.8% in 1996
as compared to 1995 and $225,800, or 32.8% as compared to 1994. As discussed
previously, these increases are principally related to the Bank's increase in
operational overhead costs associated with the acquisition of Money Centers in
the second quarter of 1995 and the start up of Continental Business Credit in
1996.
Other expenses primarily include legal fees, FDIC premiums, other losses on
problem related loans, advertising and insurance expense. Other expenses
increased by $400,000, or 19.4% in 1996 as compared to 1995 and 38.0% as
compared to 1994. The increase in other expenses in 1995, were offset in part by
a reduction in FDIC assessment fees of $123,000. In 1996 the Bank's other
expenses included expenses related to the operation of our new subsidiaries
which amounted to approximately $640,000 in 1996 and $197,000 in 1995.
Additionally, in 1995, other losses increased by $87,000 in comparison to 1994.
This increase in 1995 is due primarily to losses on problem related other real
estate owned.
SPECIAL CHARGES
During the fourth quarter of 1996, the Bank launched a strategic management
reorganization and restructuring plan focusing on improving shareholder value
designed to improve asset quality, reduce future operating costs and to enhance
net interest income while attempting to optimize the management of the Bank's
capital. As a result, the Bank recorded special charges totaling $2.2 million
pre-tax, with an after tax impact of $1.3 million.
Included in the $2.2 million of pre-tax special charges was an increase of
$900,000 to the Bank's allowance for loan losses, a $289,000 loss realized on
the repositioning and sale of certain investment securities, employee
termination and related costs of approximately $490,000 and a charge of $250,000
attributable to a negotiated settlement of a lawsuit brought against the Bank in
prior years by a former depositor, as a result of an operational/forgery claim.
For discussion on the increase to the Bank's allowance for loan losses see also
Provision for Loan Losses and Related Allowance, included herein.
Management reviewed the Bank's investment securities portfolio and instituted a
repositioning and sales strategy. The Bank reclassified its entire investment
securities held to maturity portfolio to the available for sale portfolio and
sold approximately $16.5 million of securities with an average yield of 5.6%,
realizing a loss of $289,000 on the transaction. The proceeds from the sale were
committed to be reinvested in higher yielding mortgage-backed securities. The
flexibility of the available for sale portfolio will assist management in
evaluating market opportunities while managing the Bank's exposure to interest
rate risk and asset sensitivity.
In addition, management reviewed the existing operations and decided to
eliminate certain of the Bank's in-house processing functions and facilities and
utilize outside servicers to provide these functions to the Bank. As a result of
this decision, the Bank recorded a pre-tax $225,000 charge of which the
significant components of the costs associated with this charge, relate
principally to the write off of the carrying value of software, hardware, other
equipment utilized by these processing functions, prepaid maintenance costs and
certain severance and benefit payments for planned terminations.
As a result of the recent management reorganization and restructuring plan,
additional personnel reductions in other areas are being made to eliminate
certain positions within the Bank. The Bank provided for approximately $490,000
relating to these planned terminations, severance and other employee related
costs associated with its reorganization and restructuring plan.
PROVISION FOR LOAN LOSSES AND RELATED ALLOWANCE
The provision for loan losses was $1,450,000, $600,000, and $800,000 in 1996,
1995 and 1994, respectively. The provision for loan losses in 1996 increased by
$850,000 compared to 1995 and $650,000 as compared to the provision provided for
in 1994. The levels of loan loss provisions represent the amount needed to
provide for an adequate allowance for loan losses.
As discussed previously, the Bank launched a strategic management reorganization
and restructuring plan in the fourth quarter of 1996. As part of the plan, the
Bank had performed an extensive review of the Bank's existing loan portfolio and
related allowance for loan losses. As a result of this review, the Bank placed
certain performing loans on non-performing status increasing the level of
non-performing loans to $2.7 million as of December 31, 1996 as compared to $1.6
million as of December 31, 1995. Additionally, the Bank charged-off $734,000 in
loans during 1996, as compared to $469,000 in loans charged-off in 1995. A
significant portion of the loan charge-off's were experienced in the fourth
quarter of 1996. The increased level of non-performing loans resulted in an
increase to the allowance for loan losses of $900,000.
SEVEN
<PAGE>
This charge was incurred in addition to the $550,000 provision provided during
1996. The increased level of provision established in 1996, increased the
allowance for loan losses to $2.5 million at December 31, 1996 as compared to
$1.8 million at December 31, 1995. The established allowance is anticipated to
be utilized by management to more aggressively address loan work out issues and
focus on reducing the overall level of non-performing assets.
Through evaluation of the loan portfolio, management believes the allowance for
loan losses to be adequate. This evaluation uses information currently available
including appraisals, customers' financial statements, ratios, cash flow, net
worth and collateral position. In addition, current economic conditions, as well
as the nature and volume of net loans is considered in assessing the adequacy of
the allowance.
INCOME TAXES
The Bank's effective consolidated tax rate for 1996 was (37.9)% as compared to
43.9% in 1995 and 41.6% in 1994. The 1996 rate includes the effects of special
charges. Excluding the effect of special charges, the Bank's effective tax rate
was 42.9%.
FINANCIAL CONDITION
ASSETS AND DEPOSITS
Total assets were $142,708,000 at December 31, 1996 compared to $131,881,000 at
December 31, 1995, an increase of $10.8 million, or 8.2% due primarily to an
increase in loan growth of $15 million experienced in 1996 originated through
Continental Business Credit and an increase of both commercial loans and
commercial mortgages of approximately $6.9 million, or 12.9%. The increase in
our loan portfolio was anticipated as Continental Business Credit began its
operations in January 1996. Additionally, the overall strong economic
environment experienced in the local and Long Island economy and relatively
stable interest rate environment, increased the overall demand for commercial
loans and commercial mortgages.
Total investment securities were $26.2 million at December 31, 1996 compared to
$39.4 million at December 31, 1995, a decrease of $13.2 million, or 33.5%. This
decrease was due to management instituting a repositioning and sales strategy.
The Bank reclassified its investment securities held to maturity portfolio to
the available for sale portfolio and sold approximately $16.5 million of
securities. The proceeds from the sale were committed at year end to be
reinvested in higher yielding mortgage-backed securities. The flexibility of the
available for sale portfolio will assist management in evaluating market
opportunities while managing the Bank's exposure to interest rate risk and asset
sensitivity. Investment securities continue to be a stable source of income in
this challenging lending environment, as well as a positive factor to the Bank's
capital adequacy position.
The Bank's asset base is a function of its core deposit base. Total deposits
increased by $8.0 million, or 6.7% in 1996 as compared to 1995. This increase
was experienced throughout the Bank's deposit mix. Non-interest bearing demand
deposits increased $2.7 million over 1995, money market and NOW deposits
increased $2.9 million over 1995 and time and savings deposits increased $2.3
million over 1995.
STOCKHOLDERS' EQUITY
The Bank's stockholders' equity increased by $2.5 million to $12.1 million at
December 31, 1996 from $9.6 million at December 31, 1995. The increase was
primarily due to the sale of the 230,525 shares available under the rights
offering which was completed in December 1996. The offering of 230,525 shares of
common stock in 1996 resulted in net proceeds of approximately $2.9 million of
additional capital to the Bank. The finalization of the rights offering in late
1996 and the increased level of resulting capital played an integral role in the
roll-out of the restructuring plan and post-restructuring the Bank remains
"well-capitalized" under all regulatory definitions. As of December 31, 1996,
the Banks' risk-based capital ratio was 11.60%, tier 1 risk-based ratio 10.33%
and tier 1 leverage ratio at 7.07%, all in excess of the required 8%, 4% and 4%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds result from the operations of the Bank and
its financial subsidiaries and include deposits, principal and interest payments
on loans and mortgage-backed securities, maturities from investments and
mortgage-backed securities and to a lessor extent, advances from the Federal
Home Loan Bank of New York ("FHLB") and the availability of various repurchase
lines. While maturities and scheduled repayments on loans, mortgage-backed
securities and investment securities are predictable sources of funds, deposit
flows and prepayments are greatly influenced by market interest rates, economic
conditions, and competition.
EIGHT
<PAGE>
The Bank's most liquid assets are cash and cash equivalents, which include
investments in highly liquid short-term investments. The level of these assets
is dependent upon the Bank's operating, financing lending and investing
activities during any given period. The Bank considers one ratio paramount in
quantifying liquidity, liquid assets to total assets ("liquid asset ratio").
Liquid assets are defined as federal funds sold, vault cash, balances with the
Federal Reserve Bank of New York, cash balances with correspondent banks,
short-term investments and short-term loans. At December 31, 1996, the Bank had
a liquidity position of 43.55%, as compared to 44.39% at December 31, 1995.
NINE
<PAGE>
<TABLE>
Continental Bank
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents
Cash and due from banks $ 10,596,685 $ 7,828,510
Federal funds sold 20,600,000 21,450,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 31,196,685 29,278,510
Investment securities available for sale, at fair value (Note 4) 26,242,215 22,321,709
Investment securities held to maturity, at amortized cost (Note 4)
(fair value $0 in 1996 and $17,017,989 in 1995) -- 17,101,902
Federal Home Loan Bank Stock, at cost 395,500 --
Loans (Note 5) 80,280,966 58,225,602
Less: unearned discount (109,515) (5,429)
Allowance for loan losses (Note 6) (2,518,436) (1,778,436)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net 77,653,015 56,441,737
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 7) 2,297,025 2,403,980
Franchise rights, net (Note 1) 2,045,595 2,157,173
Other assets 2,878,440 2,176,814
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 142,708,475 $ 131,881,825
====================================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits $ 27,207,186 $ 24,459,514
Money market and NOW accounts 31,539,576 28,624,322
Time and savings deposits (Note 11) 68,706,133 66,409,077
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 127,452,895 119,492,913
Other liabilities 3,137,560 2,813,370
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 130,590,455 122,306,283
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments, contingent liabilities and other information (Note 12)
Stockholders' equity: (Note 8)
Capital stock, at par $5 (3,000,000 shares authorized; 921,735 and
691,210 issued and outstanding at December 31, 1996 and 1995, respectively) 4,608,675 3,456,050
Surplus 6,445,717 4,731,538
Retained earnings 933,828 1,201,829
Net unrealized appreciation on securities available for sale, net of taxes 129,800 186,125
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,118,020 9,575,542
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 142,708,475 $ 131,881,825
====================================================================================================================================
See accompanying notes to audited consolidated financial statements
</TABLE>
TEN
<PAGE>
<TABLE>
Continental Bank
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,222,343 $ 6,184,522 $ 5,526,025
Interest on investment securities 2,733,030 2,678,986 1,457,309
Interest on federal funds sold 573,331 630,111 454,258
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 10,528,704 9,493,619 7,437,592
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits (Note 11) 4,448,337 3,953,381 2,303,631
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 6,080,367 5,540,238 5,133,961
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses (Notes 3 and 5) 1,450,000 600,000 800,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,630,367 4,940,238 4,333,961
- ------------------------------------------------------------------------------------------------------------------------------------
Other income:
Service fees on deposit accounts 946,760 847,751 787,884
Fee income from Money Centers 2,641,991 1,715,814 --
Other 110,033 186,600 111,230
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 3,698,784 2,750,165 899,114
- ------------------------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 3,802,621 3,089,055 2,190,395
Occupancy and equipment 1,105,507 914,915 689,127
Settlement of litigation and related expenses (Note 15) -- 486,881 --
Special charges (Note 3) 1,255,704 -- --
Other (Note 12) 2,463,096 2,062,685 1,495,216
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expense 8,626,928 6,553,536 4,374,738
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (297,777) 1,136,867 858,337
(Benefit) provision for income taxes (Note 9) (112,722) 499,235 357,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (185,055) $ 637,632 $ 501,337
====================================================================================================================================
Net (loss) income per share $ (0.26) $ 0.92 $ 0.73
====================================================================================================================================
</TABLE>
See accompanying notes to audited consolidated financial statements.
ELEVEN
<PAGE>
<TABLE>
Continental Bank
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December
31, 1996, 1995 and 1994
<CAPTION>
Unrealized
appreciation
(depreciation) on
Common Retained available for sale
Stock Surplus Earnings securities, net Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 3,142,615 $ 4,386,760 $ 791,929 $ -- $ 8,321,304
Change in accounting for investments
effective January 1, 1994 -- -- -- 41,000 41,000
Net income -- -- 501,337 -- 501,337
Issuance of stock dividend
(62,687 shares) 313,435 344,778 (659,949) -- (1,736)
Change in unrealized gain (loss)
on securities available for sale,
net of taxes -- -- -- (159,098) (159,098)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 3,456,050 4,731,538 633,317 (118,098) 8,702,807
Net income -- -- 637,632 -- 637,632
Cash dividends paid -- -- (69,120) -- (69,120)
Change in unrealized gain (loss)
on securities available for sale,
net of taxes -- -- -- 304,223 304,223
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,456,050 4,731,538 1,201,829 186,125 9,575,542
Net loss -- -- (185,055) -- (185,055)
Proceeds from issuance of stock
(230,525 shares) 1,152,625 1,714,179 -- -- 2,866,804
Cash dividends paid -- -- (82,946) -- (82,946)
Change in unrealized gain (loss)
on securities available for sale,
net of taxes -- -- -- (56,325) (56,325)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 4,608,675 $ 6,445,717 $ 933,828 $ 129,800 $ 12,118,020
====================================================================================================================================
</TABLE>
See accompanying notes to audited consolidated financial statements.
TWELVE
<PAGE>
<TABLE>
Continental Bank
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (185,055) $ 637,632 $ 501,337
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for loan losses 1,450,000 600,000 800,000
Depreciation and amortization 300,695 221,034 163,349
Amortization of franchise rights and leasehold, net 111,578 30,432 --
Amortization of investment securities premium, net 221,513 224,412 138,667
Net loss on sales of investment securities available for sale 289,209 -- --
Deferred income taxes (credit) (537,640) (122,602) 48,816
(Increase) decrease in other assets (311,736) (156,769) 216,564
Increase in other liabilities 324,190 1,832,222 638,210
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,662,754 3,266,361 2,506,943
INVESTMENT ACTIVITIES
Proceeds from maturing and prepayments available for sale securities 8,285,385 2,588,944 5,769,946
Proceeds from maturing and prepayments held to maturity securities 5,520,487 10,071,810 2,641,676
Proceeds from sales of investment securities available for sale 16,544,683 -- --
Purchases of investment securities available for sale (5,991,566) (2,000,000) (2,050,156)
Purchases of investment securities held to maturity (11,992,390) (9,310,613) (30,520,936)
Acquisition of Money Centers -- (2,000,000) --
Net (increase) decrease in loans (22,661,278) 853,555 2,601,459
Purchase of premises and equipment, net (193,740) (434,918) (260,188)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,488,419) (231,222) (21,818,199)
FINANCING ACTIVITIES
Net increase in deposits 7,959,982 4,215,864 25,653,629
Cash dividends paid (82,946) (69,120) --
Net proceeds from the issuance of common stock 2,866,804 -- --
Payment for fractional shares related to stock dividends -- -- (1,736)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,743,840 4,146,744 25,651,893
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 1,918,175 7,181,883 6,340,637
Cash and cash equivalents at beginning of period 29,278,510 22,096,627 15,755,990
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 31,196,685 $ 29,278,510 $ 22,096,627
====================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 4,558,000 $ 3,100,000 $ 1,811,000
Income taxes 511,000 318,000 378,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Unrealized depreciation (appreciation) on
securities available for sale, net of taxes 56,325 (304,223) 118,098
Transfer of investment securities held to maturity,
to investment securities available for sale 23,503,399 18,300,000 --
Transfer of investment securities available for sale,
to investment securities held to maturity -- 702,000 --
</TABLE>
See accompanying notes to audited consolidated financial statements.
THIRTEEN
<PAGE>
Continental Bank
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. BUSINESS
Continental Bank ("The Bank") is a New York State chartered commercial bank. The
Bank and its subsidiaries provide banking and check cashing services to domestic
markets.
FORMATION OF SUBSIDIARY, CBMC, INC. D/B/A MONEY CENTERS
On February 16, 1995, the Bank announced the formation of a wholly-owned
subsidiary, CBMC, Inc. d/b/a Money Centers ("CBMC"). The Bank made an initial
capital contribution to this subsidiary of $2 million. On April 24, 1995, CBMC,
Inc. acquired certain assets related to five stores operated by Money Centers,
Inc., for $2,000,000. The transaction was accounted for as a purchase. The
purchase price was allocated primarily to the franchise rights associated with
operating the stores, certain furniture, fixtures and equipment and the value of
operating leases assumed.
CBMC, Inc. has entered into a contract with the previous owner of Money Centers,
Inc. for consulting services over a three year period. The contract requires
compensation of $75,000 and $50,000 in 1996 and 1997, respectively.
Results of operations after the acquisition date are included in the 1995
statement of income. The following pro-forma summaries of certain income and
expense items have been prepared assuming that this acquisition had taken place
at the beginning of 1995 after giving effect to certain pro-forma adjustments,
including, among others, additional depreciation based on the fair value of the
premises and equipment acquired and amortization of intangibles resulting from
the transaction. The pro forma financial information is not necessarily
indicative of the results of operations as they would have been if the Bank and
CBMC,Inc. had been a single entity during 1995, nor is it necessarily indicative
of the results of operations which may occur in the future. Pro forma financial
information for 1994 is not presented as such information is not available.
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
Net interest and fee income $4,908,000
Other income 3,479,000
Other expense 7,088,000
Net income 738,000
FORMATION OF SUBSIDIARY, CBC OF NEW YORK, INC. D/B/A
CONTINENTAL BUSINESS CREDIT
In December 1995, the Bank announced the formation of a finance subsidiary, CBC
of New York, Inc.("CBC"). CBC specializes in commercial finance transactions
focusing in the area of receivable and other asset based financing to small and
medium sized businesses.
2. SUMMARY OF ACCOUNTING POLICIES
The accounting and reporting policies of Continental Bank and its subsidiaries
(the "Bank") conform to general accepted accounting principles and to general
practices within the financial services industries. The following is a
description of the more significant policies which the Bank follows in preparing
and presenting its consolidated financial statements.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Bank and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that effect the reported assets and liabilities
as of the date of the consolidated statements of financial condition. The same
is true of revenues and expenses reported for the period. Actual results could
differ significantly from these estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Bank considers cash and due from banks
and federal funds sold as cash and cash equivalents.
INVESTMENT SECURITIES
Available for Sale - Effective January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities"(SFAS No. 115). In connection with the adoption of
this pronouncement, debt and equity securities used as part of the Bank's
asset/liability management that may be sold in response to changes in interest
rates, prepayments, and other factors have been classified as available for
sale. Such securities are reported at fair value, with unrealized gains and
losses excluded from earnings and reported in a separate component of
stockholders' equity (on an after tax basis). Gains and losses on the
disposition of securities are recognized on the specific identification method
in the period in which they occur.
Held to Maturity - Held to maturity investment securities are stated at cost
adjusted for accretion of discount or amortization of premium. The Bank has the
intent and ability to hold such securities until maturity.
On November 15, 1995, the FASB issued a special report entitled "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities, Questions and Answers"("the Guide"). The Guide
permitted a one-time reassessment and related reclassification from the held to
maturity category (no
FOURTEEN
<PAGE>
later than December 31, 1995) that will not call into question the intent of the
enterprise to hold other debt securities until maturity in the future. In
December 1995, the Bank performed a reassessment of its investment securities
portfolio which resulted in reclassifications of approximately $18,300,000 of
investment securities from held to maturity to available for sale and $702,000
of investment securities from available for sale to held to maturity.
REVENUE RECOGNITION
Interest on loans is accrued and credited to operations based upon the principal
amount outstanding. Accretion of discounts on loans has been added to the
related interest income. Accrual of interest is stopped and reversed on a loan
when management believes, based on collection efforts and after considering
economic and business factors, that the borrower's financial condition is such
that collection of interest or principal is doubtful.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
entitled "Accounting by Creditors for Impairment of a Loan." In October 1994,
this Statement was amended by Statement No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures"(SFAS No. 118). Both
pronouncements establish the accounting by creditors for impairment of certain
loans, with the latter adding as to how a creditor recognizes interest income
related to those impaired loans. Effective January 1, 1995, the Bank adopted
SFAS Nos. 114 and 118. The adoption of SFAS Nos. 114 and 118 did not have a
material effect on the Bank's financial position or results of operation.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
charged to earnings. Loans are charged against the allowance for loan losses
when management believes that the collectability of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectability of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of loans, specific problem loans, and current economic conditions that
may affect the borrowers' ability to pay.
While management uses available information, including appraisals, to estimate
potential losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for possible loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on their judgments of
information available to them at the time of their examination.
FRANCHISE RIGHTS
Franchise rights are being amortized on a straight-line basis over twenty years.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the related assets, which range from 5 to 31 years.
Leasehold improvements are stated at cost, less accumulated amortization,
computed on the straight-line method over the lesser of the terms of the leases
or the estimated useful lives of the improvements.
OTHER REAL ESTATE (ORE)
Real estate acquired in satisfaction of a loan is reported in other assets.
Properties acquired by foreclosure or deed in l ieu of foreclosure are
transferred to ORE and recorded at the lower of cost or fair market value based
on appraised value at the date actually or constructively received less
estimated cost to sell the property. Subsequent valuation adjustments are made
if fair value less estimated costs to sell the property falls below the carrying
amount. Loan losses arising from the acquisition of such property are charged
against the allowance for loan losses. ORE approximated $127,000 as of December
31, 1996 and $500,000 at December 31, 1995, respectively and is included in
other assets in the consolidated financial statements.
INCOME TAXES
The Bank follows SFAS No. 109, "Accounting for Income Taxes," which requires the
use of an asset and liability approach for financial accounting and reporting
for income taxes.
Deferred taxes result principally from (1) provision for loan losses in excess
of allowable tax deductions; (2) special charges pursuant to the Bank's 1996
Restructuring Plan (3) tax depreciation in excess of financial statement
depreciation; (4) accretion of income on securities reported for income tax
purposes when securities mature; and (5) unrealized appreciation/(depreciation)
on available for sale securities.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of capital
shares outstanding. All share and per share amounts have been adjusted to
reflect a 10% stock dividend in 1994. All fractional shares resulting from the
stock dividends are paid to shareholders in cash.
FIFTEEN
<PAGE>
Continental Bank
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
IMPACT OF NEW ACCOUNTING STANDARDS
The Bank has adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." In accordance with this
Statement, the Bank reviews long-lived assets and related franchise rights for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable. If this review
indicates that franchise rights will not be recoverable, as generally determined
based on the estimated undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying amount of the franchise rights is
reduced by the estimated shortfall of cash flows.
In 1996 the Bank adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities," which requires that the Bank recognize as separate assets
rights to service mortgage loans for others. The servicing rights are to be
recorded based on an allocation of the total investment in related loans to the
relative fair values of the loans and the separate servicing rights retained,
providing it is practical to estimate those fair values. The adoption did not
have a material effect on the Bank's consolidated financial condition or results
of operations.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," for fiscal years beginning after December 15, 1995. This
Statement establishes a fair-value based method of accounting for stock
compensation plans with employees and others. The Bank plans to account for
stock-based compensation plans under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," as permitted by SFAS No. 123 and
will present the pro forma disclosures required under SFAS No. 123, (if such
plans are adopted by the Bank in the future) with no impact to the Bank's
results of operations. Accordingly, SFAS No. 123 was adopted January 1, 1996 and
such adoption did not have a material effect on the Bank's consolidated
financial condition or results of operations.
PROSPECTIVE ACCOUNTING CHANGES
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities which are based
on a financial-components approach that focuses on control. This approach
provides that after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred
and derecognizes financial assets and liabilities when control has been
surrendered or extinguished, respectively. The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings and is effective prospectively for
transfers and servicing of financial assets and extinguishments of liabilities
that occur after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The Bank is currently reviewing the
impact of the implementation of SFAS No. 125 on its consolidated financial
statements.
RECLASSIFICATIONS
Certain amounts in the prior years' Consolidated Financial Statements have been
reclassified to conform to the current year's presentation.
3. SPECIAL CHARGES
During the fourth quarter of 1996, the Bank launched a strategic management
reorganization and restructuring plan. As a result, the Bank recorded special
charges totaling $2.2 million pre-tax, with an after tax impact of $1.3 million.
Included in the $2.2 million of pre-tax special charges was an increase of
$900,000 to the Bank's allowance for loan losses, a $289,000 loss realized on
the repositioning and sale of certain investment securities, employee
termination and related costs of approximately $490,000 and a charge of $250,000
attributable to a negotiated settlement of a lawsuit brought against the Bank in
prior years by a former depositor, as a result of an operational/forgery claim.
As of December 31, 1996, $538,000 was accrued for employee severance,
termination and related costs.
Additionally, the Bank plans to eliminate certain of the Bank's in-house
processing functions and facilities and utilize outside servicers to provide
these functions to the Bank. As a result of this decision, the Bank recorded a
$225,000 charge of which the significant components of the costs associated with
this charge, were $151,000 relating principally to the write off of the carrying
value of software, hardware, other equipment utilized by these processing
functions and prepaid maintenance and estimated costs of $74,000 for certain
severance and benefit payments for planned employee terminations.
The restructuring plan is expected to be substantially completed prior to the
end of 1997 and the Bank believes the provisions recorded are adequate to cover
the costs associated with the plan.
SIXTEEN
<PAGE>
4. INVESTMENT SECURITIES HELD TO MATURITY AND INVESTMENT SECURITIES AVAILABLE
FOR SALE
The amortized cost and estimated market values of investments in debt securities
at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $26,009,515 $ 264,842 $ (37,142) $26,237,215
Other securities 5,000 -- -- 5,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total $26,014,515 $ 264,842 $ (37,142) $26,242,215
====================================================================================================================================
</TABLE>
As part of its efforts to manage its asset/liability strategy in an economic
environment increasingly susceptible to changes in market interest rates, in
December 1996, in connection with the Bank's reorganization and restructuring
efforts, the Bank designated all of its investment securities as investment
securities available for sale. As a result, at December 31, 1996, the Bank had
no investment securities classified as held to maturity. As of December 31,
1996, the Bank was committed to purchase approximately $17.2 million of
mortgage-backed securities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $22,002,584 $319,125 -- $22,321,709
- ------------------------------------------------------------------------------------------------------------------------------------
Total $22,002,584 $319,125 -- $22,321,709
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $17,096,902 $ -- $ (83,873) $17,013,029
Other securities 5,000 -- (40) 4,960
- ------------------------------------------------------------------------------------------------------------------------------------
Total $17,101,902 $ -- $ (83,913) $17,017,989
====================================================================================================================================
</TABLE>
SEVENTEEN
<PAGE>
Continental Bank
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
The amortized cost and estimated market values at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to prepay
obligations without prepayment penalties.
- --------------------------------------------------------------------------------
Estimated
Amortized Market
Available for sale Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 3,096,317 $ 3,099,355
Due after 1 year through 5 years -- --
Due after 5 years through 10 years 5,192,727 5,172,178
- --------------------------------------------------------------------------------
8,289,044 8,271,533
- --------------------------------------------------------------------------------
Mortgage-backed securities 17,725,471 17,970,682
- --------------------------------------------------------------------------------
Total $26,014,515 $26,242,215
================================================================================
At December 31, 1996, investment securities with an aggregate carrying value of
approximately $11,914,000 were pledged for various purposes as required or
permitted by law.
Proceeds from sales of investment securities available for sale for the year
ended December 31, 1996 were $16,545,000. Gross losses from the sales of
investment securities available for sale of $289,000 were realized during 1996.
There were no sales of investment securities available for sale or held to
maturity for the years ended December 31, 1995 and 1994.
5. LOANS
At December 31, loans consisted of the following:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Commercial loans $43,029,444 $23,221,895
Consumer installment 4,447,058 3,987,824
Mortgages 32,359,330 30,260,715
Other 445,134 755,168
- --------------------------------------------------------------------------------
80,280,966 58,225,602
Less:
Unearned discount 109,515 5,429
Allowance for loan losses 2,518,436 1,778,436
- --------------------------------------------------------------------------------
Total $77,653,015 $56,441,737
================================================================================
At December 31, 1996 and 1995, loans with unpaid principal balances of
approximately $2,678,000 and $1,619,000, respectively, on which the Bank is no
longer accruing interest income are included in the amounts listed above. If the
Bank had accrued interest income on the loans which were in a non-accrual status
at year end, its interest income would have increased by approximately $230,000
in 1996 and $131,000 in 1995.
During 1995, the Bank sold loans guaranteed by the Small Business Administration
of approximately $2,800,000 and recognized gains on these sales of approximately
$130,000.
At December 31, 1996 and 1995, the Bank had loans receivable from certain
officers and directors and their affiliates aggregating approximately $1,569,000
and $1,932,000, respectively. During 1996, $40,000 of new loans (principally to
directors and affiliates of directors) were made, repayments totaled $403,000.
In the opinion of management, such loans are in the ordinary course of business
at normal credit terms, including interest rate and collateral.
6. ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses is as follows:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Balance at January 1 $ 1,778,436 $ 1,503,269 $ 1,678,804
Provision charged
to earnings 1,450,000 600,000 800,000
Recoveries on
loans previously
charged off 24,438 144,340 99,110
Loans charged off (734,438) (469,173) (1,074,645)
- --------------------------------------------------------------------------------
Balance at
December 31 $ 2,518,436 $ 1,778,436 $ 1,503,269
================================================================================
All collection costs incurred to date (including costs associated with
recoveries) are included in other expenses in the accompanying statements of
operations.
The Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," as of January 1, 1995. SFAS No. 114
requires that certain impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance.
The Bank had previously measured the allowance for credit losses using methods
similar to those prescribed in SFAS No. 114. As a result of adopting these
statements, no additional allowance for loan losses was required as of January
1, 1995.
EIGHTEEN
<PAGE>
As of December 31, the Bank's recorded investment in impairment loans and the
related valuation allowance calculated under SFAS No. 114 are as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
- --------------------------------------------------------------------------------
Impaired loans- $2,678,000 $1,618,852
Valuation allowance $ 491,000 $ 465,000
- --------------------------------------------------------------------------------
Total Impaired Loans $2,678,000 $ 491,000 $1,618,852 $ 465,000
================================================================================
This valuation allowance is included in the allowance for loan losses on the
Bank's consolidated statement of financial condition.
The average recorded investment in impaired loans for the year ended 1996 and
1995 was $1,493,000 and $1,874,000, respectively.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful at which time
payments received are recorded as reductions of principal. The Bank recognized
interest income on impaired loans of $ 0 and $137,000 for the years ended
December 31, 1996 and 1995, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31, 1996 and 1995:
- --------------------------------------------------------------------------------
Accumulated
Depreciation
and Net Book
Cost Amortization Value
- --------------------------------------------------------------------------------
1996
Land $ 300,000 $ -- $ 300,000
Building 408,869 87,603 321,266
Leasehold improvements 1,882,133 669,384 1,212,749
Furniture, fixtures and equipment 923,231 460,221 463,010
- --------------------------------------------------------------------------------
Total $3,514,233 $1,217,208 $2,297,025
================================================================================
- --------------------------------------------------------------------------------
1995
Land $ 300,000 $ -- $ 300,000
Building 404,752 74,309 330,443
Leasehold improvements 1,852,016 600,471 1,251,545
Furniture, fixtures and equipment 824,533 302,541 521,992
- --------------------------------------------------------------------------------
Total $3,381,301 $ 977,321 $2,403,980
================================================================================
NINETEEN
<PAGE>
Continental Bank
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
8. STOCKHOLDERS' EQUITY
RIGHTS OFFERING
In July 1996, the Bank issued to shareholders of record on July 1,1996,
non-transferable rights to subscribe for one (1) share of common stock for each
three (3) shares of common stock held at the record date, at the price of $12.50
per share, expiring on September 16, 1996. Upon the expiration date, the Bank
had reserved the right to sell any shares not issued in connection with the
rights offering during the period of one (1) year following the expiration date
of the right.
The offering was completed in December 1996, resulting in net proceeds of
approximately $2.9 million and an increase in the amount of common stock
outstanding to 921,735 shares. The proceeds of the offering are anticipated to
be used for general corporate purposes, including the support of investment and
loan portfolios of the Bank and its commercial lending subsidiary.
DIVIDENDS
On February 21, 1996, the Bank declared a $.12 per share dividend to be
distributed on March 20, 1996 to stockholders of record as of March 13, 1996.
The Banking Law of the State of New York limits the amount of cash dividends
that may be paid without prior approval.
9. INCOME TAXES
Federal and state income taxes payable (receivable) as of December 31, were as
follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Current $(133,367) $ (48,606)
Deferred (292,409) (312,668)
- --------------------------------------------------------------------------------
$(425,776) $(361,274)
================================================================================
The components of the net deferred tax asset as of December 31, are as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Gross deferred tax asset $ 1,242,103 $ 750,475
Gross deferred tax liability (473,680) (437,807)
- --------------------------------------------------------------------------------
$ 768,423 $ 312,668
================================================================================
The components of the provision (benefit) for income taxes for the years ended
December 31, were as follows:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Current:
Federal $ 303,566 $ 442,829 $ 224,845
State 121,352 179,008 83,339
- --------------------------------------------------------------------------------
424,918 621,837 308,184
Deferred:
Federal (380,867) (132,829) 35,155
State (156,773) 10,227 13,661
- --------------------------------------------------------------------------------
(537,640) (122,602) 48,816
- --------------------------------------------------------------------------------
$(112,722) $ 499,235 $ 357,000
================================================================================
The following is a reconciliation of the statutory federal income tax rate to
the effective tax rate:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Federal statutory rate (34.0)% 34.0% 34.0%
State income taxes net of
federal benefit (4.4) 10.4 7.5
Nontaxable interest income -- -- (0.1)
Other 0.5 (0.5) 0.2
- --------------------------------------------------------------------------------
(37.9)% 43.9% 41.6%
================================================================================
10. BENEFIT PLANS
INCENTIVE SAVINGS PLAN
The Bank maintains the Continental Bank 401(K) Plan (the "401(K) Plan"), a
non-contributory tax deferred compensation plan. Under the 401(K) Plan,
employees 21 years of age or older with twelve months of service may make
pre-tax contributions up to the greater of 15% of their annual compensation or
applicable limits under Section 401(K) of the Internal Revenue Code, subject to
the provisions of the Employee Retirement Security Act of 1974 ("ERISA"), as
amended.
KEY EXECUTIVE INCENTIVE AWARD
Effective October 1996, the Board of Directors granted 60,000 phantom stock
units ("Units"), to certain key employees of the Bank of which each Unit
represents a right to receive a cash payment following a vesting date equivalent
in value to one share of common stock of the Bank at the then current fair
market value plus dividends or distributions, plus interest on such dividends or
distributions compounded annually and upon the occurrence of certain events can
be converted to stock. The Units vest at a rate of one-third per year beginning
on the third anniversary from the date of grant, subject to acceleration upon
the occurrence of certain events.
TWENTY
<PAGE>
PENSION PLAN
On January 31, 1996, the Bank announced its intention to terminate its defined
benefit pension plan and received final approval from the Department of Labor
and the Internal Revenue Service to terminate the pension plan during 1996. The
termination of the pension plan will not have a material effect on the Bank's
financial position or results of operations. For the year ended December 31,
1996, the Bank made no contributions to the Plan and did not recognize any
periodic pension costs.
The following table sets forth the funded status of the plan at December 31:
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $779,922 in 1995 $ 820,531
================================================================================
Actuarial present value of projected benefit
obligation for services rendered to date $(1,053,617)
Less: Plan assets at fair value, invested
primarily in certificates of deposit 1,042,610
- --------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets (11,007)
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions 114,654
Unrecognized net transition asset 10,190
Unrecognized prior service cost (24,856)
- --------------------------------------------------------------------------------
Prepaid pension cost $ 138,693
================================================================================
The total contribution due for 1995 is not fully reflected in plan assets at
December 31, 1995.
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
Assumptions and actual rates used in
accounting for the defined benefit:
Actual discount rate 7.5%
Assumed rates of increase in
compensation levels 4.5%
Expected long-term rate of return on assets 7.5%
================================================================================
Net pension cost included the following components:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Service cost-benefits earned
during the period $ 134,323 $ 143,243
Interest cost on projected
benefit obligation 72,146 67,383
Actual return on plan assets (19,730) (15,445)
Net amortization and deferral (43,894) (42,888)
- --------------------------------------------------------------------------------
Net periodic pension cost $ 142,845 $ 152,293
================================================================================
11. TIME DEPOSITS IN EXCESS OF $100,000
At December 31, 1996 and 1995, aggregate time deposits in principal amounts of
$100,000 or more were approximately $5,192,000 and $16,279,000 respectively.
Interest expense on such deposits for the three years ended December 31, 1996
was $457,000, $675,000 and $540,000, respectively.
Certificates of deposit due to affiliates of stockholders and directors
aggregated approximately $228,000 and $102,000 at December 31, 1996 and 1995,
respectively.
12. LEASE COMMITMENT AND OTHER INFORMATION
LEASE COMMITMENTS
The Bank is obligated, under noncancelable operating leases covering bank
premises and equipment, to pay minimum annual rentals of:
- --------------------------------------------------------------------------------
1997 $ 617,612
1998 599,100
1999 284,124
2000 268,674
2001 & Thereafter 1,019,920
- --------------------------------------------------------------------------------
Total $2,789,430
================================================================================
The leases covering bank premises contain renewal options at higher rates. Rent
expense charged to operations was approximately $503,000 in 1996, $472,000 in
1995, and $271,000 in 1994.
BORROWED FUNDS
Effective December 1996, the Bank has available unused lines of credit with the
FHLB and availability to borrow funds under agreements to repurchase securities
with primary dealers. As of December 31, 1996 and 1995 the Bank had no
outstanding borrowings under these agreements.
TWENTY-ONE
<PAGE>
Continental Bank
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
OTHER INFORMATION
Other expenses which exceed one percent of aggregate interest and other income
are as follows for the years ended December 31:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Computer processing $189,000 175,000 161,000
Insurance 178,000 186,000 154,000
Director and
committee fees -- 138,000 124,000
Legal fees -- 132,000 115,000
FDIC assessment -- 125,000 196,000
Consulting Fees -- 154,000 158,000
================================================================================
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances for the year ended
December 31, 1996 was approximately $1,355,000.
13. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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 Bank
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
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 may
require payment of a fee. At December 31, 1996, the Bank's total commitments to
extend credit were $3,845,000. This included stand-by letters of credit totaling
$723,000. The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained by the Bank upon examination of credit
is based on management's credit evaluation of the counterparty. Collateral held
varies, but generally includes residential and income producing properties.
CONCENTRATION OF CREDIT RISK
The Bank grants commercial loans to customers secured by residential and income
producing properties which are located throughout Long Island and the
metropolitan New York City area. Accordingly, the ultimate collectability of a
substantial portion of the Bank's loan portfolio is particularly susceptible to
market conditions in this area.
The Bank has a concentration of loans outstanding to one stockholder/director
and his affiliates aggregating 1.8% of the total loan portfolio as of December
31, 1996. These loans are secured by real estate and were granted in the normal
course of business.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective as required, on January 1, 1995 the Bank adopted Statement of
Financial Accounting Standards No. 107 ("SFAS No. 107") "Disclosures about Fair
Value of Financial Instruments". The fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than a forced or liquidation sale.
<TABLE>
<CAPTION>
The following table reflects the carrying amounts and fair values of financial instruments at December 31, 1996 and 1995:
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash & Cash Equivalents $ 31,196,685 $ 31,196,685 $ 29,278,510 $ 29,278,510
Investment Securities
Available for Sale 26,242,215 26,242,215 22,321,709 22,321,709
Held to Maturity -- -- 17,101,902 17,017,989
Loans, net 77,653,015 76,745,625 56,441,737 56,849,898
Accrued Interest Receivable 995,412 995,412 949,168 949,168
Deposits 127,452,895 127,768,733 119,492,913 119,635,515
Accrued Interest Payable 1,576,663 1,576,663 2,009,950 2,009,950
====================================================================================================================================
</TABLE>
TWENTY-TWO
<PAGE>
The methods and assumptions used to produce the fair value estimates are listed
below.
CASH & CASH EQUIVALENTS
The carrying amounts reported in the consolidated statements of financial
condition for cash and short-term investments approximate those assets' fair
values.
INVESTMENT SECURITIES
The fair value of investment securities including mortgage-backed securities was
based on quoted market prices or market prices of similar instruments with
appropriate adjustments.
ACCRUED INTEREST RECEIVABLE/PAYABLE
As accrued interest represents short-term receivables and payables, the carrying
amount is a reasonable estimate of the fair value.
LOANS
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
other loans are estimated using discounted cash flows, analyses, using interest
rates currently being offered for loans with similar terms to borrowers or
similar credit quality. The carrying amount or accrued interest approximates its
fair value.
DEPOSITS
The fair values disclosed for demand deposits, savings accounts, and certain
money market accounts, are equal to their carrying amounts at the reporting
date. Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregate expected monthly maturities
on time deposits.
As accrued interest represents short-term receivables and payables, the carrying
amount is a reasonable estimate of the fair value.
OFF-BALANCE SHEET INSTRUMENTS
Fair values of the Company's off-balance sheet instruments (lending and
investment commitments) at December 31, 1996 and 1995 were not material.
15. SETTLEMENT OF LAWSUITS
In November 1996, the Bank settled for $250,000 a lawsuit brought against the
Bank by a former depositor in 1990, as a result of an operational/forgery claim.
During 1995, the Bank settled a lawsuit commenced by the government of the
United States of America for $400,000. The plaintiff claimed that the Bank and
various other defendants conspired to defraud the government and that it
sustained losses as a result of the Bank's alleged failure to properly disclose
and service a loan extended to a borrower by the Economic Development
Administration, and the Bank's alleged violation of a certain participation. The
$400,000 payment represents full settlement of this matter and is included in
the Consolidated Statement of Earnings under litigation settlement and related
expenses.
The Bank is involved in other lawsuits during the normal course of business.
Management does not expect the outcome of these matters to have a material
effect on the Consolidated Financial Statements.
TWENTY-THREE
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Continental Bank:
We have audited the accompanying consolidated statements of financial condition
of Continental Bank and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years, in the period ended December 31, 1996. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Continental Bank and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 1994, the Bank changed its method of accounting for investments in
debt and equity securities.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New York, New York
January 31, 1997
TWENTY-FOUR
<PAGE>
CONTINENTAL BANK
CORPORATE DATA
BOARD OF DIRECTORS
IRWIN B. NELSON
Chairman of the Board
Retired Vice President
Fortis Private Capital, Inc.
Fortis Capital Corporation
WILLIAM MICHAEL BLAKE
President,
William M. Blake Agency
JOHN P. BRACKEN
Attorney
Bracken & Margolin
SAUL ERDMAN
Retired President
American Beverage Corp.
DR. VINCENT FERRAGAMO
Dentist
JOHN LIVANOS
President, Oceana Restaurant Corp.
and Livanos Restaurant, Inc.
MARTIN S. ORLAND
Retired President and COO
Fortis Private Capital, Inc.
Fortis Capital Corporation
MARTIN J. SIMON
Chairman & President
First Central Financial Corp.
(insurance)
Partner, Simon,
Drabkin & Margulies
JERRY SPIEGEL
Chairman, Spiegel Associates, Inc.
(real estate development)
JOHN P. SULLIVAN
President and
Chief Executive Officer
Continental Bank
EDWARD V. WALSH, JR.
Attorney
Lawrence & Walsh, P.C.
SENIOR OFFICERS
JOHN P. SULLIVAN
President and
Chief Executive Officer
THOMAS R. CANGEMI
Senior Vice President
Chief Financial Officer
GERALD J. GROSSMAN
Senior Vice President
Receivable Financing
PETER D. MCCARTHY
Senior Vice President
Operations Officer
WILLIAM W. RILEY
Senior Vice President
Senior Lending Officer
VICE PRESIDENTS
BARBARA SCANLON DUNBAR
Human Resources
ELIZABETH L. KUNZE
Operations
MAUREEN A. MARSH
Lending
PETER O'NEILL
Lending
THOMAS J. QUIGLEY
Banking
RALPH WALTHER
Controller
ASSISTANT VICE PRESIDENTS
LAURIE DENEN
Data Processing
MICHAEL H. GOLDSTEIN
Compliance
ANNE KNOERZER
Operations
WENDY KUBOVEC
Branch Manager
THERESA MACKEY
Branch Manager
CONTINENTAL
BUSINESS CREDIT
GERALD J. GROSSMAN
President
CONSTANCE MITCHKO
Vice President
MONEY CENTERS
ALBERT G. PYNE
Vice President
SHAREHOLDER
INFORMATION
COUNSEL
Cahn Wishod & Lamb, LLP
INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Arthur Andersen LLP
TRANSFER AGENT AND REGISTRAR First Chicago Trust Co.
of New York
525 Washington Blvd. Suite 2536
Jersey City, NJ 07303-2536
201-222-4682
STOCK LISTING
Over the Counter Market "OTC"
Symbol: COBG
MARKET MAKERS
Sandler O'Neill & Partners, L.P.
Ryan Beck & Company
Hill, Thompson, Magid & Company
F-2 REPORT
A copy of the Bank's Annual Report on Form F-2 for 1996 filed with the Federal
Deposit Insurance Corporation may be obtained without charge upon written
request to: Thomas R. Cangemi Senior Vice President Continental Bank 44N Jefryn
Blvd. West Deer Park, NY 11729.
This statement has not been reviewed or confirmed for accuracy or relevance, by
the Federal Deposit Insurance Corporation.
<PAGE>
CONTINENTAL BANK
Garden City, 118 Seventh Street 516 741-2400
North Babylon/Deer Park, 1383 Deer Park Avenue 516-254-2500
MEMBER FDIC
<PAGE>
APPENDIX E
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FORM F-4
For Quarter Ended March 31, 1997
FDIC Insurance Certificate Number 21723-0
CONTINENTAL BANK
(Exact name of bank as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
11-232789
(I. R. S. Employer Identification No.)
118 SEVENTH STREET, GARDEN CITY, NEW YORK
(Address of principal executive offices)
11530
(Zip Code)
Bank's telephone number, including area code (516) 741-2400
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check mark if the bank, as a "small business issuer" as defined
under 17 CFR 240.12b-2, is providing alternative disclosures as permitted for
small business issuers in this Form F-4. [ ]
Indicate by a check mark whether the bank (1) has filed all reports required to
be filed by section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the bank was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Capital stock of the bank outstanding at April 21, 1997 - 921,735 shares.
<PAGE>
INDEX
PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income for
the three months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 7
2
<PAGE>
<TABLE>
Continental Bank
Consolidated Statements of Financial Condition
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents
Cash and due from banks $ 8,420,770 $ 10,596,685
Federal funds sold 7,200,000 20,600,000
------------- -------------
Cash and cash equivalents 15,620,770 31,196,685
Investment securities available for sale, at fair value 69,289,309 26,242,215
Federal Home Loan Bank Stock, at cost 1,623,400 395,500
Loans 82,275,171 80,280,966
Less: unearned discount (160,874) (109,515)
Allowance for loan losses (2,616,034) (2,518,436)
------------- -------------
Loans, net 79,498,263 77,653,015
------------- -------------
Premises and equipment, net 2,143,254 2,297,025
Franchise rights, net 2,017,700 2,045,595
Other assets 2,812,199 2,878,440
------------- -------------
Total assets $ 173,004,895 $ 142,708,475
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits $ 28,902,786 $ 27,207,186
Money market and NOW accounts 32,127,948 31,539,576
Time and savings deposits 71,693,799 68,706,133
------------- -------------
Total deposits 132,724,533 127,452,895
Borrowed funds 25,000,000 --
Other liabilities 2,999,901 3,137,560
------------- -------------
Total liabilities 160,724,434 130,590,455
------------- -------------
Commitments, contingent liabilities and other information
Stockholders' equity
Capital stock, at par $5 (3,000,000 shares authorized;
921,735 issued and outstanding at March 31, 1997
and December 31, 1996) 4,608,675 4,608,675
Surplus 6,438,318 6,445,717
Retained earnings 1,567,468 933,828
Net unrealized (depreciation) appreciation on securities
available for sale, net of taxes (334,000) 129,800
------------- -------------
Total stockholders' equity 12,280,461 12,118,020
------------- -------------
Total liabilities and stockholders' equity $ 173,004,895 $ 142,708,475
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
<TABLE>
Continental Bank
Consolidated Statements of Income
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 2,150,717 $ 1,545,463
Interest on investment securities 1,038,891 612,033
Interest on federal funds sold 122,144 246,406
----------- -----------
Total interest income 3,311,752 2,403,902
----------- -----------
Interest expense:
Deposits 1,144,131 1,100,882
Borrowed funds 278,272 --
----------- -----------
Total interest expense 1,422,403 1,100,882
Net interest income 1,889,349 1,303,020
----------- -----------
Provision for loan losses 90,000 150,000
----------- -----------
Net interest income after provision
for loan losses 1,799,349 1,153,020
----------- -----------
Other income:
Service fees on deposit accounts 326,323 204,760
Fee income from Money Centers 664,079 642,546
Gains on sale of loans and securities, net 49,651 --
Other income 22,345 24,910
----------- -----------
Total other income 1,062,398 872,216
----------- -----------
Other expense:
Salaries and employee benefits 1,044,632 960,461
Occupancy and equipment 261,334 286,866
Franchise rights amortization 27,895 27,895
Other 422,046 475,999
----------- -----------
Total other expense 1,755,907 1,751,221
----------- -----------
Income before income taxes 1,105,840 274,015
Provision for income taxes 472,200 133,000
----------- -----------
Net income $ 633,640 $ 141,015
=========== ===========
Net income per share $ 0.69 $ 0.20
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
<TABLE>
Continental Bank
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Operating activities:
Net (loss) income $ 633,640 $ 141,015
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for loan losses 90,000 150,000
Depreciation and amortization 67,373 51,456
Amortization of franchise rights and leasehold, net 27,895 27,895
Amortization (accretion) of investment securities premium (discount), net (2,548) 59,316
Net loss on sales of investment securities available for sale 9,149 --
Decrease (increase) in other assets 386,141 (383,692)
Increase in other liabilities (137,659) (40,957)
------------ ------------
Net cash provided by operating activities 1,073,991 5,033
Investing activities
Proceeds from maturities, calls and prepayments available for sale securities 10,179,884 5,093,423
Proceeds from sales of investment securities available for sale 1,990,851 --
Purchases of investment securities available for sale (57,236,030) --
Purchases of investment securities held to maturity -- (8,801,424)
Net (increase) decrease in loans (1,935,248) (9,992,343)
Deletions (purchases) of premises and equipment, net 86,398 (94,640)
------------ ------------
Net cash used in investing activities (46,914,145) (13,794,984)
Financing activities
Net increase (decrease) in deposits 5,271,638 (1,132,748)
Net increase in short-term borrowings 11,000,000 --
Net increase in long-term borrowings 14,000,000 --
Cash dividends paid -- (82,946)
Other (7,409) --
------------ ------------
Net cash provided by financing activities 30,264,229 (1,215,694)
------------ ------------
Decrease in cash and cash equivalents (15,575,925) (15,005,645)
Cash and cash equivalents at beginning of period 31,196,695 29,278,510
------------ ------------
Cash and cash equivalents at end of period $ 15,620,770 $ 14,272,865
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
Continental Bank
Notes to Condensed Consolidated Financial Statements
NOTE 1 BASIS OF PRESENTATION
The interim financial statements of Continental Bank and subsidiaries ( the
"Bank") furnished in this report reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the periods reported. Actual results
could differ from those estimates. The results of operations for the periods
shown are not necessarily indicative of the results that may be expected for the
entire year.
The accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Bank's 1996 Annual Report
to Stockholders.
Certain prior period data has been reclassified to conform with the current
period presentation.
NOTE 2. EARNINGS PER SHARE
Earnings per share are calculated by dividing net income by the weighted average
number of shares outstanding. The weighted average number of shares outstanding
were 921,735 for the three months ended March 31, 1997, compared with 691,210
for the three months ended March 31, 1996.
NOTE 3. SUBSEQUENT EVENTS
On May 3, 1997, Continental Bank ("the Bank") entered into a definitive
agreement with Reliance Bancorp, Inc. ("RELY") pursuant to which RELY will
acquire the Bank. Upon completion of the acquisition, the Bank will merge into
Reliance Federal Savings Bank, RELY's wholly owned thrift subsidiary.
Under the terms of the agreement, RELY will issue 1.10 shares of its common
stock for each outstanding common share of the Bank. Based upon the closing
price of RELY's common stock as of May 2, 1997, the Bank's shareholders will
receive common stock valued at $26.40. The total transaction value is estimated
to be $24.2 million. The transaction received the unanimous approval of the
Boards of Directors of RELY and the Bank. The acquisition is expected to be
completed in the fourth quarter of calendar year 1997, and is subject to the
approval of the stockholders of Continental Bank and regulatory authorities.
In connection with the transaction, there is a provision for a termination fee
payable to RELY if the transaction is not completed under certain circumstances.
In addition, the Bank has granted RELY an option to purchase shares equal to
19.9% of the Bank's outstanding common stock under certain conditions.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Total assets were $173,000,000 at March 31, 1997 compared to
$142,700,000 at December 31, 1996, an increase of $30.3 million, or 21.2%. In
the first quarter of 1997, the Bank utilized the "wholesale" market to increase
liability growth and leverage the Bank's capital position, which in turn
increased the Bank's asset base significantly. As a result, the Bank borrowed
from the Federal Home Loan Bank of New York ("FHLB") and through repurchase
agreements from primary dealers, $25.0 million of "wholesale" funding. The
borrowings on the leverage transaction was matched with a like amount of
government backed mortgage-backed securities in the available for sale
portfolio.
Total investment securities, including investments in FHLB stock were
$70.9 million at March 31, 1997 compared to $26.6 million at December 31, 1996,
an increase of $44.3 million, or 166.2%. This increase was due primarily to the
investment of net proceeds received from the $25.0 million "wholesale" leverage
program implemented in the first quarter of 1997 and the finalization of a
repositioning and sales strategy which was executed in late December 1996 as
part of the 1996 Restructuring Plan. In December 1996, the Bank reclassified its
investment securities held to maturity portfolio to the available for sale
portfolio and sold approximately $16.5 million of securities. The proceeds from
the sale were committed at the 1996 year end to be reinvested in higher yielding
mortgage-backed securities, which settled in January 1997. The flexibility of
the available for sale portfolio will assist management in evaluating market
opportunities while managing the Bank's exposure to interest rate risk and asset
sensitivity. Investment securities continue to be a stable source of income in
this challenging lending environment, as well as a positive factor to the Bank's
capital adequacy position.
Total liabilities were $160,700,000 at March 31, 1997 compared to
$142,700,000 at December 31, 1996, an increase of $30.1 million, or 23.1%. As
discussed previously, the increase in liabilities was primarily attributable to
the $25.0 million of proceeds received from the FHLB and through repurchase
agreements from primary dealers. Additionally, total deposits increased by $5.3
million, or 4.1% at March 31, 1997 as compared to the balance at December 31,
1996. This increase was experienced throughout the Bank's deposit mix.
Non-interest bearing demand deposits increased $1.7 million, money market and
NOW deposits increased $0.6 million and time and savings deposits increased $3.0
million.
The Bank's stockholders' equity increased by $162,000 to $12.3 million
at March 31, 1997 from $12.1 million at December 31, 1996. The increase was
primarily due to net income of $633,640 for the three months ended March 31,
1997, offset by unrealized depreciation of $463,800 recorded as a holding loss
on the available for sale portfolio. The Bank continues to remain
"well-capitalized" under all regulatory definitions. As of March 31, 1997, the
Banks' risk-based capital ratio was 11.75%, tier 1 risk-based ratio 10.48% and
tier 1 leverage ratio at 6.28%, all in excess of the required 8%, 4% and 4%,
respectively.
7
<PAGE>
RESULTS OF OPERATIONS
GENERAL
The Bank reported net income of $633,600, or $0.69 per share, for the
quarter ended March 31, 1997, an increase of $493,000, or 350%, from the
$141,000, or $0.20 per share reported for the quarter ended March 31, 1996. The
growth in earnings was mainly attributable to the rapid formulation and
execution of the reorganization and restructuring plan implemented in the fourth
quarter of 1996 which resulted in an immediate positive pay-back. The first
quarter results for 1997 represents an annualized return on average assets and
average stockholders' equity of 1.53% and 20.64%, respectively.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1997 was
$1,889,000 compared to $1,303,000 for the three months ended March 31, 1996. The
increase in net interest income in the first quarter of 1997 in comparison to
the first quarter of 1996 was due in part, to an increase in the average balance
of interest-earning assets to $152.7 million experienced in the quarter ended
March 31, 1997 from $122.6 million for the same period in 1996 and an increase
in the average yield on interest-earning assets to 8.67% during the quarter
ended March 31, 1997 compared to 7.85% for the same period in 1996. The
substantial growth in average assets stems primarily from the implementation of
the $25 million "wholesale" leverage strategy and an increase of $19 million in
the average balance of loans.
As indicated previously, the borrowings on the leverage transaction was
matched with a like amount of government backed mortgage-backed securities. The
increase in the average balance of loans consisted of an increase of $13.7
million in the average balance of loans originated through the Bank's
subsidiary, Continental Business Credit, which specializes in receivable
financing for middle-market companies and an increase in the average balance of
commercial loans of $5.3 million.
Consequently, the Bank experienced an increase in the average balance
of interest-bearing liabilities of $22.5 million for the quarter ended March 31,
1997 as compared to the same period in 1996. The increase in the average balance
of interest-bearing liabilities was primarily due to the wholesale leverage
program implemented in the first quarter of 1997 and an increase of $3.0 million
in the average balance of interest-bearing deposits. The Bank's net interest
rate spread for the three months ended March 31, 1997 was 4.00% compared to
3.49% for the same period in 1996.
OTHER INCOME
Other income increased $190,000 or 21.8% for the three months ended
March 31, 1997 as compared to the three months ended March 31, 1996. The major
components of other income is fee income from Money Centers, the Banks check
cashing subsidiary, service charges on deposit accounts and other service
charges. The increase in other income for
8
<PAGE>
1996 was due primarily to an increase in Bank service fees on deposits of
$122,000 and $49,700 of net gains realized on the sales of loans and investment
securities in the first quarter of 1997. Fee income from Money Centers remained
relatively consistent with total fee income of $664,000 reported in the first
quarter of 1997 as compared to $643,000 reported for the same period in 1996.
OTHER EXPENSES
Other expenses totaled $1.8 million for the three months ended March
31, 1997 and 1996. The consistent level of other expenses were mainly
attributable to increases in operational overhead costs associated with the
continued development of the Continental Business Credit infrastructure, which
began its operations in January 1996, as well as certain management incentive
programs initiated in the first quarter of 1997. These increases were offset, in
part by cost reductions realized from the successful implementation of the 1996
restructuring plan and ongoing cost containment measures monitored by the Bank.
The major components of other expenses are salaries and employee benefits,
occupancy, depreciation and amortization and other expenses.
Salaries and employee benefits increased by $84,000, or 8.8% in the
first quarter of 1997 as compared to the first quarter of 1996. Occupancy
expense decreased $25,500, or 8.9% in the first quarter of 1997 compared to the
first quarter of 1996. Other expenses primarily include legal fees, consulting
fees, other losses on problem related loans, advertising and insurance expense.
Other expenses decreased by $54,000, or 11.3% for the three months ended March
31, 1997. The decrease in other expenses can mainly be attributable to cost
reductions experienced through ongoing cost containment measures monitored by
the Bank.
PROVISION FOR LOAN LOSSES AND RELATED ALLOWANCE
The provision for loan losses was $90,000 and $150,000 for the three
months ended March 31, 1997 and 1996, respectively. The provision for loan
losses in the first quarter of 1997 decreased by $60,000 compared to the first
quarter of 1996. The levels of loan loss provisions represent the amount needed
to provide for an adequate allowance for loan losses.
Through evaluation of the loan portfolio, management believes the
allowance for loan losses to be adequate. This evaluation uses information
currently available including appraisals, customers' financial statements,
ratios, cash flow, net worth and collateral position. In addition, current
economic conditions, as well as the nature and volume of net loans is considered
in assessing the adequacy of the allowance.
INCOME TAXES
The Bank's effective consolidated tax rate for the three months ended
March 31, 1997 42.7% as compared to 48.5% for the same period in 1996.
9
<PAGE>
SIGNATURE
Under the requirements of the Securities Exchange Act of 1934, the bank has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Continental Bank
/s/ Thomas R. Cangemi
-----------------------------
Date: May 12, 1997 Thomas R. Cangemi
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
APPENDIX F
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FORM F-4
For Quarter Ended June 30, 1997
FDIC Insurance Certificate Number 21723-0
CONTINENTAL BANK
(Exact name of bank as specified in its charter)
New York
--------
(State or other jurisdiction of incorporation or organization)
11-2327897
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(I. R. S. Employer Identification No.)
118 Seventh Street, Garden City, New York
-----------------------------------------
(Address of principal executive offices)
11530
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(Zip Code)
Bank's telephone number, including area code (516) 741-2400
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check mark if the bank, as a "small business issuer" as defined
under 17 CFR 240.12b-2, is providing alternative disclosures as permitted for
small business issuers in this Form F-4. / /
Indicate by a check mark whether the bank (1) has filed all reports required to
be filed by section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the bank was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Capital stock of the bank outstanding at July 31, 1997 - 921,735 shares.
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Index
Page No.
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Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for
the three and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 7
2
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<TABLE>
Continental Bank
Consolidated Statements of Financial Condition
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents
Cash and due from banks $ 8,996,209 $ 10,596,685
Federal funds sold 1,300,000 20,600,000
------------- -------------
Cash and cash equivalents 10,296,209 31,196,685
Investment securities available for sale, at fair value 79,347,609 26,242,215
Federal Home Loan Bank Stock, at cost 1,623,400 395,500
Loans 82,604,206 80,280,966
Less: unearned discount (164,823) (109,515)
Allowance for loan losses (2,717,488) (2,518,436)
------------- -------------
Loans, net 79,721,895 77,653,015
------------- -------------
Premises and equipment, net 2,120,998 2,297,025
Franchise rights, net 1,989,806 2,045,595
Other assets 2,211,399 2,878,440
============= =============
Total assets $ 177,311,316 $ 142,708,475
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits $ 26,539,561 $ 27,207,186
Money market and NOW accounts 33,829,781 31,539,576
Time and savings deposits 75,795,517 68,706,133
------------- -------------
Total deposits 136,164,859 127,452,895
Borrowed funds 24,800,000 -
Other liabilities 2,916,954 3,137,560
------------- -------------
Total liabilities 163,881,813 130,590,455
------------- -------------
Commitments, contingent liabilities and other information
Stockholders' equity
Capital stock, at par $5 (3,000,000 shares authorized;
921,735 issued and outstanding at June 30, 1997
and December 31, 1996) 4,608,675 4,608,675
Surplus 6,438,318 6,445,717
Retained earnings 2,245,410 933,828
Net unrealized appreciation on securities
available for sale, net of taxes 137,100 129,800
------------- -------------
Total stockholders' equity 13,429,503 12,118,020
------------- -------------
Total liabilities and stockholders' equity $ 177,311,316 $ 142,708,475
============= =============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
3
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<TABLE>
Continental Bank
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $2,151,908 $1,767,294 $4,302,625 $3,312,757
Interest on investment securities 1,384,530 718,672 2,423,421 1,330,705
Interest on federal funds sold 72,213 116,993 194,357 363,399
---------- ---------- ---------- ----------
Total interest income 3,608,651 2,602,959 6,920,403 5,006,861
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,254,370 1,124,676 2,398,501 2,225,558
Borrowed funds 371,282 -- 649,554 --
---------- ---------- ---------- ----------
Total interest expense 1,625,652 1,124,676 3,048,055 2,225,558
Net interest income 1,982,999 1,478,283 3,872,348 2,781,303
---------- ---------- ---------- ----------
Provision for loan losses 90,000 150,000 180,000 300,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 1,892,999 1,328,283 3,692,348 2,481,303
---------- ---------- ---------- ----------
Other income:
Service fees on deposit accounts 294,223 206,469 620,546 411,229
Fee income from Money Centers 682,702 677,517 1,346,781 1,320,063
Gains on sale of loans and securities, net 46,550 -- 96,201 --
Other income 68,115 87,548 90,460 112,458
---------- ---------- ---------- ----------
Total other income 1,091,590 971,534 2,153,988 1,843,750
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits 1,016,477 1,031,545 2,061,109 1,992,006
Occupancy and equipment 262,360 241,658 523,694 483,862
Franchise rights amortization 27,894 27,895 55,789 55,790
Other 481,616 647,136 903,662 1,167,797
---------- ---------- ---------- ----------
Total other expense 1,788,347 1,948,234 3,544,254 3,699,455
---------- ---------- ---------- ----------
Income before income taxes 1,196,242 351,583 2,302,082 625,598
Provision for income taxes 518,300 146,700 990,500 279,700
---------- ---------- ---------- ----------
Net income $ 677,942 $ 204,883 $1,311,582 $ 345,898
========== ========== ========== ==========
Net income per share $ 0.74 $ 0.30 $ 1.42 $ 0.50
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements
</TABLE>
4
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<TABLE>
Continental Bank
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 1,311,582 $ 345,898
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 180,000 300,000
Depreciation and amortization 134,567 104,263
Amortization of franchise rights and leasehold, net 55,789 55,789
(Accretion) amortization of investment securities premium (discount), net (35,570) 145,316
Net loss on sales of investment securities available for sale 9,149 --
Decrease (increase) in other assets 667,041 (747,749)
Increase in other liabilities (215,206) (10,490)
------------- -------------
Net cash provided by operating activities 2,107,352 193,027
Investing activities
Proceeds from maturities, calls and prepayments available for sale securities 13,419,965 10,203,853
Proceeds from sales of investment securities available for sale 1,990,851 --
Purchases of investment securities available for sale (69,715,789) --
Purchases of investment securities held to maturity -- (15,988,004)
Net increase in loans (2,248,880) (12,365,368)
Deletions (purchases) of premises and equipment, net 41,460 (155,234)
------------- -------------
Net cash used in investing activities (56,512,393) (18,304,753)
Financing activities
Net increase in deposits 8,711,964 5,897,093
Net increase in short-term borrowings 10,800,000 --
Net increase in long-term borrowings 14,000,000 --
Cash dividends paid -- (82,946)
Other (7,409) --
------------- -------------
Net cash provided by financing activities 33,504,555 5,814,147
------------- -------------
Decrease in cash and cash equivalents (20,900,486) (12,297,579)
Cash and cash equivalents at beginning of period 31,196,695 29,278,510
------------- -------------
Cash and cash equivalents at end of period $ 10,296,209 $ 16,980,931
============= =============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
5
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Continental Bank
Notes to Condensed Consolidated Financial Statements
NOTE 1 BASIS OF PRESENTATION
- -----------------------------
The interim financial statements of Continental Bank and subsidiaries ( the
"Bank") furnished in this report reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the periods reported. Actual results
could differ from those estimates. The results of operations for the periods
shown are not necessarily indicative of the results that may be expected for the
entire year.
The accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Bank's 1996 Annual Report
to Stockholders.
Certain prior period data has been reclassified to conform with the current
period presentation.
NOTE 2. EARNINGS PER SHARE
- ---------------------------
Earnings per share are calculated by dividing net income by the weighted average
number of shares outstanding. The weighted average number of shares outstanding
were 921,735 for the three and six months ended June 30, 1997, compared with
691,210 for the three and six months ended June 30, 1996.
NOTE 3. SUBSEQUENT EVENTS
- --------------------------
On May 3, 1997, Continental Bank ("the Bank") entered into a definitive
agreement with Reliance Bancorp, Inc. ("RELY") pursuant to which RELY will
acquire the Bank. Upon completion of the acquisition, the Bank will merge into
Reliance Federal Savings Bank, RELY's wholly owned thrift subsidiary.
Under the terms of the agreement, RELY will issue 1.1 shares of its common stock
for each outstanding common share of the Bank. Based upon the closing price of
RELY's common stock as of June 30, 1997, the Bank's shareholders would receive
common stock valued at $32.38 for each share of Continental Bank they own. The
transaction received the unanimous approval of the Boards of Directors of RELY
and the Bank. The acquisition is expected to be completed in the fourth quarter
of calendar year 1997, and is subject to the approval of the stockholders of
Continental Bank and regulatory authorities.
In connection with the transaction, there is a provision for a termination fee
payable to RELY if the transaction is not completed under certain circumstances.
In addition, the Bank has granted RELY an option to purchase shares equal to
19.9% of the Bank's outstanding common stock under certain conditions.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
- -------------------
Total assets were $177.3 million at June 30, 1997 compared to $142.7
million at December 31, 1996, an increase of $34.6 million, or 24.2%. In the
first quarter of 1997, the Bank utilized the "wholesale" market to increase
liability growth and leverage the Bank's capital position, which in turn
increased the Bank's asset base significantly. As a result, the Bank borrowed
from the Federal Home Loan Bank of New York ("FHLB") and through repurchase
agreements from primary dealers, $25.0 million of "wholesale" funding. The
borrowings on the leverage transaction was matched with a like amount of
government backed mortgage-backed securities in the available for sale
portfolio.
Total investment securities, including investments in FHLB stock were
$81.0 million at June 30, 1997 compared to $26.6 million at December 31, 1996,
an increase of $54.4 million, or 204.5%. This increase was due primarily to the
investment of net proceeds received from the $25.0 million "wholesale" leverage
program implemented in the first quarter of 1997 and the finalization of a
repositioning and sales strategy which was executed in late December 1996 as
part of the 1996 Restructuring Plan. In December 1996, the Bank reclassified its
investment securities held to maturity portfolio to the available for sale
portfolio and sold approximately $16.5 million of securities. The proceeds from
the sale were committed at the 1996 year end to be reinvested in higher yielding
mortgage-backed securities, which settled in January 1997. The flexibility of
the available for sale portfolio will assist management in evaluating market
opportunities while managing the Bank's exposure to interest rate risk and asset
sensitivity. Investment securities continue to be a stable source of income in
this challenging lending environment, as well as a positive factor to the Bank's
capital adequacy position.
Total liabilities were $163.9 million at June 30, 1997 compared to
$130.6 million at December 31, 1996, an increase of $33.3 million, or 25.5%. As
discussed previously, the increase in liabilities was primarily attributable to
the $25.0 million of proceeds received from the FHLB and through repurchase
agreements from primary dealers. Additionally, total deposits increased by $8.7
million, or 6.8% at June 30, 1997 as compared to the balance at December 31,
1996. Time and savings deposits increased $7.1 million and money market and NOW
deposits increased $2.3 million, these increases were slightly offset by a $0.7
million decrease in non-interest bearing demand deposits.
The Bank's stockholders' equity increased by $1.3 million to $13.4
million at June 30, 1997 from $12.1 million at December 31, 1996. The increase
was primarily due to net income of $1.3 million for the six months ended June
30, 1997. The Bank continues to remain "well-capitalized" under all regulatory
definitions. As of June 30, 1997, the Banks' risk-based capital ratio was
12.10%, tier 1 risk-based ratio 10.83% and tier 1 leverage ratio at 6.45%, all
in excess of the required 8%, 4% and 4%, respectively.
7
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RESULTS OF OPERATIONS
- ---------------------
GENERAL
The Bank reported net income of $678,000, or $0.74 per share, for the
quarter ended June 30, 1997, an increase of $473,000, or 231%, from the
$205,000, or $0.30 per share reported for the quarter ended June 30, 1996. Net
income for the six months ended June 30, 1997, was $1,312,000, or $1.42 per
share as compared to the $346,000, or $0.50 per share reported for the six
months ended June 30, 1996, reflecting an increase of 184% in earnings per
share. The growth in earnings was mainly attributable to the rapid formulation
and execution of the reorganization and restructuring plan implemented in the
fourth quarter of 1996 which resulted in an immediate positive pay-back. The
second quarter and six months results for 1997 represents an annualized return
on average assets and average stockholders' equity of 1.56% and 21.39%, 1.55%
and 20.82%, respectively.
NET INTEREST INCOME
Net interest income increased $505,000 for the second quarter ended
June 30, 1997, or 34% as compared to the same period in 1996. For the six months
ended June 30, 1997, net interest income was reported at $3,872,000, a 39%
increase compared to the same period in 1996. The increase in net interest
income for the three and six month period ended June 30, 1997 was primarily
attributable to the substantial growth in the average balance of
interest-earning assets. The growth in average assets stems primarily from the
implementation of a $25 million wholesale leverage strategy and an increased
level of deposits. The growth on the liability side was effectively deployed in
loans and securities, which increased the average balance of loans and
investment securities for the three and six month period ended June 30, 1997, by
$13.0 million and $28.8 million, $16.9 million and $24.9 million, respectively.
As indicated previously, the borrowings on the leverage transaction
were matched with a like amount of government backed mortgage-backed securities.
The increase in the average balance of loans for the three and six month period
ended June 30, 1997 compared to the same period in 1996 consisted of an increase
of $7.8 million and $10.8 million, respectively in the average balance of loans
originated through the Bank's subsidiary, Continental Business Credit, which
specializes in receivable financing for middle-market companies and an increase
in the average balance of commercial loans for the three and six month period
ended June 30 1997 compared to the same period in 1996 of $5.2 million and $6.2
million, respectively. Consequently, the Bank experienced an increase in the
average balance of interest-bearing liabilities of $28.6 million and $25.2
million for the three and six months ended June 30, 1997 as compared to the same
period in 1996. The increase in the average balance of interest-bearing
liabilities was primarily due to the wholesale leverage program implemented in
the first quarter of 1997 and an increase of $3.8 million and $3.1 million in
the average balance of interest-bearing deposits for the three and six month
period ended June 30 1997 as compared to the same period in 1996.
8
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The Banks' net interest rate spread and net interest margin was
recorded at 3.96% and 4.89% for the quarter ended June 30, 1997, as compared to
the 4.05% and 4.78% for the same period in 1996, respectively. For the six
months ended June 30, 1997, the Banks' net interest rate spread and net interest
margin was reported at 3.94% and 4.92% as compared to the 3.78% and 4.55%
reported in the same period for 1996, respectively. Generally, the Bank
continues to present strong net interest rate spreads and margins, as a result
of increased yields in the investment and loan portfolio, offset in part by an
increase in cost of funds. The moderate compression experienced in the second
quarter of 1997 verses 1996 was primarily due to the funding costs associated
with the wholesale leverage strategy adopted in early 1997. The yield on
interest-earning assets was 8.90% for the quarter ended June 30, 1997 and the
cost of interest-bearing liabilities was 4.94%. For the six month period ended
June 30, 1997 the yield on interest-earning assets was 8.78% and the cost of
interest-bearing liabilities was 4.84%.
OTHER INCOME
Other income increased $120,000 and $310,000 for the three and six
months ended June 30, 1997, or 12% and 17% as compared to the same periods in
1996. The increase in other income for the three and six months ended June 30,
1997 was due primarily to an increase in service fees on deposits of $88,000 and
$209,000 and net gains on the sale of loans and securities of $47,000 and
$96,000 respectively, primarily from the sale of SBA loans under the 7A program.
Additionally, income generated from Money Centers, the Banks' check cashing
subsidiary, continues to be a consistent source of strong fee income for the
Bank. Money Centers fee income for the three and six months ended June 30, 1997
was $683,000 and $1,347,000 as compared to $678,000 and $1,320,000 reported for
the comparable periods of 1996.
OTHER EXPENSES
Other expenses decreased $160,000 and $155,000 for the three and six
months ended June 30, 1997, or 8% and 4% as compared to the same periods in
1996. Other expenses totaled $1.8 million and $3.5 million for the three and six
months ended June 30, 1997 as compared to the $1.9 million and $3.7 million
reported for the same period in 1996. The consistent level of other expenses
were mainly attributable to increases in operational overhead costs associated
with the continued development of the Continental Business Credit
infrastructure, which began its operations in January 1996, as well as certain
management incentive programs initiated in the first quarter of 1997. These
increases were offset, in part by cost reductions realized from the successful
implementation of the 1996 restructuring plan and ongoing cost containment
measures monitored by the Bank. The major components of other expenses are
salaries and employee benefits, occupancy, depreciation and amortization and
other expenses.
Salaries and employee benefits decreased by $15,000, or 1% in the
second quarter of 1997 and increased $69,000, or 3% during the six month period
ended June 30 1997 as compared to the same period in 1996, respectively.
Occupancy expense increased by $21,000 and $40,000, or 9% and 8% for the three
and six month periods ended June 30, 1997 as
9
<PAGE>
compared to the same period of 1996. Other expenses primarily include legal
fees, consulting fees, other losses on problem related loans, advertising and
insurance expense. Other expenses decreased by $166,000 and $264,000, or 26% and
23% for the three and six month periods ended June 30, 1997 as compared to the
same period in 1996. The decrease in other expenses can mainly be attributable
to cost reductions experienced through ongoing cost containment measures
monitored by the Bank.
PROVISION FOR LOAN LOSSES AND RELATED ALLOWANCE
The provision for loan losses was $90,000 and $150,000 for the three
months ended June 30, 1997 and 1996, respectively. For the six months ended June
30, 1997, the provision for loan losses was $180,000 as compared to $300,000 for
the same period of 1996. The provision for loan losses for the three and six
months ended June 30, 1997 decreased by $60,000 and $120,000 as compared to the
same period of 1996. The levels of loan loss provisions represent the amount
needed to provide for an adequate allowance for loan losses.
Through evaluation of the loan portfolio, management believes the
allowance for loan losses to be adequate. This evaluation uses information
currently available including appraisals, customers' financial statements,
ratios, cash flow, net worth and collateral position. In addition, current
economic conditions, as well as the nature and volume of net loans is considered
in assessing the adequacy of the allowance.
INCOME TAXES
The Bank's effective consolidated tax rate for the three and six month
period ended June 30, 1997 was 43.3% and 43.0%, respectively as compared to
41.7% and 44.7% for the same period in 1996.
10
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SIGNATURE
Under the requirements of the Securities Exchange Act of 1934, the bank has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Continental Bank
/s/ Thomas R. Cangemi
---------------------
Date: July 31, 1997 Thomas R. Cangemi
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
APPENDIX G
SECTION 6022. PROCEDURE TO ENFORCE STOCKHOLDER'S RIGHT TO RECEIVE PAYMENT FOR
SHARES
1. A stockholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of stockholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a statement that he intends to demand payment for his shares if the
action is taken. Such objection is not required from any stockholder to whom the
corporation did not give notice of such meeting in accordance with this chapter
or where the proposed action is authorized by written consent of stockholders
without a meeting.
2. Within ten days after the stockholders' authorization date, which
term as used in this section means the date on which the stockholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite stockholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
stockholder who filed written objection or from whom written objection was not
required, excepting any who voted for or consented in writing to the proposed
action.
3. Within twenty days after the giving of notice to him, any
stockholder to whom the corporation was required to give such notice and who
elects to dissent shall file with the corporation a written notice of such
election, stating his name and residence address, the number and classes of
shares as to which he dissents and a demand for payment of the fair value of his
shares.
4. A stockholder may not dissent as to less than all of the shares,
held by him of record, that he owns beneficially. A nominee or fiduciary may not
dissent on behalf of any beneficial owner as to less than all of the shares of
such owner held of record by such nominee or fiduciary.
5. Upon filing a notice of election to dissent, the stockholder shall
cease to have any of the rights of a stockholder except the right to be paid the
fair value of his shares and any other rights under this section. Withdrawal of
a notice of election shall require the written consent of the corporation. If a
notice of election is withdrawn, or the proposed corporate action is abandoned
or rescinded, or a court shall determine that the stockholder is not entitled to
receive payment for his shares, or the stockholder shall otherwise lose his
dissenter's rights, he shall not have the right to receive payment for his
shares and he shall be reinstated to all his rights as a stockholder as of the
filing of his notice of election, including any intervening preemptive rights
and the right to payment of any intervening dividend or other distribution or,
if any such rights have expired or any such dividend or distribution other than
in cash has been completed, in lieu thereof, at the election of the corporation,
the fair value thereof in cash as determined by the board as of the time of such
expiration or completion, but without prejudice otherwise to any corporate
proceedings that may have been taken in the interim.
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6. At the time of filing the notice of election to dissent or within
one month thereafter the stockholder shall submit the certificates representing
his shares to the corporation, or to its transfer agent, which shall forthwith
note conspicuously thereon that a notice of election has been filed and shall
return the certificates to the stockholder or other person who submitted them on
his behalf. Any stockholder who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dis senting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting stockholder had after filing his notice of election.
7. Within seven days after the expiration of the period within which
stockholders may file their notices of election to dissent, or within seven days
after the proposed corporate action is consummated, whichever is later, the
corporation or, in the case of a merger, the receiving corporation, shall make a
written offer by registered mail to each stockholder who has filed such notice
of election to pay for his shares at a specified price which the corporation
considers to be their fair value. Such offer shall be made at the same price per
share to all dissenting stockholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting stockholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. If within thirty days after
the making of such offer, the corporation making the offer and any stockholder
agree upon the price to be paid for his shares, payment therefor shall be made
within sixty days after the making of such offer upon the surrender of the
certificates representing such shares.
8. The following procedure shall apply if the corporation fails to make
such offer within such period of seven days, or if it makes the offer and any
dissenting stockholder or stockholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(a) The corporation or, in the case of a merger, the receiving
corporation shall, within twenty days after the expiration of whichever is
applicable of the two periods last mentioned, insti tute a special proceeding in
the supreme court in the judicial district in which the office of the
corporation is located to determine the rights of dissenting stockholders and to
fix the fair value of their shares.
(b) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting stockholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
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(c) All dissenting stockholders, excepting those who, as provided in
subdivision seven, have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting stockholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting stockholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(d) The court shall determine whether each dissenting stockholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting stockholder is
so entitled, it shall proceed to fix the value of the shares, which, for the pur
poses of this section, shall be the fair value as of the close of business on
the day prior to the stockholders' authorization date, excluding any
appreciation or depreciation directly or indirectly induced by such corporate
action or its proposal. The court may, if it so elects, appoint an appraiser to
receive evidence and recommend a decision on the question of fair value. Such
appraiser shall have the power, authority and duties specified in the order
appointing him, or any amendment thereof.
(e) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting stockholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(f) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the stockholders' authorization
date to the date of payment. If the court finds that the refusal of any
stockholder to accept the corporate offer of payment for his shares was
arbitrary, vexatious or otherwise not in good faith, no interest shall be
allowed to him.
(g) The costs and expenses of such proceeding shall be determined by
the court and shall be assessed against the corporation, or, in the case of a
merger, the receiving corporation, except that all or any part of such costs and
expenses may be apportioned and assessed, as the court may determine, against
any or all of the dissenting stockholders who are parties to the proceeding if
the court finds that their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. Such expenses shall include reasonable
compensation for and the reasonable expenses of the appraiser, but shall exclude
the fees and expenses of counsel for and experts employed by any party unless
the court, in its discretion, awards such fees and expenses. In exercising such
discretion, the court shall consider any of the following: (A) that the fair
value of the shares as determined materially exceeds the amount which such
corporation offered to pay; (B) that no offer was made by such corporation; and
(C) that such corporation failed to institute the special proceeding within the
period specified therefor.
3
<PAGE>
(h) Within sixty days after final determination of the proceeding, the
corporation or, in the case of a merger, the receiving corporation shall pay to
each dissenting stockholder the amount found to be due him, upon surrender of
the certificates representing his shares.
9. Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall be dealt with as provided in section five thousand fourteen,
except that, in the case of a merger, they shall be disposed of as provided in
the plan of merger or consolidation.
10. The enforcement by a stockholder of his right to receive payment
for his shares in the manner provided herein shall exclude the enforcement by
such stockholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in subdivision five, and except
that this section shall not exclude the right of such stockholder to bring or
maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is illegal or fraudulent as to him.
11. Except as otherwise expressly provided in this section, any notice
to be given by a corporation to a stockholder under this section shall be given
in the manner provided in section six thousand five.
Added L.1964, c. 849, ss.1, eff. Sept. 1,1964.
4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
I. Section 145 of the Delaware General Corporation Law ("DGCL"), INTER ALIA,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interest of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
the conduct was unlawful. Similar indemnity is authorized for any such person
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of any such threatened, pending or
completed action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent jurisdiction
otherwise provides) such person shall not have been adjudged liable to the
corporation. Any such indemnification may be made only as authorized in each
specific case upon a determination by the shareholders or disinterested
directors or by independent legal counsel in a written opinion that
indemnification is proper because the indemnitee has met the applicable standard
of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against such person, and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the corporation would otherwise have the power to indemnify such person
under Section 145.
II. In accordance with the DGCL, Articles Tenth and Eleventh of the Registrant's
Certificate of Incorporation provide as follows:
TENTH:
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 the fact that he or she is or was a
Director or an Officer of the Corporation or is or was serving at the
request of the Corporation as a Director, Officer, employee or agent of
another corporation of or a 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 an official capacity as a Director, Officer, employee
or agent or in any other capacity while serving as a director, Officer,
employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the DGCL, as the same
exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection
therewith; provided, however, that, except as provided in Section C
hereof with respect to proceedings to enforce rights to
indemnification,
II-1
<PAGE>
the Corporation shall indemnify any such indemnitee in connection with
a proceeding (or part thereof) initiated by such indemnitee only if
such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its
final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the DGCL 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, services to
an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on
behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is
no further right to appeal (hereinafter a "final adjudication") that
such indemnitee is not entitled to be indemnified for such expenses
under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this
Article TENTH shall be contract rights and such rights shall continue
as to an indemnitee who has ceased to be a Director, Officer, employee
or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought
by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expenses of prosecuting or defending such suit. In (i)
any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense
that, and (ii) in any suit by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking the corporation
shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for
indemnification set forth in the DGCL. Neither the failure of the
Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the DGCL, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has
not met such applicable standard of conduct, shall create a presumption
that the indemnitee has not met the applicable standard of conduct or,
in the case of such a suit brought by the indemnitee, be a defense to
such suit. In any suit brought by the indemnitee to enforce a right t
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under
this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
the Corporation's Certificate of Incorporation, Bylaws, agreement, vote
of stockholders or Disinterested Directors or otherwise.
E. 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, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the DGCL.
II-2
<PAGE>
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to
the fullest extent of the provisions of this Article TENTH with respect
tot he indemnification and advancement of expenses of Directors and
Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a Director, except for liability (i) for any
breach of the Director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL, or (iv) for any transaction from which
the Director derived an improper personal benefit. If the DGCL is
amended to authorize corporate action further eliminating or limiting
the personal liability of Directors, then the liability of a Director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of
such repeal or modification.
III. Reliance has purchased a directors' and officers' liability insurance
policy for the benefit of its officers and directors.
IV. The employment agreement for each executive officer of Reliance
provides that Reliance shall either purchase a directors' and officers'
liability insurance policy for the benefit of such officer or shall indemnify
such officer to the fullest extent permitted under Delaware law.
II-3
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(A) LIST OF EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of May 3, 1997, and
amended as of July 1, 1997, by and among Reliance Bancorp, Inc.,
Reliance Federal Savings Bank and Continental Bank (included as
Appendix A to the Proxy Statement-Prospectus)
3.1 Certificate of Incorporation of Reliance Bancorp, Inc. (1)
3.2 Bylaws of Reliance Bancorp, Inc. (1)
4.1 Specimen Stock Certificate of Reliance Bancorp., Inc. (1)
5.1 Opinion of Thacher Proffitt & Wood re: Legality*
8.1 Opinion of Thacher Proffitt & Wood re: Tax Matters*
10.1(a) Reliance Federal Savings Bank Recognition and Retention Plan for
Officers and Employees (2)
10.1(b) Reliance Federal Savings Bank Recognition and Retention Plans
for Outside Directors (2)
10.2 Reliance Bancorp, Inc. 1994 Incentive Stock Option Plan (2)
10.3 Reliance Bancorp, Inc. 1994 Stock Option Plan for Outside
Directors (2)
10.4(a) Form of Reliance Bancorp, Inc. Employee Stock Ownership Plan and
Trust (1)
10.4(b) Form of Reliance Federal Savings Bank Employee Stock Ownership
Trust Agreement (1)
10.5 Form of Employment Agreement between Reliance Federal Savings
Bank and Certain Officers (1)
10.6 Form of Employment Agreement between Reliance Bancorp, Inc. and
Certain Executive Officers (1)
10.7 Form of Change-in-Control Agreement between Reliance Federal
Savings Bank and Certain Officers (1)
10.8 Form of Change-in-Control Agreement among Reliance Bancorp, Inc.
and Certain Officers (1)
10.9 Form of Reliance Federal Savings Bank Employee Severance
Compensation Plan (1)
10.10 Form of Reliance Federal Savings Bank Supplemental Executive
Retirement Plan (1)
10.11 ESOP Loan Commitment Letter and Form of ESOP Loan Documents (1)
10.12 Form of Reliance Federal Savings Bank Outside Directors'
Consultation and Retirement Plan (1)
II-4
<PAGE>
10.13 Stock Option Agreement, dated as of May 3, 1997, by and between
Continental Bank and Reliance Bancorp, Inc. (included as
Appendix B to the Proxy Statement-Prospectus)
21.1 Subsidiaries of Reliance Bancorp, Inc. (3)
23.1 Consent of Thacher Proffitt & Wood (included in Exhibit 5.1)
23.2 Consent of Muldoon, Murphy & Faucette (4)
23.3 Consent of KPMG Peat Marwick, LLP (4)
23.4 Consent of Arthur Andersen LLP (4)
23.5 Consent of Sandler O'Neill & Partners, L.P.*
24.1 Power of Attorney (included in the signature page of the Form
S-4) (4)
99.0 Stockholders Protection Rights Agreement, dated as of
September 18, 1996 (5)
99.1 Additional Solicitation Materials *
* Filed herewith.
(1) Incorporated by reference to the Exhibits filed with Reliance Bancorp,
Inc.'s Registration Statement on Form S-1, Registration No. 333-72476.
(2) Incorporated by reference to the Exhibits filed with Reliance Bancorp,
Inc.'s 1996 Proxy Statement for the Annual Meeting of Stockholders held on
November 12, 1996.
(3) Incorporated by reference to Reliance Bancorp, Inc.'s Form 10-K for the
year ended June 30, 1996, filed with the Securities and Exchange
Commission on September 30, 1996.
(4) Previously filed with the Form S-4 on July 2, 1997.
(5) Incorporated by reference to the Exhibits filed with Reliance Bancorp,
Inc.'s Registration Statement on Form 8-A, filed with the Securities and
Exchange Commission on September 27, 1996.
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
II-5
<PAGE>
(C) REPORTS, OPINIONS AND APPRAISALS OF OUTSIDE PARTIES.
The opinion of Sandler O'Neill & Partners L.P. is included as Appendix C to
the Proxy Statement- Prospectus.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a)(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;
(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 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.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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) For the purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed 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)(1) 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 reoffering by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
II-6
<PAGE>
(2) That every prospectus: (i) that is filed pursuant to paragraph
(c)(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 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 Securities Act of
1933, 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.
(d) To respond to requests for information that is incorporated by
reference into the Proxy StatementProspectus 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 documents 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.
(e) 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.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, 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 Securities 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
Securities Act and will be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Garden City, State of New York, on August 21, 1997.
RELIANCE BANCORP, INC.
-----------------------------------------
(Registrant)
By: /s/ Raymond A. Nielsen
-----------------------------------------
Raymond A. Nielsen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
and any rules and regulations promulgated thereunder, this amendment to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
DATE
----
/s/ Raymond A. Nielsen August 21, 1997
- -----------------------------------------------------
Raymond A. Nielsen
President, Chief Executive Officer and Director
/s/ Paul D. Hagan August 21, 1997
- -----------------------------------------------------
Paul D. Hagan
Vice President and Chief Financial Officer
(Chief Accounting Officer)
* August 21, 1997
- -----------------------------------------------------
Thomas G. Davis, Jr.
Director
<PAGE>
* August 21, 1997
- -----------------------------------------------------
Donald Lapasta
Director
* August 21, 1997
- -----------------------------------------------------
Conrad J. Gunther, Jr.
Director
* August 21, 1997
- -----------------------------------------------------
Raymond L. Nielsen
Director
* August 21, 1997
- -----------------------------------------------------
J. William Newby
Director
* August 21, 1997
- -----------------------------------------------------
Douglas G. Lapasta
Director
* August 21, 1997
- -----------------------------------------------------
Peter F. Neumann
Director
* By /s/ Paul D. Hagan
-------------------------------------------------
Paul D. Hagan
Attorney-in-fact**
- ----------
** By authority of power of attorney previously filed by the Registrant.
EXHIBIT 5.1
August 21, 1997
Reliance Bancorp, Inc.
585 Stewart Avenue
Garden City, New York 11530
Ladies and Gentlemen:
We have acted as special counsel for Reliance Bancorp, Inc., a Delaware
corporation ("Reliance"), and Reliance Federal Savings Bank, a federally
chartered stock form savings bank and wholly-owned subsidiary of Reliance
("Reliance Bank"), in connection with the issuance of and registration under the
Securities Act of 1933, as amended, by Reliance of an aggregate of
1,013,909 shares, subject to adjustment, of Reliance common stock, par
value $0.01 per share (the "Merger Shares"), into which certain shares of common
stock, par value $5.00 per share, of Continental Bank, a New York State
chartered commercial bank ("Continental"), will be converted pursuant to an
Agreement and Plan of Merger, dated as of May 3, 1997 and amended as of July 1,
1997, by and among Reliance, Reliance Bank and Continental (as amended, the
"Merger Agreement"), and the related preparation and filing by Reliance with the
Securities and Exchange Commission of a registration statement on Form S-4 (the
"Registration Statement"). In rendering the opinions set forth below, we do not
express any opinion concerning law other than the federal law of the United
States and the corporate law of the State of Delaware.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records and other instruments,
and have examined such matters of law, as we have deemed necessary or advisable
for purposes of rendering the opinions set forth below. As to matters of fact,
we have examined and relied upon the representations of Reliance, Reliance Bank
and Continental contained in the Merger Agreement and the Registration Statement
and, where we have deemed appropriate, representations or certificates of
officers of Reliance, Reliance Bank or Continental or public officials. We have
assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures, the legal capacity of natural persons and the
conformity to the originals of all documents submitted to us as copies. In
making our examination of any documents, we have assumed that all parties, other
than Reliance and Reliance Bank, had the corporate power and authority to enter
into and perform all obligations thereunder, and, as to such parties, we have
also assumed the due authorization by all
<PAGE>
Reliance Bancorp, Inc.
August 21, 1997 Page 2.
requisite action, the due execution and delivery of such documents and the
validity and binding effect and enforceability thereof.
Based on the foregoing, we are of the opinion that, upon effectiveness
of the Registration Statement the issuance of the Merger Shares in accordance
with the terms of the Merger Agreement will have been duly authorized and, when
the Merger Shares are issued in accordance with the terms of the Merger
Agreement and the Registration Statement, the Merger Shares will be validly
issued, fully paid and non-assessable.
In rendering the opinions set forth above, we have not passed upon and
do not purport to pass upon the application of "doing business" or securities or
"blue-sky" laws of any jurisdiction (except federal securities laws).
This opinion is given solely for the benefit of Reliance and
Continental and the shareholders of Continental who exchange shares of
Continental common stock for the Merger Shares pursuant to the Registration
Statement, and may not be relied upon by any other person or entity, nor quoted
in whole or in part, or otherwise referred to in any document without our
express written consent.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the headings "THE
MERGER -- Material Federal Income Tax Consequences" and "LEGAL MATTERS" in the
Proxy Statement-Prospectus that is part of such Registration Statement.
Very truly yours,
THACHER PROFFITT & WOOD
By: /s/ Omer S.J. Williams
Omer S.J. Williams
Exhibit 8.1
(212) 912-7633
August 21, 1997
Reliance Bancorp, Inc.
585 Stewart Avenue
Garden City, New York 11530
Re: Merger of Continental Bank into Reliance Federal
Savings Bank
------------------------------------------------
Dear Sirs:
You have requested our opinion regarding certain federal income
tax consequences of the merger (the "Merger") of Continental Bank
("Continental"), a New York chartered stock commercial bank, into Reliance
Federal Savings Bank, ("Reliance Bank"), a federally chartered stock savings
bank and wholly-owned subsidiary of Reliance Bancorp, Inc. ("Reliance"), a
Delaware corporation. The Merger will be effected pursuant to the Agreement and
Plan of Merger dated as of the 3rd day of May, 1997, as amended as of July 1,
1997, by and among Reliance, Reliance Bank and Continental (the "Merger
Agreement"). The Merger and related transactions are described in the Merger
Agreement and in the Joint Proxy Statement-Prospectus (the "Proxy Statement")
included in Reliance's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission in connection with the Merger (the
"Registration Statement"). All capitalized terms used but not defined in this
letter shall have the meanings set forth in the Plan of Merger or in the Proxy
Statement.
In connection with the opinions expressed below, we have examined
and relied on originals, or copies certified or otherwise identified to our
satisfaction, of the Merger Agreement and of such corporate records of
Continental, Reliance Bank and Reliance as we have deemed appropriate. We have
also relied, without independent verification, upon the August 21, 1997 letters
of Continental, Reliance Bank and Reliance to Thacher Proffitt & Wood containing
certain tax representations. We have assumed that the parties will act, and that
the Merger will be effected, in accordance with the Merger Agreement, and that
the representations made by Continental, Reliance Bank and Reliance in the
foregoing letters are true. In addition, we have made such investigations of law
as we have deemed appropriate to form a basis for the opinions expressed below.
<PAGE>
Reliance Bancorp, Inc.
August 21, 1997 Page 2
Based on and subject to the foregoing, it is our opinion that,
for Federal income tax purposes, under current law:
(1) The Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code;
(2) No gain or loss will be recognized by
Reliance, Reliance Bank or Continental as a result of the Merger;
(3) Except to the extent of any cash received in lieu
of a fractional share interest in Reliance Common Stock, no gain
or loss will be recognized by a holders of Continental Common
Stock who exchange their shares of Continental Common Stock for
shares of Reliance Common Stock pursuant to the Merger;
(4) The tax basis of the shares of Reliance Common
Stock received by each holder of Continental Common Stock in the
Merger will be the same as the tax basis of the shares of
Continental Common Stock surrendered pursuant to the Merger,
reduced by any amount allocable to a fractional share interest in
Reliance Common Stock for which cash is received and increased by
any gain recognized on such exchange; and
(5) The holding period of the shares of Reliance
Common Stock received by each holder of Continental Common Stock
in the Merger will include the holding period of the shares of
Continental Common Stock exchanged therefor, provided that such
stockholder holds such shares of Continental Common Stock as a
capital asset at the Effective Time.
Except as set forth above, we express no opinion to any party as
to the tax consequences, whether federal, state, local or foreign, of the Merger
or of any transaction related thereto or contemplated by the Merger Agreement.
This opinion is given solely for the benefit of Continental and its
shareholders, Reliance Bank and Reliance, and may not be relied upon by any
other party or entity or otherwise referred to in any document without our
express written consent. We consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference thereto under the heading
"The Merger - Material Federal Income Tax Consequences" and "Legal Matters" in
the Proxy Statement-Prospectus which is a part of the Registration Statement.
Very truly yours,
THACHER PROFFITT & WOOD
By: /s/ Albert J. Cardinali
---------------------------
Albert J. Cardinali
EXHIBIT 23.5
[LETTERHEAD OF SANDLER O'NEILL & PARTNERS, L.P.]
CONSENT OF SANDLER O'NEILL & PARTNERS, L.P.
We hereby consent to the inclusion of our opinion letter to the Board
of Directors of Continental Bank (the "Company") as Appendix C to the Proxy
Statement/Prospectus relating to the proposed merger of the Company with and
into Reliance Bancorp, Inc. contained in the Registration Statement on Form S-4,
as amended (File No. 333-30667), and to the references to our firm and such
opinion in such Proxy Statement/Prospectus. In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended (the "Act"), or the
rules and regulations of the Securities and Exchange Commission thereunder (the
"Regulations"), nor do we admit that we are experts with respect to any part of
such Registration Statement within the meaning of the term "experts" as used in
the Act or the Regulations.
/s/ Sandler O'Neill & Partners, L.P.
-------------------------------------
SANDLER O'NEILL & PARTNERS, L.P.
August 21, 1997
[LETTERHEAD OF CONTINENTAL BANK]
August 22, 1997
Dear Fellow Stockholders:
As you probably know, the Board of Directors of Continental Bank has
unanimously approved an Agreement and Plan of Merger under which Continental
Bank will merge with Reliance Bancorp, Inc. ("Reliance"). We are very excited
about this merger and think that this is an extremely positive development for
our stockholders, our customers and the communities we serve.
In order for us to consummate the merger with Reliance, we need the
affirmative vote of the holders of two-thirds of the outstanding shares of
Continental common stock. I therefore urge you to sign and return the enclosed
proxy card as soon as possible even if you intend to go to the Special Meeting,
which will be held on September 25, 1997.
I encourage you to read carefully the enclosed Proxy
Statement-Prospectus-it contains a great deal of important information about the
merger. While that document should be the basis for your decision, I thought it
would be helpful to you to highlight some commonly asked questions and provide
you with answers for the key features of the merger that are discussed in more
detail in the Proxy Statement-Prospectus.
Q. WHAT AM I BEING ASKED TO VOTE ON?
A. You will be asked to vote upon a proposal to approve the Agreement and Plan
of Merger, dated as of May 3, 1997 and amended as of July 1, 1997, by and among
Reliance, Reliance Federal Savings Bank, a wholly owned subsidiary of Reliance
and Continental Bank, pursuant to which Continental Bank will merge with and
into Reliance Federal Savings Bank, with Reliance Federal Savings Bank being the
resulting entity.
Q. WHY SHOULD I VOTE FOR THE MERGER?
A. Your Board believes that the merger of Continental and Reliance will provide
significant value to Continental stockholders and also enable them to
participate in the opportunities for growth that the Board believes the Merger
makes possible.
Q. WHAT ARE THE POSITIONS OF THE RESPECTIVE BOARDS OF DIRECTORS?
A. The Continental Board has unanimously approved the Merger Agreement and has
determined that the Merger is in the best interest of Continental and its
stockholders. The Continental Board, therefore unanimously recommends that
Continental's stockholders vote FOR approval of the Merger Agreement. The Merger
Agreement has also received the unanimous approval of the Board of Directors of
Reliance.
<PAGE>
Q. HOW MANY SHARES WILL I RECEIVE?
A. Upon consummation of the merger, each share of Continental you own will be
converted into 1.1 shares of Reliance. For example, if you own 10 shares of
Continental Bank common stock you will receive 11 shares of Reliance common
stock subsequent to the merger.
Q. WHAT HAPPENS TO FUTURE DIVIDENDS?
A. Historically, Reliance has paid a quarterly dividend since the quarter ended
September 30, 1994 and currently pays a quarterly dividend of $0.16 per share
which is equivalent to an annual per share dividend of $0.64 per share. Based on
the Continental exchange ratio of 1.1 shares of Reliance, the estimated dividend
pay-out would be equivalent to a quarterly dividend of $0.176 per share
annualized at a rate of $0.70 per share. Please note that there can be no
assurance that Reliance will continue to pay future dividends, as the payment of
dividends is subject to a number of factors, including but not limited to
regulatory restrictions, company profitability and Board discretion.
Q. WHAT DO I NEED TO DO NOW?
A. It is important that your shares be voted. Your vote is very important
regardless of the number of shares you own. A failure to return a properly
executed proxy card or to vote in person will have the same effect as a vote
against the Merger Agreement. Therefore I urge you once again to fill in, sign,
date and properly return the enclosed proxy card in the enclosed postage paid
envelope as soon as possible to assure that your shares will be voted at the
Special Meeting.
Q. HOW MANY VOTES ARE NEEDED TO APPROVE THE TRANSACTION?
A. Your vote is very important regardless of the number of shares you own. In
order for us to consummate the merger with Reliance, we need the affirmative
vote of the holders of two-thirds of the outstanding shares of Continental
common stock. I therefore urge you to sign and return the enclosed proxy card as
soon as possible even if you intend to go to the Special Meeting.
Q. WHAT WILL HAPPEN IF I DON'T VOTE?
A. A failure to return a properly executed proxy card or to vote in person will
have the same effect as a vote against the Merger Agreement.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES WITH THE PROXY CARD?
A. No. Continental stock certificates should NOT be returned with the enclosed
proxy card and should not be forwarded to the Exchange Agent until a Continental
stockholder has received a Letter of Transmittal and related forms, which will
not occur until shortly after the Merger is consummated.
<PAGE>
Q. WILL RELIANCE'S SHARES BE LISTED ON A STOCK EXCHANGE?
A. Yes. The stock of Reliance is traded on The Nasdaq Stock Market's National
Market System under the symbol RELY.
REMEMBER, IT IS IMPORTANT THAT YOU READ THE ENCLOSED PROXY STATEMENT-PROSPECTUS
AND SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE. YOUR VOTE IS
IMPORTANT TO US REGARDLESS OF THE NUMBER OF SHARES YOU OWN. DO NOT SEND IN ANY
STOCK CERTIFICATES AT THIS TIME.
Thank You.
Sincerely,
John P. Sullivan
President and
Chief Executive Officer
