<PAGE>
As filed with the Securities and Exchange Commission on July 31, 1997.
Registration No. 333-29223
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
Amendment No. 1 to:
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------
FIRST NATIONAL BANCORP OF RIVER FALLS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1895464 6711
- ------------------------------- ------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification No.) Classification Code Number)
104 EAST LOCUST STREET
RIVER FALLS, WISCONSIN 54022
(715) 425-2401
(Address, including Zip Code, and telephone number, including area code, of
registrant's principal executive offices)
PHILIP G. BETZEL
THE FIRST NATIONAL BANK OF RIVER FALLS
104 EAST LOCUST STREET
RIVER FALLS, WISCONSIN 54022
(715) 425-2401
(Name, address, including Zip Code, and telephone number, including area code,
of agent for service)
--------------------------
Copies to:
MICHELE D. VAILLANCOURT
WINTHROP & WEINSTINE, P.A.
3000 DAIN BOSWORTH PLAZA
60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
347-0700
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE
SECURITIES TO THE PUBLIC:
UPON CONSUMMATION OF THE REORGANIZATION.
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. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------
<PAGE>
FIRST NATIONAL BANCORP OF RIVER FALLS, INC.
Cross Reference Sheet Showing Heading or Location
in the Prospectus of Information Required by
Items 1 through 19, Part I, of Form S-4
<TABLE>
<CAPTION>
Form S-4 Item and Heading Prospectus Heading or Location
- -------------------------------------------------------------- ----------------------------------------
<S> <C>
A. Information About the Transaction
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus. . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus. . . . . . . . . . . . . . . . . . . . . . . . Additional Information; Outside Back
Cover Page of Prospectus.
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors.
4. Terms of the Transaction. . . . . . . . . . . . . . . . . Prospectus Summary; The Reorganization; Comparison
of Bank Stock With Holding Company Stock.
5. Pro Forma Financial Information . . . . . . . . . . . . . First National Bancorp of River Falls, Inc.
6. Material Contracts with the Company Being Acquired. . . . Not applicable.
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters . . . . . . Not applicable.
8. Interests of Named Experts and Counsel. . . . . . . . . . Not applicable.
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities. . . . . . . . . . . . . . Not applicable.
B. Information About the Registrant.
10. Information with Respect to S-3 Registrants . . . . . . . Not applicable.
11. Incorporation of Certain Information by Reference . . . . Not applicable.
12. Information with Respect to S-2 or S-3 Registrants. . . . Not applicable.
13. Incorporation of Certain Information by Reference . . . . Not applicable.
14. Information with Respect to Registrants Other Than
S-3 or S-2 Registrants. . . . . . . . . . . . . . . . . . Prospectus Summary; Risk Factors; First
National Bancorp of River Falls, Inc.;
Comparison of Bank Stock with Holding
Company Stock; Supervision and Regulation.
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Companies . . . . . . . . Not applicable.
16. Information with Respect to S-2 or S-3 Companies. . . . . Not applicable.
-i-
<PAGE>
Form S-4 Item and Heading Prospectus Heading or Location
- -------------------------------------------------------------- ----------------------------------------
17. Information with Respect to Companies Other Than
S-3 or S-2 Companies. . . . . . . . . . . . . . . . . . . Prospectus Summary; Risk Factors; The First
National Bank of River Falls; Comparison of
Bank Stock with Holding Company Stock;
Supervision and Regulation.
D. Voting and Management Information
18. Information if Proxies, Consents or Authorizations
are to be Solicited . . . . . . . . . . . . . . . . . . . The Reorganization; First National Bancorp
of River Falls, Inc.; The First National Bank
of River Falls; Rights of Dissenting Shareholders
of Bank.
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer . . . . . Not applicable.
</TABLE>
-ii-
<PAGE>
_________________________, 1997
To the Shareholders of The First National Bank of River Falls:
The First National Bank of River Falls (the "Bank") will hold a special
meeting of its shareholders (the "Special Meeting") on Wednesday, August 20,
1997, at 3:30 p.m., at the Bank, 104 East Locust Street, River Falls, Wisconsin
54022.
This meeting is of great importance to Bank shareholders because you will
be asked to consider and approve the formation of a one-bank holding company to
own the shares of the Bank. The directors and officers of the Bank have
determined it is in the best interests of the Bank and its shareholders to
organize such a holding company at this time. The holding company format is the
most common type of bank ownership in the industry and, as described below, it
offers several advantages to shareholders of the Bank. The new holding company
is called FIRST NATIONAL BANCORP OF RIVER FALLS, INC. (the "Holding Company").
If the Holding Company is approved for the Bank, the Bank's shareholders
would have their shares of the Bank's $100.00 per share par value common stock
("Bank Stock") exchanged for the Holding Company's $100.00 per share par value
common stock ("Holding Company Stock") in a reorganization (the
"Reorganization"). The Bank shareholders would become the Holding Company
shareholders, and the Holding Company would become the only shareholder of the
Bank.
The Reorganization would not involve any sale of the Bank. The formation
of the Holding Company is for the benefit of Bank shareholders and will result
in no special financial gain to any of the officers or directors of the Bank.
The advantages to forming the Holding Company to own the Bank Stock include
the following:
1. CREATE OPPORTUNITY FOR HOLDING COMPANY TO BUY HOLDING COMPANY STOCK. A
holding company has the power to purchase its own stock, while there are
certain limitations that may restrict a national bank from doing so. The
Holding Company would have the power to purchase the Holding Company
Stock from its shareholders if they wanted to sell Holding Company Stock.
Management anticipates that the Holding Company may purchase Holding
Company Stock from shareholders if its Board of Directors deems it to be in
the best interests of the Holding Company and the Bank and if such purchase
was permissible under applicable laws and regulations. However, redemption
of the Holding Company Stock would be at the discretion of the Board of
Directors of the Holding Company.
2. USE OF DIVIDEND EXCLUSION. Dividends paid by a bank to a corporate owner
of more than 80% of the stock of the bank are not taxed as ordinary income
because of an exclusion from taxable income provided by the Internal
Revenue Code of 1986, as amended. Thus, as the owner of all of the Bank
Stock, the Holding Company would have more money available to it to service
debt and for other purposes than would be available to individual owners
whose dividends from the Bank would be taxed as ordinary income. This also
would allow the Holding Company to meet any future capital requirements
that are not provided by the future earnings of the Bank by borrowing funds
and using these nontaxable dividends to repay these borrowings. The
interest expense incurred by the Holding Company on the loan could be used
to offset Bank earnings on a consolidated federal income tax return.
The application of this deduction against the Bank's income would reduce
the tax liability of the Holding Company.
3. PREVENTION OF DILUTION OF SHAREHOLDERS' INTERESTS. If it is necessary to
raise additional capital for the Bank in the future, the formation of the
Holding Company would facilitate this process. The Holding Company would
have the ability to borrow funds from a lending bank and inject those funds
into the capital of the Bank by purchasing newly-issued shares of Bank
Stock. This would not dilute the ownership interests of the Holding
Company's shareholders, and the Holding Company shareholders would not have
to purchase additional shares to prevent dilution of their ownership
interests in the Bank. If the Holding Company is not formed and it becomes
necessary to inject capital into the Bank in the future, all of the Bank's
shareholders would have to buy their proportionate share of new shares of
Bank Stock in order to prevent dilution of their ownership interests in the
Bank.
4. INCREASED OPPORTUNITY TO EXPAND. Should it be determined in the future
that it is in the best interest of the shareholders to expand into other
geographic markets, either by acquiring additional banks or establishing
branches, the
<PAGE>
Holding Company could facilitate such expansion. The Bank's ability to
expand into other geographic markets would be more limited than the Holding
Company's ability to do so. The Holding Company could be used to inject
additional capital into the Bank if the Bank determines it wants to open a
new branch or acquire a branch. Further, the Holding Company could
purchase an existing bank and either operate it as a separate affiliate of
the Bank or cause a newly acquired bank to merge with the Bank. At this
time, neither the Bank nor the Holding Company has any definitive plans to
open or acquire a branch or another bank.
5. INCREASED OPPORTUNITY TO DIVERSIFY. The Holding Company would offer the
ability to diversify the business of the Holding Company and the Bank
because the Holding Company could create or acquire corporations engaged
in bank-related activities. The Bank is more restricted than the
Holding Company in the types of activities in which it may engage. The
range of activities in which the Holding Company could engage through
nonbank subsidiaries includes, subject to approval of regulatory
authorities, loan service companies, mortgage companies, independent
trust companies, small loan and factoring companies, equipment leasing
companies, credit life and disability insurance companies, and certain
insurance, advisory, and brokerage activities. The timing and extent
of those operations by the Holding Company will depend on many factors,
including competitive and financial conditions existing in the future as
well as the financial condition of the Holding Company and the Bank.
6. INCREASED FLEXIBILITY. The Bank's Board believes that the proposed
Reorganization will better prepare the Bank for responding flexibly and
efficiently to future changes in the laws and regulations governing banks
and bank-related activities. The bank holding company corporate structure
would allow management to take advantage of any new opportunities in
banking and bank-related fields that are made available to bank holding
companies but not to banks.
This letter is followed by a formal notice of the Special Meeting of the
Bank's shareholders and a Proxy Statement/Prospectus, which serves two purposes.
First, it is the Proxy Statement of the Bank which describes the proposed
Reorganization and asks you to send in your Proxy to vote on the Reorganization
at the Special Meeting. A form of Proxy is enclosed separately (on blue paper).
Second, it is the Prospectus of the Holding Company which describes the Holding
Company and the Holding Company Stock.
The Bank's Board of Directors has unanimously approved the offer to
exchange Bank Stock for Holding Company Stock. Each of the Bank's Directors
has indicated his or her intention to vote as a Bank shareholder in favor of
the Reorganization. The Board of Directors urges you to read the enclosed
Proxy Statement/Prospectus carefully and hopes that you choose to join them
in approving the Holding Company formation.
Please return the enclosed Proxy to ensure that your shares are represented
in the voting on this transaction. IN ORDER TO APPROVE THE REORGANIZATION, THE
AFFIRMATIVE VOTE OF AT LEAST TWO-THIRDS (66-2/3%) OF ALL OF THE OUTSTANDING
SHARES, OR 6,667 SHARES, OF THE BANK WILL BE NEEDED. YOUR VOTE IS IMPORTANT
REGARDLESS OF HOW MANY SHARES YOU OWN. PLEASE SIGN AND RETURN THE PROXY
PROMPTLY IN THE ENCLOSED ENVELOPE. If you attend the Special Meeting, you may
at that time revoke your proxy and vote your shares in person at the Special
Meeting.
The Directors believe that the formation of a Holding Company is an
important step forward for the Bank. If you have questions about the Holding
Company or the Proxy Statement/Prospectus, please call me at (715) 425-2401.
Very truly yours,
Philip G. Betzel, President
-2-
<PAGE>
THE FIRST NATIONAL BANK OF RIVER FALLS
104 EAST LOCUST STREET
RIVER FALLS, WISCONSIN 54022
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 20, 1997
To the Shareholders of The First National Bank of River Falls:
A special meeting of shareholders (the "Special Meeting") of The First
National Bank of River Falls, a national banking association ("Bank"), will be
held on Wednesday, August 20, 1997 at the Bank, 104 East Locust Street, River
Falls, Wisconsin 54022, starting at 3:30 p.m., Central Time, for the following
purposes:
1. To vote on the following resolution:
RESOLVED, that the Agreement and Plan of Merger dated as of May 21,
1997 ("Reorganization Agreement") by and among First National Bancorp
of River Falls, Inc., The First National Bank of River Falls, and
River Falls Interim National Bank whereby (i) First National Bank of
River Falls, as the national bank resulting from the merger under the
Reorganization Agreement, will become a wholly-owned subsidiary of
First National Bancorp of River Falls, Inc. and (ii) shareholders of
The First National Bank of River Falls as it currently exists will
become shareholders of First National Bancorp of River Falls, Inc., is
hereby authorized and approved.
2. To transact such other business as may properly come before the
meeting or any adjournments thereof.
The stock transfer books of the Bank will not be closed. Instead, and as
provided in the Bank's Bylaws, the Bank's Board of Directors has set the close
of business on August 4, 1997 as the record date for determining the
shareholders entitled to notice of and to vote at the Special Meeting and any
adjournments or postponements thereof. The affirmative vote of at least two-
thirds (66-2/3%) of the issued and outstanding shares of the Bank, or 6,667
shares, must be voted in favor of the above resolution in order to permit the
holding company formation and resulting reorganization (the "Reorganization") to
proceed.
UNDER SUBSECTIONS 215a(b), (c) AND (d) OF THE UNITED STATES CODE,
SHAREHOLDERS OF THE BANK HAVE CERTAIN DISSENTERS' RIGHTS IN CONNECTION WITH THE
PROPOSED REORGANIZATION. A COPY OF THOSE SECTIONS IS ATTACHED TO THE FOLLOWING
PROXY STATEMENT/PROSPECTUS AS EXHIBIT B.
THE BOARD OF DIRECTORS OF THE BANK BELIEVES THAT THE PROPOSED
REORGANIZATION IS IN THE BEST INTERESTS OF THE BANK AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF THE BANK VOTE "FOR" THE
REORGANIZATION.
By Order of the Board of Directors
Susan L. Langer, Secretary
______________, 1997
<PAGE>
PROXY STATEMENT
OF
THE FIRST NATIONAL BANK OF RIVER FALLS
--------------------------
PROSPECTUS
OF
FIRST NATIONAL BANCORP OF RIVER FALLS, INC.
SPECIAL MEETING OF SHAREHOLDERS OF THE FIRST NATIONAL BANK OF RIVER FALLS
TO BE HELD AUGUST 20, 1997
This Proxy Statement/Prospectus is being furnished to the holders of common
stock, $100.00 per share par value ("Bank Stock"), of The First National Bank of
River Falls, a national banking association based in River Falls, Wisconsin (the
"Bank"), in connection with the solicitation of proxies by the Bank's Board of
Directors for use at the special meeting of shareholders (the "Special Meeting")
to be held on Wednesday, August 20, 1997 at the Bank, 104 East Locust Street,
River Falls, Wisconsin 54022 starting at 3:30 p.m., Central Time, and at any
adjournments or postponements thereof. At the Special Meeting, the shareholders
of the Bank will consider and vote upon the proposed acquisition of the Bank
Stock by First National Bancorp of River Falls, Inc., a Wisconsin corporation
(the "Holding Company"), by means of a reorganization (the "Reorganization") in
which all Bank Stock will be exchanged for shares of Holding Company Stock and
the Bank shareholders will become shareholders of the Holding Company.
This Proxy Statement/Prospectus also is the Prospectus of the Holding
Company for the issuance of up to 10,000 shares of its common stock, par value
$100.00 per share ("Holding Company Stock"), to be issued in exchange for the
outstanding shares of Bank Stock in the merger of the Bank with and into River
Falls Interim National Bank, a national "interim" bank and a wholly-owned
subsidiary of the Holding Company ("New Bank"), pursuant to the Agreement and
Plan of Merger dated as of May 21, 1997 among the Holding Company, the Bank and
the New Bank (the "Reorganization Agreement"). The New Bank will be the
surviving entity in the merger. (As used in this Proxy Statement/Prospectus,
the term "Bank" shall mean, as the context requires, The First National Bank of
River Falls before the Reorganization and the national bank resulting from the
merger of The First National Bank of River Falls with the New Bank in connection
with the Reorganization.)
-------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE ___ FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY THE BANK'S SHAREHOLDERS IN EVALUATING THE PROPOSAL TO BE
VOTED ON AT THE SPECIAL MEETING AND THE ACQUISITION OF THE HOLDING COMPANY STOCK
OFFERED HEREBY.
-------------------------------------------------
Under its Articles of Incorporation, the Holding Company will have an
option (the "Call Option") to purchase from its shareholders shares of the
Holding Company Stock under certain circumstances for the purpose of preserving
the Holding Company's status as an "S corporation" under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"). The Bank's Board
intends to elect S corporation status for the Holding Company effective for the
year beginning January 1, 1998. The Bank currently does not have such an option
to acquire Bank Stock. The Call Option will apply to Holding Company Stock
owned by all owners of Bank Stock, whether now or in the future. The Holding
Company's Call Option may limit a shareholder's ability to sell shares of
Holding Company Stock to other purchasers and may also limit the formation of a
market for the Holding Company Stock. See "Risk Factors -- Special
Considerations Regarding an Investment in the Holding Company -- S Corporation
Status," "First National Bancorp of River Falls, Inc. -- Subchapter S Status of
Holding Company" and "Comparison of Bank Stock with Holding Company Stock --
Call Option."
-------------------------------------------------
THE SHARES OF THE HOLDING COMPANY STOCK TO BE ISSUED PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AUTHORITY NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AUTHORITY PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORM OF PROXY ARE FIRST
BEING MAILED TO SHAREHOLDERS OF THE BANK ON OR ABOUT _____________, 1997.
-----------------------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS ______________, 1997.
<PAGE>
AVAILABLE INFORMATION
The Holding Company has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-4 (together with any
amendments thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the shares of Holding
Company to be issued pursuant to the Reorganization Agreement. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and should be available for
inspection at the Commission's Regional Offices located at 7 World Trade Center,
New York, New York 10048 and 500 W. Madison St., Suite 1400, Chicago, Illinois
60611. Copies of such information also can be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates.
The information also is available at the Commission's Website,
http://sec.gov.com.
The Holding Company does not plan to automatically send annual or quarterly
reports to its shareholders. However, the Holding Company plans to prepare
annual reports containing unaudited financial statements and information, and it
will make such reports available to its shareholders at its annual meeting of
shareholders and send copies of its annual reports to shareholders upon their
request.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO PURCHASE THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION WHERE, OR TO OR FROM ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. IN THOSE JURISDICTIONS WHERE THE OFFER MUST BE MADE BY A
LICENSED BROKER OR DEALER, THIS OFFER WILL BE MADE ON BEHALF OF THE HOLDING
COMPANY ONLY BY REGISTERED BROKERS OR DEALERS WHO ARE LICENSED UNDER THE LAWS OF
SUCH JURISDICTIONS.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, THE
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE HOLDING COMPANY OR THE BANK SINCE THE DATE OF THIS
PROSPECTUS. THE HOLDING COMPANY IS REQUIRED TO ADVISE SHAREHOLDERS OF ANY
FUNDAMENTAL CHANGE AFFECTING THE TERMS OF THE TRANSACTION BETWEEN THE BANK AND
THE HOLDING COMPANY.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT COVER ANY RESALE OF THE HOLDING
COMPANY STOCK TO BE RECEIVED BY SHAREHOLDERS OF THE BANK UPON CONSUMMATION OF
THE REORGANIZATION, AND NO PERSON IS AUTHORIZED TO USE THIS PROXY/STATEMENT
PROSPECTUS IN CONNECTION WITH ANY SUCH RESALE.
UNDER SUBSECTIONS 215a(b), (c) AND (d) OF THE UNITED STATES CODE,
SHAREHOLDERS OF THE BANK HAVE CERTAIN DISSENTERS' RIGHTS IN CONNECTION WITH THE
REORGANIZATION. SEE "RIGHTS OF DISSENTING SHAREHOLDERS OF BANK" AND EXHIBIT B
HERETO.
-2-
<PAGE>
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 2
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . 5
Special Meeting of Shareholders. . . . . . . . . . . . . . . . . . . 5
Recommendation of Bank's Board of Directors. . . . . . . . . . . . . 5
Effects of the Reorganization. . . . . . . . . . . . . . . . . . . . 6
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . 6
Federal Income Tax Consequences. . . . . . . . . . . . . . . . . . . 6
Effective Time of the Reorganization . . . . . . . . . . . . . . . . 6
Conditions to the Reorganization . . . . . . . . . . . . . . . . . . 6
Call Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Tender Offer and Bridge Loan . . . . . . . . . . . . . . . . . . . . 7
Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . . 8
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Risks Inherent in Banking Industry . . . . . . . . . . . . . . . . . 9
Special Considerations Regarding an Investment in the
Holding Company. . . . . . . . . . . . . . . . . . . . . . . . . 10
THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reasons for the Reorganization . . . . . . . . . . . . . . . . . . . 12
Description of the Reorganization. . . . . . . . . . . . . . . . . . 13
Special Meeting of Shareholders. . . . . . . . . . . . . . . . . . . 14
Operation of the Bank Following the Reorganization . . . . . . . . . 16
Accounting Treatment of the Transaction. . . . . . . . . . . . . . . 16
Conditions Precedent to the Reorganization . . . . . . . . . . . . . 16
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . 17
Federal Securities Regulation. . . . . . . . . . . . . . . . . . . . 18
Resale of Holding Company Stock. . . . . . . . . . . . . . . . . . . 19
Expenses of Reorganization . . . . . . . . . . . . . . . . . . . . . 20
RIGHTS OF DISSENTING SHAREHOLDERS OF BANK. . . . . . . . . . . . . . . . 20
FIRST NATIONAL BANCORP OF RIVER FALLS, INC . . . . . . . . . . . . . . . 22
History, Business and Properties . . . . . . . . . . . . . . . . . . 22
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Security Ownership of Certain Beneficial Owners and Management . . . 24
Description of Holding Company Stock . . . . . . . . . . . . . . . . 25
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 25
Transactions with Related Parties. . . . . . . . . . . . . . . . . . 25
Indemnification of Directors and Officers and
Certain Anti-Takeover Provisions . . . . . . . . . . . . . . . . 25
Subchapter S Status of Holding Company . . . . . . . . . . . . . . . 26
Tender Offer and Bridge Loan . . . . . . . . . . . . . . . . . . . . 27
THE FIRST NATIONAL BANK OF RIVER FALLS . . . . . . . . . . . . . . . . . 27
History and Business . . . . . . . . . . . . . . . . . . . . . . . . 27
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 30
Monetary Policies and Economic Conditions. . . . . . . . . . . . . . 44
-3-
<PAGE>
PAGE
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 45
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 45
Director Compensation. . . . . . . . . . . . . . . . . . . . . . . . 47
Security Ownership of Certain Beneficial Owners and Management . . . 47
Description of Bank Stock. . . . . . . . . . . . . . . . . . . . . . 47
Transactions with Related Parties. . . . . . . . . . . . . . . . . . 48
Indemnification of Directors and Officers. . . . . . . . . . . . . . 48
Recommendation of Bank's Board of Directors. . . . . . . . . . . . . 48
COMPARISON OF BANK STOCK WITH HOLDING COMPANY STOCK. . . . . . . . . . . 49
Authorized Shares and Par Value. . . . . . . . . . . . . . . . . . . 49
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Market for the Stock . . . . . . . . . . . . . . . . . . . . . . . . 50
Call Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Value of Bank Stock. . . . . . . . . . . . . . . . . . . . . . . . . 52
Preemptive Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 53
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SUPERVISION AND REGULATION . . . . . . . . . . . . . . . . . . . . . . . 53
Regulation of Holding Company. . . . . . . . . . . . . . . . . . . . 53
Regulation of Bank . . . . . . . . . . . . . . . . . . . . . . . . . 56
Capital Requirements for Holding Company and Bank. . . . . . . . . . 60
Liquidity Requirements for Holding Company and Bank. . . . . . . . . 61
Loan Limits to Borrowers . . . . . . . . . . . . . . . . . . . . . . 61
Securities Registrations and Filings . . . . . . . . . . . . . . . . 61
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
INDEX TO FINANCIAL STATEMENTS OF THE FIRST NATIONAL BANK OF RIVER FALLS. F-1
EXHIBIT A -- Agreement and Plan of Merger. . . . . . . . . . . . . . . . A-1
EXHIBIT B -- United States Code Sections 215a(b), (c) and (d)
Regarding Dissenters' Rights . . . . . . . . . . . . . . . . . . B-1
EXHIBIT C -- Tax Opinion of Winthrop & Weinstine, P.A. . . . . . . . . . C-1
-4-
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. THIS SUMMARY IS NECESSARILY INCOMPLETE AND
SELECTIVE, AND IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS.
SHAREHOLDERS OF THE BANK ARE URGED TO READ CAREFULLY THE ENTIRE PROXY
STATEMENT/PROSPECTUS, INCLUDING THE EXHIBITS.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS A NUMBER OF FORWARD-LOOKING
STATEMENTS WHICH REFLECT THE CURRENT VIEWS OF MANAGEMENT OF THE BANK WITH
RESPECT TO FUTURE EVENTS THAT WILL HAVE AN EFFECT ON THE FUTURE FINANCIAL
PERFORMANCE OF THE HOLDING COMPANY AND THE BANK. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE HEREIN, THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE CURRENTLY ANTICIPATED.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS.
THE REORGANIZATION
The Holding Company, a Wisconsin corporation, was formed on May 19, 1997.
It is proposed that the Holding Company will acquire all the outstanding shares
of the Bank through a reorganization (the "Reorganization") as a result of which
the Holding Company will be owned by the former Bank shareholders, and the Bank
will become a wholly-owned subsidiary of the Holding Company. See "The
Reorganization."
The Holding Company currently is in the organizational stage and has no
operating history. See "First National Bancorp of River Falls, Inc. -- History,
Business and Properties." The Bank is a national banking association chartered
by the Office of the Comptroller of the Currency ("OCC") and has been operating
as a commercial bank in River Falls, Wisconsin since 1904. In 1993, it opened a
branch in Prescott, Wisconsin. The Bank offers comprehensive banking services
to the residential, commercial, industrial and agricultural areas that it
serves. Such services include agricultural, commercial, real estate and
personal loans; checking, savings and time deposits; and other customer
services, such as safe deposit facilities. The principal executive offices
of the Holding Company and the Bank are located at 104 East Locust Street, River
Falls, Wisconsin 54022. See "The First National Bank of River Falls -- History
and Business."
SPECIAL MEETING OF SHAREHOLDERS
The Special Meeting of the Bank's shareholders will be held on Wednesday,
August 20, 1997 at 3:30 p.m., Central Time, at the Bank, 104 East Locust Street,
River Falls, Wisconsin 54022. The purpose of the Special Meeting is to consider
and vote upon (i) the exchange of Bank Stock for Holding Company Stock under the
Reorganization Agreement and (ii) such other matters as may properly be brought
before the Special Meeting or any adjournments or postponements thereof.
Shareholders of record as of the close of business on August 4, 1997 are
entitled to notice of and to vote at the Special Meeting. At such date, there
were 10,000 shares of Bank Stock outstanding, each of which will be entitled to
one vote on each matter to be acted upon or which may properly come before the
Special Meeting. The affirmative vote of the holders of at least two-thirds
(66-2/3%) of the outstanding shares of the Bank Stock, or 6,667 shares, will be
required to approve the Reorganization. Directors and executive officers of the
Bank own or control, directly or indirectly, 63.71% (6,371 shares) of the
outstanding shares of Bank Stock and have indicated that they intend to vote
their shares in favor of the Reorganization. See "The Reorganization -- Special
Meeting of Shareholders."
RECOMMENDATION OF BANK'S BOARD OF DIRECTORS
The Board of Directors of the Bank believes that the proposed
Reorganization will benefit the Bank and is in the best interests of its
shareholders. Accordingly, the Board recommends that its shareholders vote
their shares of Bank Stock to approve the Reorganization. The Bank's Directors
and executive officers have indicated that they will vote all of their shares of
Bank Stock in favor of the Reorganization. See "The Reorganization -- Reasons
for the Reorganization" and "The First National Bank of River Falls --
Recommendation of the Bank's Board of Directors."
-5-
<PAGE>
EFFECTS OF THE REORGANIZATION
Subject to certain limitations and appraisal rights provided by law, on the
effective date of the Reorganization:
1. The Bank will be merged with and into the newly-formed River Falls
Interim National Bank ("New Bank"), which will be a wholly-owned
subsidiary of the Holding Company, and the resulting national
bank will become a wholly-owned subsidiary of the Holding Company;
2. Each issued and outstanding share of Bank Stock (other than shares
held by any of the Bank's shareholders who properly exercise their
dissenters' rights and shares sold to the Holding Company in the
Tender Offer described below) will be converted into the right to
receive one share of Holding Company Stock; and
3. The Bank shareholders will become the shareholders of the Holding
Company. "The Reorganization -- Description of the Reorganization."
DISSENTERS' RIGHTS
In accordance with the National Bank Act, any holder of Bank Stock has the
right to object to the Reorganization and demand payment of the fair value of
his or her shares of Bank Stock in cash if the shareholder (i) either votes
against the Reorganization at the Special Meeting or gives written notice to an
officer of the Bank, at or before the vote at the Special Meeting, that he or
she dissents from the Reorganization, (ii) makes a written request to the Bank
within 30 days after the "Effective Time" of the Reorganization (as defined
below), to receive the fair value of his or her shares in cash, AND (iii)
surrenders to the Bank along with the written request the certificates for his
or her shares of Bank Stock. If a dissenting shareholder of the Bank does not
timely and properly comply with the requirements for dissenting, that
shareholder's dissenters' rights will terminate. If a Bank shareholder who
attempts to exercise dissenters' rights does not make an effective demand for
payment or otherwise loses his or her status as a dissenting shareholder, such
shareholder shall be entitled to receive from the Holding Company the same
number of shares of Holding Company Stock that such Bank shareholder would have
received in the Reorganization if he or she had not attempted to exercise
dissenters' rights. See "Rights of Dissenting Shareholders of Bank."
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization has been structured with the intent that it qualify for
federal income tax purposes as a tax-free transaction so that shareholders of
the Bank will recognize no gain or loss on the exchange of their Bank Stock for
Holding Company Stock. Exhibit C to this Proxy Statement/Prospectus is an
opinion of Winthrop & Weinstine, P.A., counsel for the Bank and the Holding
Company, that the Reorganization is a tax-free transaction. See "The
Reorganization -- Tax Considerations."
EFFECTIVE TIME OF THE REORGANIZATION
The Reorganization will take place as promptly as practicable after receipt
of all necessary approvals of governmental agencies and authorities and the
satisfaction of certain other terms and conditions (the "Effective Time"). See
"The Reorganization -- Closing Date."
CONDITIONS TO THE REORGANIZATION
The Reorganization is subject to the satisfaction of certain conditions
including, but not limited to, receiving the approval of the OCC, the Board of
Governors of the Federal Reserve System ("Board of Governors"), and at least
two-thirds (66-2/3%), or 6,667 shares, of the outstanding shares of Bank Stock.
The Holding Company and the Bank have received the required approvals from the
OCC and the Federal Reserve Board. The Holding Company and the Bank may amend,
modify or waive certain conditions if, in the opinion of the Boards of Directors
of the Holding Company and the Bank, the action would not have a material
adverse effect on the benefits intended for holders of Holding Company Stock.
See "The Reorganization -- Conditions Precedent to the Reorganization."
-6-
<PAGE>
CALL OPTION
The Articles of Incorporation of the Holding Company contain a provision
giving the Holding Company an option (the "Call Option") to purchase from its
shareholders shares of Holding Company Stock under certain circumstances for the
purpose of preserving the Holding Company's status as an S corporation under
Subchapter S of the Code. The Holding Company's Board intends to elect S
corporation status for the Holding Company effective for the year beginning
January 1, 1998. The Call Option may limit a shareholder's ability to sell
shares of Holding Company Stock to purchasers other than the Holding Company.
In addition, the Call Option may reduce the likelihood of another buyer
obtaining control of the Holding Company through the acquisition of large blocks
of Holding Company Stock. There is no similar right allowing the Bank to buy
shares of Bank Stock. See "Risk Factors -- Special Considerations Regarding an
Investment in the Holding Company -- S Corporation Status," "First National
Bancorp of River Falls, Inc. -- Subchapter S Status of Holding Company" and
"Comparison of Bank Stock With Holding Company Stock -- Call Option."
TERMINATION
The Reorganization Agreement is subject to termination by the Holding
Company, the Bank, or the New Bank if any of the conditions to the
Reorganization are not fulfilled within a reasonable period of time or the
Reorganization is not advisable in the opinion of the Boards of Directors of the
Holding Company, the Bank or the New Bank. See "The Reorganization --
Termination."
TENDER OFFER AND BRIDGE LOAN
During the period from August 4, 1997 until 5:00 p.m., Central Time, on
September 12, 1997, the Holding Company will be conducting a tender offer (the
"Tender Offer") for up to 1,000 of the outstanding shares of Bank Stock for
$2,250 per share. If more than 1,000 shares of Bank Stock are tendered in the
Tender Offer, the Holding Company will purchase 1,000 shares of Bank Stock, and
each shareholder tendering shares in the Tender Offer will be entitled to sell a
number of shares that is proportionate to the number of shares he or she is
tendering as compared to all shares tendered in the Tender Offer. The Holding
Company is conducting the Tender Offer to give shareholders of the Bank an
opportunity to sell their Bank Stock, as historically there has been a limited
market for the Bank Stock, and to facilitate the acquisition of Bank Stock by
the Holding Company in the Reorganization. Bank Stock acquired by the Holding
Company in the Tender Offer will be an asset of the Holding Company.
For purposes of the S corporation provisions of the Code, the Bank currently
has 66 shareholders, and an S corporation is allowed under the Code to have a
maximum of 75 shareholders. Therefore, even if no Bank Stock is tendered in the
Tender Offer, after the Effective Time of the Reorganization, the Holding
Company will have fewer than 75 shareholders for purposes of the Code, and the
Holding Company's S corporation election is not contingent upon the successful
completion of the Tender Offer. See "Risk Factors--Special Considerations
Regarding an Investment in the Holding Company--S Corporation Status" and "First
National Bancorp of River Falls, Inc.--Subchapter S Status of Holding Company."
The Tender Offer is being made pursuant to documents and materials (the "Tender
Offer Materials") being mailed by the Holding Company to all shareholders of the
Bank concurrently with the mailing of this Proxy Statement/Prospectus.
Shareholders who do not receive Tender Offer Materials should contact Mr. Philip
G. Betzel, President of the Bank and the Bank Holding Company, at The First
National Bank of River Falls, 104 East Locust Street, River Falls, Wisconsin
54022, telephone number (715) 425-2401. The Tender Offer Materials state that
if shareholders have any questions or desire any additional information
regarding the Tender Offer, they should contact Mr. Betzel at such address and
telephone number.
To pay for the shares of Bank Stock acquired in the Tender Offer and to pay
for certain other expenses and costs in connection with the Reorganization, the
Holding Company will borrow up to $2,370,000 (the "Bridge Loan") and pay a
portion of the proceeds of the Bridge Loan to the shareholders who accept the
Tender Offer in full payment of the shares of Bank Stock tendered. In addition
to funding the purchase of the shares of Bank Stock in the Tender Offer (for a
total maximum of $2,250,000), the proceeds of the Bridge Loan will be used to
make the minimum $120,000 capital contribution to the New Bank required by law.
If the Reorganization is approved by the holders at least 6,667 shares of Bank
Stock, the Bank and the New Bank will merge, and each shareholder of the Bank
who did not tender their shares of Bank Stock in the Tender Offer and those
shareholders who did not properly dissent will exchange their shares of Bank
Stock for shares of Holding Company Stock. After the Reorganization, the Bank
Stock will be owned only by the Holding Company. At that time, the Holding
Company will cause the Bank to declare a dividend to the Holding Company
sufficient to repay the Bridge Loan of up to $2,370,000 and to pay certain
Holding Company expenses estimated to be approximately $87,000 (including an
estimated $2,000 of interest payable on the Bridge Loan). See "First National
Bancorp of River Falls, Inc. -- Tender Offer and Bridge Loan."
-7-
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial information presented below reflects certain
financial information of the Bank on a historical basis as of and for the
periods indicated. This data should be read in conjunction with the Bank's
Consolidated Financial Statements and related notes included herein. See "The
First National Bank of River Falls -- Selected Financial Data," " --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Index to Financial Statements.
THE FIRST NATIONAL BANK OF RIVER FALLS
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
As of and for the Three As of and for the Years
Months Ended March 31, Ended December 31,
------------------------- -------------------------
1997 1996 1996 1995
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Operating data:
Interest income. . . . . . . . . . . . . . . . . . . $ 2,867 $ 2,828 $ 11,438 $ 10,855
Interest expense . . . . . . . . . . . . . . . . . . 1,411 1,379 5,539 5,109
--------- ---------- ---------- ----------
Net interest income. . . . . . . . . . . . . . . . . . 1,456 1,449 5,899 5,746
Provision for loan losses. . . . . . . . . . . . . . 90 165 270 775
--------- ---------- ---------- ----------
Net interest income after provision
for loan losses. . . . . . . . . . . . . . . . . . 1,366 1,284 5,629 4,971
Noninterest income . . . . . . . . . . . . . . . . . 169 261 952 1,498
Noninterest expense. . . . . . . . . . . . . . . . . 1,300 1,026 4,288 3,968
--------- ---------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . 235 519 2,293 2,501
Income tax expense (benefit) . . . . . . . . . . . . (9) 105 457 489
--------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . 244 414 1,836 2,012
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income per common share. . . . . . . . . . . . . 24.45 41.41 183.56 201.23
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Weighted average common shares
outstanding. . . . . . . . . . . . . . . . . . . . 10,000 10,000 10,000 10,000
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Balance sheet data:
Total assets . . . . . . . . . . . . . . . . . . . . $149,159 $ 143,697 $ 148,160 $ 140,913
Net loans (1). . . . . . . . . . . . . . . . . . . . 95,852 86,733 94,772 87,286
Investment securities. . . . . . . . . . . . . . . . 46,011 46,522 43,924 41,844
Deposits . . . . . . . . . . . . . . . . . . . . . . 122,940 119,594 125,110 119,666
Short-term borrowings. . . . . . . . . . . . . . . . 8,856 7,232 5,136 4,014
Total stockholders' equity . . . . . . . . . . . . . 16,239 15,655 16,264 15,677
Key ratios:
Return on average assets (2) . . . . . . . . . . . . 0.65% 1.15% 1.28% 1.49%
Return on average equity (2) . . . . . . . . . . . . 5.97% 10.50% 11.75% 14.14%
Average stockholders' equity to
average assets . . . . . . . . . . . . . . . . . . 10.81% 10.96% 10.87% 10.57%
Net interest margin (2). . . . . . . . . . . . . . . 4.05% 4.24% 4.32% 4.51%
Operating efficiency ratio . . . . . . . . . . . . . 80.00% 60.00% 62.59% 54.78%
Nonperforming loans/total loans (3). . . . . . . . . 5.29% 2.18% 2.79% 1.15%
Allowance for loan losses/total
loans (3). . . . . . . . . . . . . . . . . . . . . 1.62% 1.59% 1.57% 1.48%
Allowance for loan losses/
nonperforming loans. . . . . . . . . . . . . . . . 30.70% 68.80% 56.24% 121.80%
Common stock dividend payout
ratio. . . . . . . . . . . . . . . . . . . . . . . -- -- 49.03% 39.76%
</TABLE>
- --------------------
(1) Includes loans held for sale.
(2) Annualized for the three months ended March 31, 1997 and 1996.
(3) Excluding loans held for sale.
-8-
<PAGE>
RISK FACTORS
CHOOSING TO EXCHANGE SHARES OF BANK STOCK FOR SHARES OF HOLDING COMPANY
STOCK INVOLVES CERTAIN SPECIAL CONSIDERATIONS AND RISKS. EACH BANK SHAREHOLDER
SHOULD CAREFULLY CONSIDER ALL OF THE FOLLOWING SPECIAL CONSIDERATIONS AND RISKS
IN ADDITION TO THE INFORMATION SET FORTH ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
RISKS INHERENT IN BANKING INDUSTRY
There are certain special considerations and risks inherent in the business
of banking that are not unique to the Bank or the Holding Company but are common
to all entities involved in the banking industry. Set forth below are some of
the special considerations and risks inherent in the business of banking.
REGULATION OF BANK HOLDING COMPANIES
The United States banking system is highly regulated, with both individual
states and the federal government having rights regarding the chartering,
supervision and examination of banks and bank holding companies. Bank holding
companies, including the Holding Company, and national banks, including the
Bank, are each subject to federal regulation and supervision. The Holding
Company is subject to the Bank Holding Company Act of 1956, as amended ("Holding
Company Act"), and to regulation and supervision by the Federal Reserve System,
including the Federal Reserve Board. The Federal Reserve Board possesses cease
and desist powers over bank holding companies to prevent or remedy unsafe or
unsound practices or violations of law. These and other restrictions limit how
the Holding Company may conduct its business and obtain financing. See
"Supervision and Regulation -- Regulation of Holding Company."
REGULATION OF NATIONAL BANKS
The Bank is subject to supervision and examination by the OCC, which is the
Bank's primary federal regulator, and the Federal Deposit Insurance Corporation
("FDIC"), which has secondary federal responsibility for the regulation and
supervision of the Bank. The various federal laws and regulations apply to many
aspects of the Bank's operations and financial condition, including dividends,
reserves, deposits, loans, investments, mergers, acquisitions, and the
establishment of branch offices and facilities. These and other restrictions
limit how the Bank may conduct its business and obtain financing. See
"Supervision and Regulation -- Regulation of Bank."
RESTRICTIONS ON PAYMENT OF DIVIDENDS BY THE BANK TO THE HOLDING COMPANY
The ability of the Holding Company to meet its debt service requirements
and to pay dividends will depend on the ability of the Bank to pay dividends to
the Holding Company on the Bank Stock, as the Holding Company has no other
source of significant income. As set forth above, the Bank is subject to
federal law and regulations which limit the amount of dividends the Bank may pay
to the Holding Company. For example, the payment of dividends by the Bank as
national banking association is affected by the requirement to maintain adequate
capital pursuant to the capital adequacy guidelines issued by the OCC. All
banks and bank holding companies are required to have a minimum total capital to
risk-weighted assets (total capital) ratio of 8.00% and a minimum Tier 1 capital
to risk-weighted assets (Tier 1) ratio of 4.00%. Additionally, banking
organizations must maintain a minimum Tier 1 capital to total assets (leverage)
ratio of 3.00%. This 3.00% leverage ratio is a minimum for banking
organizations without any supervisory, financial or operational weaknesses or
deficiencies. However, most banking organizations, including the Bank, are
expected to maintain a leverage ratio of 100 to 200 basis points above this
minimum depending on their financial condition. As of March 31, 1997, the
Bank's leverage ratio was 10.4%, its total risk-based capital ratio was 17.3%,
and its Tier 1 risk-based ratio was 16.0%. If (i) the OCC increases any of
these required ratios; (ii) the total of risk-weighted assets of the Bank
increases significantly; and/or (iii) the Bank's income decreases significantly,
the Bank's Board of Directors may decide or be required to retain a greater
portion of the Bank's earnings to achieve and maintain the required capital or
asset ratios. This will reduce the amount of funds available for the payment of
dividends by the Bank to the Holding Company. Further, in some cases, the OCC
could take the position that it has the power to prohibit the Bank from paying
dividends if, in its view, such payments would constitute unsafe or unsound
banking practices. In addition, whether dividends are paid and their frequency
and amount will depend on the financial condition and performance, and the
discretion of management, of the Bank. The foregoing restrictions on dividends
paid by the Bank may limit the Holding Company's ability to obtain funds from
such dividends for its cash needs, including funds for payment of its debt
service requirements and operating expenses. The amount of dividends the Bank
could pay to the Holding Company as of March 31, 1997 without prior regulatory
approval, which is limited by statute to the sum of undivided
-9-
<PAGE>
profits for the current year plus net profits for the preceding two years, was
$2,392,275. See "Supervision and Regulation -- Regulation of Bank."
IMPACT OF INTEREST RATES AND ECONOMIC CONDITIONS
The results of operations for financial institutions, including the Bank
and the Holding Company, may be materially and adversely affected by changes in
prevailing economic conditions, including changes in interest rates, declines in
real estate market values and the monetary and fiscal policies of the federal
government. See "Risk Factors -- Special Considerations Regarding an Investment
in the Holding Company -- Competition; Dependence on Economic Conditions" and
"Supervision and Regulation." The profitability of the Holding Company and the
Bank is in part a function of the spread between the interest rates earned on
loans and interest rates paid on deposits and other interest-bearing
liabilities. Like most banking institutions, the Bank's net interest margin
will continue to be affected by general economic conditions and other factors
that influence market interest rates and the Bank's ability to respond to
changes in such rates. At any given time, the Bank's assets and liabilities
will be such that they are affected differently by a given change in interest
rates, and, as a result, an increase or decrease in rates could have a positive
or negative affect on the Bank's net income, capital and liquidity. See "The
First National Bank of River Falls -- Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEREGULATION
There have been significant changes in the banking industry in past years.
Many of the changes have resulted from federal legislation intended to
deregulate the banking industry. This legislation has, among other things,
increased the power of non-banks to offer traditional banking services.
Legislation currently in Congress proposes modifications of some of the
prohibitions on the type of businesses in which bank holding companies may
engage. In addition, other types of financial institutions, including
securities brokerage companies, insurance companies, and investment banking
firms, have been given and may continue to be given powers to engage in
activities which traditionally have been engaged in only by banks. Such changes
may continue to place the Holding Company and the Bank in more direct
competition with other financial institutions. See "Supervision and Regulation
- -- Deregulation."
SPECIAL CONSIDERATIONS REGARDING AN INVESTMENT IN THE HOLDING COMPANY
In addition to the special considerations and risks inherent in the banking
business described above, there are special considerations and risks associated
with an investment in the Holding Company, as described below.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the Bank's estimate of the amount
of the loan portfolio that will not be repaid and consequently will have to be
written off. The allowance is established by management using historical
experience and by making various assumptions and judgments about the ultimate
collectability of the loan portfolio. The Bank's allowance for loan losses as
of December 31, 1995 and 1996 and March 31, 1997 was $1,296,000, $1,443,000 and
$1,516,000, respectively, which represented 1.48%, 1.57% and 1.62%,
respectively, of the total amount of loans. There can be no assurance that the
allowance will prove to be sufficient to cover future loan losses. The Holding
Company's profitability and financial condition would be adversely affected to
the extent that the estimated allowance is insufficient to cover future loan
losses incurred. See "The First National Bank of River Falls -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition -- Allowance for Loan Losses."
COMPETITION; DEPENDENCE ON ECONOMIC CONDITIONS
The Bank is engaged in the highly competitive business of commercial
banking. There were two other banks, one savings institution and one credit
union in the River Falls, Wisconsin area as of March 31, 1997. The Bank's
competitors include local, regional and national banking and non-banking
entities which are not necessarily subject to the same regulatory standards or
restrictions as the Bank. In addition, every bank, including the Bank, is
affected by the economic conditions and the economy of the area in which it
operates. Because the Bank is located in River Falls, Wisconsin, it depends to
an extent upon the success of significant employers in that area, including the
University of Wisconsin, River Falls, which in turn are affected by the
economies of their market segments. Therefore, the Bank and the Holding Company
remain vulnerable to downturns in the economy of the River Falls area and to
downturns in the economy in general. Adverse economic conditions could have a
negative impact upon the quality of the Bank's loan
-10-
<PAGE>
portfolio, the Bank's ability to pay dividends to the Holding Company, and the
Holding Company's earnings. See "The First National Bank of River Falls --
Monetary Policies and Economic Conditions."
S CORPORATION STATUS
The Holding Company's Board intends to elect S corporation status for the
Holding Company effective for the year beginning January 1, 1998. The Bank also
will elect S corporation status. As an S corporation, the shareholders of the
Holding Company will bear the responsibility of paying the tax on income
generated by the Holding Company and its subsidiaries. This responsibility will
be enforced by the Internal Revenue Service and the applicable state taxing
authorities regardless of the amount of distributions made from the Holding
Company to its shareholders. Distributions from the Holding Company will depend
on approval by management, the ability of the Bank to pay dividends to the
Holding Company and other regulatory restrictions which may be imposed by the
Bank's or Holding Company's regulatory authorities. See "Supervision and
Regulation -- Regulation of Bank."
In order for the Holding Company to elect S corporation status, all
shareholders of the Company must consent to such election. If all
shareholders do not give such consent, S corporation status will not be
elected for the Holding Company or the Bank, and the Reorganization will
otherwise proceed as described in this Proxy Statement/Prospectus. The
inability of the Holding Company to elect S corporation status could have a
material adverse effect on the Bank, the Holding Company, and the Holding
Company's shareholders.
Once a valid S corporation election has been made and approved, the
requirements of S corporation status must be maintained in order to avoid its
termination. These restrictions include limiting the type and total number of
shareholders, maintaining only one class of stock, making only proportionate
distributions to the shareholders and meeting various other technical
requirements. Specifically, the Code provides that an S corporation can have
a maximum of 75 shareholders, with spouses counted as one shareholder. Also,
a shareholder who holds shares in different capacities such as, for example,
individually and in an independent retirement account (IRA) is counted as one
shareholder for purposes of the S corporation provisions of the Code. For
purposes of the S corporation provisions of the Code, the Bank has 66
shareholders.
Generally, the S corporation provisions of the Code limit the type of
shareholders of an S corporation to individual residents of the United
States, certain United States trusts, and pension, profit sharing and stock
bonus plans qualified under Section 401(a) of the Code, as well as certain
domestic charitable organizations exempt from taxation under Section 501(a)
or 501(c)(3) of the Code. Inadvertent termination of the election could
subject income to the corporate level tax with distributions also being taxed
as dividends to the shareholders. The Holding Company's Articles of
Association contain the Call Option which is intended to prevent the Holding
Company from inadvertently losing its S corporation status. However, there
can be no assurance that the Call Option would have that effect in every case.
The Holding Company will be required to pay corporate taxes on built-in
gains which are recognized within a ten-year period following the election of S
corporation status. This tax could be imposed on the excess of the fair market
value of the Holding Company over its tax basis in its assets. The total gain
to which this tax could apply is substantially higher than the amount which
management anticipates to incur. See "The First National Bank of River Falls --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Subchapter S Election and Built-In Gains Tax."
Federal legislation which for the first time has allowed a financial
institution to elect to be an S corporation was passed within the last year.
Many technical federal and state tax issues have been raised since that time
which have not yet been resolved by subsequent legislation or guidance.
Moreover, many states have not yet determined how or to what extent their laws
will conform to federal tax laws regarding financial institutions as
S corporations. In addition, federal legislation has been contemplated which
could potentially eliminate the benefits of making the S corporation election
for certain taxpayers such as the Holding Company. Management will need to
monitor the status of future federal and state legislation when determining
whether or not to make the election. Shareholders should consult their own
legal counsel or other tax advisor as to the specific tax consequences to them
of the S corporation status of the Holding Company under federal and state laws.
See "First National Bancorp of River Falls, Inc. -- Subchapter S Status of
Holding Company" and "Comparison of Bank Stock with Holding Company Stock --
Call Option."
LACK OF ACTIVE MARKET; MARKET VALUE
Currently, there is no market for the Holding Company Stock, and there can
be no assurance that any market will develop. In addition, the Call Option will
restrict the transfer of the Holding Company Stock and limit the types of
persons to which Holding Company Stock may be transferred. For example,
currently the Call Option gives the Holding Company the right to acquire a
shareholder's Holding Company Stock if that shareholder plans to transfer the
Holding Company Stock to a corporation. Any market that may develop in the
Holding Company Stock probably will be extremely limited. If a trading market
does not develop or is not maintained, holders of Holding Company Stock may
experience difficulty in reselling it. See "Comparison of Bank Stock with
Holding Company Stock -- Market for the Stock."
LACK OF DIVERSIFICATION
The Holding Company's business activity will consist of its ownership of
the Bank Stock. As a result, the Holding Company will lack diversification as
to business activities and market area, and any event affecting the Bank will
have a direct effect on the Holding Company. See "First National Bancorp of
River Falls, Inc."
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THE REORGANIZATION
GENERAL
The Reorganization is designed to offer shareholders of the Bank the
opportunity to form the Bank Holding Company, which will own all shares of Bank
Stock. The Holding Company, a Wisconsin business corporation, was incorporated
for the purpose of participating in the Reorganization and becoming the bank
holding company of the Bank, and the Boards of Directors of the Bank, the
Holding Company and the New Bank have adopted and approved the Reorganization
Agreement.
The following steps, among others, must be taken to complete the
Reorganization:
1. The shareholders of the Bank must approve the Reorganization by the
affirmative vote of at least two-thirds (66-2/3%), or 6,667 shares,
of the outstanding shares of Bank Stock;
2. The Federal Reserve Board must approve the Holding Company's
application to become a bank holding company under the Holding Company
Act; and
3. The OCC must approve the Reorganization.
See "The Reorganization -- Conditions Precedent to the Reorganization."
REASONS FOR THE REORGANIZATION
The Board of Directors of the Bank recommends the Reorganization because it
believes that a bank holding company will offer opportunities to the Bank to
obtain financing, compete more effectively, and expand its services in type,
number, and geographical scope. In addition, the Board believes that the
formation of a holding company will provide the following benefits to the Bank's
shareholders.
- CREATE OPPORTUNITY FOR HOLDING COMPANY TO BUY HOLDING COMPANY STOCK.
Under federal law, a national bank is prohibited from purchasing its
own stock, except in certain limited circumstances. Therefore, any
Bank shareholder who desires to sell his or her Bank Stock must
generally locate a person willing to purchase the Bank Stock rather
than selling it to the Bank. In the past, it has been difficult for
a seller to find a buyer, particularly if the seller wants to sell a
large number of shares. The Holding Company will not be prohibited
from purchasing Holding Company Stock unless such a purchase would
make the Holding Company insolvent. Therefore, the Holding Company
may become a potential buyer of Holding Company Stock, whereas the
Bank could not buy Bank Stock except in limited circumstances.
Management anticipates that the Holding Company may purchase Holding
Company Stock from shareholders if its Board of Directors deems it to
be in the best interests of the Holding Company and the Bank and if
such purchase was permissible under applicable laws and regulations.
However, the Holding Company will not be required to purchase Holding
Company Stock but may do so in the discretion of its Board of
Directors. In certain circumstances, approval by the Federal Reserve
Board may be required for the purchase of Holding Company Stock. See
"Comparison of Bank Stock With Holding Company Stock -- Market for the
Stock."
- USE OF DIVIDEND EXCLUSION. The Bank's Board believes that the
proposed Reorganization will provide greater flexibility in meeting
the financing needs of the Bank or any other banks or corporations
acquired by the Holding Company. Dividends paid by a bank to a
corporate owner of more than 80% of the stock of a bank are not taxed
as ordinary income because of an exclusion from taxable income
provided by the Code. Thus, as the owner of all of the Bank Stock,
the Holding Company would have more money available to it to service
debt and for other purposes than would be available to individual
owners whose dividends from the Bank would be taxed as ordinary
income. Currently, there is no need for the Bank or the Holding
Company to obtain additional financing. If the need for additional
financing should arise, however, those financing requirements could be
obtained through borrowings by the Holding Company, which would then
be paid to the Bank by the Holding Company as a capital contribution
or as a purchase of additional Bank Stock. The loan to the Holding
Company would be paid with dividends received from the Bank, which
would not be taxable to the Holding Company because it would hold at
least 80% of the Bank Stock. The interest expense incurred by the
Holding Company on the loan could be used to offset Bank earnings on a
consolidated federal income tax return, which would reduce the tax
liability of the Holding Company.
- PREVENTION OF DILUTION OF SHAREHOLDERS' INTERESTS. If it is necessary
to raise additional capital for the Bank in the future, the formation
of the Holding Company will facilitate this process. The Holding
Company has the ability to borrow funds from a lending bank and inject
those funds into the capital of the Bank by purchasing newly-issued
shares of Bank Stock. As a result, the Holding Company shareholders
would not have to purchase additional shares to prevent dilution of
their ownership interests in the Bank. If it is necessary to build
capital in the Bank in the future and the
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Holding Company is not formed, all of the Bank's shareholders would
have to buy their pro rata share of new shares of Bank Stock in order
to prevent dilution of their ownership interests in the Bank.
- INCREASED OPPORTUNITY TO EXPAND. The principal means for a bank to
seek continued growth, apart from using more fully the business
potential within its present market area, is by using the holding
company structure to reach into other geographic markets. The
Bank's ability to expand into other geographic markets would be
more limited than the Holding Company's ability to do so. After the
Reorganization, the Holding Company will be able to create new banks
or acquire existing banks anywhere in Wisconsin and other states,
subject to the approval of regulatory authorities. The Holding
Company currently has no definitive plans to acquire any such banks.
- INCREASED OPPORTUNITY TO DIVERSIFY. The proposed Holding Company
offers the ability to diversify the business of the Holding Company
and the Bank because the Holding Company could create or acquire
corporations engaged in bank-related activities. The Bank is more
restricted than the Holding Company in the types of activities in
which it may engage. Diversification by bank holding companies into
bank-related activities is governed by the Holding Company Act and the
regulations of the Federal Reserve Board promulgated under the Holding
Company Act. The range of activities in which the Holding Company may
engage through nonbank subsidiaries includes, subject to approval of
the Federal Reserve Board, loan service companies, mortgage companies,
independent trust companies, small loan and factoring companies,
equipment leasing companies, credit life and disability insurance
companies, and certain insurance, advisory, and brokerage operations.
The Holding Company may in the future engage directly or through
subsidiaries in one or more of those activities. However, the timing
and extent of those operations by the Holding Company will depend on
any factors, including competitive and financial conditions existing
in the future as well as the financial condition of the Holding
Company and the Bank.
- INCREASED FLEXIBILITY. The Bank's Board believes that the proposed
Reorganization will better prepare the Bank for responding flexibly
and efficiently to future changes in the laws and regulations
governing banks and bank-related activities. Often, opportunities
arise for bank holding companies that are not available to banks, and
vice versa. The bank holding company corporate structure would allow
management to take advantage of any new opportunities in banking and
bank-related fields that are made available to bank holding companies
but not to banks.
The Board believes that greater overall strength will result to the Bank through
the formation of the Holding Company. The formation of the Holding Company is
not part of a plan or effort to adversely affect any shareholder or to unduly
benefit any shareholder, director, or officer. Except for those shareholders
who properly exercise dissenters' rights or who tender their Bank Stock in the
Tender Offer, the proportionate interests of the Bank shareholders in the
Holding Company Stock will be identical to current proportionate interests in
the Bank Stock.
DESCRIPTION OF THE REORGANIZATION
The Holding Company intends to acquire all of the outstanding shares of
Bank Stock through the Reorganization. To perform the Reorganization, the
Holding Company will capitalize and own 1,000 shares of the New Bank, and the
New Bank will be a wholly-owned subsidiary of the Holding Company. The New
Bank will not conduct any banking business or any other business. It will be
a "shell" bank with no employees, no liabilities, no operations, and no
assets (except for a nominal $120,000 capital contribution required by law).
It will be formed for the sole purpose of the Reorganization.
To perform the Reorganization, the Bank will be merged into the New
Bank, with the New Bank as the surviving entity. Each share of Bank Stock
now held by the shareholders (except shares sold in the Tender Offer or
shares held by shareholders who properly dissent) will be converted into one
share of Holding Company Stock, and the Bank shareholders will become
shareholders of the Holding Company. In addition, by virtue of the merger of
the Bank into the New Bank, the Bank will become a wholly-owned subsidiary of
the Holding Company. After the Reorganization, the Bank will have 11,000
shares of stock outstanding, consisting of the 1,000 shares issued to the
Holding Company to initially capitalize the New Bank and the 10,000 shares of
the pre-Reorganization Bank Stock which were either acquired by the Holding
Company through voluntary one-for-one exchange for Holding Company Stock or
acquired in the Tender Offer. After the Reorganization, the Holding Company
will own the Bank, and the former Bank shareholders who do not sell their
shares of Bank Stock in the Tender Offer and who do not properly exercise
their dissenters' rights will own the Holding Company Stock, as follows:
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<PAGE>
CURRENT AFTER REORGANIZATION
Shareholders Shareholders
| |
10,000 shares (100%) 10,000 shares (100%) of Holding
of Company Stock
Bank Stock |
| |
| --REORGANIZATION-- Holding Company
| |
| 11,000 shares (100%)
| of Bank Stock
| |
Bank Bank
Promptly after the Effective Time of the Reorganization, the Bank will mail
transmittal forms and exchange instructions to each holder of record of Bank
Stock as of the close of business on August 4, 1997 to be used to surrender and
exchange certificates evidencing shares of Bank Stock for certificates
evidencing the shares of Holding Company Stock to which such holder is entitled
in the Reorganization. After receipt of such transmittal forms, each holder of
certificates formerly representing Bank Stock will be able to surrender such
certificates to the Bank, and each such holder will receive in exchange for
shares of Bank Stock certificates evidencing the number of whole shares of
Holding Company Stock to which such holder is entitled. SHAREHOLDERS OF THE
BANK SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL
FORM.
After the Effective Time of the Reorganization, each certificate
representing Bank Stock, until so surrendered and exchanged, will evidence only
the right to receive the number of whole shares of Holding Company Stock which
the holder is entitled to receive unless such holder has properly exercised
dissenters' rights. See "Rights of Dissenting Shareholders of Bank." The
holder of such unexchanged certificates will not be entitled to receive any
dividends or other distributions payable by the Holding Company until the
certificate has been exchanged. Subject to applicable laws, such dividends and
any other distributions will be paid without interest.
SPECIAL MEETING OF SHAREHOLDERS
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of Bank Stock
in connection with the solicitation of proxies by the Bank's Board of Directors
for use at the Special Meeting to be held at the Bank, 104 East Locust Street,
River Falls, Wisconsin 54022 on Wednesday, August 20, 1997 commencing at 3:30
p.m. Central Time, and at any adjournments or postponements thereof.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to the shareholders of the Bank on or about _________, 1997.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, holders of Bank Common Stock will consider and vote
upon a proposal to approve the Reorganization and such other matters as may
properly be brought before the Special Meeting or any adjournments or
postponements thereof. The Boards of Directors of the Bank and the Holding
Company currently know of no such matters.
The Bank's Board has unanimously approved the Reorganization and recommends
a vote FOR approval of the Reorganization. See "The First National Bank of
River Falls -- Recommendation of the Bank's Board of Directors."
The Bank's Board has fixed the close of business on August 4, 1997 as the
record date for determining the Bank shareholders entitled to notice of and to
vote at the Special Meeting or any adjournments or postponements thereof.
Therefore, only holders of record of shares of Bank Stock at the close of
business on August 4, 1997 will be entitled to notice of and to vote at the
Special Meeting. On that date, there were outstanding and entitled to vote
10,000 shares of Bank Stock, which were held by approximately 80 record holders.
Each outstanding share of Bank Stock entitles the
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<PAGE>
record holder to one vote on all matters to be acted upon at the Special
Meeting, either in person or by proxy. The presence at the Special Meeting in
person or by proxy of the holders of a majority of the issued and outstanding
shares of Bank Stock entitled to vote will constitute a quorum for the
transaction of business. The Bank's articles of association and by-laws as well
as applicable law do not appear to address the issue of whether a vote for
abstention is treated as a "yes" vote or "no" vote. Accordingly, for purposes
of voting at this Special Meeting of shareholders, abstentions will be treated
as "no" votes.
The OCC's regulations require that at least two-thirds (66-2/3%) of the
outstanding capital stock of a national bank approve a merger of that bank.
Because the Reorganization will be conducted as a merger of the New Bank and the
Bank, this requirement applies to the vote on the Reorganization. Thus, the
affirmative vote of the holders of at least two-thirds (66-2/3%) of the
outstanding shares of Bank Stock, or at least 6,667 shares, is required to
approve the Reorganization.
As of March 31, 1997, the directors and executive officers of the Bank
owned or controlled 63.71% percent, or 6,371 shares, of the shares of Bank Stock
outstanding. See "The First National Bank of River Falls -- Management" and "--
Security Ownership of Certain Beneficial Owners and Management." The directors
and executive officers of the Bank have indicated that they will not tender
their shares of Bank Stock in the Tender Offer, will not exercise their
dissenters' rights, and will vote to approve the Reorganization.
PROXIES
This Proxy Statement/Prospectus is being furnished to Bank shareholders in
connection with the solicitation of proxies by and on behalf of the Bank's Board
of Directors for use at the Special Meeting.
All shares of Bank Stock which are entitled to vote and which are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, if not revoked, will be voted at the Special
Meeting in accordance with the instructions indicated on such proxies. If no
instructions are indicated, such proxies will be voted FOR approval and adoption
of the Reorganization. If any other matters are properly presented at the
Special Meeting for consideration, including, among other things, consideration
of a motion to adjourn the Special Meeting to another time and/or place
(including, without limitation, for the purpose of soliciting additional
proxies), the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
Any shareholder executing and returning a proxy may revoke it by (i)
submitting a later proxy to the Bank before the taking of the vote at the
Special Meeting, (ii) giving written notice of revocation to the Bank before the
taking of the vote at the Special Meeting, or (iii) attending the Special
Meeting and voting in person (although attending the Special Meeting will not
revoke a proxy previously executed and submitted unless that shareholder
indicates at the Special Meeting that he or she wishes to vote at the Special
Meeting). Any subsequent proxy or written notice of revocation should be sent
so as to be delivered to The First National Bank of River Falls, 104 East Locust
Street, River Falls, Wisconsin 54022, Attention: Philip G. Betzel, President,
or hand delivered to Mr. Betzel, at or before the taking of the vote at the
Special Meeting. Failure to submit a proxy or to vote at the Special Meeting
has the same effect as a negative vote for purposes of approving or disapproving
the Reorganization.
The cost of preparing and mailing this Proxy Statement/Prospectus will be
borne by the Bank. In addition to solicitation by use of the mails, proxies may
be solicited by directors, officers and employees of the Bank in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees will not be additionally compensated for such solicitation
services but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. Arrangements will be made with custodians,
nominees and fiduciaries for forwarding proxy solicitation materials to
beneficial owners of shares held of record by such custodians, nominees and
fiduciaries, and the Bank will reimburse such custodians, nominees and
fiduciaries for the reasonable expenses incurred in connection therewith.
SHAREHOLDERS OF THE BANK SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
FEDERAL LAW PROVIDES APPRAISAL RIGHTS TO HOLDERS OF BANK STOCK WHO DISSENT
FROM THE REORGANIZATION, BUT ONLY IF STATUTORY PROCEDURES ARE CAREFULLY FOLLOWED
BY THE SHAREHOLDER. SEE "RIGHTS OF DISSENTING SHAREHOLDERS OF BANK."
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<PAGE>
OPERATION OF THE BANK FOLLOWING THE REORGANIZATION
The Bank's management anticipates that, following the Reorganization, the
business of the Bank will be conducted substantially unchanged from the manner
in which it is now being conducted. The Bank's name will be changed from "The
First National Bank of River Falls" to "First National Bank of River Falls."
The Bank will be operated under substantially the same management, and no
changes in personnel are anticipated as a result of the Reorganization. After
the Reorganization, the Bank will continue to be subject to regulation and
supervision by regulatory authorities to the same extent as currently
applicable. See "Supervision and Regulation." The Bank will continue to
prepare an annual report in the same format as in prior years, and the Holding
Company will send to all of its shareholders a consolidated annual report in a
similar format as that used in the Bank's report. The Holding Company will
convene an annual meeting of its shareholders at a similar time and for similar
purposes as the Bank's annual meeting.
ACCOUNTING TREATMENT OF THE TRANSACTION
The Reorganization will be treated similar to a "pooling of interests" for
accounting purposes. Accordingly, under generally accepted accounting
principles, the assets and liabilities of the Bank will be recorded in the
financial statements of the Holding Company at their carrying values at the
Effective Date.
CONDITIONS PRECEDENT TO THE REORGANIZATION
The Reorganization Agreement (Exhibit A) provides that the consummation of
the Reorganization is subject to certain conditions that have not yet been met,
including, but not limited to, the following:
1. The application by the Holding Company to be a registered bank holding
company under the Holding Company Act has been approved by the Federal
Reserve Board. Such application was approved by the Federal Reserve
Board on or about July 3, 1997.
2. The OCC has granted all required approvals for consummation of the
Reorganization. The OCC granted such approvals on or about
July 2, 1997.
3. The Reorganization has been approved by shareholders owning at least
two-thirds (66-2/3%), or 6,667 shares, of the outstanding Bank Stock.
4. The Holding Company and the Bank each has performed all its
obligations under the Reorganization Agreement.
5. The New Bank has become a party to the Reorganization Agreement.
These conditions are for the sole benefit of the Holding Company and the
Bank and may be asserted by them or may be waived or extended by them, in whole
or in part, at any time or from time to time. Any determination by the Holding
Company and the Bank concerning the conditions described above shall be final
and binding.
It is anticipated that these conditions will be met. Any waiver or
extension of conditions not met will be conducted only if, in the opinion of the
Boards of Directors of the Holding Company and the Bank, the action would not
have a material adverse effect on the benefits intended for holders of the
Holding Company Stock.
REGULATORY APPROVAL
As described above, the proposed Reorganization must be approved by the
OCC. The application for approval of the Reorganization was filed by the
Holding Company and the Bank with the OCC on or about May 22, 1997. The
application will also be furnished by the OCC to the Federal Reserve Board, the
FDIC and the United States Department of Justice. The application was
approved by the Federal Reserve Board and the OCC on or about July 3 and July
2, 1997, respectively.
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<PAGE>
The approval of the OCC reflects the OCC's view that the Reorganization
does not contravene the competitive standards of the law and is consistent with
regulatory concerns relating to bank management and to the safety and soundness
of the subject banking organizations. Such approval is not to be interpreted as
an opinion by the OCC that the Reorganization is favorable to the shareholders
of the Bank from a financial point of view or that the OCC has considered the
adequacy of the terms of the exchange. THE APPROVAL OF THE REORGANIZATION BY
THE OCC IN NO WAY CONSTITUTES AN ENDORSEMENT OR RECOMMENDATION OF THE
REORGANIZATION BY THE OCC. The proposed Reorganization will be consummated and
become effective on the date specified in the Certificate Approving Merger
issued by the OCC.
While it cannot be predicted what action may be taken by any of these
regulatory agencies, it is anticipated that if the requisite regulatory approval
is obtained, the Reorganization will be effected not later than September 30,
1997 or such later date as management of the Bank and the Holding Company deems
appropriate.
CLOSING DATE
The closing of the Reorganization is to take place on a date, the "Closing
Date," to be selected by the Holding Company, at 104 East Locust Street, River
Falls, Wisconsin 54022; provided, however, that all approvals, consents and
authorizations for the valid and lawful consummation of the Reorganization have
been obtained or waived at that time.
On the Closing Date, all of the Bank shareholders' right, title and
interest in and to the shares of the Bank Stock, without any further action on
the part of the shareholders, will automatically become and be converted into
only a right to receive the Holding Company Stock.
Shortly before the Closing Date, the Bank and the Holding Company will
prepare and deliver to the OCC a letter notifying the OCC of the consummation
date of the Reorganization, and the Reorganization will become effective, and
the Effective Time will occur, at the time and date specified in such letter.
Beginning on or shortly after the Effective Time, each shareholder of the Bank
is to deliver to the Bank or its agent the stock certificates for the shares of
Bank Stock owned by the shareholder duly and properly endorsed or accompanied by
a duly executed Letter of Transmittal and such other evidence of ownership as
the Bank shall reasonably request. Upon receipt of such stock certificates, the
Bank will issue and deliver to the shareholders a stock certificate representing
shares of Holding Company Stock that such shareholder is entitled to receive in
the Reorganization.
TERMINATION
The Reorganization Agreement may be terminated at any time by the Bank, the
Holding Company, or the New Bank, upon written notice which has been authorized
and approved by resolution adopted by its Board of Directors and delivered to
the other parties, if either (i) any of the conditions precedent to the
Reorganization are not fulfilled within a reasonable period of time, such period
to be determined by a majority of the Board of Directors of either the Bank, the
Holding Company, or the New Bank, in their sole and absolute discretion; or (ii)
for any other reason, the completion of the Reorganization is inadvisable in the
opinion of the majority of the Board of Directors of the Bank, the Holding
Company, or the New Bank. Upon any termination of the Reorganization Agreement,
it would be of no further effect, and there would be no liability by reason of
the Reorganization Agreement or the termination thereof on the parties thereto
or their respective directors, officers, employees, agents or shareholders.
TAX CONSIDERATIONS
CORPORATE INCOME TAX
After the Reorganization, the Holding Company will own at least 80% of the
outstanding shares of Bank Stock. This will permit the Holding Company and the
Bank to file a consolidated federal income tax return. The filing of a
consolidated federal income tax return will permit the deduction of any interest
expense the Holding Company may incur as an expense against the income of the
Bank, and any dividend paid to the Holding Company by the Bank on the shares of
Bank Stock held by the Holding Company will not be taxable as ordinary income to
the Holding Company. In addition, the ability to file a consolidated federal
income tax return may increase the cash flow available to the Holding Company to
meet its obligations. The State of Wisconsin does not permit consolidated
income tax returns.
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<PAGE>
The creation of the Holding Company creates a separate taxpayer under the
Internal Revenue Code of 1986, as amended (the "Code"). Before filing its
election to be treated as an S corporation, the Holding Company will be treated
as a C corporation under the Code. When it is a C corporation, the Holding
Company, through its consolidated tax return with the Bank and any other
subsidiaries that may be formed or acquired in the future, will be required to
pay federal and state income taxes on its net income. Immediately after the
formation of the Holding Company, the principal income to the Holding Company
will be dividends from the Bank. Those dividends will not be taxable income to
the Holding Company if the Holding Company holds at least 80% of the outstanding
shares of Bank Stock. Therefore, until such time as the Holding Company
generates substantial income from sources other than Bank dividends, it is
anticipated that it will not incur any significant tax liability.
As a separate taxpayer, when it is a C corporation, the Holding Company may
incur a separate tax on any liquidation of the Holding Company or on an
acquisition of the Holding Company's assets by a third party. Therefore, a
liquidation of the Holding Company or a sale of Bank Stock by the Holding
Company could generate a double-level tax -- that is, a tax on the Holding
Company and a tax on the Holding Company shareholders. A double-level tax can
be avoided, however, if the third party acquires the Holding Company Stock for
cash or acquires the Holding Company Stock in a tax-free reorganization.
INDIVIDUAL INCOME TAX
The Holding Company and the Bank have been advised by their counsel,
Winthrop & Weinstine, P.A., Minneapolis, Minnesota, in such counsel's opinion
("Tax Opinion"), that as a result of the Reorganization, for federal income
tax purposes: (i) no gain or loss will be recognized by the Bank shareholders
on the conversion of their shares of Bank Stock into shares of Holding
Company Stock; (ii) the income tax basis of the shares of Holding Company
Stock in the hands of the Bank shareholders will be the same as their basis
in the shares of the Bank Stock; and (iii) the holding period of the shares
of the Holding Company Stock in the hands of the Bank shareholders will
include the holding period of the shares of the Bank Stock, but only if the
shares of the Bank Stock are capital assets as of the time of the
Reorganization. A copy of the form of the Tax Opinion is attached hereto as
Exhibit C; the Tax Opinion also addresses matters pertaining to corporate tax
consequences of the Reorganization.
The Tax Opinion is based on the following representations of the Holding Company
and the Bank:
1. The fair market value of the Holding Company Stock to be received by
each shareholder of the Bank in the Reorganization will be
approximately equal to the fair market value of the Bank Stock
surrendered in exchange for the Holding Company Stock.
2. There is no plan or intention by the shareholders who own one percent
(1%) or more of the Bank Stock, and, to the best of the knowledge of
the management of the Bank, there is no plan or intention on the part
of the remaining shareholders of the Bank Stock, to sell, exchange, or
otherwise dispose of the Holding Company Stock to be received in the
transaction in an amount that would reduce the shareholders' ownership
of Holding Company Stock to a number of shares having a value, as of
the Effective Time of the Reorganization, of less than fifty percent
(50%) of the total value of shares of Bank Stock outstanding
immediately before the Effective Time. For purposes of this
representation, shares of Bank Stock exchanged for cash or other
property, surrendered by shareholders exercising dissenters' rights,
or exchanged for cash in lieu of fractional shares of Holding Company
Stock will be treated as outstanding Bank Stock as of the Effective
Time of the Reorganization. Moreover, shares of Bank Stock and shares
of Holding Company Stock held by shareholders of the Bank and otherwise
sold, redeemed, or disposed of prior or subsequent to the
Reorganization will be considered for purposes of this representation.
For purposes of the Tax Opinion, "management" means the Board of
Directors and executive officers of each organization identified in
this Proxy Statement/Prospectus.
3. The New Bank, as the surviving corporation, will acquire and hold
after the Reorganization at least ninety percent (90%) of the fair
market value of the net assets and at least seventy percent (70%) of
the fair market value of the gross assets of the Bank as of the time
immediately prior to the Effective Time of the Reorganization. (For
purposes of this representation, all payments to shareholders who
exercise their dissenters' rights, expenses of the Reorganization, and
all redemptions and distributions, except for normal dividends, made
by the Bank immediately before the Reorganization and which are part
of the plan of Reorganization will be considered assets held by the
Bank immediately prior to the Effective Time of the Reorganization.)
4. Prior to the Reorganization, the Holding Company will own all of the
issued and outstanding stock of the New Bank.
5. The New Bank has no plan or intention to issue an additional class of
stock or to issue additional shares of its common stock that would
result in the Holding Company's ownership of less than ninety percent
(90%) of the New Bank's common stock.
6. The Holding Company has no plan or intention to: (a) liquidate the New
Bank; (b) merge the New Bank with or into another bank or corporation;
(c) cause the New Bank to sell or to otherwise dispose of any of the
Bank's assets, except in the ordinary course of business; or (d) sell
or otherwise dispose of any stock of the New Bank.
7. At the Effective Time of the Reorganization, the New Bank will not have
outstanding any warrants, options, convertible securities, or any
other type of right pursuant to which any person could acquire stock
of the New Bank.
8. The Bank is not under the jurisdiction of a court in a case under
Chapter 11 of the United States Bankruptcy Code, as amended, or a
similar case.
9. Following the completion of the Reorganization, the New Bank will
continue the historic business of the Bank or use a significant
portion of the Bank's historic business assets in a business.
10. On the date the Effective Time of the Reorganization occurs, the fair
market value of the assets of the Bank will exceed the sum of its
liabilities plus the liabilities, if any, to which the assets are
subject.
11. The liabilities of the Bank assumed by the New Bank, and the
liabilities to which the transferred assets of the Bank are subject,
have been incurred in the ordinary course of the Bank's business.
12. The Holding Company has no plan or intention to redeem or otherwise
reacquire any of the Holding Company Stock issued in the
Reorganization.
13. The Holding Company, the Bank, the New Bank and the shareholders of
the Bank will pay their respective expenses, if any, incurred in
connection with the Reorganization.
14. There is no intercorporate indebtedness between the Holding Company,
the Bank or the New Bank which will be issued, acquired or settled at
a discount.
15. No stock of the New Bank will be issued in the Reorganization.
16. No two parties to the Reorganization are investment companies within
the meaning of Section 368(a)(2)(F)(iii) and (iv) of the Code.
17. The management of the Holding Company and of the Bank are not aware of
any facts that might adversely affect the determination that the
Reorganization is a tax-free reorganization.
18. There are good business reasons for the Reorganization.
Based on these representations, legal counsel is of the opinion under current
law that for federal income tax purposes:
1. The proposed Reorganization will constitute a reorganization within
the meaning of Section 368(a)(1)(A) of the Code by reason of Section
368(a)(2)(D) of the Code. The Reorganization will not be disqualified
by reason of the fact that the Holding Company Stock is used in the
Reorganization. (Code Section 369(a)(2)(D).)
2. No gain or loss will be recognized to the Bank on the transfer of
substantially all of its assets to the New Bank in exchange for
Holding Company Stock and the assumption by the New Bank of the
liabilities of the Bank.
3. No gain or loss will be recognized to the Holding Company or the New
Bank upon the receipt by the New Bank of substantially all of the
assets of the Bank in exchange for Holding Company Stock and the
assumption by the New Bank of the liabilities of the Bank.
4. The basis of the Bank assets in the hands of the New Bank will be the
same as the basis of those assets in the hands of the Bank immediately
prior to the Effective Time of the Reorganization.
5. The holding period of the assets of the Bank in the hands of the New
Bank will include the period during which such assets were held by the
Bank.
6. The basis of the stock of the New Bank in the hands of the Holding
Company will be increased by an amount equal to the basis of the Bank
assets acquired by the New Bank in the Reorganization and will be
decreased by the amount of liabilities of the Bank assumed by the New
Bank and the amount of liabilities to which the acquired assets of the
Bank are subject.
7. Gain, if any, will be realized by shareholders of the Bank who receive
both Holding Company Stock and cash in exchange for their Bank Stock
(including cash for part of their shares sold in the Tender Offer,
and Holding Company Stock in the Reorganization for the remainder of
their Bank Stock). Gain will be recognized by each such
shareholder, but not in excess of the amount of cash received. The
determination of whether the exchange has the effect of the
distribution of a dividend will be made on a
shareholder-by-shareholder basis; provided, however, that no opinion
is expressed with respect to the income tax consequences to each
shareholder of the Bank who receives cash immediately prior to, or
as a result of, the Reorganization.
8. Gain will be recognized to those Bank shareholders who receive solely
cash in exchange for their Bank Stock (including in the Tender Offer).
9. Where solely cash is received by a dissenting shareholder of the Bank
in exchange for his, her or its Bank Stock, the cash payment will be
treated as received by the shareholder as a distribution in
redemption of his, her or its Bank Stock subject to the conditions
and limitations of Section 302 of the Code.
10. The income tax basis of the Holding Company Stock to be received by
the shareholders of the Bank will be the same as the basis of the Bank
Stock surrendered in exchange for the Holding Company Stock.
11. The holding period of the Holding Company Stock to be received by the
shareholders of the Bank will include the period during which the
Bank Stock surrendered in exchange for the Holding Company Stock was
held, provided that the Bank Stock is held as a capital asset on the
date of the exchange.
No tax rulings from the Internal Revenue Service have been obtained
regarding the tax effects of the Reorganization, and the Tax Opinion will not
be binding on the Internal Revenue Service. Therefore, shareholders should
consult their own legal counsel or other tax advisor as to the specific tax
consequences of the Reorganization to them under the federal tax laws, as
well as any consequences under applicable state or local tax laws.
SHAREHOLDERS WHO EXERCISE DISSENTERS' RIGHTS AND RECEIVE CASH FOR THEIR
BANK STOCK SHOULD BE AWARE THAT SUCH TRANSACTION WILL BE A TAXABLE TRANSACTION
FOR FEDERAL INCOME TAX PURPOSES, AND THOSE SHAREHOLDERS ARE URGED TO CONSULT
THEIR TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES TO THEM UNDER THE FEDERAL
TAX LAWS, AS WELL AS ANY CONSEQUENCES UNDER APPLICABLE STATE OR LOCAL TAX LAWS.
FEDERAL SECURITIES REGULATION
The offer of the Holding Company Stock to holders of Bank Stock is not
being made to (nor can it be accepted from or on behalf of holders of Bank Stock
in any state or other jurisdiction in which the making of the offer or the
acceptance thereof would not be in compliance with the securities laws of such
jurisdiction. The Holding Company is not, and shall not be, obligated to
acquire any shares of Bank Stock or issue or deliver any shares of Holding
Company Stock in any jurisdiction in which the agreement to do so would not
comply with the securities laws of such jurisdiction. However, the Holding
Company, at its discretion, may take such action as it may deem necessary or
desirable to comply with the securities laws of any such jurisdictions.
This transaction may be registered in certain states according to the laws
of those states. No securities commission, securities department, or similar
office or any state has approved or disapproved the Holding Company Stock to be
issued in the Reorganization or has passed upon the accuracy or adequacy of this
Prospectus. Any representation to the contrary may be a criminal offense.
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<PAGE>
RESALE OF HOLDING COMPANY STOCK
SUMMARY OF CONDITIONS OF RESALE
The following summary of the conditions under which shareholders of the
Holding Company may sell their shares of Holding Company Stock after the
Effective Time is qualified in its entirety by the more detailed discussion
below and by the provisions of the federal Securities Act of 1933, as amended
("Securities Act"), discussed herein.
As described below, holders of Holding Company Stock will be able to resell
their shares in the following circumstances:
- All shareholders of the Holding Company Stock generally will be able
to sell their shares in private transactions, provided certain
conditions are met, and generally will be able to transfer such shares
by will, for estate planning purposes, and pursuant to the laws of
descent and distribution.
- Shareholders who are not "affiliates" of the Bank or the Holding
Company (as the term "affiliates" is described below) at the time of
resale generally will be able to resell their Holding Company Stock
without restriction pursuant to Rule 145 under the federal Securities
Act.
- Shareholders who are "affiliates" of the Bank or the Holding Company
or who have been "affiliates" during the year beginning with the
Effective Time will be able to resell their shares of Holding Company
Stock under Rule 145 if certain conditions are met, including that the
Holding Company is a reporting company under the federal Securities
Exchange Act of 1934 ("Exchange Act") and has filed all of its reports
required to be filed with the Commission under the Exchange Act.
- Shareholders who are not "affiliates" of the Bank or the Holding
Company and have not been "affiliates" for at least 90 days prior to
the resale of the Holding Company Stock may sell their shares under
Rule 145 during the period beginning one year and ending two years
after the Effective Time if the Holding Company is subject to the
reporting requirements of the Exchange Act and has filed all of its
reports required to be filed with the Commission under the Exchange
Act. In addition, such former affiliates may sell their shares of
Holding Company Stock without restriction under the federal Securities
Act beginning two years after the Effective Time.
The discussion of restrictions on resale in this section entitled "The
Reorganization -- Resale of Holding Company Stock" is limited to federal
securities law. Shareholders who want to transfer their Holding Company Stock
are also subject to additional restrictions imposed on certain transfers of
shares by the terms of the Call Option and to any restrictions or limitations
imposed by state securities or Blue Sky laws. Each stock certificate evidencing
Holding Company Stock will bear a legend summarizing the restrictions on resale
and requiring an opinion of counsel that the resale is exempt from registration
under federal and state securities laws. See "Comparison of Bank Stock with
Holding Company Stock -- Call Option." Therefore, shareholders should consult
their own legal counsel prior to making any transfers of shares of Holding
Company Stock.
PRIVATE RESALES BY AFFILIATES AND NON-AFFILIATES GENERALLY ALLOWED
After the Reorganization, generally all shares of Holding Company Stock may
be sold by all shareholders in private transactions under certain conditions.
These conditions include the requirement that the buyer purchase the shares only
for investment and not for immediate resale, that the buyer is familiar with the
financial condition and business of the Holding Company, and that the buyer is
sophisticated in financial and business matters. In addition, all holders of
shares of Holding Company Stock also may generally transfer such shares by gift,
for estate planning purposes, or by will or the laws of descent and
distribution.
RULE 145 AVAILABLE AS AN ADDITIONAL MEANS OF RESELLING HOLDING COMPANY STOCK
The issuance of the Holding Company Stock in the Reorganization has been
registered under the Securities Act. This provides another means under federal
securities laws for shareholders of the Holding Company to resell their Holding
Company Stock, as explained below.
DEFINITION OF "AFFILIATE." Shareholders of the Holding Company who are
"affiliates" of the Bank or the Holding Company within the meaning of the
Securities Act are treated differently than non-affiliates with respect to the
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<PAGE>
resale of their Holding Company Stock pursuant to Rule 145 under the Securities
Act. Shareholders who are affiliates of the Bank or the Holding Company at the
time of the proposed resale are subject to certain restrictions on the resale of
their shares, as described below. Under federal securities laws, "affiliates" of
an entity are those individuals, corporations, partnerships, or other entities
that control, are controlled by, or are under common control with that entity.
Generally, affiliates of the Bank and the Holding Company are their directors,
executive officers, major shareholders, and persons related to such affiliates.
For example, if a Director of the Bank owned all of the stock of Company X,
which in turn owned shares of Bank Stock, both the Director and Company X would
be considered affiliates for purposes of federal securities laws.
RESALES BY NON-AFFILIATES UNDER RULE 145. Holding Company Stock may be sold
without registration or limitation under the Securities Act by shareholders of
the Holding Company who are not affiliates of either the Bank or the Holding
Company. Therefore, after the Effective Time, such non-affiliates may sell
Holding Company Stock under the federal Securities Act without restriction and
without complying with the conditions for a private sale of shares, as described
above. However, and also as described above, such sales could be limited and
restricted by the terms of the Call Option or by state securities or Blue Sky
laws. See "Comparison of Bank Stock with Holding Company Stock -- Call Option."
RESALES BY AFFILIATES UNDER RULE 145. Under Rule 145 under the Securities
Act, generally affiliates of the Bank and Holding Company may sell their shares
of Holding Company Stock received in the Reorganization if, at the time of
resale, (i) the Holding Company is current in filing its reports with the
Securities and Exchange Commission ("Commission"), (ii) the number of shares of
Holding Company Stock being sold by such affiliate during any 90-day period does
not exceed 1% of the total number of outstanding shares of Holding Company
Stock, and (iii) the sale is made in a "broker's transaction" (as defined in
Rule 144 under the Securities Act). Because the Holding Company plans to
discontinue filing reports with the Commission on or before January 30, 1998, it
may be difficult for holders of Holding Company Stock who are affiliates of the
Bank or the Holding Company to sell their Holding Company Stock under Rule 145
after that date. However, sales of Holding Company Stock in private sales or
transfers for estate planning purposes generally will still be permitted.
RESALES BY CERTAIN FORMER AFFILIATES. Under Rule 145, a person who
previously was an affiliate of the Bank or the Holding Company but who is no
longer an affiliate of the Holding Company may resell shares of Holding Company
Stock during the one-year period commencing with the Effective Time under Rule
145 pursuant to the conditions imposed by Rule 145 for resales of shares by
affiliates, which are described above. Beginning one year after the Effective
Time, a former affiliate may resell shares under Rule 145 if the Holding Company
then is current in filing its required reports with the Commission. Rule 145
also provides that beginning two years after the Effective Time, a person who
has not been an affiliate of the Holding Company for at least three months may
resell Holding Company Stock without complying with any conditions imposed by
Rule 145. Because the Holding Company plans to discontinue filing reports with
the Commission on or before January 30, 1998 (as explained above), it may be
difficult for holders of Holding Company Stock who are non-affiliates of the
Bank or the Holding Company to sell their Holding Company Stock under Rule 145
after that date until they have held the Holding Company Stock for at least two
years, in which case the requirement that the Holding Company be current in
filing its reports with the Commission does not apply. However, sales of
Holding Company Stock in private sales or transfers for estate planning purposes
generally will still be permitted.
This Proxy Statement/Prospectus may not be used by an affiliate of the Bank
or the Bank Holding Company for the resale of Holding Company Stock received in
the Reorganization.
EXPENSES OF REORGANIZATION
If the Reorganization is consummated, the Holding Company and the Bank will
pay their respective costs and expenses, if any, incurred in connection with the
Reorganization. If the Reorganization is not consummated, all costs and
expenses will be paid by the Bank. It is estimated that those costs and
expenses will be approximately $85,000, plus an estimated $2,000 of accrued
interest on the Bridge Loan.
RIGHTS OF DISSENTING SHAREHOLDERS OF BANK
Subsections 215a(b), (c), and (d) of the National Bank Act ("Section
215a"), a copy of which is attached hereto as Exhibit B, set forth the procedure
to be followed by any shareholder of the Bank who wishes to dissent from the
Reorganization and obtain the value of his or her shares of Bank Stock in cash
instead of obtaining Holding Company
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<PAGE>
Stock in the Reorganization. Any Bank shareholder who wants to exercise his or
her right to dissent should carefully review Exhibit B because the following
description is a summary of those subsections and is qualified in its entirety
by reference to Exhibit B. THE FAILURE OF A SHAREHOLDER TO TIMELY AND PROPERLY
COMPLY WITH THE PROCEDURES PRESCRIBED BY EXHIBIT B WILL RESULT IN THE LOSS OF
THAT SHAREHOLDER'S RIGHT TO DISSENT FROM THE REORGANIZATION AND OBTAIN THE FAIR
VALUE OF HIS OR HER SHARES OF BANK STOCK IN CASH.
Pursuant to the provisions of Section 215a, in order to exercise
dissenters' rights, a Bank shareholder must (i) vote against the Reorganization
at the Special Meeting or give written notice prior to the vote at the Special
Meeting that he or she dissents from the Reorganization and (ii) make a written
request to the Bank to receive the value of his or her shares in cash, and that
written request must be accompanied by the surrender of his or her Bank Stock
certificates delivered to the Bank within thirty (30) days after the Effective
Time. Any such notices and requests described herein should be addressed to Mr.
Philip G. Betzel, The First National Bank of River Falls, 104 East Locust
Street, River Falls, Wisconsin 54022. The law does not provide for a dissent
with respect to less than all of a dissenting shareholder's shares.
Section 215a provides that the value of the shares of Bank Stock of any
dissenting shareholder must be ascertained, as of the Effective Time, by an
appraisal made by a committee ("Committee") consisting of one person selected by
the vote of the holders of the majority of the Bank Stock who have properly
exercised their dissenting shareholders' rights, one person selected by the
directors of the Bank resulting from the Reorganization, and one person selected
by the other two so selected. The value determined by any two of the three
appraisers shall govern. It is the position of Bank's management that
dissenting shareholders must pay for the costs of the appraiser selected by them
plus 50% of the costs of the third appraiser selected by the first two
appraisers. If an appraisal by the OCC is requested or required in accordance
with Section 215a (as described below), the cost of the OCC's appraisal must be
paid by the Bank resulting from the Reorganization.
If the value of the Bank Stock fixed by the Committee is not satisfactory
to any dissenting shareholder who has properly requested payment, that
shareholder may, within five days after being notified of the appraised value of
such shares, appeal to the OCC, who must then cause a reappraisal to be made.
The value of a dissenting Bank shareholder's shares of Bank Stock as determined
by such reappraisal is final and binding.
If, within 90 days from the Effective Time, for any reason one or more of
the appraisers is not selected as described above, or the Committee fails to
determine the value of such shares, the OCC shall, upon the written request of
any interested party to the "Office of the Comptroller of the Currency, One
Financial Plaza, Suite 2700, 440 South LaSalle Street, Chicago, Illinois 60605-
1073," cause an appraisal to be made, which shall be final and binding on all
parties.
Banking Circular 259, which describes the valuation methods used by the OCC
to estimate the value of a bank's shares when required in a merger transaction,
should be read carefully by shareholders contemplating exercise of dissenters'
rights under the National Bank Act. A copy of Banking Circular 259 is available
from the Bank upon request.
Any shareholder of the Bank who properly exercises his or her dissenting
shareholders' rights will be notified in writing of the Effective Time by
certified mail, return receipt requested, mailed to the last known address of
any such shareholder as shown on the Bank's records, within ten days after the
Effective Time.
A Bank shareholder's failure to vote against the proposed Reorganization
will not constitute a waiver of that shareholder's appraisal rights, as
enumerated in Section 215a of the National Bank Act, if the shareholder gives
notice in writing prior to the vote on the Reorganization at the Special Meeting
as provided above.
ANY SHAREHOLDER WHO IS CONSIDERING EXERCISING DISSENTING SHAREHOLDERS'
RIGHTS IS URGED TO SEEK INDEPENDENT LEGAL COUNSEL.
IF A BANK SHAREHOLDER PROPERLY EXERCISES DISSENTERS' RIGHTS, THEN, AS OF
THE EFFECTIVE TIME OF THE REORGANIZATION, ALL OF THE BANK STOCK OWNED BY SUCH
SHAREHOLDER WILL CEASE TO REPRESENT ANY OWNERSHIP RIGHTS IN THE BANK AND WILL BE
CONVERTED INTO THE RIGHT TO RECEIVE THE FAIR VALUE FOR THOSE SHARES IN CASH, AS
REQUIRED BY LAW.
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<PAGE>
FIRST NATIONAL BANCORP OF RIVER FALLS, INC.
HISTORY, BUSINESS AND PROPERTIES
The Holding Company was incorporated as a Wisconsin business corporation
under the Wisconsin Business Corporation Law, Chapter 180 of the Wisconsin
Statutes, on May 19, 1997 at the direction of the Bank's management. The
Holding Company was formed to acquire the Bank Stock and to engage in business
as a bank holding company under the Holding Company Act. Copies of the Articles
of Incorporation and Bylaws of the Holding Company will be provided to any Bank
shareholder upon request.
The Holding Company is in the organizational and developmental stage and
has no earnings or history of operation. The Holding Company currently has no
employees, no business, owns no property and has not issued any capital stock,
including shares of Holding Company Stock. The Holding Company will own all of
the New Bank Stock immediately prior to the Reorganization. The Holding Company
is not a party to any legal proceedings.
CAPITALIZATION
The following table sets forth the capitalization (dollars in thousands) of
the Holding Company as of March 31, 1997 and the pro forma capitalization of the
Holding Company assuming the Holding Company becomes a bank holding company by
virtue of the merger of the Bank with and into the New Bank. In addition,
certain capital ratios are presented. The table should be read in conjunction
with the Consolidated Financial Statements and related notes contained elsewhere
herein.
<TABLE>
<CAPTION>
As of March 31, 1997
---------------------------
Actual Pro Forma (1)
--------- -------------
<S> <C> <C>
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ --
--------- ---------
Stockholders' equity
Common stock, $100 par value; 20,000 shares authorized;
-0- shares issued and outstanding (actual);
9,000 shares issued and outstanding (pro forma) . . . . -- 900
Additional paid-in capital . . . . . . . . . . . . . . . . -- 1,220
Retained earnings . . . . . . . . . . . . . . . . . . . . . . -- 10,971
Unrealized gain on securities available for sale, net . . . -- 446
---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . -- 13,537
--------- ---------
Total capitalization . . . . . . . . . . . . . . . . . . . . . $ $ 13,537
--------- ---------
--------- ---------
Regulatory capital ratios:
Tier 1 risk-based capital. . . . . . . . . . . . . . . . -- 13.3%
Total risk-based capital . . . . . . . . . . . . . . . . -- 14.6%
Leverage . . . . . . . . . . . . . . . . . . . . . . . . -- 8.6%
</TABLE>
- -------------
(1) The pro forma adjustments to capital include the following:
The merger of the Bank into the New Bank. The Bank Stock and additional
paid-in capital are $1,000,000 each prior to the Effective Time of
the Reorganization and after the Tender Offer. New Bank's common
stock and additional paid-in capital are $100,000 and $20,000,
respectively, prior to the Reorganization. Subsequent to the
Effective Time of the Reorganization, the New Bank's common stock
and additional paid-in capital will be $1,100,000 and $1,020,000,
respectively.
The Bank's retained earnings prior to the Effective Time of the
Reorganization also reflect the assumed payment of a pre-merger dividend of
$450,000, which was paid in June 1997, and a post-merger dividend of
$2,437,000 to be paid in connection with the Reorganization.
The Holding Company's retained earnings reflect the historical retained
earnings of the Bank, adjusted for the dividends described above, and
interest expense of $2,000 attributable to the Bridge Loan.
The Holding Company has no present plans to engage in any activities other
than as a holding company for the capital stock of the Bank. The Holding
Company's management believes, however, that the opportunities available to a
bank holding company for diversification of its business and raising of capital
cause the bank holding company to be a more advantageous form of operation than
a bank. The Holding Company may examine and may pursue opportunities from time
to time that arise for expansion of its operations and activities. See "The
Reorganization -- Reasons for the Reorganization."
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<PAGE>
MANAGEMENT
The development and management of the Holding Company will be dependent
upon the efforts and skills of the following individuals, who are the initial
executive officers and directors of the Holding Company and all of whom serve as
executive officers and/or directors of the Bank:
NAME AGE POSITION WITH BANK AND HOLDING COMPANY
- ---- --- --------------------------------------
Philip G. Betzel 52 President and Director
Donna Smith 69 Chairman of the Board of Directors
Curtis Armstrong 53 Director
Frederick Benson 45 Director
Dr. Roland Hammer 69 Director
Ellroy Lund 62 Director
Jeffrey McCardle 40 Senior Vice President and Director
Patricia Smith Neir 45 Director
Sandra Smith Wurm 44 Director
PHILIP G. BETZEL has been President and Vice Chairman of the Bank since
August 1994, a Director of the Bank since January 1984, and the President and a
Director of the Holding Company since its incorporation on May 19, 1997. Before
being appointed as President of the Bank, Mr. Betzel was Executive Vice
President of the Bank from January 1984 until August 1994.
DONNA SMITH has been Chairman of the Bank since August 1994 and has been a
Director of the Bank since January 1972. She has served as Chairman and a
Director of the Holding Company since May 19, 1997. Donna Smith is the
mother of Patricia Smith Neir and Sandra Smith Wurm.
CURTIS ARMSTRONG has been a Director of the Bank since September 1995 and a
Director of the Holding Company since May 19, 1997. Mr. Armstrong has been
President of TFC Corp., Inc., a manufacturer of waste container compactors,
since February 1996. From January 1974 until October 1995, he was operations
manager and then President of Mycogen Seeds in Prescott, Wisconsin. Mr.
Armstrong also served as a Director of Pierce County Bank in Ellsworth,
Wisconsin, from 1994 until that bank's 1995 acquisition by Valley Bank.
FREDERICK BENSON has been a Director of the Bank since January 1994 and a
Director of the Holding Company since May 19, 1997. Mr. Benson has been
President of Lund's Hardware, Inc. in River Falls, Wisconsin, for more than five
years.
DR. ROLAND HAMMER has been a Director of the Bank since 1983 and a Director
of the Holding Company since May 19, 1997. Dr. Hammer has been a physician with
the River Falls Medical Clinic in River Falls, Wisconsin, for more than five
years.
ELLROY LUND has been a Director of the Bank since January 1996 and a
Director of the Holding Company since May 19, 1997. He has been President of
Lund Builders, a home builder in River Falls, Wisconsin, for more than five
years.
JEFFREY MCCARDLE has been Senior Vice President and a Director of the Bank
since January 1995 and a Director of the Holding Company since May 19, 1997. He
was Vice President of the Bank from January 1984 through December 1994.
PATRICIA SMITH NEIR has been a Director of the Bank since January 1992 and
a Director of the Holding Company since May 19, 1997. She has been an Account
Executive with Xerox Corporation for over five years. Patricia Smith Neir is
the daughter of Donna Smith and the sister of Sandra Smith Wurm.
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<PAGE>
SANDRA SMITH WURM has been a Director of the Bank since January 1992 and a
Director of the Holding Company since May 19, 1997. She also is a part-time
special projects employee of the Bank and has served in that capacity since
January 1995. Sandra Smith Wurm is the daughter of Donna Smith and the
sister of Patricia Smith Neir.
The Directors serve until the next shareholders' meeting at which Directors
are elected or until their earlier removal, resignation or death. Executive
officers are elected annually by the Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
assumed beneficial ownership of the Holding Company Stock immediately after the
Effective Time of the Reorganization by (i) each director of the Holding
Company, (ii) the President of the Holding Company, (iii) all directors and
executive officers of the Holding Company as a group, and (iv) each person known
by management of the Holding Company to own more than 5% of the Bank Stock. The
table assumes that no shareholder of the Bank is exercising dissenters' rights
or tendering shares in the Tender Offer, of which there can be no assurance.
SHARES OWNED
------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS (1) NUMBER PERCENT OF CLASS(2)
----------------------------------------- ------ -------------------
Smith Family (3) . . . . . . . . . . . . 5,575 55.75%
Philip G. Betzel . . . . . . . . . . . . 605 (4) 6.05%
Jeffrey McCardle . . . . . . . . . . . . 72 (5) *
Dr. Roland Hammer. . . . . . . . . . . . 69 (6) *
Fredrick Benson. . . . . . . . . . . . . 30 (7) *
Curtis Armstrong . . . . . . . . . . . . 10 *
Ellroy Lund. . . . . . . . . . . . . . . 10 *
Patricia Smith Neir (3). . . . . . . . . 0 0
Donna Smith (3). . . . . . . . . . . . . 0 0
Sandra Smith Wurm (3). . . . . . . . . . 0 0
All directors and executive officers
as a group (nine persons) . . . . 6,371 63.71%
- ------------------------------------------
*Less than 1%.
(1) Except as indicated in the footnotes to this table, the persons named in
the table will have sole voting and investment power with respect to all
shares of Holding Company Stock shown as beneficially owned by them.
Unless otherwise indicated, the address of the individuals named in the
table is The First National Bank of River Falls, 104 East Locust Street,
River Falls, Wisconsin 54022.
(2) Based on 10,000 shares of Holding Company Stock outstanding as of the
Effective Time.
(3) The Smith Family consists of numerous individuals and trusts. The three
members of the Smith Family identified in the Table above are Directors of
the Bank and the Holding Company. Members of the Smith Family act in
concert with respect to voting the 5,575 shares of Bank Stock owned by
them, although there is no
-24-
<PAGE>
formal written agreement or voting trust with respect to the voting of such
shares. No shares of Bank Stock of the Smith Family now held in trusts are
attributed to the trustees or the beneficiaries of the trusts because the
trustees have historically voted these shares as directed by the Smith
Family.
(4) Includes 595 shares held of record by Philip G. Betzel and his spouse, Mary
A. Betzel.
(5) Includes 62 shares held of record jointly by Jeffrey M. McCardle and his
spouse, Mary Ellen McCardle.
(6) Includes 19 shares held of record by the Marion Hammer Trust; Mrs. Marion
Hammer is Dr. Hammer's spouse.
(7) Does not include 412 shares held of record by Mr. David E. Benson, who is
the father of Mr. Frederick Benson, and 413 shares held by Ruth Anne
Benson, who is the mother of Mr. Frederick Benson; Mr. Benson disclaims
beneficial ownership of these shares.
DESCRIPTION OF HOLDING COMPANY STOCK
The Holding Company's authorized capital stock consists of 20,000 shares of
Holding Company Stock, all of one class, designated as common stock, none of
which shares, as of the date hereof, is issued or outstanding. The maximum
number of shares of Holding Company Stock which will be issued to the holders of
Bank Stock, upon the terms and subject to the conditions of the Reorganization,
is 10,000 shares. The Holding Company currently has no plans to sell,
distribute, or otherwise issue the remaining 10,000 shares of authorized but
unissued Holding Company Stock. The excess 10,000 shares have been authorized
at this time to provide the Holding Company with greater flexibility to expand
or diversify its business in the future.
For more information about the Holding Company Stock, see "Comparison of
Bank Stock with Holding Company Stock."
EXECUTIVE COMPENSATION
Since its incorporation and to the date hereof, the Holding Company has not
paid any compensation to any of its directors or executive officers, has not
proposed compensation to be made in the future to any of its directors or
executive officers, and has not established standards or other arrangements by
which its directors are to be compensated for services as directors, including
any amounts payable for committee participation or special assignments. No
profit-sharing plan or any other benefit plan exists or is contemplated for the
Holding Company. No change in the compensation or benefits to the Bank
employees is contemplated by reason of the Holding Company formation.
TRANSACTIONS WITH RELATED PARTIES
The Holding Company has not engaged in any transactions or entered into any
contracts with any of its directors or executive officers. No such transactions
or contracts are anticipated at this time by the Holding Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND CERTAIN ANTI-TAKEOVER PROVISIONS
As set forth in Sections 180.0850 through 180.0859 of the Wisconsin
Statutes, the Bylaws of the Holding Company require that the Holding Company
indemnify a person from all reasonable expenses and liabilities asserted
against, incurred by, or imposed on that person in any proceeding to which he or
she is made or threatened to be made a party by reason of being or having been
an officer or director of the Holding Company. Indemnification will not be made
if the person breached a duty to the Holding Company in one of the following
ways: (i) a willful failure to deal fairly with the Holding Company in a matter
involving a conflict of interest; (ii) a violation of criminal law, unless the
person had reasonable cause to believe his or her conduct was lawful or had no
reasonable cause to believe his or her conduct was unlawful; (iii) a transaction
from which the person derived improper personal profit; or (iv) willful
misconduct. The right to indemnification includes, in some circumstances, the
right to receive reimbursement of costs and expenses in such a proceeding as
they are incurred.
Insofar as indemnification for liabilities arising under the Securities Act
may be available to directors, officers, and controlling persons of the Holding
Company pursuant to the foregoing provisions of its Bylaws or otherwise, the
Holding Company 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.
-25-
<PAGE>
The Holding Company has purchased insurance against liabilities asserted
against its directors, officers, employees, or agents, whether or not it has the
power to indemnify them against such liabilities under the provisions of its
Bylaws or pursuant to applicable law.
Sections 180.1140 through 180.1144 of the Wisconsin Business Corporation
Law ("WBCL") prohibit certain "business combinations" (such as mergers) between
a target "resident domestic corporation" and a person beneficially owing 10% or
more of the outstanding voting stock of such corporation (an "interested
stockholder") within three years after the date such person became a 10%
beneficial owner (the "acquisition date"). However, the business combination is
permitted under such statutes if the business combination or the initial
acquisition of such stock has been approved before the acquisition date by the
target corporation's board of directors. After such three-year period, a
business combination between the target corporation and the interested
stockholder may take place only if approved by the holders of a majority of the
voting stock not beneficially owned by the interested stockholder, or if the
combination satisfies certain adequacy-of-price standards intended to provide a
fair price for shares held by disinterested stockholders or under certain other
circumstances. The Holding Company may meet the definition of a "resident
domestic corporation" upon completion of this offering.
The foregoing provisions of the WBCL could have the effect, among others,
of discouraging take-over proposals for the Holding Company or impeding a
business combination between the Holding Company and a major shareholder of the
Holding Company.
SUBCHAPTER S STATUS OF HOLDING COMPANY
Management of the Holding Company intends to file an election to convert
its tax status from a C corporation to an S corporation effective for the
taxable year beginning January 1, 1998. This election requires the consent
of all of the Holding Company shareholders. If the consent of all of the
Holding Company shareholders is not obtained, the Holding Company will not
make the S corporation election, and the Reorganization will otherwise
proceed as described in this Proxy Statement/Prospectus. Management also
intends to make an election to convert the Bank and any other subsidiary of
the Holding Company to Qualified Subchapter S Subsidiaries to provide for S
corporation treatment for the income of the subsidiaries. The main objective
of making the S elections is to avoid the double tax which is imposed on C
corporations.
As a C corporation, the Holding Company and its subsidiaries are required
to pay a corporate level tax on their earnings. When Holding Company profits
are distributed to the shareholders in the form of dividends, the shareholders
must pay tax on the dividend income, resulting in a double tax. As an S
corporation, the income is taxed only once. The earnings are reported to the
shareholders to be included in their taxable income as the income is earned by
the Holding Company and its subsidiaries. Distributions to the shareholders, to
the extent paid out of the earnings which they have included in their income,
are not taxed. The undistributed earnings of the Holding Company which are
generated subsequent to the effective date of the S election will increase the
shareholders' basis in their Holding Company Stock. The combination of the
shareholder tax on the earnings, the nontaxable distributions and the stock
basis adjustments allow the shareholders to avoid double taxation.
In many cases, the individual tax liability which is paid by the
shareholders on the earnings of the Holding Company and its subsidiaries as S
corporations will be higher than the corporate tax which would have been paid by
the Holding Company and its subsidiaries as C corporations. However, management
anticipates that the reduced taxes from the avoidance of the double tax on the S
corporation distributions and the potential future tax savings which may result
from the increase in the basis of the Holding Company Stock upon a sale will be
larger than the increase in the taxes paid on the earnings. The resulting
benefit to any one shareholder will depend on the specific circumstances of each
shareholder.
For the Holding Company to convert its tax status to an S corporation,
all of the shareholders must be eligible shareholders, and all of the
shareholders must make a written consent to the election. Generally,
eligible shareholders consist of individuals who are United States residents,
certain United States trusts, and pension, profit sharing and stock bonus
plans qualified under Section 401(a) of the Code, as well as certain domestic
charitable organizations exempt from taxation under Section 501(a) or
501(c)(3) of the Code. Once the election is in effect, future shareholders
will be limited to such eligible S corporation shareholders and will be
deemed to have consented to the election. The election may be terminated in
the future with the approval of the shareholders owning a majority of the
Holding Company Stock or will be terminated by operation of law if the
Holding Company fails to meet the requirements of an S corporation. Once an
S corporation election has been in effect and is subsequently terminated, a
corporation cannot reelect S corporation status for a period of five years.
Relief from inadvertent termination by operation of law can be granted by the
Internal Revenue Service under certain circumstances.
A disadvantage of converting to S status is the exposure to the built-in
gain ("BIG") tax. The BIG tax is a double level tax which is applied at both
the corporate level and the individual level. This tax is applied to any net
built-
-26-
<PAGE>
in gains which are recognized by the Holding Company and its subsidiaries during
the ten-year period commencing with the effective date of the S election.
The built-in gain at the time of the election is the amount of the fair
market value of an asset over its tax basis at that time. If this gain is
recognized through a sale within the ten-year period following the Subchapter S
election, the BIG tax will be triggered. This will effectively tax the gain in
a manner similar to the tax which would have been required if a C corporation
recognized the gain and distributed the net earnings to the shareholder in the
form of a dividend. Gains on assets sold after ten years and gains on assets
acquired after the date of the S election are not subject to the BIG tax. In
addition, since the built-in gain is limited to the excess of the fair market
value of the asset in excess of the tax basis at the date of the S election, all
future appreciation is not subject to double taxation.
Management currently has no intentions which would trigger the BIG tax,
except as described in the following paragraph.
In order for the Bank to be eligible for the Qualified Subchapter S
Subsidiary election, it must change the method by which it calculates its bad
debt expense for tax purposes. It currently uses the experience method and will
be required to change to the specific charge-off method. The balance of the
loan loss reserve recognized using the experience method as of the effective
date of the election will be recaptured into taxable income over a six-year
period. This recapture of income will be a built-in gain. Management currently
estimates that this built-in gain will amount to $475,000. See "The First
National Bank of River Falls -- Subchapter S Election and Built-In Gains Tax."
TENDER OFFER AND BRIDGE LOAN
During the period from August 4, 1997 until 5:00 p.m., Central Time, on
September 12, 1997, the Holding Company will be conducting the Tender Offer for
up to 1,000 of the outstanding shares of Bank Stock for $2,250 per share. If
more than 1,000 shares of Bank Stock are tendered in the Tender Offer, the
Holding Company will purchase 1,000 shares of Bank Stock, and each shareholder
tendering shares in the Tender Offer will be entitled to sell a number of shares
that is proportionate to the maximum of 1,000 shares the Holding Company will
accept in the Tender Offer as compared to the total number of shares tendered in
the Tender Offer. For example, if a shareholder owned 150 shares of Bank Stock
and tendered all of those shares in the Tender Offer, and a total of 1,250
shares of Bank Stock were tendered in the Tender Offer, the Holding Company
would buy from that shareholder 120 shares of Bank Stock, determined by
multiplying the 150 shares of Bank Stock owned by the shareholder by a fraction,
the numerator of which is the total of 1,000 shares to be purchased by the
Holding Company in the Tender Offer and the denominator of which is the total of
1,250 shares tendered in the Tender Offer. Subject to such pro rata reduction,
a shareholder tendering any shares of Bank Stock in the Tender Offer must tender
all shares of Bank Stock owned by him or her.
To fund the purchase of the shares of Bank Stock in the Tender Offer, the
Bank will obtain the Bridge Loan in an amount up to $2,370,000. In addition to
funding the purchase of the shares of Bank Stock in the Tender Offer (for a
maximum purchase price of $2,250,000), the proceeds of the Bridge Loan will be
used to make the minimum $120,000 capital contribution to the New Bank required
by law. After the Reorganization, management of the Bank will cause the Bank to
declare and pay a dividend to the Holding Company in an amount sufficient to
repay the total amount of the Bridge Loan plus certain Holding Company expenses
estimated to be approximately $87,000.
THE FIRST NATIONAL BANK OF RIVER FALLS
HISTORY AND BUSINESS
The Bank was chartered by the OCC in 1903 as a national banking
association. It opened in 1904 at its original location in River Falls,
Wisconsin, and it remained there until September 1974, when it moved to is
present site at the intersection of Main and Locust Streets, one block from the
University of Wisconsin-River Falls. In 1993, the Bank opened a branch office
in Prescott, Wisconsin, near U.S. Highway 10.
The City of River Falls is located in West Central Wisconsin in the St.
Croix River Valley approximately 30 miles east of St. Paul, Minnesota. River
Falls, which has approximately 10,600 residents, is the location of not only the
University of Wisconsin-River Falls but the summer training camp for the Kansas
City Chiefs professional football team. In addition to the University of
Wisconsin, River Falls, other major employers in the area include the River
Falls School District and Kolpak, Inc.
-27-
<PAGE>
The City of Prescott is located in the St. Croix River Valley approximately
13 miles southwest of River Falls and 20 miles southeast of St. Paul, Minnesota.
Prescott, which is located at the confluence of the Mississippi and St. Croix
Rivers, has approximately 3,500 residents.
The Bank provides a wide variety of full-service commercial banking
products. These products are offered to individuals, service businesses,
industries, governmental units, financial institutions and other entities.
These products may be obtained at the Bank's main office in River Falls and its
branch in Prescott. The retail banking services the Bank offers include
accepting demand, savings and time deposits in the forms of regular checking
accounts, NOW accounts, market money accounts, passbook savings, statement
savings, certificates of deposit and club accounts. Deposit customers are
eligible for ATM cards and debit cards, which provide convenient access through
the three Bank-owned ATMs as well as devices established by other financial
institutions that participate in the Tyme and Cirrus systems. Additionally, the
Bank makes secured and unsecured commercial, construction, mortgage and consumer
loans and equipment leases.
The Bank is subject to regulation and supervision, as a national bank, by
the OCC and, as a member of the Federal Reserve System, by the Federal Reserve
Board. Because the Bank's deposits are insured up to the applicable limit
(currently $100,000) by FDIC, the Bank is also subject to FDIC regulation.
Wisconsin usury laws impose certain interest rate and fee restrictions on the
Bank. See "Supervision and Regulation."
SELECTED FINANCIAL DATA
The table presented below reflects certain consolidated financial
information of the Bank on a historical basis as of and for the dates indicated
(dollars in thousands, except per share data). The historical consolidated
financial data as of and for the three months ended March 31, 1997 and 1996 are
derived from the unaudited historical financial statements of the Bank and
reflect, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such data.
The results of operations for the three months ended March 31, 1997 and 1996 may
not be indicative of results of operations to be obtained for the entire fiscal
year. The selected consolidated financial and other data should be read in
conjunction with the Bank's consolidated financial statements and related notes
included herein. See "The First National Bank of River Falls -- Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Index to Financial Statements.
-28-
<PAGE>
THE FIRST NATIONAL BANK OF RIVER FALLS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Three As of and for the Years
Months Ended March 31, Ended December 31,
---------------------- ------------------------
1997 1996 1996 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Operating data:
Interest income. . . . . . . . . . . . . . . . . . . $ 2,867 $ 2,828 $ 11,438 $ 10,855
Interest expense . . . . . . . . . . . . . . . . . . 1,411 1,379 5,539 5,109
-------- -------- --------- ---------
NET INTEREST INCOME. . . . . . . . . . . . . . . . 1,456 1,449 5,899 5,746
Provision for loan losses. . . . . . . . . . . . . . 90 165 270 775
-------- -------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . 1,366 1,284 5,629 4,971
Noninterest income . . . . . . . . . . . . . . . . . 169 261 952 1,498
Noninterest expense. . . . . . . . . . . . . . . . . 1,300 1,026 4,288 3,968
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . 235 519 2,293 2,501
Income tax expense (benefit) . . . . . . . . . . . . (9) 105 457 489
-------- -------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 244 $ 414 $ 1,836 $ 2,012
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income per common share. . . . . . . . . . . . . $ 24.45 $ 41.41 $ 183.56 $ 201.23
-------- -------- --------- ---------
-------- -------- --------- ---------
Weighted average common shares outstanding . . . . . 10,000 10,000 10,000 10,000
-------- -------- --------- ---------
-------- -------- --------- ---------
Balance sheet data:
Total assets . . . . . . . . . . . . . . . . . . . . $149,159 $143,697 $148,160 $140,913
Net loans (1). . . . . . . . . . . . . . . . . . . . 95,852 86,733 94,772 87,286
Investment securities. . . . . . . . . . . . . . . . 46,011 46,522 43,924 41,844
Deposits . . . . . . . . . . . . . . . . . . . . . . 122,940 119,594 125,110 119,666
Short-term borrowings. . . . . . . . . . . . . . . . 8,856 7,232 5,136 4,014
Total stockholders' equity . . . . . . . . . . . . . 16,239 15,655 16,264 15,677
Key ratios:
Return on average assets (2) . . . . . . . . . . . . 0.65% 1.15% 1.28% 1.49%
Return on average equity (2) . . . . . . . . . . . . 5.97% 10.50% 11.75% 14.14%
Average stockholders' equity to average assets . . . 10.81% 10.96% 10.87% 10.57%
Net interest margin (2). . . . . . . . . . . . . . . 4.05% 4.24% 4.32% 4.51%
Operating efficiency ratio . . . . . . . . . . . . . 80.00% 60.00% 62.59% 54.78%
Nonperforming loans/total loans (3). . . . . . . . . 5.29% 2.18% 2.79% 1.15%
Allowance for loan losses/total loans (3). . . . . . 1.62% 1.59% 1.57% 1.48%
Allowance for loan losses/nonperforming
loans. . . . . . . . . . . . . . . . . . . . . . . 30.70% 68.80% 56.24% 121.80%
Common stock dividend payout ratio . . . . . . . . . -- -- 49.03% 39.76%
</TABLE>
- -------------------
(1) Includes loans held for sale.
(2) Annualized for the three months ended March 31, 1997 and 1996.
(3) Excluding loans held for sale.
-29-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BASIS OF PRESENTATION
The following discussion and analysis provides information regarding the
Bank's historical results of operations and financial condition as of and for
the years ended December 31, 1996 and 1995 and as of and for the three months
ended March 31, 1997 and 1996. This discussion and analysis should be read in
conjunction with the Bank's Consolidated Financial Statements and the notes
thereto and the other financial information included herein.
OVERVIEW
The Bank's net income for the three months ended March 31, 1997 decreased
$170,000 or 41.06% to $244,000 from $414,000 for the three months ended March
31, 1996. Net income for the year ended December 31, 1996 decreased $176,000 or
8.75% to $1,836,000 from $2,012,000 in 1995.
Total assets at March 31, 1997 increased $5,462,000 or 3.80% to
$149,159,000 from $143,697,000 at March 31, 1996. Total assets at December 31,
1996 increased $7,247,000 or 5.14% to $148,160,000 from $140,913,000 at December
31, 1995.
The annualized return on average assets was 0.65% for the three months
ended March 31, 1997, compared with 1.15% for the three months ended March 31,
1996. The return on average assets was 1.28% for the year ended December 31,
1996, compared with 1.49% for the year ended December 31, 1995.
The annualized return on average equity was 5.97% for the three months
ended March 31, 1997, compared with 10.50% for the three months ended March 31,
1996. The return on average equity was 11.75% for the year ended December 31,
1996, compared with 14.14% for the year ended December 31, 1995.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income is interest earned on loans and
other earning assets less interest paid on deposits and other borrowed funds.
Earning assets are categorized as federal funds sold, securities, and loans.
Interest-bearing liabilities are categorized as deposits and short-term
borrowings, which include federal funds purchased, securities sold under
repurchase agreements, and borrowings from the U.S. Treasury.
Net interest income for the three months ended March 31, 1997 increased
$7,000 or 0.48% to $1,456,000 from $1,449,000 for the three months ended March
31, 1996. Net interest income was positively impacted by an increase of
$7,167,000 or 5.25% in average interest-earning assets to $143,802,000 for the
three months ended March 31, 1997 from $136,635,000 for the three months ended
March 31, 1996, offset by a decrease of 0.31% in average yields on average
interest-earning assets to 7.97% for the three months ended March 31, 1997 from
8.28% for the three months ended March 31, 1996. Average interest-earning
assets were impacted by a 10.81% increase in average loans due to continued loan
demand and a 4.86% increase in average taxable investment securities resulting
from increased deposit growth in excess of loan demand. The positive impact to
net interest income was partially offset by the increase of $4,974,000 or 4.30%
in average interest-bearing liabilities to $120,536,000 for the three months
ended March 31, 1997 from $115,562,000 for the three months ended March 31,
1996. The increase in average interest-bearing deposits was partially offset by
a decrease in the rate paid on average interest-bearing liabilities of 0.09% to
4.68% for the three months ended March 31, 1997 from 4.77% for the three months
ended March 31, 1996. Average interest-bearing liabilities increased due
primarily to an increase of $3,838,000 or 5.16% in certificate deposits
resulting from some certificate deposit specials, matching others' rates, and
increased marketing efforts. The net interest spread declined 0.22% to 3.29%
for the three months ended March 31, 1997 from 3.51% for the three months ended
March 31, 1996, while net interest margin declined to 4.05% from 4.24%.
Net interest income for 1996 increased $153,000 or 2.66% to $5,899,000 from
$5,746,000 for 1995. Net interest income was positively impacted by an increase
of $9,230,000 or 7.25% in average interest-earning assets to $136,561,000 for
the year ended December 31, 1996 from $127,331,000 for the year ended
December 31, 1995, partially offset by a decrease of 0.15% in average yields on
average interest-earning assets to 8.38% for 1996 compared to 8.53% for 1995.
This decrease was due to a general decreasing rate environment during 1996.
Average interest-earning assets were impacted by a 10.88% increase in average
loans and a 1.71% increase in average taxable investment securities. The
positive impact to net interest income was partially offset by an increase of
$5,603,000 or 5.16% in average interest-
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<PAGE>
bearing liabilities to $114,115,000 for the year ended December 31, 1996 from
$108,512,000 for the year ended December 31, 1995. Average interest-bearing
liabilities increased primarily due to an increase of $7,557,000 or 11.10% in
certificate of deposit accounts resulting from certificate of deposit promotions
and other marketing efforts. This increase partially resulted in a decrease of
$3,007,000 in the savings and money market accounts between the periods.
The following table presents the changes in net interest income by volume
and rate and the total thereof for the periods indicated (in thousands).
Changes in net interest income due to both volume and rate have been included in
changes due to rate.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997 vs. 1996 Year Ended December 31, 1996 vs. 1995
------------------------------------------ -------------------------------------
Increase (Decrease) Due to Change In Increase (Decrease) Due to Change In
------------------------------------------ -------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold . . . . . . . . . . . . $ (48) $ (2) $ (50) $ 43 $ (5) $ 38
Taxable investment securities. . . . . . . 31 (13) 18 44 (73) (29)
Nontaxable investment
securities . . . . . . . . . . . . . . . (3) -- (3) (77) (36) (113)
Loans. . . . . . . . . . . . . . . . . . . 211 (137) 74 820 (133) 687
------ ------ ------ ------ ------ -----
TOTAL INTEREST-EARNING
ASSETS . . . . . . . . . . . . . . . . 191 (152) 39 830 (247) 583
------ ------ ------ ------ ------ -----
Interest-bearing liabilities:
Deposits-interest bearing:
Interest-bearing demand
deposits . . . . . . . . . . . . . . . . 6 (2) 4 14 (17) (3)
Savings. . . . . . . . . . . . . . . . . . 1 -- 1 (18) 3 (15)
Money market . . . . . . . . . . . . . . . (15) (1) (16) (78) (21) (99)
Time . . . . . . . . . . . . . . . . . . . 55 (30) 25 425 95 520
Total interest-bearing
deposits . . . . . . . . . . . . . . . 47 (33) 14 343 60 403
Federal funds purchased and
securities sold under
repurchase agreements. . . . . . . . . . 25 (6) 19 25 3 28
Treasury tax and loan deposits . . . . . . -- (1) (1) -- (1) (1)
------ ------ ------ ------ ------ ------
TOTAL INTEREST-BEARING
LIABILITIES. . . . . . . . . . . . . . 72 (40) 32 368 62 430
------ ------ ------ ------ ------ ------
CHANGE IN NET INTEREST
INCOME. . . . . . . . . . . . . . . . $ 119 $ (112) $ 7 $ 462 $ (309) $ 153
------ -------- ------- ------ ------ ------
------ -------- ------- ------ ------ ------
</TABLE>
-31-
<PAGE>
The following table presents, for the periods and as of the dates
indicated, information regarding the Bank's average balance sheet. Ratio,
yield, and rate information are based on average daily balances during the three
months ended months ended March 31, 1997 and 1996 and the years ended
December 31, 1996 and 1995. Nonaccrual loans are included in the average
balances for loans, net, for the periods indicated (in thousands, except
yields).
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
-------------------------------------------------- -------------------------------------------------
1997 1996 1996 1995
------------------------ ------------------------ ------------------------ ------------------------
Average Average Average Average Average Average Average Average
Yield/ Yield/ Yield/ Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------ ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning
assets:
Federal funds sold. . . . $ 3,618 $ 45 4.98% $ 7,251 $ 95 5.24% $ 2,234 $ 118 5.28% $ 1,457 $ 80 5.49%
Taxable investment
securities (1) . . . . . 37,372 653 6.99% 35,640 635 7.13% 35,153 2,528 7.19% 34,561 2,557 7.40%
Nontaxable investment
securities . . . . . . . 8,316 142 6.83% 8,469 145 6.85% 8,317 574 6.90% 9,374 687 7.33%
Loans (1) (2) . . . . . . 94,496 2,027 8.58% 85,275 1,953 9.16% 90,857 8,218 9.04% 81,939 7,531 9.19%
------- ------ ----- ------- ------ ---- ------- ----- ---- ------ ----- ----
TOTAL INTEREST-
EARNING ASSETS . . . . 143,802 2,867 7.97% 136,635 2,828 8.28% 136,561 11,438 8.38% 127,331 10,855 8.53%
Noninterest-earning
assets. . . . . . . . . 7,324 7,294 7,268 7,217
-------- -------- -------- --------
TOTAL ASSETS . . . . . $151,126 $143,903 $143,778 $134,625
-------- -------- -------- --------
-------- -------- -------- --------
Liabilities and
stockholders' equity:
Interest-bearing liabilities:
Deposits-interest bearing:
Interest-bearing demand
deposits . . . . . . $14,078 $72 2.05% $12,954 68 2.10% $12,476 $263 2.11% $11,865 $266 2.24%
Savings. . . . . . . . 12,484 90 2.88% 12,286 89 2.90% 12,308 364 2.96% 12,908 379 2.94%
Money market . . . . . 8,600 63 2.93% 10,620 79 2.98% 8,375 248 2.96% 10,782 347 3.22%
Time . . . . . . . . . 78,201 1,094 5.60% 74,363 1,069 5.75% 75,644 4,354 5.76% 68,087 3,834 5.63%
------- ----- ---- ------- ----- ---- ------- ----- ---- ------- ----- -----
TOTAL INTEREST-BEARING
DEPOSITS. . . . . . 113,363 1,319 4.65% 110,223 1,305 4.74% 108,803 5,229 4.81% 103,642 4,826 4.66%
Federal funds purchased
and securities sold
under repurchase agreements 6,844 895.20% 5,019 705.58% 4,641 2775.97% 4,216 2495.91%
Treasury tax and loan
deposits. . . . . . . 329 33.65% 320 45.00% 617 334.92% 654 345.20%
------- -------- ------- -------- ------- -------- ------- --------
TOTAL INTEREST-BEARING
LIABILITIES. . . . 120,536 1,411 4.68% 115,562 1,379 4.77% 114,115 5,539 4.85% 108,512 5,109 4.71%
Non-interest bearing
liabilities. . . . . . . 14,247 12,574 14,038 11,883
TOTAL LIABILITIES. . 134,783 128,136 128,153 120,395
Stockholders' equity . . . 16,343 15,767 15,625 14,230
-------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $151,126 $143,903 $143,778 $134,625
-------- -------- -------- --------
-------- -------- -------- --------
Net interest income. . . . $1,456 $1,449 $5,899 $5,746
------ ------ ------ ------
------ ------ ------ ------
Net interest spread. . . . 3.29% 3.51% 3.53% 3.82%
Net interest margin. . . . 4.05% 4.24% 4.32% 4.51%
</TABLE>
- ---------------------------------
(1) Yields are calculated using stated rates, not tax-equivalent rates.
(2) Includes loan fees of $35,581, $104,209, $301,260 and $246,822 for the
three months ended March 31, 1997 and 1996 and the years ended December 31,
1996 and 1995, respectively.
-32-
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses was $90,000 for
the three months ended March 31, 1997, a decrease of $75,000 over the provision
for loan losses of $165,000 for the three months ended March 31, 1996. The
provision for loan losses was $270,000 for the year ended December 31, 1996, a
decrease of $505,000 or 65.16% from the amount for the year ended December 31,
1995. Annual fluctuations in the provision for loan losses result from
management's regular assessment of the adequacy of the allowance for loan
losses. See "-- Allowance for Loan Losses" below. The amount of loan loss
provision to be taken in future periods will depend on management's assessment
of the adequacy of the allowance for loan losses in relation to the entire loan
portfolio.
NONINTEREST INCOME. The following table presents the components of
noninterest income for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service charges and other fees . . . . . . . $117 $120 $461 $450
Net investment securities gains. . . . . . . -- 39 47 23
Gain (loss) on loans held for sale . . . . . (84) (45) (31) 646
Other. . . . . . . . . . . . . . . . . . . . 136 147 475 379
---- ---- ---- ------
TOTAL . . . . . . . . . . . . . . . . . $169 $261 $952 $1,498
---- ---- ---- ------
---- ---- ---- ------
</TABLE>
Noninterest income consists mainly of service charges on deposit accounts,
other service fees, and gains or losses on the sale of investment securities and
loans held for sale. Noninterest income was $169,000 for the three months ended
March 31, 1997, a decrease of $92,000 or 35.25% over noninterest income of
$261,000 for the three months ended March 31, 1996. Approximately $79,000 of
this decrease was primarily due to higher mark to market expense on loans held
for sale and the absence of investment security gains in the three months ended
March 31, 1997. Noninterest income was $952,000 for the year ended December 31,
1996, a decrease of $546,000 or 36.45% over the year ended December 31, 1995.
This decrease was primarily due to a large unrealized gain of $646,000 on loans
held for sale in 1995. The gain on loans held for sale of $646,000 in 1995 was
caused by a decreasing interest rate environment in 1995, which had the effect
of increasing the carrying value of the loans held for sale and reversing losses
recorded in 1994 on certain of these loans, which were caused by an increasing
interest rate environment in 1994.
NONINTEREST EXPENSE. The following table presents the components of
noninterest expense for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries and employee benefits . . . . . . . $ 688 $ 648 $ 2,814 $ 2,443
Occupancy. . . . . . . . . . . . . . . . . . 70 60 227 227
Depreciation . . . . . . . . . . . . . . . . 60 69 245 255
Impairment write-off on branch
building . . . . . . . . . . . . . . . . . 213 -- -- --
FDIC assessment. . . . . . . . . . . . . . . 4 -- 1 128
Professional fees. . . . . . . . . . . . . . 7 13 36 33
Other real estate expenses . . . . . . . . . 4 14 18 54
Other. . . . . . . . . . . . . . . . . . . . 254 222 947 828
------ ------ ------- -------
TOTAL. . . . . . . . . . . . . . . . . . $1,300 $1,026 $4,288 $3,968
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
Noninterest expense was $1,300,000 for the three months ended March 31,
1997, an increase of $274,000 or 26.71% over noninterest expense of $1,026,000
for the three months ended March 31, 1996. Noninterest expense was $4,288,000
for the year ended December 31, 1996, an increase of $320,000 or 8.06% over
noninterest expense of $3,968,000 for the year ended December 31, 1995.
Salaries and employee benefits expense was $688,000 for the three months
ended March 31, 1997, an increase of $40,000 or 6.17% over salaries and employee
benefits expense of $648,000 for the three months ended March 31, 1996. This
increase was due primarily to more employees and increased cost of health
insurance.
Salaries and employee benefits expense was $2,814,000 for the year ended
December 31, 1996, an increase of $371,000 or 15.19% over salaries and employee
benefits expense of $2,443,000 for the year ended December 31, 1995. This
increase was due to more employees, raises in the 5% to 7% range, and increased
benefit costs.
-33-
<PAGE>
Occupancy expense was $70,000 for the three months ended March 31, 1997, an
increase of $10,000 or 16.67% from occupancy expense of $60,000 for the three
months ended March 31, 1996. This increase was due primarily to an increase in
computer-related costs. Occupancy expense was $227,000 for each of the years
ended December 31, 1996 and 1995.
Depreciation expense was $60,000 for the three months ended March 31, 1997,
a decrease of $9,000 or 13.04% from depreciation expense of $69,000 for the
three months ended March 31, 1996. This decrease was due to certain assets
becoming fully depreciated during 1996.
Depreciation expense was $245,000 for the year ended December 31, 1996, a
decrease of $10,000 or 3.92% over depreciation expense of $255,000 for the year
ended December 31, 1995. This decrease was due to certain assets becoming fully
depreciated during 1996.
In January 1997, the Bank's management and Board of Directors decided to
build a new building in Prescott, Wisconsin at a new branch site and to sell the
former branch building. This decision caused the Bank to investigate and
consider the possible impairment of the carrying value of the old branch
building. As a result, during the three months ended March 31, 1997, the Bank
recognized an impairment write-off in the amount of $213,000 related to the
branch location's building.
FDIC assessment expense was $4,000 for the three months ended March 31,
1997, an increase of $4,000 from FDIC assessment expense of $-0- for the three
months ended March 31, 1996. This increase was due to the Bank's having to
start paying on FICO bonds through an increase in the FDIC assessment rate
resulting from the merger of the Bank Insurance Fund and the Savings Association
Insurance Fund. FDIC assessment expense was $1,000 for the year ended December
31, 1996, a decrease of $127,000 or 99.22% from FDIC assessment expense of
$128,000 for the year ended December 31, 1995. This decrease was due to the
FDIC lowering the assessment rate.
INCOME TAX EXPENSE. Income tax expense (benefit) was $(9,000) for the
three months ended March 31, 1997, a decrease of $114,000 or 108.57% from income
tax expense of $105,000 for the three months ended March 31, 1996. The
effective tax benefit rate was 3.83% for the three months ended March 31, 1997
and was due to nontaxable municipal bond interest and non-taxable loan interest
in an amount greater than book taxable income. This condition resulted from a
one-time impairment write-down in the amount of $213,000 taken in the quarter
ended March 31, 1997. Income tax expense was $457,000 for the year ended
December 31, 1996, a decrease of $32,000 or 6.54% over income tax expense of
$489,000 for the year ended December 31, 1995. The effective tax rate increased
from 19.55% for the year ended December 31, 1995 to 19.93% for the year ended
December 31, 1996.
FINANCIAL CONDITION
LOANS. The Bank's lending activities are presently guided by the general
loan policies established by the Bank's Board of Directors. Total loans,
excluding loans held for sale, were $93,392,000 at March 31, 1997, an increase
of $1,384,000 or 1.50% over the December 31, 1996 amount of $92,008,000,
which was an increase of $9,589,000 or 11.6% over the December 31, 1995
amount of $82,419,000.
-34-
<PAGE>
The following table presents a summary of the Bank's loan portfolio,
excluding loans held for sale, as of March 31, 1997, and December 31, 1996
and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996 December 31, 1995
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Real estate. . . . . . . . . . . . . . . . . $34,267 36.7 $32,889 35.7 $28,770 34.9
Commercial and agricultural. . . . . . . . . 20,960 22.4 23,238 25.3 23,884 20.0
Residential real estate. . . . . . . . . . . 28,833 30.9 26,796 29.1 21,153 25.7
Consumer . . . . . . . . . . . . . . . . . . 9,332 10.0 9,085 9.9 8,612 10.4
------- ------ ------- ------ ------- -----
TOTAL LOANS AND LEASES . . . . . . . . . . $93,392 100.0 $92,008 100.0 $82,419 100.0
------- ------ ------- ------ ------- -----
------- ------ ------- ------ ------- -----
</TABLE>
REAL ESTATE LOANS. Real estate loans are primarily commercial real
estate loans. This category also includes real estate loans secured by
farmland and multi-family residential properties. The loan mix in the Bank's
portfolio indicates the trend toward real estate loans. This trend has
resulted from a separate real estate department and focusing growth efforts
in this area. As of March 31, 1997, real estate loans represented the
largest class of loans, at 36.7% of total loans.
COMMERCIAL AND AGRICULTURAL LOANS. Commercial and agricultural loans
principally include loans to manufacturing, wholesale, retail, municipal, and
agricultural businesses. Commercial loans are made on the financial strength
and repayment ability of the borrower as well as the collateral securing the
loans.
RESIDENTIAL REAL ESTATE LOANS. Residential real estate loans principally
include residential real estate first and second mortgages and home equity lines
of credit. As of March 31, 1997, residential real estate loans were $28,833,000
or 30.87% of total loans, up from $26,796,000 or 29.12% of total loans at
December 31, 1996.
CONSUMER. Consumer loans include automobile and home improvement loans,
personal lines of credit, student loans and overdrafts. As of March 31, 1997,
consumer loans were $9,332,000 or 9.99% of total loans, up from $9,085,000 or
9.87% of total loans at December 31, 1996.
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS. The
following tables present a distribution of the maturity of loans and, for those
loans due after one year, the sensitivity of loans to interest rate changes as
of March 31, 1997 (in thousands). The amounts exclude residential real estate
loans and consumer loans.
<TABLE>
<CAPTION>
As of March 31, 1997, Maturing In
----------------------------------------------------
One Year One to Over
or Less Five Years Five Years Total
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Real estate. . . . . . . . . . . . . . . . . $3,063 $17,441 $13,763 $34,267
Commercial and agricultural. . . . . . . . . 8,052 5,277 7,631 20,960
Interest Sensitivity
------------------------------
Fixed Rate Variable Rate
----------- -------------
Real estate. . . . . . . . . . . . . . . . . $29,052 $2,152
Commercial and agricultural. . . . . . . . . 9,246 3,662
</TABLE>
NONPERFORMING ASSETS. The Bank reports all loans which are 90 days or more
past due as nonaccrual loans, excluding those loans which in management's
opinion are well collateralized or exhibit other characteristics which make them
fully collectible. The Bank does not return a loan to accrual status until it
is brought current with respect to both principal and interest and future
principal payments are no longer in doubt. When a loan is placed on nonaccrual
status, any previously accrued and uncollected interest is reversed. The Bank
adopted Financial Accounting Standards Board ("FASB") Statement No. 114,
"Accounting by Creditors for Impairment of a Loan," on January 1, 1995. The
Bank defines a loan as impaired when it is probable that the Bank will be unable
to collect all principal and interest payments due in accordance with the terms
of the loan agreement. The effect of adopting Statement No. 114 was not
significant to the Bank.
-35-
<PAGE>
The following table presents the nonperforming assets as of March 31, 1997,
and December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996 December 31, 1995
-------------- ----------------- -----------------
<S> <C> <C> <C>
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,016 $1,835 $1,005
Accrual loans which are past due 90 days or more as to principal
or interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,032 47 59
Troubled debt restructurings . . . . . . . . . . . . . . . . . . . . . . . 891 684 724
------ ------ ------
TOTAL NONPERFORMING LOANS . . . . . . . . . . . . . . . . . . . . . . . 4,939 2,566 1,788
Other real estate owned. . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
------ ------ ------
TOTAL NONPERFORMING ASSETS . . . . . . . . . . . . . . . . . . . . . . $4,939 $2,566 1,788
------ ------ ------
------ ------ ------
Total nonperforming loans/total loans. . . . . . . . . . . . . . . . . . . 5.29% 2.79% 2.17%
Total nonperforming assets/total assets. . . . . . . . . . . . . . . . . . 3.31% 1.73% 1.27%
</TABLE>
NONPERFORMING LOANS. Nonperforming loans as a percentage of total loans
outstanding increased as of March 31, 1997 to 5.29% compared with 2.79% as of
December 31, 1996. This increase was primarily due to an increase in loans past
due 90 days of $1,985,000 as of March 31, 1997. This increase was largely the
result of one large agricultural loan that is now being restructured. Interest
is still accruing.
ALLOWANCE FOR LOAN LOSSES. The current level of the allowance for loan
losses is a result of management's assessment of the risks within the portfolio
based on the information revealed in the credit review processes. The Bank
utilizes a risk-rating system on all loans and a quarterly review and reporting
process which results in the calculation of the guideline reserves based on the
risk within the portfolio. This assessment of risk takes into account the
composition of the loan portfolio, previous loan loss experience, current
economic conditions, and other factors that in management's opinion deserve
special recognition.
-36-
<PAGE>
The following table presents a summary of the Bank's allowance for loan
losses for the periods shown (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance, beginning of period . . . . . . . . $1,443 $1,296 $1,296 $ 1,751
Charge-offs:
Commercial and agricultural. . . . . . . -- (2) (5) (19)
Real estate. . . . . . . . . . . . . . . (18) (75) (133) (1,206)
Residential real estate . . . . . . . . -- -- -- (18)
Consumer . . . . . . . . . . . . . . . . (2) (6) (12) (5)
------ ------- ------- -------
TOTAL CHARGE-OFFS. . . . . . . . . . (20) (83) (150) (1,248)
------ ------- ------- -------
Recoveries:
Commercial and agricultural. . . . . . . 2 2 8 8
Real estate. . . . . . . . . . . . . . . -- 1 15 5
Residential real estate . . . . . . . . -- -- -- (1)
Consumer . . . . . . . . . . . . . . . . 1 3 4 4
------ ------- ------- -------
TOTAL RECOVERIES . . . . . . . . . . 3 6 27 18
------ ------- ------- -------
NET CHARGE-OFFS. . . . . . . . . . . (17) (77) (123) (1,230)
------ ------- ------- -------
Provision for loan losses. . . . . . . . . . 90 165 270 775
------ ------- ------- -------
BALANCE, END OF PERIOD . . . . . . . $1,516 $1,384 $1,443 $1,296
------ ------- ------- -------
------ ------- ------- -------
Net charge-offs /average
loans outstanding(1)(2) . . . . . . . . . . 0.07% 0.36% 0.14% 1.50%
Allowance for loan losses/total
loans(1). . . . . . . . . . . . . . . . . . 1.62% 1.59% 1.57% 1.48%
Nonperforming loans/total loans(1) . . . . . 5.29% 2.18% 2.79% 1.15%
Allowance for loan losses/
nonperforming loans . . . . . . . . . . . . 30.70% 68.80% 56.24% 121.80%
</TABLE>
- --------------------
(1) Total loans excludes loans held for sale.
(2) Annualized for the three months ended March 31, 1997 and 1996.
ALLOCATED ALLOWANCE FOR LOAN LOSSES. While the allowance for loan
losses is available to absorb credit losses in the entire portfolio, the
table below presents an estimate of the allowance for loan losses allocated
by loan type (dollars in thousands). The unallocated portion of the
allowance for loan losses represents the allowance available for the entire
portfolio as well as reserves identified for qualitative factors, unfunded
commitments, and letters of credit. The relatively large charge-off total
for 1995 as compared to 1996 is due to losses sustained in 1995 on Federal
Housing Administration ("FHA") Title I securities, which are included in real
estate loans in the above tables. A significant portion of the allowance for
loan losses is allocated to the commercial and agriculture loan portfolios
due to their higher degree of risk as well as their historical loan loss
experience.
The allowance for loan losses is an amount that management believes will be
adequate to absorb estimated losses on existing loans that may become
uncollectable, based on an evaluation of the collectibility of loans and prior
loan loss experience. This evaluation also takes in consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, a review of specific problem loans, and current economic conditions and
trends that may affect the borrower's ability to pay.
-37-
<PAGE>
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------------------------- -------------------------------
Percent of Loans Percent of Loans
Amount to Total Loans Amount to Total Loans
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Real estate. . . . . . . . . . . . . $ 490 36.7 $ 513 35.7
Commercial and agricultural . . . . 600 22.4 395 25.3
Residential real estate . . . . . . 238 30.9 219 29.1
Consumer . . . . . . . . . . . . . . 17 10.0 18 9.9
Unallocated . . . . . . . . . . . . 171 N/A 298 N/A
------ ----- ------ -----
TOTAL . . . . . . . . . . . . . $1,516 100.0 $1,443 100.0
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
December 31, 1995
-------------------------
Percent of Loans
Amount to Total Loans
------ ----------------
[S] [C] [C]
Real estate. . . . . . . . . . . . . $ 439 34.9
Commercial and agricultural . . . . 435 29.0
Residential real estate . . . . . . 199 25.7
Consumer . . . . . . . . . . . . . . 22 10.4
Unallocated . . . . . . . . . . . . 201 N/A
------ ------
TOTAL . . . . . . . . . . . . . $1,296 100.0
------ ------
------ ------
INVESTMENT SECURITIES. The Bank's investment portfolio is managed to meet
its liquidity needs while maximizing investment income. Additionally,
management augments the quality of the loan portfolio by maintaining an
investment portfolio oriented toward mortgage-backed securities. The portfolio
also provides the opportunity to structure maturities and repricing time tables
in a flexible manner and to meet applicable requirements for pledging securities
sold under repurchase agreements. The portfolio is comprised of U.S. Treasury
securities, U.S. government agency instruments, mortgage-backed securities,
obligations of states and political subdivisions, and a modest amount of equity
securities in the form of Federal Reserve Stock. Federal funds sold are
additional investments which are not classified as investment securities. All
investment securities are classified as available-for-sale and recorded at fair
value. Unrealized gains or losses, net of the deferred tax effect, are reported
as increases or decreases in stockholders' equity.
The following table presents a summary of the Bank's investment portfolio
as of March 31, 1997 and December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
----------------------------- ----------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S. government
agencies . . . . . . . . . . . . . . . . . $ 8,176 17.8 $ 8,285 18.9
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . 8,238 17.9 8,134 18.5
Mortgage-backed securities . . . . . . . . . 27,760 60.3 25,640 58.4
Other securities . . . . . . . . . . . . . . 1,837 4.0 1,865 4.2
------- ----- ------- -----
TOTAL INVESTMENT SECURITIES . . . . . . $46,011 100.0 $43,924 100.0
------- ----- ------- -----
------- ----- ------- -----
December 31, 1995
----------------------------
Amount Percent
------- -------
<S> <C> <C>
U.S. Treasury securities
and obligations of U.S. government
agencies . . . . . . . . . . . . . . . . . $12,586 30.1
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . 8,688 20.8
Mortgage-backed securities . . . . . . . . . 19,176 45.8
Other securities . . . . . . . . . . . . . . 1,394 3.3
------- ------
TOTAL INVESTMENT SECURITIES . . . . . . $41,844 100.0
------- ------
------- ------
</TABLE>
Securities were $46,011,000 at March 31, 1997, an increase of $2,087,000 or
4.75% over the December 31, 1996 amount of $43,924,000, which was an increase of
$2,080,000 or 5.0% over the December 31, 1995 amount of $41,844,000.
-38-
<PAGE>
MATURITY OF DEBT INVESTMENT SECURITIES. As of March 31, 1997, debt
investment securities had the following maturity and yield characteristics
(dollars in thousands):
<TABLE>
<CAPTION>
As of March 31, 1997, Maturing in
- -------------------------------------------------------------------------------------------------------------------------------
Over One Year
Through Over Five Years
One Year or Less Five Years Through Ten Years Over Ten Years Total
---------------- ---------------- ----------------- ---------------- ----------------
Weighted Weighted Weighted Weighted Weighted
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ -------- ------ -------- -------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities and
obligations of U.S.
government
agencies. . . . . . . . . . . $2,000 7.87% $ -- --% $6,239 6.20% $160 8.14% $ 8,399 6.63%
Obligations of
states and
political
subdivisions(1) . . . . . . . 440 15.03% 974 14.22% 1,390 10.36% 5,108 10.11% 7,912 10.91%
Other securities. . . . . . . -- -- 400 7.75% 1,344 7.49% -- -- 1,744 7.62%
Mortgage-backed
securities(2) . . . . . . . . -- -- -- -- -- -- -- -- 27,221 8.30%
Equity
securities(2) . . . . . . . . -- -- -- -- -- -- -- -- 60 6.00%
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
TOTAL
INVESTMENT
SECURITIES . . . . . . . $2,440 9.16% $1,374 11.11% $8,973 7.01% $5,268 10.05% $45,336 8.25%
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
</TABLE>
(1) Yields are presented on a tax-equivalent basis to reflect the tax-exempt
nature of these securities. The incremental tax rate applied is 34%.
(2) Anticipated maturities on mortgage-backed securities are not readily
determinable since they may be prepaid without penalty and equity
securities do not have stated maturity dates.
-39-
<PAGE>
DEPOSITS. The Bank emphasizes developing relationships with individuals
and business customers in order to increase its core deposit base. The Bank has
numerous deposit products, including checking accounts, money market accounts,
savings accounts, and certificates of deposit, designed to meet the individual
needs of its customers.
The following table sets forth the distribution of the Bank's deposits by
type as of March 31, 1997, and December 31, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------------------- --------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand . . . . . . . . . $ 13,018 10.6 $ 14,943 11.9
Interest-bearing demand. . . . . . . . . . . 11,716 9.5 12,272 9.8
Money market accounts. . . . . . . . . . . . 7,313 6.0 8,703 7.0
Savings deposits . . . . . . . . . . . . . . 12,337 10.0 12,912 10.3
Time certificates of deposit:
Less than $100,000. . . . . . . . . . . . 69,162 56.3 67,412 53.9
$100,000 or more. . . . . . . . . . . . . 9,394 7.6 8,868 7.1
-------- ----- -------- -----
TOTAL. . . . . . . . . . . . . . . . $122,940 100.0 $125,110 100.0
-------- ----- -------- -----
-------- ----- -------- -----
December 31, 1995
--------------------------
Amount Percent
------ -------
<S> <C> <C>
Noninterest-bearing demand . . . . . . . . . $12,119 10.1
Interest-bearing demand. . . . . . . . . . . 13,265 11.1
Money market accounts. . . . . . . . . . . . 9,109 7.6
Savings deposits . . . . . . . . . . . . . . 12,287 10.3
Time certificates of deposit:
Less than $100,000. . . . . . . . . . . . 64,902 54.2
$100,000 or more. . . . . . . . . . . . . 7,984 6.7
-------- ------
TOTAL. . . . . . . . . . . . . . . . $119,666 100.0
-------- ------
-------- ------
</TABLE>
Total deposits were $122,940,000 as of March 31, 1997, a decrease of
$2,170,000 or 1.73% from the December 31, 1996 amount of $125,110,000, which
was an increase of $5,444,000 or 4.5% over the December 31, 1995 amount of
$119,666,000.
The following table presents a maturity distribution of time certificates
of deposit of $100,000 or more at March 31, 1997 (in thousands):
March 31,
1997
---------
Time certificates of deposits of $100,000 or more:
Three months or less . . . . . . . . . . . . . . . $4,575
Over three months to six months . . . . . . . . . . 970
Over six months to twelve months . . . . . . . . . 2,231
Over twelve months . . . . . . . . . . . . . . . . 1,618
------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $9,394
------
------
SHORT-TERM BORROWINGS. Borrowings with original maturities of one year or
less are classified as short-term. The following table presents a summary of
the Bank's short-term borrowings, which were greater than 30% of stockholders'
equity as of March 31, 1997 and December 31, 1995 and 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996 December 31, 1995
-------------- ----------------- -----------------
<S> <C> <C> <C>
Securities sold under repurchase agreements
outstanding at period end . . . . . . . . $5,641 $4,802 $3,571
Weighted average rate at period end . . . . . 5.44% 5.59% 5.92%
Daily average outstanding for the period . . . $6,138 $4,641 $3,910
Weighted average rate for the period . . . . . 5.44% 5.97% 5.88%
Highest outstanding at any month end . . . . . $6,669 $7,828 $5,289
</TABLE>
CAPITAL MANAGEMENT. Stockholders' equity as of March 31, 1997 decreased
$25,000 or 0.15% to $16,239,000 from $16,264,000 as of December 31, 1996. This
decrease was due to the retention of current period earnings of $244,000 offset
by net unrealized losses on securities held for sale of $269,000.
Risk-based capital guidelines established by regulatory agencies set
minimum capital standards based on the risk associated with a financial
institution's assets. See "Supervision and Regulation -- Regulation of Bank --
Capital Adequacy Standards." The primary component of such capital standards is
Tier 1 capital, which is defined as stockholders' equity less intangible assets.
Below is a comparison of the Bank's March 31, 1997 and December 31, 1996 and
1995 risk-based
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<PAGE>
capital ratios on a historical basis with the minimum requirements for well
capitalized and adequately capitalized banks, as defined by the federal
regulatory agencies' Prompt Corrective Action Rules:
<TABLE>
<CAPTION>
Minimum Requirements
--------------------------
March 31, December 31, December 31, Well Adequately
Capital Category 1997 1996 1995 Capitalized Capitalized
- ---------------- ---- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital . . . . 16.0% 14.8 15.6 6.0% 4.0%
Total risk-based capital . . . . . 17.3% 16.0 16.9 10.0% 8.0%
Leverage ratio . . . . . . . . . 10.4% 10.7 10.6 5.0% 4.0%
</TABLE>
The following table is a summary of the Bank's pro forma March 31, 1997
risk based capital ratios assuming the Reorganization and resulting Bank
dividend had occurred on March 31, 1997:
Pro forma
Capital Category March 31, 1997
---------------- --------------
Tier 1 risk-based capital. . . . . . . . 13.3%
Total risk-based capital . . . . . . . . 14.6%
Leverage ratio . . . . . . . . . . . . . 8.6%
ASSET/LIABILITY MANAGEMENT
LIQUIDITY MANAGEMENT. Liquidity management represents management's effort
to provide a continuing flow of funds to meet the Bank's financial commitments,
customer borrowing needs, and deposit withdrawal requirements. The Bank's
liquidity position is monitored by an asset/liability committee. The Bank
adjusts its investments in liquid assets based upon management's assessment of
(i) expected loan demand, (ii) expected deposit flows, (iii) yields available on
interest-bearing deposits, and (iv) the objective of its asset/liability
management program. The largest category of assets representing a ready source
of liquidity for the Bank is its short-term financial instruments, which include
federal funds sold and investment securities maturing within one year.
Liquidity is also provided through the regularly scheduled maturities of assets.
The liquidity position of the Bank is also greatly enhanced by its significant
base of core deposits. The Bank also maintains available lines of federal funds
borrowing from nonaffiliated financial institutions. Excess liquidity is
generally invested in interest-bearing overnight deposits and other short-term
government and agency obligations. The Bank anticipates it will have sufficient
funds available to meet its current loan commitments. At March 31, 1997, the
Bank had outstanding commitments to extend credit amounting to $10,813,000.
INTEREST RATE SENSITIVITY. Effective asset/liability management also
includes minimizing the impact of future interest rate changes on net interest
income. Management of interest rate sensitivity is accomplished through the
composition of loans and investments, and by adjusting the maturities on
interest-earning assets and interest-bearing liabilities. Interest rate
sensitivity indicates a financial institution's potential earnings exposure to
fluctuating interest rates. Rate sensitivity and liquidity are related since
both are affected by maturing assets and liabilities. However, interest rate
sensitivity also takes into consideration those assets and liabilities with
interest rates that are subject to change prior to maturity. While no single
measure can completely identify the impact of changes in interest rates on net
interest income, one traditional gauge of interest rate sensitivity is to
measure, over a variety of time periods, the differences in the amounts of the
Bank's rate-sensitive assets and rate-sensitive liabilities. These differences,
or "gaps," provide an indication of the extent that net interest income may be
affected by future changes in interest rates.
A positive gap exists when rate-sensitive assets exceed rate-sensitive
liabilities and indicates that a greater volume of assets than liabilities will
reprice during a given time period. This mismatch may enhance earnings in a
rising-rate environment and may inhibit earnings when interest rates decline.
Conversely, when rate-sensitive liabilities exceed rate-sensitive assets, a
negative gap results, indicating that a greater volume of liabilities than
assets will reprice during the period. In this case, a rising-rate environment
may inhibit earnings and declining rates may enhance earnings.
The following table presents the Bank's interest rate gap analysis as of
March 31, 1997 (dollars in thousands). The table also presents the gap between
interest rate-sensitive assets and liabilities as a percentage of total assets
as of March 31, 1997. In calculating the gap values, amortization flows are
based on contractual
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<PAGE>
characteristics of the loans and investment securities, as well as the
anticipated prepayment characteristics. Prepayment rates for mortgages and
mortgage-related investments reflect expectations based on national assumptions,
and prepayments on consumer loans reflect the Bank's historical experience.
Nonmaturity deposit balances are positioned in the one year or less category,
based on expected repricing behavior given historical experience and
management's expectations.
<TABLE>
<CAPTION>
Repricing in or Maturing In
-----------------------------------------------------
One Year One to Over Five
or Less Five Years Years Total
-------- ---------- --------- --------
<S> <C> <C> <C> <C>
Investment securities. . . . . . . . . . . . $ 5,853 $23,081 $ 17,077 $ 46,011
Loans . . . . . . . . . . . . . . . . . . . 35,693 43,145 18,530 97,368
-------- ------- -------- --------
TOTAL RATE-SENSITIVE ASSETS . . . . . . $ 41,546 $66,226 $ 35,607 $143,379
-------- ------- -------- --------
-------- ------- -------- --------
Savings, money market, and
interest-bearing checking . . . . . . . . $ 16,770 $ 14,596 $ -- $ 31,366
Time deposits . . . . . . . . . . . . . . . 50,612 27,426 518 78,556
Short-term borrowings . . . . . . . . . . . 7,447 1,409 -- 8,856
-------- -------- -------- --------
TOTAL RATE-SENSITIVE LIABILITIES . . . . $ 74,829 $ 43,431 $ 518 $118,778
-------- -------- -------- --------
-------- -------- -------- --------
Rate sensitive gap . . . . . . . . . . . . . $(33,283) $ 22,795 $ 35,089 $ 24,601
Cumulative rate-sensitive gap . . . . . . . (33,283) (10,488) 24,601 --
Rate-sensitive gap % to total assets . . . . (22.3)% 15.3% 23.5% 16.5%
Cumulative rate-sensitive gap % to total
assets . . . . . . . . . . . . . . . . . . (22.3)% (7.0)% 16.5% --
</TABLE>
CUMULATIVE RATE-SENSITIVE GAP PERCENT TO TOTAL ASSETS. Gap analysis
attempts to capture interest rate risk which is attributable to the mismatching
of interest rate-sensitive assets and liabilities. However, varying interest
rate environments often create unexpected changes in interest rate sensitivity,
for example changing loan prepayments. These unexpected changes are not
captured very well in most gap analyses and, as a result, a gap report may not
provide a complete assessment of the Bank's interest rate risk. Therefore, the
Bank utilizes a gap analysis that shows cumulative income change if market rates
were to decrease as many as 200 basis points and increase as many as 300 basis
points. The structuring of the Bank's balance sheet is targeted to ensure that
earnings do not exhibit large variations. At March 31, 1997, the Bank's
computer simulations under the most likely interest rate scenario provided by an
independent forecaster indicate that the projected earnings are within
acceptable parameters. Given the Bank's current interest rate risk profile,
management's response to increase in interest rates is to promote variable-rate
deposit products and loans.
CASH FLOW. The Bank's principal sources of funds are deposits, scheduled
loan repayments, prepayments of loan principal, borrowings, maturities of
investment securities, mortgage-backed securities, and short-term investments
and operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions, and competition. The
Bank generally manages the pricing of its deposits to maintain a steady deposit
balance. The primary source of cash from operating activities is net income.
The primary investing activities of the Bank are lending and purchasing
investment securities. For the three months ended March 31, 1997, investing
activities used a net $4,072,000. Loan originations, net of principal
repayments, and purchases of investment securities accounted primarily for this
use. If general interest rates decline, the Bank would expect to experience an
increase in prepayments, particularly in its fixed-rate loans. The increased
funds from this source could not necessarily be reinvested at yields and terms
to maintain the net interest margins the Bank has experienced during the last
three fiscal years. For the year ended December 31, 1996, investing activities
used a net $9,151,000. Loan originations and purchases of investment securities
accounted primarily for this use.
For the three months ended March 31, 1997, financing activities provided a
net $1,101,000. Historically, the primary financing activity of the Bank has
been deposits and short-term borrowings. Deposits decreased $2,170,000 for the
three months ended March 31, 1997, and short-term borrowings increased
$3,721,000 for the
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<PAGE>
three months ended March 31, 1997. For the year ended December 31, 1996,
financing activities provided a net $5,666,000. Deposits increased $5,444,000
and short-term borrowings increased $1,122,000.
EMERGING ACCOUNTING STANDARDS. FASB Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
establishes new standards for transfers and servicing of financial assets and
extinguishments of liabilities. The new standard will require the Bank to
recognize the servicing of assets it controls and liabilities incurred after a
transfer of financial assets. This statement will require, among other things,
that the Bank record an asset or liability for servicing rights when it sells
loans and retains the servicing and then amortize the asset or liability over
the period during which servicing income is expected to be received. This
statement is effective for transactions occurring after December 31, 1996. In
management's opinion, the application of this statement is not material to the
Bank's financial statements for the period ended March 31, 1997.
The Financial Accounting Standards Board has also issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS No. 128),
which is effective for financial statements issued for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
This standard replaces the presentation of primary earnings per share with a
presentation of basic earnings per share and also requires dual presentation of
basic and diluted earnings per share for all entities with complex capital
structures. Because early adoption of FAS No. 128 is not permitted, there is no
impact on the Bank's earnings per share amounts for the interim periods
presented herein. However, upon adoption in the fourth quarter of 1997, all
prior interim and annual period earnings per share data presented will be
restated to conform with the provisions of FAS No. 128. The Bank does not
expect the impact of the adoption of FAS No. 128 to be material to previously
reported earnings per share amounts.
IMPACT OF INFLATION AND CHANGING PRICES. The consolidated financial
statements and related data presented herein have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation.
Substantially all of the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have more impact on the Bank's performance
than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services. The liquidity and the maturity structure of the Bank's
assets and liabilities are important to the maintenance of acceptable
performance levels. The Bank discloses the estimated fair values of its
financial instruments in accordance with FASB Statement No. 107.
SUBCHAPTER S ELECTION AND BUILT-IN GAINS TAX. Management of the Holding
Company intends to file an election to convert its tax status from C corporation
to S corporation under the Code effective January 1, 1998. If the Holding
Company completes and files the election, existing deferred tax assets and
liabilities will be eliminated on the date of such filing, except in the case of
deferred income tax liabilities on any unrecognized "built-in gain" expected to
be realized during the ten-year period after the effective date.
The built-in gains tax is a corporate level tax which is computed by
applying the maximum regular corporate tax rate against the gain realized upon
disposing of any asset that can be attributed to appreciation before the
conversion (that is, the fair value of the company's assets over their tax bases
at the date of conversion). The deferred tax liability will continue to be
remeasured at each balance sheet date until the end of the ten-year period.
Management does not expect that any built-in gains will be realized from the
sale of assets during such period. Approximately $475,000 of built-in gains
related to the required recapture of the tax basis allowance for loan losses
will be recognized over six years, and approximately $130,000 of built-in gains
related to investments will be recognized as the securities are either called or
mature.
If the election for a change to S corporation status had been filed and
effective as of January 1, 1997, it would of had the effect of reducing deferred
income tax assets and retained earnings by approximately $350,000 and reducing
net income by approximately $725,000.
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<PAGE>
MONETARY POLICIES AND ECONOMIC CONDITIONS
The monetary policies of regulatory authorities, including the Federal
Reserve Board, have a significant effect on the operating results of bank
holding companies and their subsidiary banks, including the Holding Company and
the Bank. The Federal Reserve Board regulates the national supply of bank
credit. Among the means available to the Federal Reserve Board to regulate such
supply are open market operations and U.S. government securities, changes in the
discount rate on depository institution borrowings, and changes in reserve
requirements against depository institution deposits. These means are used in
varying combinations to influence the growth and distribution of bank loans,
investments, and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
The laws and regulations to which the Holding Company and the Bank are
subject are constantly under review by Congress, regulatory agencies and state
legislatures. These laws and regulations may be changed dramatically in the
future, which could affect the ability of bank holding companies to engage in
certain activities such as nationwide banking, securities underwriting and
insurance, as well as the amount of capital that banks and bank holding
companies must maintain, premiums paid for deposit insurance and other matters
directly affecting earnings. It is not certain which changes will occur, if
any, or the effect such changes will have on the profitability of the Holding
Company and the Bank, their ability to compete effectively, or the composition
of the financial services industry.
The banking industry also is affected by general economic conditions, such
as inflation, recession, unemployment and other factors. In addition, the
business of the Holding Company and the Bank could be affected by the economic
conditions of the industries in which the major employers in the River Falls and
Prescott areas are involved, including the University of Wisconsin, River Falls.
The foregoing references to applicable laws, statutes, regulations and
legislation or brief summaries thereof which do not purport to be complete and
are qualified in their entirety by reference to such statutes, regulations and
legislation.
COMPETITION
The banking business in Wisconsin is characterized by a high degree of
competition. The principal methods of competition among commercial banks are
price (including interest rates paid on deposits, interest rates charged on
loans, and fees charged) and service (including convenience and quality of
service rendered to customers). In addition to competition among commercial
banks, banks face significant competition from non-banking financial
institutions, including savings and loan associations, credit unions, small loan
companies, and insurance companies.
The Bank's principal competition is from the other financial institutions
located in River Falls and Prescott, Wisconsin. These institutions consist of
River Falls State Bank, M & I Community State Bank, First Federal Savings Bank,
La Crosse -- Madison, and Westconsin Credit Union in River Falls and M & I
Community State Bank in Prescott. The Bank's competition comes from these
institutions and others located near River Falls and Prescott. Insurance
companies, mortgage bankers, and brokerage firms provide additional competition
for certain banking services. The Bank also competes for interest-bearing funds
with issuers of commercial paper and other securities, including the United
States Government.
EMPLOYEES
As of March 31, 1997, the Bank's total number of employees was 76, of which
63 were considered to be full-time employees. No Bank employees are members of
a collective bargaining unit. Management considers its relations with employees
to be good.
PROPERTIES
The Bank's main office is located at 104 East Locust Street, River Falls,
Wisconsin 54022 and consists of approximately 20,000 square feet of space owned
by the Bank. The Bank currently is conducting a feasibility study regarding its
River Falls facility, which is expected to be completed in September 1997.
Bank's management believes that as a result of that study, the Bank will remodel
or add on to its River Falls main office. The Bank's
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<PAGE>
branch office is located in Prescott, Wisconsin at 1151 North Canton Street and
consists of approximately 2,000 square feet of space owned by the Bank. The Bank
is constructing another facility in Prescott to serve as its branch and expects
that construction will be complete and the branch will be moved in September
1997. The new building consists of a total of 8,000 square feet of space, of
which 6,000 will be used by the Bank and 2,000 will be leased by the Bank to
tenants. The building now being used by the Bank for its Prescott branch has
been sold.
LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings known to the Bank
that, in the opinion of the directors and officers of the Bank, would be
materially adverse to the Bank's financial condition, business, or operations.
There are no material pending or threatened legal proceedings known to the Bank
in which any director, executive officer, or affiliate of the Bank (or any
association of any of them) has a material interest that is adverse to the Bank.
MANAGEMENT
The executive officers and directors of the Bank and the Holding Company
are the same and are described in "First National Bancorp of River Falls, Inc.
- -- Management."
EXECUTIVE COMPENSATION
The following table shows compensation earned for services rendered in all
capacities to the Bank by Philip G. Betzel, the President of the Bank, who is
the only executive officer of the Bank whose salary and bonus exceeded $100,000
for the year ended December 31, 1996 (the "Named Executive Officer"):
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------------------
All
Bonus Other
Name and Principal Position Year Salary Earned(1) Compensation(2)
- --------------------------- ---- ------ --------- ---------------
Philip G. Betzel,
President 1996 $130,702 $13,070 $32,398
- --------------------
(1) Represents bonuses earned in 1996 which were paid in 1997.
(2) Consists of (i) $1,043 of life insurance premiums paid by the Bank on
behalf of the Named Executive Officer under a program available to all
eligible employees; (ii) $13,120 contributed by the Bank on behalf of the
Named Executive Officer under The First National Bank of River Falls 401(k)
and Profit Sharing Plan available to all eligible employees; (iii) $6,535
contributed by the Bank on behalf of the Named Executive Officer under The
First National Bank of River Falls Pension Plan available to all eligible
employees; and (iv) $11,700 of Directors' fees. See "First National Bank
of River Falls -- Director Compensation."
THE FIRST NATIONAL BANK OF RIVER FALLS 401(k) AND PROFIT SHARING PLAN
The Bank maintains under Section 401(a) and 401(k) of the Code a profit
sharing plan known as The First National Bank of River Falls 401(k) and Profit
Sharing Plan ("Profit Sharing Plan"), in which executive officers participate on
the same basis as all other employees, subject to certain overall and specific
anti-discrimination restrictions. The Profit Sharing Plan is a defined
contribution profit sharing plan designed to provide retirement benefits to the
employees of the Bank. The Profit Sharing Plan is designed to be funded with
both employee contributions and discretionary Bank contributions. Eligible
employees may elect to reduce their pay by an amount equal to up to 5.0% of
their annual "Earnings," with provision for an additional 7.5% of such
"Earnings" if the Bank does not contribute to the discretionary portion of the
Profit Sharing Plan, and contribute that amount to their account under the
Profit Sharing Plan, subject to a maximum annual dollar limit of $9,500 for each
of 1996 and 1997. All employee contributions under the Profit Sharing Plan are
pre-tax contributions, and no voluntary after-tax contributions are allowed.
"Earnings" consist of the first $150,000 (in 1996) of Form W-2
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<PAGE>
earnings as defined in the Profit Sharing Plan and any amounts contributed by
the employee to a 401(k) plan and certain other benefit plans under the Code but
do not include overtime pay, bonuses, 10% of commissions for any employees whose
compensation consists only of commissions, and all commissions for employees
whose compensation consists partly of commissions.
The Bank may make matching contributions ("Matching Contributions") or
profit sharing contributions ("Profit Sharing Contributions") under the Profit
Sharing Plan, all of which are discretionary. The Matching Contributions are
limited to a percentage, determined in the sole discretion of the Bank, of the
amount of the employee's contributions to the Profit Sharing Plan. The Bank
makes Matching Contributions equal to 50.0% of each participant's contribution
to the Profit Sharing Plan, up to 2.5% of the participant's annual Earnings. In
addition, the Bank, at the discretion of its Board of Directors, may make
further contributions of up to 7.5% of the participant's annual Earnings. There
are legal limits on the amount of Matching Contributions that the Bank can make
for certain highly-paid participants in the Profit Sharing Plan. Each
employee's share of the Bank's Profit Sharing Contribution is determined by
multiplying the amount of such Profit Sharing Contribution by the ratio of that
Employee's Earnings to the total Earnings of all qualified participants in the
Profit Sharing Plan for the plan year.
Matching Contributions and Profit Sharing Contributions contributed by the
Bank under the Profit Sharing Plan for the Named Executive Officer during 1996
are set forth in the Summary Compensation Table under the heading "All Other
Compensation." Matching Contributions and Profit Sharing Contributions for all
of the Bank's employees (including executive officers) participating in the
Profit Sharing Plan in 1996 were $161,000. The Trustee of the Profit Sharing
Plan is Putnam Fiduciary Trust Company ("Putnam"), Boston, Massachusetts, and
the Administrator is Philip G. Betzel, President of the Bank and the Holding
Company.
THE FIRST NATIONAL BANK OF RIVER FALLS PENSION PLAN
The Bank maintains The First National Bank of River Falls Pension Plan
("Pension Plan"), which is a defined contribution money purchase pension plan
designed to provide retirement income and other benefits to the employees of the
Bank. All eligible Bank employees are allowed to participate in the Pension
Plan. The only contributions that eligible employees are allowed to make under
the Pension Plan are "rollover" contributions distributed to the employee from
another employer's qualified retirement plan. Employees need not satisfy the
Pension Plan's age and service requirements before making a rollover
contribution. Under the Pension Plan adopted on January 1, 1996, the Bank is
required to make annual contributions to the Pension Plan equal to 5% of each
eligible employee's "Compensation" for purposes of the Pension Plan.
"Compensation" includes the first $150,000 (in 1996) of Form W-2 earnings as
defined in the Pension Plan and any amounts the employee contributes to a 401(k)
plan and certain other plans under the Code, but it excludes overtime, bonuses,
10% of commissions for an employee whose only remuneration is commissions, and
all commissions for an employee whose compensation consists partly of
commissions. When an employee leaves the employment of the Bank, the employee
receives only that portion of the employer contribution amount that has become
vested. Employees have a 100% vested interest in the employer contribution
amounts when they reach age 55 or when they die or become disabled.
Employer contributions contributed by the Bank under the Pension Plan for
the Named Executive Officer during 1996 are set forth in the Summary
Compensation Table under the heading "All Other Compensation." Employer
contributions for all the Bank's employees (including executive officers)
participating in the Pension Plan in 1996 were $82,000. The Trustee of the
Pension Plan is Putnam, and the Administrator is Mr. Philip G. Betzel.
DIRECTOR COMPENSATION
Each Director receives Directors' fees of $650 per month, except Donna
Smith (the Chairman of the Board) and Philip G. Betzel (the Vice Chairman of the
Board), who receive $1,300 and $975 per month, respectively.
In addition, the Bank has a deferred compensation plan for its Directors
("Directors' Plan"). The Directors' Plan is a defined benefit plan designed to
provide retirement benefits to the Bank's Directors in the form of deferred
compensation. Under the Directors' Plan, each Director is to receive $500 per
month upon retirement, except Philip G. Betzel (the Named Executive Officer and
Vice Chairman of the Board), who is to receive $750 per
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<PAGE>
month. The benefit vests at the rate of 20% per year beginning in the sixth
year of a Director's service as such, with 100% of the benefit becoming vested
at the end of the tenth year of service. The period over which payments are
made ("Payment Period") is determined based on the number of years served on the
Board. Directors receive deferred compensation for a period of one year for
each two years served before January 1, 1991 and for a period of one year for
each four years served after January 1, 1991. The Bank's contributions under
the Directors' Plan are actuarially determined based upon the life expectancy,
assumed retirement date and length of Payment Period for each Director. The
criteria used to determine the amounts contributed or payable does not depend
upon any performance formula or measure. The payment to a Director of benefits
under the Directors' Plan begins when the Director retires from the Board and
continues until the earlier of the end of his or her Payment Period or the
Director's death. After a Director's death, the Director's estate, heirs or
descendants have no right to any remaining payments that would otherwise be
available to that Director under the Directors' Plan. The Bank's contributions
to the Directors' Plan were $7,000 and $24,000, respectively, for the three
months ended March 31, 1997 and the year ended December 31, 1996.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 31, 1997, the beneficial ownership of outstanding shares of
Bank Stock by the Named Executive Officer, the Bank's Directors, all executive
officers and directors as a group, and those Bank shareholders who are the
beneficial owners of more than 5% of the Bank Stock, are as described in the
table included in the portion of this Proxy Statement/Prospectus entitled "First
National Bancorp of River Falls, Inc. -- Security Ownership of Certain
Beneficial Owners and Management."
DESCRIPTION OF BANK STOCK
As of the date hereof, the Bank is authorized to issue 10,000 shares of
Bank Stock, of which 10,000 shares are issued and outstanding. The Bank has
approximately 80 shareholders of record, although it has only 66 shareholders
for purposes of the S corporation provisions of the Code. For further
information about the Bank Stock, see "Comparison of Bank Stock with Holding
Company Stock."
TRANSACTIONS WITH RELATED PARTIES
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with directors, officers, and/or the owners
of more than ten percent (10%) of the Bank Stock or the Holding Company Stock,
as the case may be, or with associates of such persons. Such transactions have
been and will continue to be on substantially the same terms, including
collateral and interest rate, as those prevailing at the time for comparable
transactions with unrelated persons of similar credit standing and do not and
will not involve more than the normal risk of collectibility or present other
unfavorable features. The dollar amount of these loans was $780,000 at March
31, 1997 and $1,298,000 at December 31, 1996. No loans to related person were
restructured to provide for a deferral of payments and/or a reduction in
interest rates.
From time to time, the Bank has entered into nonbanking business
transactions with entities with which some of its directors are affiliated.
Those transactions have been at arm's length and have been at competitive
prices.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bank has adopted Wisconsin law with respect to the indemnification of
the Bank's directors, officers, and employees. Wisconsin law governing
indemnification is substantially similar to the law governing indemnification of
the Holding Company's directors, officers, and employees. For a brief summary
of law, see "First National Bancorp of River Falls, Inc. -- Indemnification of
Directors and Officers and Certain Anti-takeover Provisions." However, with
respect to claims by banking regulators against a national bank's directors,
officers or employees, indemnification is prohibited in cases where (i) a civil
money penalty is assessed, (ii) the individual is removed from office or is
prohibited from participating in the affairs of the bank, or (iii) the
individual is ordered to cease and desist or to take any affirmative action
with respect tothe affairs of the bank.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Bank
pursuant to the foregoing provisions, or otherwise, the Bank 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.
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The Bank has purchased insurance insuring the Bank, its directors and its
officers against liabilities asserted against its directors and officers subject
to certain conditions and limitations. Expenses of an officer or director in
such a proceeding may be advanced based upon her or his agreement to repay such
expenses if it is determined that he or she is not entitled to indemnification.
If the officer or director is successful on the merits in any such proceeding,
his or her expenses shall be paid; otherwise, indemnification can only be made
upon a showing that he or she met the applicable standard of conduct as
determined by a court, a quorum of disinterested directors, by independent legal
counsel, or by the stockholders.
RECOMMENDATION OF THE BANK'S BOARD OF DIRECTORS
The Board of Directors of the Bank recommends that all shareholders vote to
approve the Reorganization. The decision of the Board of Directors of the Bank
to recommend the Reorganization to its shareholders is based on their belief
that the Bank's affiliation with the Holding Company is in the best interests of
the Bank and its shareholders.
Such belief is based on a number of factors, including recent and
historical transactions in the Bank's capital stock, the Board of Directors'
knowledge of the business, operations, properties, assets, earnings and
prospects of the Bank, and the advantages provided by a holding company
corporate organizational structure. The Board of Directors of the Bank did not
attach a relative weight to the factors it considered in reaching its decision,
but considered all factors in making the determination to recommend the
Reorganization to the shareholders. See "The Reorganization -- Reasons for the
Reorganization."
COMPARISON OF BANK STOCK WITH HOLDING COMPANY STOCK
AUTHORIZED SHARES AND PAR VALUE
The Bank currently is authorized to issue 10,000 shares of Bank Stock. All
10,000 shares of Bank Stock are issued and outstanding. After the
Reorganization, the Bank will be authorized to issue 1,000,000 shares of common
stock, $100.00 per share par value. The Holding Company is authorized to issue
20,000 shares of Holding Company Stock, none of which has been issued. Either
the Bank or the Holding Company could increase the amount of authorized stock at
any time by an amendment to its Articles of Association or Incorporation that
has been approved by its shareholders.
The Holding Company will issue less than the full amount of its 20,000
authorized shares in the Reorganization. The Holding Company has no specific
plans at this time regarding the sale or distribution of any authorized but
unissued shares of Holding Company Stock.
VOTING RIGHTS
Each share of Bank Stock has one vote on all matters presented to the
shareholders, except with respect to voting on the election of directors, in
which case both the holders of the Bank Stock and Holding Company Stock have
cumulative voting rights, as hereinafter described. Each act by the
shareholders of the Bank requires a majority vote, except as otherwise provided
by law. (For example, the approval of a merger, including the Reorganization,
requires the affirmative vote of two-thirds (66-2/3%) of the outstanding shares
of Bank Stock.)
There are some differences in the voting requirements imposed on the Bank
by the federal banking laws as compared to those imposed on the Holding Company
by the Wisconsin general corporate laws. For example, under federal banking
law, a shareholder vote of at least two-thirds of the outstanding shares of Bank
Stock is required to approve a Bank merger. Under the Wisconsin Business
Corporation Law, however, a vote of the majority of the outstanding shares of
Holding Company Stock can approve a Holding Company merger.
All of the directors of the Bank and the Holding Company are elected at
each respective annual meeting. Currently, the shareholders of the Bank elect
the Bank's Board of Directors at the Bank's annual meeting of shareholders held
in January of each year. Shareholders may vote for or against the election of a
director or abstain from voting for a director either in person or by proxy.
Bank shareholders exercise direct control over the Bank's affairs by electing
the Bank's directors and by exercising their right to vote on other Bank matters
from time to time.
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The Bank is required by law to grant cumulative voting rights to the
holders of Bank Stock in the election of directors. Although cumulative
voting rights are not required by law to be granted to holders of Holding
Company Stock, management determined to do so to more closely equate the
rights of owning Holding Company Stock to owning Bank Stock. Cumulative
voting rights allows minority shareholders to have more influence in the
election of directors than they would have with standard voting rights. For
example, a holder of 500 shares of Bank Stock voting on the election of five
directors would have 2,500 votes (500 shares multiplied by the number of
directors). These votes then could be voted by the shareholder for or
against any number of directors, including only one or two directors.
If the proposed Reorganization is consummated, the shareholders who receive
Holding Company Stock will elect the Holding Company Board of Directors, who
will annually elect the Holding Company officers. The officers of the Holding
Company will vote the shares of Bank Stock held by the Holding Company, and
therefore will elect the Bank Board of Directors, acting pursuant to the
instructions of the Board of Directors of the Holding Company. There is no
requirement that the boards of the Bank and of the Holding Company be identical.
Shareholders of the Holding Company will exercise direct control over the
Holding Company by electing the Holding Company directors and by exercising
other voting rights, and therefore will exercise indirect control over the Bank.
The direct control of the Bank Stock will be exercised by the Holding Company
Board of Directors, who are obligated to act in the best interests of the
Holding Company shareholders.
DIVIDENDS
The Bank has paid cash dividends on the Bank Stock each year since at least
1984, and it expects to continue to pay dividends in the future. Recent annual
dividends (paid semi-annually) have been as follows:
DIVIDEND
YEAR PER SHARE
---- ---------
1992 $55
1993 $65
1994 $70
1995 $80
1996 $90
After the Effective Time of the Reorganization, management of the Bank
intends to declare a dividend to the Holding Company, as the Bank's only
shareholder, in an amount sufficient to repay the Bridge Loan. The amount of
the Bridge Loan will depend in large part on the number of shares of Bank Stock
purchased by the Bank in the Tender Offer. The amount of the Bridge Loan is
estimated to be up to $2,370,000.
The Board of Directors of the Holding Company intends to pay cash dividends
on the Holding Company Stock at least annually. Substantially all of the
Holding Company's assets will consist of its investment in the Bank, and
immediately after the Reorganization, the availability of funds for dividends to
be paid by the Holding Company to holders of Holding Company Stock will depend
primarily upon the receipt of dividends from the Bank. Dividends of the Holding
Company will also depend on its future earnings, the financial condition of the
Holding Company and its subsidiaries, and other factors.
Whether the dividends paid by the Holding Company in the future will be
equal to, less than, or more than the dividends paid by the Bank in the past
cannot be predicted. If the Holding Company incurs indebtedness, such as
Reorganization expenses or a loan to purchase Holding Company Stock, Bank
dividends received by the Holding Company will be applied toward that
indebtedness, at least in part, rather than be paid to Holding Company
shareholders as dividends from the Holding Company.
Under applicable national banking law, the Bank is restricted as to the
maximum amount of dividends it may pay on the Bank Stock. A national bank may
not pay dividends except out of undivided profits. Additionally, a national
bank may not pay any dividend until an amount equal to at least 10% of net
income for the preceding two consecutive half years has been transferred to
surplus. Such transfers are required until the surplus fund equals 100% of the
bank's common capital. A bank's ability to pay dividends may also be restricted
if losses in excess of undivided profits have been charged against surplus and
in certain other circumstances. Federal regulators have authority to prohibit a
bank from engaging in any action deemed by them to constitute an unsafe or
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unsound practice, including the payment of dividends. In addition to the
foregoing, Wisconsin business corporations such as the Holding Company are
prohibited by Wisconsin law from paying dividends while they are insolvent or if
the payment of dividends would render them unable to pay debts as they come due
in the usual course of business. See "Supervision and Regulation."
MARKET FOR THE STOCK
No established public trading market exists for the Bank Stock, and no
brokerage firm regularly makes a market for the Bank Stock. The Bank Stock is
infrequently traded, and the current market for it is limited. The Bank is
prohibited by law from purchasing its own shares except in limited
circumstances.
Similarly, there will be no established public trading market for Holding
Company Stock. Unlike the Bank, however, the Holding Company generally will be
able to purchase its own shares. In some circumstances, a bank holding company
may not purchase its own shares without giving prior notice to the Federal
Reserve Board. If the Holding Company desires to purchase as much as 10% (in
value) of its own Holding Company Stock in any 12-month period, it may be
required in some instances to obtain approval for so doing from the Federal
Reserve Board. If less than 10% is purchased, however, the Holding Company is
restricted in acquiring its own shares only by sound business judgment, its
prior commitments, and the consolidated financial condition of the Holding
Company and its subsidiaries. In no event may a Wisconsin corporation purchase
its own shares when the corporation is insolvent or when such a purchase would
make it insolvent.
CALL OPTION
The description of the Call Option set forth herein is qualified in its
entirety by reference to the Holding Company's Articles of Incorporation, a copy
of which is available upon request to the Bank.
SUMMARY OF TERMS OF CALL OPTION
Under certain limited circumstances related to the status of the Holding
Company as an S corporation under Subchapter S of the Code, the Holding
Company's Articles of Incorporation provide that it will have an option (the
"Call Option") to "call" or acquire shares of Holding Company Stock under
certain circumstances. The Bank has no similar right to purchase shares of Bank
Stock. Specifically, upon the occurrence of the following events (the
"Triggering Events"), the Holding Company, at the sole discretion of a majority
of its Board of Directors, will have an option to purchase the shares of Holding
Company Stock held by the referenced shareholder, and the shareholder will be
required to sell his or her Holding Company Stock to the Holding Company upon
exercise of the Call Option:
1. Any transfer by a shareholder of shares of Holding Company Stock
(including, without limitation, voluntary transfers, transfers at
death and involuntary transfers such as bankruptcy and divorce) (a) to
any person or entity that is an "ineligible shareholder" as defined in
Subchapter S of the Code; OR (b) so that the Holding Company ceases to
be, or will cease to be, an "S corporation" as defined by the Code; OR
(c) which results in both an increase in the number of shareholders of
the Holding Company as determined by Section 1361 of the Code AND such
increase of shareholders would result in there being more than 65
shareholders of the Holding Company; or
2. Any action or inaction by a shareholder which causes the Holding
Company to fail to comply with the Subchapter S laws and regulations
of and under the Code; or
3. The failure of any current or proposed shareholder of the Holding
Company, upon the demand of the President of the Holding Company, to
elect S corporation status as defined by Subchapter S of the Code.
Any attempt by a shareholder to transfer any shares of Holding Company
Stock as described in paragraph 1 above will be null and void.
Upon the occurrence of any of the Triggering Events, the Holding Company
will have the Call Option to purchase the shares of Holding Company Stock
transferred or owned by the shareholder taking or failing to take the actions
described above. The Holding Company shall have such option for a term of 120
days immediately
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following the date the President of the Holding Company becomes aware of the
occurrence of a Triggering Event. The exercise price of the Call Option
will be equal to (i) 1.25 multiplied by the "Tangible Book Value" of the Bank
and any other bank subsidiaries of the Holding Company as of the
Determination Date plus (ii) 100% of the value of the intangible assets
reflected on the Consolidated Financial Statements of the Bank and any other
bank subsidiaries of the Holding Company as of the "Determination Date" plus
(iii) 100% of the value of all of the assets of the Holding Company
(excluding the Holding Company's investment in the Bank and any other bank
subsidiaries of the Holding Company) on the Determination Date minus (iv) the
amount of the liabilities of the Holding Company on the Determination Date,
all divided by the number of outstanding shares of Holding Company Stock.
All values of assets and amounts of liabilities will be determined in good
faith by the Holding Company. The term "Tangible Book Value" means the sum
of the balances, determined as of the Determination Date, in the ledger
accounts of the Bank and any other Holding Company bank subsidiaries for
their capital stock, surplus, and undivided profits (including year-to-date
earnings after income taxes but excluding their reserve for loan losses and
intangible assets). The term "Determination Date" is the date of purchase of
the shares upon exercise of the Call Option. Assuming the occurrence of a
Triggering Event, and based on the terms of the Call Option, the exercise
price on December 31, 1996 and March 31, 1997 would have been $2,032.96 and
$2,029.86, respectively.
The purpose of the Call Option is to protect the status of the Holding
Company as an S corporation under the Code. See "First National Bancorp of
River Falls, Inc. -- Subchapter S Status of Holding Company."
POTENTIAL ANTI-TAKEOVER AND OTHER EFFECTS OF CALL OPTION
Because the terms of the Call Option are contained in the Holding Company's
Articles of Incorporation, they will apply to all owners of shares of Holding
Company Stock, whether now or in the future. The Holding Company's Call Option
may reduce the ability of third parties to obtain control of the Holding
Company. In particular, the Call Option could make acquisitions of large blocks
of Holding Company Stock by other buyers more difficult. The Call Option also
could discourage tender offers, proxy contests, or other attempts to gain
control of the Holding Company through the acquisitions of Holding Company
Stock. Shareholders who might support the takeover of the Holding Company in a
given situation could amend, alter or repeal the Call Option provision only by
obtaining an affirmative vote of over fifty percent (50%) of the issued and
outstanding shares.
Because of these effects, the Call Option may render removal of current
management by a new owner less likely. This could be the case whether or not
such removal would be beneficial to shareholders generally. Another overall
effect of the provision may be to limit shareholder participation in
transactions such as tender offers.
Whether the Call Option serves as an advantage to management or to
shareholders depends on the particular circumstances. In a hostile tender
offer, for example, members of management and shareholders who support them may
benefit from the provision, while shareholders who want to participate in the
tender offer or remove management would be disadvantaged.
The Holding Company's Articles of the Incorporation and Bylaws do not
contain provisions having an anti-takeover effect other than the Call Option
provision described above.
LEGEND ON HOLDING COMPANY STOCK CERTIFICATES
Each certificate representing shares of Holding Company Stock will bear a
legend in substantially the following form:
The shares of common stock represented by this certificate (the
"Shares") and may not be transferred until First National Bancorp of River
Falls, Inc. (the "Corporation") has been furnished with evidence
satisfactory to counsel for the Corporation that there has been compliance
with all applicable federal and state or territorial securities laws with
respect to the Shares, including, without limitation, an opinion of counsel
satisfactory in form and substance to counsel for the Corporation that the
offer and sale of the Shares is exempt under federal and state securities
laws. Further, the Shares are subject to the option of the Corporation to
purchase said Shares upon the occurrence of certain events as provided in
Article VIII of the Corporation's Articles of Incorporation.
The federal and state securities law requirements for resale of the Holding
Company Stock referred to in the first sentence of the foregoing legend
are described in the portion of this Proxy Statement/Prospectus entitled
"The Reorganization -- Resale of Holding Company Stock." If a
shareholder obtains an opinion satisfactory to legal counsel for the
Holding Company that such requirements have been met, the transfer of
the Holding Company Stock will be allowed as meeting the requirements of
federal and state securities laws. However, such transfer may be
subject to other conditions, such as the approval of bank regulatory
authorities and the applicability of the Call Option. See"-- Summary of
Terms of Call Option."
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VALUE OF BANK STOCK
As of March 31, 1997 and December 31, 1996, the per share book value of the
Bank Stock, according to the Bank's internal financial statements, was
approximately $1,624 and $1,626, respectively. To the best knowledge of the
Bank, in 1997 there was one sale of Bank Stock at the price of $2,033 per
share.
At least initially, the book value of one share of Holding Company Stock
will be equivalent to the book value of a share of Bank Stock. There is no
assurance, however, that those values will remain equivalent, particularly if
the Holding Company should acquire another bank or establish a non-banking
subsidiary to conduct a banking-related business. Bank Stock will not reflect
the value of any other Holding Company subsidiaries that may be established in
the future.
In addition, during the period from August 4, 1997 until the close of
business on September 12, 1997, the Bank is conducting the Tender Offer in which
_______ shares of Bank Stock had been tendered to the Bank through _______,
1997. The price to be paid by the Bank in the Tender Offer is $2,250 per share
of Bank Stock.
PREEMPTIVE RIGHTS
Shareholders of the Bank currently have the right to subscribe for and
purchase any newly-issued shares of Bank Stock; such rights are known as
preemptive rights. Specifically, upon the issuance by the Bank of shares of
Bank Stock, shareholders of the Bank would have the right to purchase a number
of such shares of Bank Stock equal to the total number of newly-issued shares of
Bank Stock multiplied by a fraction, the numerator of which is the number of
shares owned by that shareholder and the denominator of which is the total
number of outstanding shares of Bank Stock. The terms under which a Bank
shareholder may purchase shares upon the exercise of preemptive rights are the
same terms under which the Bank is issuing shares. For example, if a
shareholder owned 500 shares of Bank Stock, the Bank had 10,000 shares of Bank
Stock outstanding, and the Bank was issuing an additional 2,500 shares for
$2,250 per share in cash, that shareholder would have the right to purchase 125
shares of the newly-issued shares of Bank Stock (determined by multiplying 2,500
shares by 500/10,000) for $2,250 per share in cash. Upon consummation of the
Reorganization, preemptive rights for Bank Stock will be eliminated because the
Holding Company will own 100% of the Bank Stock.
Applicable law does not require that the Holding Company shareholders
have preemptive rights. However, in order to more closely equate the rights
of owning Holding Company Stock to owning Bank Stock, management of the
Holding Company has determined to grant to holders of Holding Company Stock
preemptive rights that are similar to those that presently exist for the Bank
Stock. The preemptive rights are set forth in the Holding Company's Articles
of Incorporation prepared by the Bank's management and filed with the
Wisconsin Secretary of State to form the Holding Company. The Articles can
be amended only upon the affirmative vote of the holders of a majority of the
outstanding shares of the Holding Company Stock.
OTHER
In the event of the voluntary dissolution, liquidation or winding up of the
Holding Company or the Bank, the holders of the Holding Company Stock or the
Bank Stock, as the case may be, would be entitled to receive, pro rata, after
satisfaction in full of the prior rights of creditors (including holders of
indebtedness), all the remaining assets available for distribution. Neither the
Bank Stock nor the Holding Company Stock is convertible into any other security.
Authorized but unissued shares of Holding Company Stock may be issued for cash
or other consideration upon the authorization of the Board of Directors for
proper corporate purposes.
All of the shares of Bank Stock and Holding Company Stock issued or to be
issued is or will be fully paid and nonassessable, except as provided by law.
The Wisconsin Business Corporation Law imposes a statutory liability on
shareholders of every corporation up to an amount equal to the par value of
their shares, or an amount equal to the consideration for which their shares
without par value were issued, for all debts owing to employees of the
corporation for services performed for such corporation, but not exceeding six
months' service in any one case.
SUPERVISION AND REGULATION
The following discussion of applicable statutes, regulations and policies
are brief summaries thereof, do not purport to be complete and are qualified in
their entirety by reference to such statutes, regulations and policies.
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REGULATION OF HOLDING COMPANY
The Holding Company, if the Reorganization is successful, will be a bank
holding company subject to the supervision of the Federal Reserve Board under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank
holding company, the Holding Company will be required to file with the Federal
Reserve Board annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board
may also make examinations of the Holding Company and the Bank.
APPROVAL OF ACQUISITIONS
The Holding Company must obtain the approval of the Federal Reserve Board
prior to consummating the following: the acquisition of all or substantially
all of the assets of a bank or another bank holding company; the merger or
consolidation with another bank holding company; or the direct or indirect
acquisition of ownership or control of any voting shares of a bank or a bank
holding company, if, after such acquisition, the Holding Company would own or
control more than 5% of such voting shares (unless it already owns or controls
the majority of such shares). In addition, the direct or indirect acquisition
by a bank holding company of more than 5% of the voting shares, or all or
substantially all of the assets, of a bank located in another state requires
approval by the Federal Reserve Board. Although such approval may generally be
granted without regard to any contrary laws of the second state, certain
additional state or federal restrictions on intrastate banking may apply. See
"Supervision and Regulation -- Intrastate Banking."
A holding company must also obtain Federal Reserve Board approval prior to
redeeming any of its equity securities in an amount equal to 10% or more of its
net worth in any 12-month period. Furthermore, under certain circumstances, any
redemptions, dividends or distributions with respect to a holding company's
equity securities may be considered an unsafe or unsound practice by the Federal
Reserve Board.
APPROVAL OF CHANGES IN CONTROL
Before any "company," as defined in the Holding Company Act, may acquire
"control," as defined in the Holding Company Act, over the Holding Company, the
prior approval of the Federal Reserve Board generally is required. The term
"company" is defined in the Holding Company Act to include any bank,
corporation, general or limited partnership, association or similar
organization, business trust or any other trust (unless by its terms, the trust
must terminate either within 25 years or within 21 years and 10 months after the
death of individuals living on the effective date of the trust). The term
"control" is defined in the Holding Company Act to include the following:
ownership, control or power to vote 25% or more of the outstanding shares of any
class of voting stock of a bank or other company, directly or indirectly or
acting through one or more persons; control in any manner over the election of a
majority of the directors, trustees, or general partners (or individuals
exercising similar functions) of the bank or other companies; the power to
exercise, directly or indirectly, a controlling influence over the management or
policies of the bank or other company as determined by the Federal Reserve
Board; or conditioning in any manner of the transfer of 25% or more of the
outstanding shares of any class of voting securities of a bank or other company
upon the transfer of 25% or more of the outstanding shares of any class of
voting securities of another bank or other company. In addition, before any
individual or entity which is not required to seek prior approval from the
Federal Reserve Board as forth above may acquire control of the Holding Company,
prior notice to the Federal Reserve Board is required pursuant to Regulation Y
of the Federal Reserve Board.
Under Regulation Y, the following transactions constitute, or are presumed
to constitute, the acquisition of "control" requiring prior notice: (i) the
acquisition of any voting securities of a bank holding company if, after the
transactions, the acquiring person (or persons acting in concert) owns,
controls, or holds the power to vote 25% or more of any class of voting
securities of the institution; or (ii) the acquisition of any voting securities
of a bank holding company if, after the transaction, the acquiring person (or
persons acting in concert) owns, controls, or holds with the power to vote 10%
or more (but less than 25% of any class of voting securities of the institution,
and if: (x) the institution has registered securities under Section 12 of the
Securities Exchange Act of 1934 ("Exchange Act"), or (y) no other person will
own a greater percentage of that class of voting securities immediately after
the transaction. The Holding Company Stock is not registered under the Exchange
Act.
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PERMISSIBILITY OF OTHER FINANCIAL ACTIVITIES
Under the Holding Company Act, the Holding Company will be clearly
permitted, directly or through subsidiaries, to engage in a variety of financial
activities (and to own shares of companies engaged in certain activities) found
by the Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank holding company
normally is not permitted, however, to acquire direct or indirect ownership of
more than 5% of the voting shares of any company which is not a bank or is
engaged in activities determined by the Federal Reserve Board to not be closely
related to banking. Certain exemptions are available with respect to
subsidiaries engaged in servicing and liquidating activities, companies acquired
by a bank holding company in satisfaction of debts previously contracted, or
companies engaged in certain insurance activities.
Another principal exception to the general prohibition against more than 5%
ownership of subsidiaries engaged in nonbanking activities allows the
acquisition, sometimes subject to an application or notice process, of interests
in companies whose activities are found by the Federal Reserve Board, by order
or regulation, to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the activities that have been
previously determined by regulation to be closely related to banking are making
or servicing loans; trust company functions; insurance agency activities and
insurance underwriting; limited leasing activities; community development;
performing certain data processing services; providing management consulting
services to depository institutions; acting as an investment or financial
advisor; and providing securities brokerage services. Other activities approved
by the Federal Reserve Board include consumer financial counseling; futures and
options advisory services; check guaranty services; collection agency and credit
bureau services; and real and personal property appraisals.
In determining whether a particular activity is a proper incident to
banking or managing or controlling banks, the Federal Reserve Board considers
whether the performance of such activity by an affiliate of the holding company
can reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, which outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices. The
Federal Reserve Board also differentiates between activities commenced DE NOVO
and activities commenced through the acquisition of a going concern and is
empowered to presume that expansion of a nonbanking activity DE NOVO results in
benefits to the public through increased competition.
PROHIBITIONS OF CERTAIN RELATED TRANSACTIONS
The Holding Company and the Bank are prohibited from engaging in certain
tie-in arrangements in connection with the extension of credit, the lease or
sale of any property, or the furnishing of services. The Bank is also subject
to certain restrictions imposed by the Federal Reserve Act on extensions of
credit to, investments in the stock or other securities of, the taking of such
stocks or securities as collateral for loans to, or the purchase of assets from
or the guarantee of obligations of, the Holding Company or any of its
subsidiaries. The provisions of Section 23A of the Federal Reserve Act and
related statutes place limits on all insured banks (including the Bank) as to
the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, their parent bank holding company and certain of such
holding company's other subsidiaries and as to the amount of advances to third
parties collateralized by the securities or obligations of bank holding
companies or their subsidiaries. In addition, most of these loans and certain
other transactions must be secured in prescribed amounts. Certain exemptions
from the foregoing restrictions apply to transactions between 80% or more owned
bank subsidiaries of the same bank holding company. The Holding Company will
own all of the Bank Stock.
CAPITAL ADEQUACY STANDARDS
Each federal banking regulatory agency, including the Federal Reserve
Board, is required to cause banking institutions to achieve and maintain
adequate capital by establishing minimum levels of capital and other appropriate
measures. The Federal Reserve Board has issued capital adequacy guidelines,
which are applicable to the Holding Company and which affect its ability to pay
dividends. These guidelines provide for a minimum ratio of qualifying total
capital risk-weighted assets of 8.00%, of which at least 4.00% should be in the
form of Tier 1 capital. These guidelines and regulations further provide that
capital adequacy is to be considered on a case-by-case basis in view of various
qualitative factors that affect a bank or bank holding company's overall
financial condition.
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For purposes of calculating these ratios, an institution's "qualifying
total capital" primarily consists of Tier 1 and Tier 2 capital. Tier 1 capital
("core capital elements") generally consists of the sum of common stockholders'
equity, qualifying non-cumulative perpetual preferred stock (including related
surplus), qualifying cumulative perpetual preferred stock (including related
surplus and subject to certain limitations), and minority interests in
consolidated subsidiaries, minus goodwill and certain other intangible assets
(except certain mortgage servicing rights and limited purchased credit card
relationships). Tier 2 capital ("supplementary capital elements") includes the
allowance for loan and lease losses; perpetual preferred stock and related
surplus; hybrid capital investments, perpetual debt and mandatory convertible
debt securities; and term subordinated debt and intermediate term preferred
stock, including related surplus. The Federal Reserve Board's capital adequacy
guidelines also permit certain perpetual debt securities to be treated as
primary capital and impose certain limitations on the amount of mandatory
convertible instruments, perpetual preferred stock, and perpetual debt that may
qualify as primary capital. Therefore, subject to definition and limitation
under applicable rules and regulations, "qualifying total capital" consists of
the sum of Tier 1 and Tier 2 capital elements (limited to 100% of Tier 1
capital), less certain investments in banking or finance subsidiaries that are
not consolidated for accounting or supervisory purposes, reciprocal holdings of
banking organizations' capital securities, or other items at the direction of
the Federal Reserve Board.
After the Reorganization, the Holding Company's capital will be in excess
of the Federal Reserve Board's minimum standards. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Financial
Condition -- Capital Resources." The Federal Reserve Board has issued a policy
statement that discourages bank holding companies experiencing earnings
weaknesses, inadequate capital, or other serious problems from paying dividends
that are not covered by earnings or are derived from borrowed funds or unusual
or nonrecurring gains. Bank holding companies also are expected to maintain
adequate capital to meet financial obligations as they come due and to serve as
a financial resources to their subsidiaries. Capital directives, including
cease and desist orders, formal agreements, memoranda of understanding, and
board of director resolutions, may be issued to mandate the maintenance of
adequate capital levels.
ENFORCEMENT POWERS OF FEDERAL RESERVE BOARD
The Federal Reserve Board has enforcement powers over bank holding
companies and their nonbanking subsidiaries to forestall activities that
represent unsafe or unsound practices or constitute violations of law. These
powers may be exercised through the issuance of cease and desist orders or other
actions. The Federal Reserve Board is also empowered to assess civil penalties
against companies or individuals who violate the Holding Company Act in amounts
of up to $1,000,000 for each day's violation, to order termination of nonbanking
activities of nonbanking subsidiaries of bank holding companies, and to order
termination of ownership and control of nonbanking subsidiaries by bank holding
companies.
REGULATION OF BANK
As a national banking association, the Bank is subject to primary
regulation by the OCC. All national banks are also members of the Federal
Reserve System and, to a limited extent, some regulations promulgated by the
Federal Reserve Board apply to the Bank. In addition, because the deposits of
the Bank are insured up to the applicable limit (currently $100,000) by the
FDIC, the FDIC has certain regulatory powers with respect to the Bank.
REGULATION BY THE OCC
The OCC issues charters and regulations, conducts examinations, and
generally supervises the operation of national banks. This supervision extends
to a comprehensive regulatory scheme governing, among other things, capital
requirements, lending limits, transactions between affiliates, and the safety
and soundness of the Bank's activities in general. In addition, the consent of
the OCC generally would be required for any major corporate reorganization
involving the Bank, including a merger or significant purchase or disposition of
assets. Any national bank which does not operate in accordance with or conform
to regulations, policies and directives may be sanctioned for non-compliance.
For example, proceedings may be instituted against any member institution or any
director, officer, employee or person participating in the conduct or affairs of
such institution who engages in unsafe and unsound practices, which includes a
violation of applicable laws and regulations. In addition, the FDIC
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<PAGE>
has secondary responsibility for regulation of the Bank, and it has the
authority to terminate the insurance of accounts pursuant to procedures
established for that purpose.
REGULATORY RESTRICTIONS ON PAYMENT OF DIVIDENDS; CAPITAL ADEQUACY STANDARDS
Most of the Holding Company's cash flow and income will be derived from
dividends paid to it by the Bank. Federal laws and OCC regulations prohibit it
the withdrawal of any portion of the Bank's capital and place certain statutory
limitations on the payment of dividends. National banks may pay dividends in an
amount no greater than the amount of its undivided profits, subject to other
provisions of applicable law. In addition, the board of directors may declare
dividends of so much of the undivided profits of the bank as the directors deem
expedient, except that until the surplus fund of such bank equals its common
capital, no dividends may be declared unless there has been carried to the
surplus fund not less than 10% of its net income of the preceding two
consecutive six-month periods in the case of annual dividends; provided,
however, that any amounts paid into a fund for the retirement of any preferred
stock out of a bank's net income for such period or periods shall be deemed to
be additions to its surplus fund if, upon the retirement of such preferred
stock, the amounts so paid into such retirement fund may then properly be
carried to surplus. In any such case, the bank is required to transfer to
surplus the amounts so paid into such retirement fund on account of the
preferred stock as such stock is retired. In addition, the approval of the OCC
is required if the total of all dividends declared by a bank in any calendar
year exceeds the total of its net income of that year combined with its retained
net income of the preceding two years, less any required transfers to surplus or
a fund for the retirement of any preferred stock.
The payment of dividends by any national bank is affected by requirements
that banks maintain adequate capital pursuant to the capital adequacy guidelines
issued by the OCC. These guidelines provide for a minimum ratio of qualifying
total capital (after deductions) to risk-weighted assets of 8.0%. They further
provide that capital adequacy is to be considered on a case-by-case basis in
view of various qualitative factors that affect a bank or bank holding company's
overall financial condition. For purposes of calculating these ratios, Tier 1
capital generally consists of the sum of common stockholders' equity, non-
cumulative perpetual preferred stock, and minority interests in consolidated
subsidiaries. Tier 2 capital is comprised of the allowance for loan and lease
losses, cumulative perpetual preferred stock, long-term preferred stock,
convertible preferred stock and any related surplus, hybrid capital instruments
and term subordinated debt instruments. Each of the elements in Tier 2 capital
is subject to limitations. Several items, such as goodwill and certain other
intangible assets and deferred tax assets, are deducted from Tier 1 capital when
calculating a risk-based capital ratio. In addition, investments (both equity
and debt) in unconsolidated banking and finance subsidiaries and reciprocal
holdings of bank capital instruments are deducted from total capital. A
national bank's "qualifying capital base" consists of the sum of Tier 1 (after
deductions) and qualifying Tier 2 capital elements as defined in applicable
rules and regulations. "Risk-weighted assets" also are calculated in accordance
with applicable rules and regulations. The Bank is in compliance with the
Federal Reserve Board's minimum capital guidelines described above because it
has capital ratios above such guidelines. At March 31, 1997, the Bank's
leverage ratio was 10.4%, its total risk-based capital ratio was 17.3%, and its
Tier 1 risk-based ratio was 16.0%.
The above regulations and restrictions on dividends paid by the Bank may
limit the Holding Company's ability to obtain funds from such dividends for its
cash needs, including funds for the payment of operating expenses and debt
service. In addition, the OCC would take the position that it has the power to
prohibit the Bank from paying dividends if, in its view, such payments would
constitute unsafe or unsound banking practices.
PROHIBITIONS ON CERTAIN RELATED TRANSACTIONS
Section 23B of the Federal Reserve Act prohibits member banks (such as the
Bank) and their subsidiaries and certain affiliates from engaging in certain
transactions (including, for example, loans) with certain affiliates unless the
transactions are substantially the same, or at least as favorable to such bank
or its subsidiaries, as those prevailing at the time for comparable transactions
with or involving other non-affiliated companies. In the absence of such
comparable transactions, any transaction between a member bank and its
affiliates must be on terms and under circumstances, including credit standards,
that in good faith would be offered to or would apply to non-affiliated
companies.
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<PAGE>
INTEREST RATES AND USURY LAWS
The National Bank Act allows national banks to charge "interest" at the
rate allowed by the state where the bank's home office is located to customers
within that state and to customers located outside its home state. The term
"interest" in this context is viewed expansively to include many lending
charges, as expressed by the OCC in a recently issued Interpretive Letter and a
recent United States Supreme Court decision. Accordingly, the Bank, with its
main office located in Wisconsin, may charge the maximum rate allowable under
Wisconsin law.
INTERSTATE BANKING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") permits interstate banking and branching by national
banks on a national level, thereby eliminating geographic barriers. Pursuant to
the Riegle-Neal Act, the Federal Reserve Board has the authority to approve an
application by an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than the home state of such bank holding
company. Although state laws may in some ways restrict interstate branching,
the Riegle-Neal Act provides that approval by the Federal Reserve Board
generally may be granted without regard to whether such a transaction is
prohibited under the laws of either state.
The Riegle-Neal Act contains three main branching provisions which focus on
the following issues: interstate banking; interstate branching; and interstate
branching on a DE NOVO basis. First, with regard to interstate banking (as
discussed above), the Riegle-Neal Act essentially provides that a bank holding
company may acquire a bank in another state regardless of contrary state law.
Second, effective as of June 1, 1997, federal regulatory agencies will be
permitted to approve mergers between insured banks with different home states
regardless of contrary state law. Notwithstanding the foregoing, a state may
"opt out" of this law by passing legislation which expressly prohibits
interstate mergers. If a state does so, it must enact the law before June 1,
1997, and the law must be non-discriminatory; that is, the law must apply
equally to state and national banks. National banks with their home office in a
state where legislation is passed to "opt out" of the Riegle-Neal Act's
interstate branching provisions would be effectively prohibited from
participating in any interstate merger. Similarly, banks from outside the state
would be prohibited from merging with in-state banks. At this time, it is
unclear whether a state's decision to "opt out" is an irreversible action. For
those states which want to expedite the effective date of this provision of the
Riegle-Neal Act, state legislatures may "opt in" at any time prior to June 1,
1997. By doing so, a state will pave the way for interstate mergers prior to
the effective date of June 1, 1997. If a state takes no legislative action to
"opt out" or to "opt in" early, then interstate mergers will be permitted with
banks which maintain their home offices in that state as of June 1, 1997.
Under the Riegel-Neal Act, there is a distinction between the acquisition
of an entire bank and the acquisition of a single branch of a bank. The
foregoing discussion relates to the acquisition of an entire bank. Under the
Riegle-Neal Act, however, if state law expressly allows it, a bank may acquire a
single branch of a bank in another state.
Wisconsin has taken no legislative action to either "opt-in" or "opt-out"
of the provisions of the Riegle-Neal Act. Therefore, as noted above, beginning
June 1, 1997, interstate mergers are permitted with banks which maintain their
home offices in Wisconsin. Wisconsin state law does not expressly allow the
acquisition of DE NOVO branches. Therefore, single branch acquisitions which
might otherwise be allowable under the Riegle-Neal Act are prohibited.
With regard to resulting operations, any main office or branch operating at
the time of an interstate merger may be retained and operated as a main office
or branch. Additional branching by the resulting bank is permitted wherever any
bank involved in the transaction could have branched under federal and state law
prior to the merger. Thus, if the Bank engaged in an interstate merger with
Bank A from State A, and assuming the laws of the Bank's home state and State A
permit interstate bank mergers, the resulting bank could be operated as it was
prior to the merger, either as a main office or branch. Furthermore, the
resulting bank could thereafter establish branch offices wherever the Bank or
Bank A could establish branches under federal and state law prior to the merger.
The third key provision of the Riegle-Neal Act addresses interstate
branching on a DE NOVO basis. Effective June 1, 1997, this provision permits
federal regulators to approve an application by an insured bank to
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<PAGE>
establish and operate a DE NOVO branch in the state in which it has no branches
and which is not its home state. For purposes of the Riegle-Neal Act, a DE NOVO
branch is defined as a branch office of a national bank or state bank that is
originally established as a branch and does not become a branch as a result of
an acquisition, conversion, merger or consolidation. However, a state must
specifically "opt in" to this section of the Riegle-Neal Act. In order to do so
successfully, a state must pass legislation before June 1, 1997 which
specifically permits DE NOVO branching and which is nondiscriminatory as to its
application. After June 1, 1997, if a national bank opens a DE NOVO branch in a
state which permits DE NOVO branching, the bank then would be able to avail
itself of the benefits of banking laws in that state which apply to state-
chartered banks, including intrastate banking laws. The Wisconsin legislature
did not expressly provide for DE NOVO branching. Therefore, DE NOVO branching
into Wisconsin is prohibited.
DEREGULATION
There have been significant changes in the banking industry in past years.
Many of these changes have been effected by federal legislation intended to
deregulate the banking industry. This legislation has, among other things,
eliminated interest rate restrictions on time deposit accounts and increased the
power of nonbanks to expand into traditional banking services.
Future changes in the banking industry may include some modification of
prohibitions on the types of businesses in which bank holding companies may
engage. In addition, other types of financial institutions, including mutual
funds, securities brokerage companies, insurance companies, and investment
banking firms, have been given, and may continue to be given, powers to engage
in activities which generally have been engaged in only by banks. Such changes
may place the Holding Company in more direct competition with these other
financial institutions.
LIMITATIONS ON ACQUISITIONS
The Holding Company is subject to laws which may have the effect of making
it more difficult to acquire voting control of the Holding Company, although the
Bank's management is not aware of any recent efforts that might be made to
obtain control of the Holding Company.
Any "change in control" of the Holding Company would be subject to the
prior approval of the applicable bank regulatory authorities, including the
Federal Reserve Board under the Holding Company Act and Regulation Y of the
Federal Reserve Board. See "Supervision and Regulation -- Regulation of Holding
Company." The prior approval of the Federal Reserve Board is required before
any "company" may acquire "control" over the Holding Company (as defined in the
Holding Company Act). In addition, before any individual or entity which is not
required to seek prior approval from the Federal Reserve Board may acquire
control of the Holding Company, prior notice to the Federal Reserve Board is
required pursuant to Regulation Y of the Federal Reserve Board. Under
Regulation Y, a "change in control" includes the acquisition of voting
securities which would cause the acquiring person to own, control, or hold,
after such acquisition, 10% or more (but less than 25%) of any class of voting
securities of a bank holding company (i) if the bank holding company has
registered securities under the Exchange Act, or (ii) no other person will own a
greater percentage of that class of voting securities immediately after the
transaction. The Holding Company Stock is not registered under the Exchange
Act.
As required by law, shareholders of the Bank had the right to subscribe and
purchase any additional shares of Bank Stock issued by the Bank; such rights are
known as preemptive rights. Specifically, upon the issuance by the Bank of
shares of Bank Stock, shareholders of the Bank would have the right to purchase
a number of newly-issued shares of Bank Stock equal to the number of shares of
Bank Stock issued multiplied by a fraction, the numerator of which is the number
of shares owned by a shareholder of the Bank and the denominator of which is the
total number of outstanding shares of Bank Stock. For example, if a shareholder
owned 200 shares of Bank Stock, the Bank had 5,000 shares of Bank Stock
outstanding, and the Bank was issuing an additional 10,000 shares, that
shareholder would have the right to purchase 400 shares of the newly-issued Bank
Stock, determined by multiplying the 10,000 shares offered by a fraction, the
numerator of which is the 200 shares owned by that holder and the denominator of
which is the 5,000 shares outstanding before the issuance of the 10,000 shares
of Bank Stock.
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<PAGE>
Applicable law does not require that the Holding Company shareholders have
preemptive rights. However, in order to more closely equate the rights of
owning Holding Company Stock to owning Bank Stock, management of the Bank
Holding Company had determined to grant substantially similar preemptive rights
to holders of Holding Company Stock.
CAPITAL REQUIREMENTS FOR HOLDING COMPANY AND BANK
The Federal Reserve Board and the OCC use capital adequacy guidelines in
their examination and regulation of bank holding companies and banks. If
capital falls below minimum guideline levels, a bank holding company may, among
other things, be denied approval to acquire or establish additional banks or
non-bank businesses.
The Federal Reserve Board and the OCC's capital guidelines establish the
following minimum regulatory capital requirements for bank holding companies and
banks: a risk-based requirement expressed as a percentage of total risk-
weighted assets, and a leverage requirement expressed as a percentage of total
assets. The risk-based requirement consists of a minimum ratio of total capital
to a total risk-weighted assets of 8%, of which at least one-half must be Tier 1
capital (which consists principally of stockholders' equity). The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with minimum requirements of 4% to 5% for
all others.
The risk-based and leverage standards presently used by the Federal Reserve
Board and the OCC are minimum requirements, and higher capital levels will be
required if warranted by the particular circumstances or risk profiles of
individual banking organizations. Further, any banking organization
experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions (that is, Tier 1 capital
less all intangible assets), well above the minimum levels.
The Federal Reserve Board's regulations provide that the foregoing capital
requirements will generally be applied on a bank-only (rather than a
consolidated) basis in the case of a bank holding company with less than $150
million in total consolidated assets. It is anticipated that the Bank and the
Holding Company will exceed these minimum requirements.
As of March 31, 1997, the Bank's Tier 1 risk-based ratio was approximately
16.0%, its total risk-based capital ratio was approximately 17.3%, and its
leverage ratio was approximately 10.4%.
LIQUIDITY REQUIREMENTS FOR HOLDING COMPANY AND BANK
Generally, under federal banking law, a national bank may purchase and sell
for its own account three different types of investments. A bank may purchase
and sell an unlimited amount of Type 1 securities - that is, obligations of the
United States or general obligations of a state or a political subdivision of a
state - subject only to the exercise of prudent banking judgment. A bank may
purchase for its own account Type II and III securities, when in its prudent
business judgment it believes that the obligator will, among other things, be
able to meet all debt service obligations and that the security is readily
marketable. A bank may not hold Type II and III securities of any one obligator
in a total amount in excess of 10% of the bank's capital and surplus. Type II
securities include general obligations of a state or a political subdivision or
any agency of a state or political subdivision for housing, university or
dormitory purposes.
The OCC does not have any specific requirements as to a bank's liquidity
adequacy. Rather, the OCC reviews a number of different factors to determine
whether a bank's liquidity is adequate. These factors include, among other
things, the bank's capital adequacy (this factor is discussed in more detail
above in the section of this Proxy Statement/Prospectus entitled "Capital
Requirements for Holding Company and Bank"), its funds management practices, its
core deposits, its volatile deposits (generally, deposits that are not insured),
its liquid assets and whether the funding meets the needs of the bank. The Bank
believes that its present liquidity is adequate.
The Federal Reserve Board's Regulation Y does not impose specific liquidity
requirements on bank holding companies. However, a key principle underlying the
Federal Reserve Board's supervision of bank holding companies is that such
companies should be operated in a way that promotes the soundness of their
subsidiary banks. In this regard, a principal objective of a bank holding
company's funding strategy should be to support
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capital investments in subsidiaries with capital and long-term sources of funds,
and maintain sufficient liquidity and capital strength to provide assurance that
any outstanding debt obligations can be serviced and repaid without adversely
affecting the condition of the affiliated bank. In addition, there are special
rules limiting the acquisition of debt in connection with the formation of small
one-bank holding companies. The Federal Reserve Board requires that new holding
companies' debt-to-equity ratio decline to 30% within 12 years after acquisition
of a bank and that the holding company will be able to safely meet debt
servicing and other requirements imposed by its creditors. The debt-to-equity
ratio limitations are generally applied to releveraging transactions except in
connection with further bank acquisitions.
LOAN LIMITS TO BORROWERS
Generally, under federal banking laws, a national bank may make to any one
borrower total loans and extensions of credit not fully secured by collateral
having a market value at least equal to the loan in an amount not to exceed 15%
of the unimpaired capital and unimpaired surplus of the bank. Generally, the
total loans to any one person fully secured by marketable collateral having a
value at least equal to the outstanding loan may not exceed 10% of the
unimpaired capital and unimpaired surplus of the bank. Bank holding companies
are not subject to specific limitations on loans to one borrower. However, bank
holding company lending activities require the prior approval of the Federal
Reserve Board under Regulation Y.
SECURITIES REGISTRATIONS AND FILINGS
The Holding Company has filed with the Securities and Exchange Commission
("SEC") in Washington, D.C., a Registration Statement on Form S-4 Registration
(No. 333-________) under the Securities Act, for the registration of the
issuance of the Holding Company Stock in the Reorganization. This Proxy
Statement/Prospectus constitutes the Prospectus filed as a part of the
Registration Statement.
The Bank currently is not subject to the requirements of the Exchange Act
and files no reports or proxy statements with the SEC pursuant thereto. After
consummation of the Reorganization, the Holding Company will be subject to the
reporting requirements of the Exchange Act pursuant to Section 15(d) thereof,
but the Holding Company's duty to file such reports is automatically suspended
as to each fiscal year if, at the beginning of that fiscal year, the Holding
Company's stock is held by fewer than 300 shareholders of record. Immediately
upon completion of the Reorganization, the Holding Company's stock will be held
by no more than approximately 80 shareholders of record. Therefore, it is
anticipated that within 30 days after January 1, 1998, the Holding Company will
no longer be obligated to file reports under the Exchange Act.
LEGAL MATTERS
Certain legal matters in connection with the Reorganization will be passed
upon for the Holding Company and the Bank by Winthrop & Weinstine, P.A., 3000
Dain Bosworth Plaza, 60 South Sixth Street, Minneapolis, Minnesota 55402.
EXPERTS
The financial statements of the Bank as of December 31, 1996 and for each
of the two years in the period ended December 31, 1996 included in this Proxy
Statement/Prospectus had been audited by McGladrey & Pullen LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS OF
THE FIRST NATIONAL BANK OF RIVER FALLS
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . .F-2
Balance Sheets as of March 31, 1997 (Unaudited)
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . .F-3
Statements of Operations for the Three Months
Ended March 31, 1997 (Unaudited) and the Years Ended
December 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . .F-4
Statements of Stockholders' Equity for the Three
Months Ended March 31, 1997 (Unaudited) and the Years
Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . .F-5
Statements of Cash Flows for the Three Months Ended
March 31, 1997 (Unaudited) and the Years Ended
December 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . .F-7
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . .F-8
F-1
<PAGE>
[LOGO]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First National Bank of River Falls
and Subsidiary
River Falls, Wisconsin
We have audited the accompanying consolidated balance sheet of First National
Bank of River Falls and Subsidiary as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1996 and 1995. 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 financial position of First National Bank
of River Falls and Subsidiary as of December 31, 1996, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995,
in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
St. Paul, Minnesota
April 2, 1997
F-2
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1997 December 31,
ASSETS (Unaudited) 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 3,439,773 $ 5,903,973
Available-for-sale securities (Note 3) 46,011,481 43,924,386
Loans held for sale (Note 4) 3,975,961 4,206,932
Loans, net (Notes 5, 10, and 12) 91,876,166 90,564,956
Premises and equipment, net (Note 6) 1,522,417 1,658,246
Accrued interest receivable and other assets (Note 9) 2,333,315 1,901,087
------------- -------------
$ 149,159,113 $ 148,159,580
--------------------------------
--------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Notes 3 and 7):
Noninterest-bearing $ 13,017,882 $ 14,942,710
Interest-bearing 109,921,942 110,166,790
--------------------------------
TOTAL DEPOSITS 122,939,824 125,109,500
Short-term borrowings (Note 8) 8,856,427 5,136,089
Dividends payable - 450,000
Accrued interest payable and other liabilities 1,124,003 1,200,308
--------------------------------
TOTAL LIABILITIES 132,920,254 131,895,897
--------------------------------
Commitments, Contingencies, and Credit Risk (Note 10)
Stockholders' Equity (Note 13)
Common stock, par value $100 per share; 10,000 shares
authorized, issued, and outstanding 1,000,000 1,000,000
Additional paid-in capital 1,000,000 1,000,000
Retained earnings 13,792,719 13,548,258
Unrealized gain (loss) on available-for-sale securities, net (Note 3) 446,140 715,425
--------------------------------
TOTAL STOCKHOLDERS' EQUITY 16,238,859 16,263,683
--------------------------------
$ 149,159,113 $ 148,159,580
--------------------------------
--------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended March 31
(Unaudited) Years Ended December 31
----------------------------- -----------------------------
1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 2,025,825 $ 1,953,115 $ 8,219,403 $ 7,531,263
Securities 795,177 779,697 3,101,015 3,244,503
Federal funds sold 45,496 95,430 117,613 79,596
---------------------------------------------------------
2,866,498 2,828,242 11,438,031 10,855,362
---------------------------------------------------------
Interest expense:
Deposits 1,318,750 1,305,730 5,228,719 4,825,651
Short-term borrowings 91,959 73,672 310,178 283,425
---------------------------------------------------------
1,410,709 1,379,402 5,538,897 5,109,076
---------------------------------------------------------
NET INTEREST INCOME 1,455,789 1,448,840 5,899,134 5,746,286
Provision for loan losses (Note 5) 90,000 165,000 270,000 775,000
---------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,365,789 1,283,840 5,629,134 4,971,286
---------------------------------------------------------
Other income:
Service charges and other fees 117,383 120,064 461,270 449,970
Securities gains (losses), net (Note 3) - 39,475 46,925 22,679
Gain (loss) on loans held for sale (84,459) (45,011) (31,340) 646,040
Other income 136,426 146,636 474,970 379,122
---------------------------------------------------------
169,350 261,164 951,825 1,497,811
---------------------------------------------------------
Other expenses:
Salaries and employee benefits (Note 11) 688,074 647,740 2,814,180 2,442,604
Occupancy expenses 342,635 128,876 472,189 482,298
Other expenses 269,577 249,277 1,001,975 1,042,855
---------------------------------------------------------
1,300,286 1,025,893 4,288,344 3,967,757
---------------------------------------------------------
INCOME BEFORE INCOME TAXES 234,853 519,111 2,292,615 2,501,340
Income tax expense (benefit) (Note 9) (9,608) 105,051 457,051 489,090
---------------------------------------------------------
NET INCOME $ 244,461 $ 414,060 $ 1,835,564 $ 2,012,250
---------------------------------------------------------
---------------------------------------------------------
Average shares outstanding 10,000 10,000 10,000 10,000
---------------------------------------------------------
---------------------------------------------------------
Earnings per common share $ 24.45 $ 41.41 $ 183.56 $ 201.23
---------------------------------------------------------
---------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
--------------------------
Shares Par Value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1994 10,000 $ 1,000,000
Net income - -
Cash dividends declared ($80 per share) - -
Net change in unrealized gain (loss) on available-for-sale
securities (Note 3) - -
--------------------------
Balance, December 31, 1995 10,000 1,000,000
Net income - -
Cash dividends declared ($90 per share) - -
Net change in unrealized gain (loss) on available-for-sale
securities (Note 3) - -
--------------------------
Balance, December 31, 1996 10,000 1,000,000
Net income (unaudited) - -
Net change in unrealized gain (loss) on available-for-sale
securities (Note 3) (unaudited) - -
--------------------------
Balance, March 31, 1997 (unaudited) 10,000 $ 1,000,000
--------------------------
--------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Unrealized Gain
Additional (Loss) on
Paid-In Retained Available-for-
Capital Earnings Sale Securities Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 1,000,000 $ 11,400,444 $ (899,834) $ 12,500,610
Net income - 2,012,250 - 2,012,250
Cash dividends declared ($80 per share) - (800,000) - (800,000)
Net change in unrealized gain (loss) on available-for-sale
securities (Note 3) - - 1,963,924 1,963,924
--------------------------------------------------------------
Balance, December 31, 1995 1,000,000 12,612,694 1,064,090 15,676,784
Net income - 1,835,564 - 1,835,564
Cash dividends declared ($90 per share) - (900,000) - (900,000)
Net change in unrealized gain (loss) on available-for-sale
securities (Note 3) - - (348,665) (348,665)
-------------------------------------------------------------
Balance, December 31, 1996 1,000,000 13,548,258 715,425 16,263,683
Net income (unaudited) - 244,461 - 244,461
Net change in unrealized gain (loss) on available-for-sale
securities (Note 3) (unaudited) - - (269,285) (269,285)
-------------------------------------------------------------
Balance, March 31, 1997 (unaudited) $ 1,000,000 $ 13,792,719 $ 446,140 $ 16,238,859
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
F-6
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31
(Unaudited) Years Ended December 31
---------------------------- --------------------------
1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 244,461 $ 414,060 $ 1,835,564 $ 2,012,250
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Securities (gains) losses, net - (39,475) (46,925) (22,679)
Net amortization and accretion of bond premiums and
discounts 38,762 40,409 133,286 183,710
(Gain) loss on loans held for sale 84,459 45,011 31,340 (646,040)
Net (increase) decrease in loans held for sale (Note 4) 146,512 2,692,913 1,925,246 3,406,594
Impairment write-off on branch building 212,505 - - -
Provision for loan losses 90,000 165,000 270,000 775,000
Depreciation 60,004 68,448 244,719 255,115
Deferred income taxes (74,000) (5,000) 8,900 130,000
Other (295,811) (260,416) (45,758) (164,344)
---------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 506,892 3,120,950 4,356,372 5,929,606
---------------------------------------------------------
Cash Flows From Investing Activities
Cash flows from available-for-sale securities (Note 14):
Maturities 675,094 3,098,792 11,188,252 4,719,511
Sales - 1,138,987 1,370,510 2,812,991
Purchases (3,208,958) (9,577,398) (15,254,082) (5,569,323)
Net (increase) decrease in federal funds sold - 1,000,000 3,500,000 (3,500,000)
Net (increase) decrease in loans (1,401,210) (2,349,299) (9,712,185) (12,858,068)
Purchases of premises and equipment (136,680) (45,080) (243,873) (187,025)
----------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,071,754) (6,733,998) (9,151,378) (14,581,914)
----------------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits (2,169,676) (71,239) 5,443,837 8,690,665
Increase (decrease) in short-term borrowings 3,720,338 3,218,146 1,122,198 (1,328,083)
Cash dividends paid (450,000) (450,000) (900,000) (350,000)
---------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,100,662 2,696,907 5,666,035 7,012,582
---------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,464,200) (916,141) 871,029 (1,639,726)
Cash and Cash Equivalents
Beginning 5,903,973 5,032,944 5,032,944 6,672,670
---------------------------------------------------------
Ending $ 3,439,773 $ 4,116,803 $ 5,903,973 $ 5,032,944
---------------------------------------------------------
---------------------------------------------------------
See Notes to Consolidated Financial Statements (Additional Cash Flow Information--Note 14).
</TABLE>
F-7
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: First National Bank of River Falls (Bank) is a commercial
bank with operations in River Falls and Prescott, Wisconsin. The Bank provides
retail and commercial loan and deposit services principally to customers within
a 30-mile radius of the Bank's locations. The Bank's wholly-owned subsidiary,
FNBRF, Inc., performs various investment activities.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates. A material estimate that is particularly susceptible to significant
change relates to the determination of the allowance for loan losses.
BASIS OF PRESENTATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
1996: The accompanying unaudited consolidated financial statements as of and for
the three months ended March 31, 1997 and 1996, have been prepared in accordance
with the instructions to Form 10-QSB and, therefore, do not include all
information and disclosures necessary for a fair presentation of results of
operations, financial position, and consolidated cash flows in conformity with
generally accepted accounting principles. However, such statements do reflect,
in the opinion of management of the Bank, all adjustments, consisting of only
normal recurring accruals, necessary for a fair presentation of the results of
operations for these periods.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of First National Bank of River Falls and its wholly-owned
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH, CASH EQUIVALENTS, AND CASH FLOWS: For purposes of reporting cash flows,
cash and cash equivalents includes cash on hand and amounts due from banks. Cash
flows from loans, federal funds purchased and sold, deposits, and short-term
borrowings are reported net.
INVESTMENTS IN DEBT AND MARKETABLE EQUITY SECURITIES: The Bank accounts for debt
and marketable equity securities in accordance with Financial Accounting
Standards Board (FASB) Statement No. 115. This statement requires that
management determine the appropriate classification of securities at the date of
adoption and thereafter as each individual security is acquired. In addition,
the appropriateness of such classification is reassessed at each balance sheet
date.
AVAILABLE-FOR-SALE SECURITIES: Securities classified as available-for-sale are
those debt securities that the Bank intends to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Bank's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains or losses, net of the related deferred
tax effect, are reported as increases or decreases in stockholders' equity.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
F-8
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR SALE AND SERVICING: Loans held for sale are those loans that the
Bank has the intent to sell in the foreseeable future and are carried at the
lower of aggregate cost or market value. The market value calculation includes
consideration of all open positions. Gains and losses on sales of loans are
recognized at trade dates and are determined by the difference between the sales
proceeds and the carrying value of the loans. All sales are made without
recourse. The Bank continues to service these loans and recognizes servicing
fees over the lives of the loans. These servicing rights are also salable. In
management's opinion, the fair value of these servicing rights is not
significant to the financial position or results of operations of the Bank.
LOANS, ALLOWANCE FOR LOAN LOSSES, AND ACCOUNTING CHANGE: Loans are stated at the
amount of unpaid principal, reduced by an allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss experience. This
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are
significant changes in economic conditions.
The Bank defines a loan as impaired when it is probable the Bank will be unable
to collect all principal and interest payments due in accordance with the terms
of the loan agreement. Impaired loans that have been separately identified for
evaluation are measured based on the present value of expected future cash flows
or, alternatively, the observable market price of the loans or the fair value of
the collateral. However, for those loans that are collateral dependent (that is,
if repayment of those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is probable, the
measure of impairment of those loans is to be based on the fair value of the
collateral.
Interest on loans is recognized over the terms of the loans and is calculated
using the simple-interest method on principal amounts outstanding. For impaired
loans, accrual of interest is discontinued on a loan when management believes,
after considering collection efforts and other factors, that the borrower's
financial condition is such that collection of interest is doubtful. Interest on
these loans is recognized only when actually paid by the borrower if collection
of the principal is likely to occur.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is provided principally by the
straight-line method over the estimated useful lives of the assets. Building and
improvements are depreciated over 10 to 30 years, and equipment is depreciated
over 5 to 7 years.
F-9
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER REAL ESTATE OWNED: Other real estate owned (OREO) represents properties
acquired through foreclosure or other proceedings. OREO is recorded at the lower
of the carrying amounts of the related loans or fair value of the properties
less estimated costs of disposal and is included in other assets. Any write-down
to fair value less estimated costs of disposal at the time of transfer to OREO
is charged to the allowance for loan losses. Property is evaluated regularly to
ensure that the recorded amount is supported by its current fair value less
estimated costs of disposal. Subsequent write-downs are charged to other
expenses.
LONG-LIVED ASSETS: The Bank reviews for impairment of its long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Impairment is measured by comparing the
carrying values of long-lived assets to estimated fair values of the assets.
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets are reduced by a
valuation allowance when management determines that it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
EARNINGS PER COMMON SHARE: Earnings per common share data is computed based on
the weighted average number of common shares outstanding.
BENEFIT PLANS:
DIRECTORS' DEFERRED COMPENSATION PLAN: The Bank provides a deferred compensation
plan covering the Bank's Board of Directors. The plan pays deferred compensation
to each director upon retirement from the Board based on the number of years of
service as a director. The right to payments vests over the director's first ten
years of service. The Bank accrues the estimated present value of this liability
over the director's term of active service.
PENSION PLAN: The Bank provides a noncontributory money purchase plan covering
substantially all employees who are eligible as to age and length of service.
The Bank's required contribution is equal to 5 percent of each participant's
eligible annual compensation.
F-10
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALARY REDUCTION--401(K) AND PROFIT SHARING PLAN: The Bank provides a 401(k)
plan which covers substantially all of the Bank's employees who are eligible as
to age and length of service. A participant may elect to make contributions of
up to 5 percent of the participant's annual compensation, with provisions for an
additional 7.5 percent if the Bank does not contribute to the discretionary
profit sharing plan. The Bank makes matching contributions of 50 percent of each
participant's contribution up to 2.5 percent of the participant's annual
compensation. In addition, the Bank, at the discretion of the Board of
Directors, may make further contributions of up to 7.5 percent of each
participant's eligible annual compensation.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were
used by the Bank in estimating the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents approximate their fair values.
FEDERAL FUNDS SOLD: Fair value of federal funds sold is based on the carrying
value reported on the consolidated balance sheets.
SECURITIES: Fair values for all securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
LOANS HELD FOR SALE: Fair values are based on quoted market prices of similar
loans sold on the secondary market.
LOANS: For variable-rate loans that reprice frequently and that have experienced
no significant change in credit risk, fair values are based on carrying values.
Fair values for all other loans are estimated based on discounted cash flows,
using interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality.
DEPOSIT LIABILITIES: Fair values disclosed for demand deposits equal their
carrying amounts, which represent the amounts payable on demand. The carrying
amounts for variable-rate money market accounts and certificates of deposit
approximate their fair values 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.
SHORT-TERM BORROWINGS: The fair values of all short-term borrowings approximate
their carrying amounts.
ACCRUED INTEREST RECEIVABLE AND PAYABLE: The fair values of both accrued
interest receivable and payable approximate their carrying amounts.
F-11
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OFF-BALANCE SHEET INSTRUMENTS: Since the majority of the Bank's off-balance
sheet instruments consist of nonfee-producing, variable-rate commitments, the
Bank has determined they do not have a distinguishable fair value.
RECENTLY ISSUED ACCOUNTING STANDARDS: The Financial Accounting Standards Board
has issued Statement No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES (FAS No. 125), which is
effective for transactions occurring after December 31, 1996. The statement
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. A transfer of financial assets in which the transferor
surrenders control over those assets is accounted for as a sale to the extent
that consideration other than beneficial interests in the transferred assets is
received in exchange. The statement also establishes standards on the initial
recognition and measurement of servicing assets and other retained interests and
servicing liabilities, and their subsequent measurement.
The statement requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
to return them in certain circumstances in which the secured party has taken
control of those assets. In addition, the statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor under
the liability, either judicially or by the creditor.
The Financial Accounting Standards Board has also issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE (FAS No. 128), which is
effective for financial statements issued for both interim and annual periods
ending after December 15, 1997. Earlier application is not permitted. This
standards replaces the presentation of primary earnings per share with a
presentation of basic earnings per share and also requires dual presentation of
basic and diluted earnings per share for all entities with complex capital
structures. Because early adoption of FAS No. 128 is not permitted, there is no
impact on the Bank's earnings per share amounts for the interim periods
presented herein. However, upon adoption in the fourth quarter of 1997, all
prior interim and annual period earnings per share data presented will be
restated to conform with the provisions of FAS No. 128. The Bank does not expect
the impact of the adoption of FAS No. 128 to be material to previously reported
earnings per share amounts.
NOTE 2. RESTRICTIONS ON CASH AND CASH EQUIVALENTS
The Bank is required to maintain reserve balances, in cash or on deposit with
the Federal Reserve Bank, based upon a percentage of deposits. The total
required reserve balances as of March 31, 1997, and December 31, 1996, were
approximately $582,000 (unaudited) and $608,000, respectively.
F-12
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. AVAILABLE-FOR-SALE SECURITIES
SUMMARY OF SECURITIES:
<TABLE>
<CAPTION>
March 31, 1997
(Unaudited)
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 659,455 $ 22,754 $ - $ 682,209
U.S. government corporations and
agencies 7,739,547 12,969 (258,750) 7,493,766
Corporate securities 1,743,982 47,958 (14,968) 1,776,972
Mortgage-backed securities 27,220,768 758,341 (218,720) 27,760,389
Obligations of states and political
subdivisions 7,911,754 365,286 (38,895) 8,238,145
Other 60,000 - - 60,000
---------------------------------------------------------
$45,335,506 $1,207,308 $(531,333) $46,011,481
---------------------------------------------------------
---------------------------------------------------------
<CAPTION>
December 31, 1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 656,023 $ 37,455 $ - $ 693,478
U.S. government corporations and
agencies 7,737,009 24,030 (169,180) 7,591,859
Corporate securities 1,746,101 67,029 (7,472) 1,805,658
Mortgage-backed securities 24,924,623 811,523 (96,562) 25,639,584
Obligations of states and political
subdivisions 7,716,655 438,016 (20,864) 8,133,807
Other 60,000 - - 60,000
---------------------------------------------------------
$42,840,411 $1,378,053 $(294,078) $43,924,386
---------------------------------------------------------
---------------------------------------------------------
CONTRACTUAL MATURITIES:
<CAPTION>
March 31, 1997
(Unaudited) December 31, 1996
--------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,439,803 $ 2,470,604 $ 1,239,545 $ 1,255,115
Due after one year through five years 1,374,074 1,546,350 3,068,185 3,299,943
Due after five years through ten years 8,973,274 8,793,299 8,269,337 8,204,841
Due after ten years 5,267,587 5,380,839 5,278,721 5,464,903
--------------------------- ---------------------------
18,054,738 18,191,092 17,855,788 18,224,802
Mortgage-backed securities 27,220,768 27,760,389 24,924,623 25,639,584
Federal Reserve Bank stock 60,000 60,000 60,000 60,000
--------------------------- ---------------------------
$45,335,506 $46,011,481 $42,840,411 $43,924,386
--------------------------- ---------------------------
--------------------------- ---------------------------
</TABLE>
F-13
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
Anticipated maturities on mortgage-backed securities are not readily
determinable since they may be prepaid without penalty, and Federal Reserve Bank
stock does not have a stated maturity date.
REALIZED GAINS AND LOSSES:
Three Months Ended March 31
(Unaudited) Years Ended December 31
--------------------------- ------------------------
1997 1996 1996 1995
- ---------------------------------------------- ------------------------
Gross gains $ - $39,475 $46,925 $37,679
Gross losses $ - $ - $ - (15,000)
--------------------------- ------------------------
$ - $39,475 $46,925 $22,679
--------------------------- ------------------------
--------------------------- ------------------------
PLEDGED SECURITIES: Available-for-sale securities with a carrying value of
$8,084,987 (unaudited) and $8,215,865 at March 31, 1997, and December 31, 1996,
respectively, were pledged to secure short-term borrowings.
CHANGES IN THE UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES:
<TABLE>
<CAPTION>
Three Months
Ended March 31, Years Ended December 31
1997 ---------------------------
(Unaudited) 1996 1995
- ------------------------------------------------------------ ---------------------------
<S> <C> <C> <C>
Balance, beginning $715,425 $ 1,064,090 $ (899,834)
Unrealized gain (loss) during the period (408,000) (528,280) 2,975,642
Deferred tax effect related to unrealized
gain (loss) 138,715 179,615 (1,011,718)
-------- ---------------------------
Balance, ending $446,140 $ 715,425 $1,064,090
--------- ---------------------------
--------- ---------------------------
</TABLE>
NOTE 4. LOANS HELD FOR SALE AND LOAN SERVICING
March 31,
1997 December 31,
(Unaudited) 1996
- ----------------------------------------------------- --------------
Balance, beginning $4,206,932 $6,163,518
Loans originated 1,644,126 6,615,709
Loans sold (1,790,638) (8,540,955)
Adjustment to fair value (84,459) (31,340)
---------- ----------
Balance, ending $3,975,961 $4,206,932
---------- ----------
---------- ----------
F-14
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LOANS HELD FOR SALE AND LOAN SERVICING (CONTINUED)
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans are as
follows:
March 31,
1997 December 31,
(Unaudited) 1996
- ------------------------------------------------------------ -------------
Mortgage loan portfolios serviced for:
FHLMC $ 61,059,915 $ 60,748,821
Other investors 3,037,549 3,110,881
------------ -------------
$ 64,097,464 $ 63,859,702
------------ -------------
------------ -------------
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in deposits, were approximately $205,000 (unaudited) and
$462,000 at March 31, 1997, and December 31, 1996, respectively.
Loan servicing rights covered by FAS No. 65 as amended by FAS 122 on loans
originated during the year ended December 31, 1996 were not significant.
Loan servicing rights under FAS No. 125 on loans originated during the three
months ended March 31, 1997, were not significant.
NOTE 5. LOANS
COMPOSITION OF LOANS:
March 31,
1997 December 31,
(Unaudited) 1996
- ------------------------------------------------------------ ------------
Commercial $ 16,924,581 $ 19,146,762
Agricultural 4,035,661 4,091,530
Residential real estate 28,833,096 26,795,376
Other real estate 34,267,126 32,888,647
Consumer 9,331,737 9,085,305
------------ ------------
93,392,201 92,007,620
Less allowance for loan losses 1,516,035 1,442,664
------------ ------------
Loans, net $ 91,876,166 $ 90,564,956
------------ ------------
------------ ------------
ALLOWANCE FOR LOAN LOSSES:
<TABLE>
<CAPTION>
Three Months Ended March 31
(Unaudited) Years Ended December 31
---------------------------- ---------------------------
1997 1996 1996 1995
- ------------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Balance, beginning $ 1,442,664 $ 1,295,522 $ 1,295,522 $ 1,750,626
Provision charged to operations 90,000 165,000 270,000 775,000
Loans charged off (19,989) (82,671) (150,291) (1,248,229)
Recoveries 3,360 6,090 27,433 18,125
---------------------------- ---------------------------
Balance, ending $ 1,516,035 $ 1,383,941 $ 1,442,664 $ 1,295,522
---------------------------- ---------------------------
---------------------------- ---------------------------
</TABLE>
F-15
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. LOANS (CONTINUED)
IMPAIRED LOANS:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
- ---------------------------------------------------------------------- ------------
<S> <C> <C>
Loans receivable for which there is a related allowance
for credit losses for a portion of the balance $ 1,735,244 $ 1,679,905
Loans receivable for which there is no related allowance
for credit losses 176,500 377,790
----------- ------------
Total impaired loans $ 1,911,744 $ 2,057,695
----------- ------------
----------- ------------
Average balance (based on quarter-end balances) $ 1,984,720 $ 2,262,696
Related allowance for credit losses 565,543 568,688
</TABLE>
Cash received and recognized as interest income on impaired loans in the years
ended December 31, 1996 and 1995, and the three months ended March 31, 1997 and
1996 (unaudited), was insignificant.
NOTE 6. PREMISES AND EQUIPMENT
March 31,
1997 December 31,
(Unaudited) 1996
- --------------------------------------------------------------- ------------
Land $ 346,287 $ 346,287
Buildings and improvements 1,300,405 1,484,941
Equipment 2,061,121 2,007,172
------------ ------------
3,707,813 3,838,400
Less accumulated depreciation (2,185,396) (2,180,154)
------------ ------------
$ 1,522,417 $ 1,658,246
------------ ------------
------------ ------------
NOTE 7. DEPOSITS
March 31,
1997 December 31,
(Unaudited) 1996
- --------------------------------------------------------------- ------------
Demand deposits $ 13,017,882 $ 14,942,710
NOW and money market accounts 19,029,349 20,974,525
Savings deposits 12,336,661 12,912,334
Time certificates, $100,000 or more 9,393,695 8,867,490
Other time deposits 69,162,237 67,412,444
------------- -------------
Total $ 122,939,824 $ 125,109,503
------------- -------------
------------- -------------
F-16
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. DEPOSITS (CONTINUED)
Scheduled maturities of time deposits are as follows:
March 31,
1997 December 31,
(Unaudited) 1996
- --------------------------------------------------------------- ------------
1997 $ 39,386,412 $ 46,422,924
1998 25,296,293 18,637,779
1999 8,892,910 7,476,254
2000 2,346,294 1,350,147
2001 1,878,637 1,830,726
755,386 562,104
------------ ------------
$ 78,555,932 $ 76,279,934
------------ ------------
------------ ------------
NOTE 8. SHORT-TERM BORROWINGS
March 31,
1997 December 31,
(Unaudited) 1996
- --------------------------------------------------------------- ------------
Borrowings from the U.S. Treasury $ 415,856 $ 333,770
Federal funds purchased 2,800,000 -
Repurchase agreements 5,640,571 4,802,319
------------ ------------
$ 8,856,427 $ 5,136,089
------------ ------------
------------ ------------
NOTE 9. INCOME TAXES
The cumulative tax effects of the primary temporary differences are shown in the
following table:
December 31,
1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Loan loss allowances $ 345,000
Deferred compensation accruals 107,000
Alternative minimum tax credit 134,000
Accrued compensation 32,000
Other 5,000
------------
Total deferred tax assets 623,000
------------
Deferred tax liabilities:
Discount accretion (37,000)
Unrealized gain on available-for-sale securities (369,000)
------------
Total deferred tax liabilities (406,000)
------------
Net deferred tax asset (liability) $ 217,000
------------
------------
F-17
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES (CONTINUED)
The provision for income taxes charged to operations consists of the following:
Years Ended December 31
------------------------
1996 1995
- --------------------------------------------------------------------------
Current tax expense $ 448,151 $ 359,090
Deferred tax expense (benefit) 8,900 130,000
------------------------
$ 457,051 $ 489,090
------------------------
------------------------
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate of 35 percent to pretax income as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------
1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Computed "expected" tax expense $ 802,415 $ 875,469
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (net of disallowed expenses) (355,013) (388,406)
Benefit of income taxed at lower rates (12,879) (14,006)
Other 22,528 16,033
------------------------
$ 457,051 $ 489,090
------------------------
------------------------
</TABLE>
NOTE 10. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
CONTINGENCIES: In the normal course of business, the Bank is involved in various
legal proceedings. In the opinion of management, any liability resulting from
such proceedings would not have a material adverse effect on the consolidated
financial statements.
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. These financial
instruments include commitments to extend credit and standby letters of credit.
They involve, to varying degrees, elements of credit risk in excess of amounts
recognized on the consolidated balance sheets.
F-18
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
The Bank's exposure to credit loss in the event of nonperformance by the other
parties to the financial instrument for these commitments is represented by the
contractual amounts of the instruments. The Bank uses the same credit policies
in making commitments as it does for on-balance sheet instruments. These
commitments were as follows:
March 31,
1997 December 31,
(Unaudited) 1996
- ------------------------------------------------------------ ------------
Commitments to extend credit $ 9,379,000 $ 8,716,000
Standby letters of credit 1,434,000 1,545,000
------------ ------------
$ 10,813,000 $ 10,261,000
------------ ------------
------------ ------------
COMMITMENTS TO EXTEND CREDIT: 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. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. If deemed necessary upon extension of credit, the amount
of collateral obtained is based on management's credit evaluation of the party.
Collateral held varies, but may include accounts receivable, crops, livestock,
inventory, property and equipment, and income-producing commercial properties.
STANDBY LETTERS OF CREDIT: Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Collateral held varies as specified above and is required in instances which the
Bank deems necessary. At December 31, 1996, approximately 90 percent of the
standby letters of credit were collateralized.
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK:
CONCENTRATIONS OVER INSURED LIMITS: The nature of the Bank's business requires
that it maintain amounts due from banks which, at times, may exceed federally
insured limits. The Bank has not experienced any losses in such accounts.
CONCENTRATION BY GEOGRAPHIC LOCATION: The Bank makes agricultural, agribusiness,
commercial, residential, and consumer loans to customers primarily in River
Falls and Prescott, Wisconsin. Although the Bank's loan portfolio is
diversified, a substantial portion of the Bank's customers' abilities to honor
their contracts is dependent upon the business and agricultural economy in River
Falls and surrounding areas.
F-19
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
Significant concentrations of credit risk which are not evident from the summary
and discussion in Note 5 include loans made in states other than Wisconsin
totaling $22,619,806 (unaudited) and $22,711,638 at March 31, 1997, and December
31, 1996, respectively. These are primarily commercial and real estate loans and
are granted under the same lending policies as loans made within the Bank's
primary trade area.
CONCENTRATION BY INSTITUTION: The Bank has a substantial concentration of funds
totaling $2,338,369 (unaudited) and $4,991,535 at March 31, 1997, and December
31, 1996, respectively, on deposit in noninterest-bearing accounts at Firstar
Bank, N.A.
NOTE 11. BENEFIT PLANS
DIRECTORS DEFERRED COMPENSATION PLAN: Bank contributions to the plan were $7,000
(unaudited), $6,000 (unaudited), $24,000, and $19,000 in the three months ended
March 31, 1997 and 1996, and the years ended December 31, 1996 and 1995,
respectively.
PENSION PLAN: Bank contributions to the plan were $-0- (unaudited), $-0-
(unaudited), and $82,219 in the three months ended March 31, 1997 and 1996, and
the year ended December 31, 1996, respectively. There were no contributions to
the pension plan in 1995 as the plan was adopted on January 1, 1996, by the
Bank.
SALARY REDUCTION--401(k) AND PROFIT SHARING PLAN: Bank contributions to the plan
were $9,233 (unaudited), $60,793 (unaudited), $161,367, and $217,955 for the
three months ended March 31, 1997 and 1996, and the years ended December 31,
1996 and 1995, respectively.
NOTE 12. LOANS AND OTHER TRANSACTIONS WITH RELATED PARTIES
Shareholders of the Bank, and officers and directors, including their families
and companies of which they are principal owners, are considered to be related
parties. These related parties were loan customers of, and had other
transactions with, the Bank in the ordinary course of business. In management's
opinion, these loans and transactions were on the same terms as those for
comparable loans and transactions with nonrelated parties.
LOANS: Total loans to related parties were approximately $780,325 (unaudited)
and $1,297,529 at March 31, 1997, and December 31, 1996, respectively.
F-20
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the Bank's primary federal regulatory agency. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of assets and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios (set forth in the table below) of
total and Tier I capital, and of Tier I capital to average assets (all as
defined in the regulations). Management believes, as of March 31, 1997, and
December 31, 1996, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the Bank's primary
regulator, the OCC, categorized the Bank as Well Capitalized under the
regulatory framework for prompt corrective action. To be categorized as Well
Capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Actual For Capital Adequacy Purposes Action Provisions
-------------------------- ------------------------------ ----------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1997. (unaudited):
Total capital (to risk-weighted
assets) $ 16,878,000 17.3% $ >7,804,855 >8.0% $ > 9,756,069 >10.0%
- - - -
Tier I capital (to risk-weighted
assets) 15,658,000 16.0% >3,887,000 >4.0% > 5,830,500 > 6.0%
- - - -
Tier I capital (to average assets) 15,658,000 10.4% >5,980,000 >4.0% > 7,475,000 > 5.0%
- - - -
As of December 31, 1996:
Total capital (to risk-weighted
assets) 16,866,000 16.0% >8,433,000 >8.0% >10,541,250 >10.0%
- - - -
Tier I capital (to risk-weighted
assets) 15,548,000 14.8% >4,202,162 >4.0% > 6,303,243 > 6.0%
- - - -
Tier I capital (to average assets) 15,548,000 10.7% >5,812,336 >4.0% > 7,265,421 > 5.0%
- - - -
</TABLE>
NOTE 14. ADDITIONAL CASH FLOW INFORMATION
CASH FLOWS FROM SECURITIES:
Three Months Ended March 31
(Unaudited) Years Ended December 31
--------------------------------------------------------
1997 1996 1996 1995
- -------------------------------------------- ---------------------------
Maturities $ 675,094 $ 3,098,792 $ 11,188,252 $ 4,719,511
Sales - 1,138,987 1,370,510 2,812,991
Purchases (3,208,958) (9,577,398) (15,254,082) (5,569,323)
--------------------------- ---------------------------
$ (2,533,864) $ (5,339,619) $ (2,695,320) $ 1,193,179
--------------------------- ---------------------------
--------------------------- ---------------------------
F-21
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. ADDITIONAL CASH FLOW INFORMATION (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Three Months Ended March 31
(Unaudited) Years Ended December 31
--------------------------- --------------------------
1997 1996 1996 1995
- ---------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
Cash payments for interest $ 1,446,396 $ 1,381,789 $ 5,560,359 $ 4,965,547
Cash payments for income taxes 53,303 354 450,354 314,090
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Three Months Ended March 31
(Unaudited) Years Ended December 31
--------------------------- --------------------------
1997 1996 1996 1995
- ----------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
Net change in unrealized gain (loss)
on securities available-for-sale
(Note 3) $ (269,285) $ (436,145) $ (348,665) $ 1,963,924
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
Note 15. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
The fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
March 31, 1997 (Unaudited) December 31, 1996
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,439,773 $ 3,439,773 $ 5,903,973 $ 5,903,973
Securities 46,011,481 46,011,481 43,924,386 43,924,386
Loans held for sale 3,975,961 3,975,961 4,206,932 4,206,932
Loans, net 91,876,166 91,831,000 90,564,956 90,626,000
Accrued interest receivable 1,844,518 1,844,518 1,577,125 1,577,125
Financial liabilities:
Deposits 122,939,824 122,904,000 125,109,500 125,194,000
Short-term borrowings 8,856,427 8,856,427 5,136,089 5,136,089
Dividends payable - - 450,000 450,000
Accrued interest payable 508,144 508,144 524,756 524,756
</TABLE>
FAIR VALUE OF COMMITMENTS: The estimated fair value of fee income on letters of
credit at March 31, 1996 (unaudited), and December 31, 1996, is insignificant.
Loan commitments on which the committed interest rate is less than the current
market rate are also insignificant at both dates.
F-22
<PAGE>
FIRST NATIONAL BANK OF RIVER FALLS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE l5. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK (CONTINUED)
INTEREST RATE RISK: The Bank assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal operations. As a
result, the fair values of the Bank's financial instruments will change when
interest rate levels change, and that change may be either favorable or
unfavorable to the Bank. Management attempts to balance interest rate risk with
investment returns. However, borrowers with fixed-rate obligations are more
likely to prepay in a falling rate environment and less likely to prepay in a
rising rate environment. Conversely, depositors who are receiving fixed rates
are more likely to withdraw funds before maturity in a rising rate environment
and less likely to do so in a falling rate environment. Management monitors
rates and maturities of assets and liabilities and attempts to minimize interest
rate risk by adjusting terms of new loans and deposits and by investing in
securities with terms that mitigate the Bank's overall interest rate risk.
F-23
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), made by and between The
First National Bank of River Falls, a banking association organized under the
laws of the United States, being located at 104 East Locust Street, City of
River Falls, County of Pierce, in the State of Wisconsin (hereinafter referred
to as the "River Falls Bank"), with capital of $1,000,000 divided into 10,000
shares of common stock, each of $100 par value per share (the "River Falls Bank
Common Stock"), and undivided profits and surplus (including net unrealized
loss/gain on available for sale securities) of approximately $15,239,000 as of
March 31, 1997, and First National Bancorp of River Falls, Inc., a corporation
organized under the laws of the State of Wisconsin, being located at 104 East
Locust Street, City of River Falls, County of Pierce, in the State of Wisconsin
(hereinafter referred to as "Bancorp"), each acting pursuant to a resolution of
its board of directors, adopted by the vote of a majority of its directors,
pursuant to the authority given by and in accordance with the provisions of the
Act November 7, 1918, as amended (12 U.S.C. Section 215a) and other applicable
federal law and state law, witnesseth as follows:
WHEREAS, Bancorp will apply to the Office of the Comptroller of the Currency
(the "Comptroller") for approval to establish an interim banking association,
organized under the laws of the United States, to be titled River Falls Interim
National Bank, to be located at 104 East Locust Street, City of River Falls,
County of Pierce, in the State of Wisconsin (hereinafter referred to as the
"River Falls Interim Bank");
WHEREAS, it is the intent of the parties that, upon organization of the River
Falls Interim Bank, the River Falls Interim Bank will become a party to this
Agreement in accordance with the Addendum attached to this agreement as Exhibit
A (the "Addendum") and succeed to the rights and obligations of Bancorp under
this Agreement and Bancorp shall no longer be a party to this Agreement;
WHEREAS, upon organization of the River Falls Interim Bank, Bancorp will cause
the River Falls Interim Bank to execute the Addendum;
WHEREAS, the River Falls Interim Bank shall have capital stock of $100,000
divided into 1,000 shares of common stock (the "River Falls Interim Bank Common
Stock") each of $100 par value per share and surplus of approximately $20,000.
WHEREAS, for business reasons, the River Falls Bank and Bancorp desire to have
the River Falls Bank merge with and into the River Falls Interim Bank; and
WHEREAS, the merger contemplated herein is intended to be a tax free
reorganization pursuant to Section 368 of the Internal Revenue Code of 1986, as
amended.
NOW, THEREFORE, in consideration of the above premises and the mutual promises
and covenants herein contained, the parties agree as follows:
1. MERGER. The River Falls Bank shall be merged with and into the River Falls
Interim Bank, as successor to Bancorp, under the charter of the River Falls
Bank (the "Merger").
A-2
<PAGE>
2. RESULTING BANK. The name of the resulting bank (hereinafter referred to as
the "Resulting Bank") shall be the First National Bank of River Falls.
3. BUSINESS OF THE ASSOCIATION. The business of the Resulting Bank shall be
that of a national banking association. This business shall be conducted
by the Resulting Bank at its main office which shall be located at 104 East
Locust Street, River Falls, Wisconsin, and at its legally established
branches.
4. RESULTING CAPITAL. The amount of capital stock of the Resulting Bank shall
be $1,100,000 divided into 11,000 shares of common stock, each of $100 par
value, and at the time the Merger shall become effective, the Resulting
Bank shall have undivided profits and surplus (including capital reserves)
which will be equal to the combined capital structure of the River Falls
Bank and River Falls Interim Bank, as stated in the preamble and recitals,
respectively, of this Agreement, and as adjusted for normal earnings,
expenses and dividends (and, if applicable, purchase accounting
adjustments) between March 31, 1997, and the effective time of the Merger.
5. EFFECT OF MERGER. All assets of the River Falls Bank existing as of the
effective time of the Merger shall pass to and vest in the Resulting Bank
without any conveyance or other transfer, and the Resulting Bank shall be
responsible for all liabilities of every kind and description of each of
the merging banks existing as of the effective time of the Merger.
6. CONVERSION AND EXCHANGE OF CAPITAL STOCK.
a. RIVER FALLS BANK. On the Effective Date, by virtue of the Merger
contemplated herein and without any action by any shareholder of the
River Falls Bank or the River Falls Interim Bank, the shareholders of
the River Falls Bank, except for those holders of River Falls Bank
Common Stock who elect to exercise dissenting shareholders' rights
pursuant to the Appraisal Laws (as hereinafter defined in Section 7),
shall receive one (1) share of common stock of Bancorp for each share
of River Falls Bank Common Stock held by the shareholders of the River
Falls Bank on the Effective Date.
b. RIVER FALLS INTERIM BANK. On the Effective Date, by virtue of the
Merger contemplated herein and without any action by any shareholder
of the River Falls Bank or the River Falls Interim Bank, all of the
presently outstanding shares of common stock of River Falls Interim
Bank shall remain outstanding as shares of common stock of the River
Falls Interim Bank (the Resulting Bank) and the holders thereof shall
retain their present rights therein.
c. EXCHANGE OF SHARES AND SURRENDER OF STOCK CERTIFICATE. Upon the
Merger becoming effective, each shareholder of the River Falls Bank
shall deliver to the Resulting Bank or its agent the certificate(s)
representing such shares of River Falls Bank Common Stock owned by the
shareholder duly and properly endorsed or accompanied by a duly
executed Assignment Separate from Certificate and such other evidence
of ownership as the Resulting Bank shall reasonably request. Upon
receipt of such certificate(s), Bancorp shall issue and deliver to the
shareholder a certificate representing shares in Bancorp as provided
in Section 6.a. hereof.
A-3
<PAGE>
On and after the Effective Date, each outstanding stock certificate that
prior to the Effective Date evidenced issued and outstanding River Falls
Bank Common Stock shall be deemed for all corporate purposes evidence of
ownership of the number of shares of the Bancorp common stock into which
the same shall have been converted pursuant to Section 6.a.
7. DISSENTING SHAREHOLDERS OF THE RIVER FALLS BANK. The shares of River Falls
Bank Common Stock held by the River Falls Bank shareholders who have timely
and properly exercised their dissenters' rights in accordance with the
provisions of 12 USC Section 215a applicable to dissenters' rights (the
"Appraisal Laws") are referred to herein as "Dissenting Shares". Each
Dissenting Share, the holder of which, as of the Effective Date has not
effectively withdrawn or lost dissenters' rights under the Appraisal Laws,
shall be deemed canceled and (i) shall be entitled only to such rights as
are granted by the Appraisal Laws and (ii) shall not be entitled to any
rights as a shareholder of the River Falls Bank, the Resulting Bank or
Bancorp. Each holder of Dissenting Shares who becomes entitled to payment
for his/her/its River Falls Bank Common Stock pursuant to the provisions of
the Appraisal Laws shall receive payment therefor from the Resulting Bank
(but only after the amount thereof shall have been agreed upon or finally
determined pursuant to such provisions). If any shareholder holding
Dissenting Shares shall effectively withdraw or lose his/her/its
dissenters' rights under the Appraisal Laws, such Dissenting Shares shall
automatically be converted into the right to receive Bancorp stock in
accordance with Section 6.a. of this Agreement.
8. CLOSING. The closing of the Merger transaction contemplated hereunder
shall take place at 104 East Locust Street, River Falls, Wisconsin.
9. BOARD OF DIRECTORS. The present Board of Directors of the River Falls Bank
shall continue to serve as the Board of Directors of the Resulting Bank
until the next annual meeting or until such time as their successors have
been elected and have qualified.
10. ARTICLES OF ASSOCIATION. Upon consummation of the Merger, the Articles of
Association of the Resulting Bank shall read in their entirety as set forth
in Exhibit B attached hereto and hereby made a part hereof.
11. RATIFICATION BY SHAREHOLDERS AND EFFECTIVE DATE. This Agreement shall be
ratified and confirmed by the affirmative vote of shareholders of each of
the merging banks owning at least two-thirds of its capital stock
outstanding, at a meeting to be held on the call of the directors. A
letter notifying the Comptroller of the consummation date for the Merger
shall be sent to the Comptroller and the Merger shall become effective at
the time specified in such notification letter (hereinafter and
hereinbefore referred to as the Effective Date).
12. CONDITIONS PRECEDENT. This Agreement is subject to and conditioned upon
the following:
a. Approval and ratification of this Agreement by the holders of at least
two-thirds of the capital stock outstanding of each of the merging
banks;
b. Receipt of all other approvals and consents and satisfaction of all
other requirements as are prescribed by applicable law in connection
with this Agreement, including, without limitation, approval of the
Merger by the Comptroller; and
A-4
<PAGE>
c. Performance by each party hereto of all its obligations under this
Agreement; and
d. Execution of the Addendum by the River Falls Interim Bank.
13. TERMINATION. This Agreement may be terminated at any time by any of the
parties, on written notice, authorized and approved by resolution adopted
by its Board of Directors and delivered to the other party, upon the
occurrence of any of the following events:
a. Any of the conditions precedent set forth in Section 12 are not
fulfilled within a reasonable period of time, such reasonable period
of time to be determined by a majority of the Board of Directors of
either the River Falls Bank, Bancorp or, upon execution of the
Addendum, the River Falls Interim Bank, in their sole and absolute
discretion; or
b. For any other reason consummation of the Agreement is inadvisable in
the opinion of the majority of the Board of Directors of either the
River Falls Bank, Bancorp, or, upon execution of the Addendum, the
River Falls Interim Bank.
Upon termination pursuant to this Section 13, this Agreement shall be void
and of no further effect, and there shall be no liability by reason of this
Agreement or the termination thereof on the parties hereto or their
respective directors, officers, employees, agents or shareholders.
14. EXPENSES. The Resulting Bank shall pay the entire costs and expenses
incurred in connection with performance of this Agreement and compliance
with the covenants and agreements to be performed or complied with
hereunder, including legal fees, provided, however, that the expense of
appraisal, if any, as provided in Section 7 of this Agreement shall be
allocated between the parties as provided by applicable law and regulations
and provided, further, that except as otherwise provided by applicable law
and regulations, all expenses incurred by any dissenting shareholders shall
be the responsibility of said dissenting shareholders and not the
responsibility of the River Falls Bank, the Resulting Bank or Bancorp.
15. FURTHER ACTION. If at any time the Resulting Bank shall consider or be
advised that any further assignment, assurance of law or other actions are
necessary or desirable to vest, perfect or confirm in the Resulting Bank
the title to any property or right of the River Falls Bank to be acquired
by or as a result of this Agreement, or are otherwise necessary or
desirable to carry out the purposes of this Agreement, the proper officers
and directors of the River Falls Bank and/or the River Falls Interim Bank
shall execute and deliver such deeds, assignments and assurances of law and
take such other actions as may be necessary and proper to vest, perfect or
confirm title to said property or right in the Resulting Bank and otherwise
carry out the purposes of this Agreement.
16. AMENDMENT. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto; provided, however,
that after this Agreement has been approved by the shareholders of the
River Falls Bank or the River Falls Interim Bank pursuant to Section 11
above, no such amendment shall affect the rights of such shareholders in a
manner which is materially adverse to such shareholders unless such
amendment is approved by two-thirds of the shareholders adversely affected
by such amendment. Notwithstanding the foregoing, all parties agree that
this Agreement may be amended pursuant to an agreement signed by each of
the presidents of the River Falls Bank, Bancorp, or upon the execution of
the Addendum, the River
A-5
<PAGE>
Falls Interim Bank, respectively, provided such agreement does not affect
the rights of the River Falls Bank, Bancorp, or the River Falls Interim
Bank or their shareholders in a manner which is materially adverse to any
such parties.
17. ENTIRE AGREEMENT. This Agreement expresses the whole agreement between the
parties with respect to the Merger contemplated hereby, there being no
representations, warranties or other agreements (oral or written) not
expressly set forth or provided for herein.
18. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
19. HEADINGS, ETC. The various headings in this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement or any section or provision hereof or any exhibit annexed hereto.
Reference in this Agreement to any such section or exhibit are to such
section or exhibit of or to this Agreement, and all references to this
Agreement shall expressly include any such exhibit. All exhibits referred
to herein are hereby incorporated by reference and made a part of this
Agreement as though fully set forth herein.
20. GOVERNING LAW. This Agreement shall be deemed to be a contract made under
the laws of the United States and for all purposes it, plus any related or
supplemental documents and notices, shall be construed in accordance with
and governed by such laws.
21. CONSTRUCTION. Wherever possible, each provision of this Agreement and each
related document shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement or any
related document shall be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such prohibition
or invalidity without invalidating the remainder of such provision or the
remaining provisions of this Agreement or such related documents.
22. WAIVER. No failure on the part of either party to exercise, and no delay
in exercising, any right or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right or remedy
hereunder preclude any other or further exercise thereof or the exercise of
any other right or remedy granted hereby or by any related document or by
law.
Attest: The First National Bank of River Falls
/s/ Susan L. Langer By: /s/ Philip G. Betzel
- ------------------------------ -----------------------------------
Secretary Its: President
(Seal of Bank)
A-6
<PAGE>
STATE OF WISCONSIN )
) ss.
COUNTY OF PIERCE )
On this 21 day of May, 1997, before me, a Notary Public for the State and
County aforesaid, personally came Philip G. Betzel, as President, and Susan
L. Langer, as Secretary, of The First National Bank of River Falls and each
in his/her capacity acknowledged the foregoing instrument to be the act and
deed of The First National Bank of River Falls and the seal affixed thereto
to be its seal.
WITNESS my official seal and signature this day and year aforesaid.
Seal of Notary /s/ Tracy Bruesewitz
---------------------------------------
Notary Public, Tracy Bruesewitz
------------------------
County Pierce
--------------------------------
My commission expires 3-29-98
-----------------
Attest: First National Bancorp of River Falls, Inc.
/s/ Jeffrey M. McCardle /s/ Philip G. Betzel
- ----------------------------- By: ---------------------------------------
Senior Vice President Its: President
(No Seal)
STATE OF WISCONSIN )
) ss.
COUNTY OF PIERCE )
On this 21 day of May, 1997, before me, a Notary Public for the State and
County aforesaid, personally came Philip G. Betzel, as President, and Jeffrey
M. McCardle, as Senior Vice President, of First National Bancorp of River
Falls, Inc., and each in his/her capacity acknowledged the foregoing
instrument to be the act and deed of said First National Bancorp of River
Falls, Inc.
WITNESS my official seal and signature this day and year aforesaid.
Seal of Notary /s/ Tracy Bruesewitz
---------------------------------------
Notary Public, Tracy Bruesewitz
------------------------
County Pierce
--------------------------------
My commission expires 3-29-98
-----------------
A-7
<PAGE>
EXHIBIT A
ADDENDUM TO AGREEMENT AND PLAN OF MERGER
This Addendum to Agreement and Plan of Merger (the "Addendum"), is made and
entered into this ___ day of _______________, 1997, by and among The First
National Bank of River Falls, River Falls, Wisconsin, a banking association
organized under the laws of the United States (the "River Falls Bank"), First
National Bancorp of River Falls, Inc., a corporation organized under the laws of
the State of Wisconsin ("Bancorp") and River Falls Interim National Bank, River
Falls, Wisconsin, a banking association organized under the laws of the United
States (the "River Falls Interim Bank").
WHEREAS, Bancorp and the River Falls Bank have entered into that certain
Agreement and Plan of Merger (the "Merger Agreement") whereby the parties
declared their intent to merge the River Falls Bank with and into the River
Falls Interim Bank;
WHEREAS, as of the date of the Merger Agreement, Bancorp owns 100% of the
outstanding common stock of the River Falls Interim Bank;
WHEREAS, the Merger Agreement provided that upon organization of the River Falls
Interim Bank, the River Falls Interim Bank would execute this Addendum prior to
consummation of the merger, thereby succeeding to the rights and obligations of
Bancorp pursuant to the terms of the Merger Agreement.
NOW, THEREFORE, in consideration of the above premises and the mutual promises
and covenants herein contained, the parties agree as follows:
1. RIVER FALLS INTERIM BANK AS PARTY TO THE MERGER AGREEMENT. Effective as of
the date of this Addendum, the River Falls Interim Bank shall be a party to the
Merger Agreement and succeed to all the rights and obligations of Bancorp as
provided in the Merger Agreement.
2. CANCELLATION OF BANCORP AS A PARTY TO THE MERGER AGREEMENT. Effective as
of the date of this Addendum, Bancorp shall no longer be a party to the Merger
Agreement.
3. EFFECT OF THIS ADDENDUM AGREEMENT. Except as specifically amended herein,
the terms and conditions of the Merger Agreement shall remain unchanged and
shall remain in full force and effect.
4. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
A-8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Addendum effective the
day and year first above written.
Attest: The First National Bank of River Falls
_________________________ By: __________________________________
Secretary Its: President
(Seal of Bank)
STATE OF WISCONSIN )
) ss.
COUNTY OF ____________ )
On this ____ day of __________, 1997, before me, a Notary Public for the State
and County aforesaid, personally came ____________________, as President, and
____________________, as Secretary, of The First National Bank of River Falls
and each in his/her capacity acknowledged the foregoing instrument to be the act
and deed of The First National Bank of River Falls and the seal affixed thereto
to be its seal.
WITNESS my official seal and signature this day and year aforesaid.
Seal of Notary _______________________________________
Notary Public, ________________________
County ________________________________
My commission expires _________________
Attest: River Falls Interim National Bank
_________________________ By: ___________________________________
Secretary Its: President
(Seal of Bank)
A-9
<PAGE>
STATE OF ________________ )
)ss.
COUNTY OF _______________ )
On this ____ day of __________, 19__, before me, a Notary Public for the State
and County aforesaid, personally came _____________________________________, as
President, and _________________________________, as Secretary, of River Falls
Interim National Bank, and each in his/her capacity acknowledged the foregoing
instrument to be the act and deed of said River Falls Interim National Bank, and
the seal affixed thereto to be its seal.
WITNESS my official seal and signature this day and year aforesaid.
Seal of Notary _______________________________________
Notary Public, ________________________
County ________________________________
My commission expires _________________
Attest: First National Bancorp of River Falls, Inc.
_________________________ By: ___________________________________
Senior Vice President Its: President
(No Seal)
STATE OF ______________ )
)ss.
COUNTY OF ___________ )
On this ____ day of __________, 19__, before me, a Notary Public for the State
and County aforesaid, personally came_______________________________________, as
President, and ________________________________________, as Senior Vice
President, of First National Bancorp of River Falls, Inc., and each in his/her
capacity acknowledged the foregoing instrument to be the act and deed of said
First National Bancorp of River Falls, Inc.
WITNESS my official seal and signature this day and year aforesaid.
Seal of Notary _______________________________________
Notary Public, ________________________
County ________________________________
My commission expires _________________
A-10
<PAGE>
EXHIBIT B
ARTICLES OF ASSOCIATION OF
FIRST NATIONAL BANK OF RIVER FALLS
- --------------------------------------------------------------------------------
FIRST. The title of this Association shall be First National Bank of River
Falls.
SECOND. The main office of the Association shall be in River Falls, county of
Pierce, state of Wisconsin. The general business of the Association shall be
conducted at its main office and its branches.
THIRD. The board of directors of the Association shall consist of not less than
five nor more than twenty-five persons, the exact number within such minimum and
maximum limits to be fixed and determined from time to time by resolution of a
majority of the full board of directors or by resolution of a majority of the
votes to which all of its shareholders are entitled at any annual or special
meeting thereof. Each director, during the full term of his or her
directorship, shall own common or preferred stock of the Association or of a
bank holding company owning the Association with an aggregate par, stated, fair
market or equity value of not less than One Thousand Dollars ($1,000), as of
either (i) the date of purchase, (ii) the date the person became a director, or
(iii) the date of that person's most recent election to the board of directors,
whichever is more recent. Any combination of common or preferred stock of the
Association or holding company may be used. Shares held by directors in
accordance with this paragraph shall not be pledged as security for loans to the
directors.
Any vacancy in the board of directors may be filled by action of a majority of
the remaining directors between meetings of shareholders. The board of
directors may not increase the number of directors between meetings of
shareholders to a number which: (i) exceeds by more than two the number of
directors last elected by shareholders where the number was fifteen or less; or
(ii) exceeds by more than four the number of directors last elected by the
shareholders where the number was sixteen or more, but in no event shall the
number of directors exceed twenty-five.
Terms of directors, including directors selected to fill vacancies, shall expire
at the next regular meeting of shareholders at which directors are elected,
unless the directors resign or are removed from office.
Despite the expiration of a director's term, the director shall continue to
serve until his or her successor is elected and qualifies or until there is a
decrease in the number of directors and his or her position is eliminated.
Honorary or advisory members of the board of directors, without voting power or
power of final decision in matters concerning the business of the Association
may be appointed by resolution of a majority of the full board of directors, or
by resolution of the shareholders at any annual or special meeting. Honorary or
advisory directors shall not be required to own qualifying shares and shall not
be counted to determine the number of directors of the Association or for the
presence of a quorum in connection with any action by the board of directors.
FOURTH. There shall be an annual meeting of the shareholders to elect directors
and transact whatever other business may be brought before the meeting. The
annual meeting shall be held at the main office of the Association or any other
convenient place the board of directors may designate, on the third Wednesday of
January of each year as specified therefore in the Bylaws, or if that day falls
on a legal holiday in the state in which the Association is located, on the next
following banking day. If no election is held on the day fixed or in event of a
legal holiday, an election may be held on any subsequent day within sixty (60)
days of the day fixed, to be designated by the board of directors, or, if the
directors fail to fix the day, by shareholders representing two-thirds
A-11
<PAGE>
(2/3) of the shares issued and outstanding. In all cases at least ten (10) days
advance notice of the meeting shall be given to the shareholders by first class
mail.
In all elections of directors, the number of votes each common shareholder may
cast will be determined by multiplying the number of shares he or she owns by
the number of directors to be elected. Those votes may be cumulated and cast
for a single candidate or may be distributed among two or more candidates in the
manner selected by the shareholder. On all other questions, each common
shareholder shall be entitled to one vote for each share of stock held by him or
her.
A director may resign at any time by delivering written notice to the board of
directors, its chairperson, or to the Association, which resignation shall be
effective when the notice is delivered unless the notice specifies a later
effective date.
A director may be removed by the shareholders at a meeting called to remove him
or her, when notice of the meeting stating that the purpose or one of the
purposes is to remove him or her is provided, if there is a failure to fulfill
one of the affirmative requirements for qualification, or for cause; provided,
however, that a director may not be removed if the number of votes sufficient to
elect him or her under cumulative voting is voted against his or her removal.
FIFTH. The amount of authorized capital stock of the Association shall be
divided into one million (1,000,000) shares of common stock of the par value of
One Hundred and 00/100 Dollars ($100.00) each; but said capital stock may be
increased or decreased from time to time, according to the provisions of the
laws of the United States. The Association may cancel shares of common stock
surrendered to it; provided, however, that such cancellation would not result in
a reduction of the aggregate of the Association's capital and capital surplus
accounts and would not result in a distribution of the Association's cash or
other assets to any shareholder.
No holder of shares of the capital stock of any class of the association shall
have any preemptive or preferential right of subscription to any shares of any
class of stock of the association, whether now or hereafter authorized, or to
any obligations convertible into stock of the association, issued, or sold, nor
any right of subscription to any thereof other than such, if any, as the board
of directors, in its discretion may from time to time determine and at such
price as the board of directors may from time to time fix.
Unless otherwise specified in these Articles of Association or required by law,
(i) all matters requiring shareholder action, including amendments to these
Articles of Association, must be approved by shareholders owning a majority
voting interest in the outstanding voting stock, and (ii) each shareholder shall
be entitled to one vote per share.
Unless otherwise specified in these Articles of Association or required by law,
all shares of voting stock shall be voted together as a class on any matters
requiring shareholder approval. If a proposed amendment would affect two or
more classes or series in the same or a substantially similar way, all the
classes or series so affected must vote together as a single voting group on the
proposed amendment.
Shares of the same class or series may be issued as a dividend on a pro rata
basis and without consideration. Shares of another class or series may be
issued as share dividends in respect of a class or series of stock if approved
by a majority of the votes entitled to be cast by the class or series to be
issued unless there are no outstanding shares of the class or series to be
issued. Unless otherwise provided by the board of directors, the record date
for determining shareholders entitled to a share dividend shall be the date the
board of directors authorizes the share dividend.
Unless otherwise provided in the Bylaws, the record date for determining
shareholders entitled to notice of and to vote at any meeting is the close of
business on the day before the first notice is mailed or otherwise sent to the
shareholders, provided that in no event may a record date be more than seventy
(70) days before the meeting.
A-12
<PAGE>
If a shareholder is entitled to fractional shares pursuant to preemptive rights,
a stock dividend, consolidation or merger, reverse stock split or otherwise, the
Association may: (i) issue fractional shares or; (ii) in lieu of the issuance
of fractional shares, issue script warrants entitling the holder to receive a
full share upon surrendering enough script or warrants to equal a full share;
(iii) if there is an established and active market in the Association's stock,
make reasonable arrangements to provide the shareholder with an opportunity to
realize a fair price through sale of the fraction, or purchase of the additional
fraction required for full shares; (iv) remit the cash equivalent of the
fraction to the shareholder; or (v) sell full shares representing all the
fractions at public auction or to the highest bidder after having solicited and
received sealed bids from at least three licensed stock brokers and distribute
the proceeds pro rata to the shareholders who otherwise would be entitled to the
fractional shares. The holder of a fractional share is entitled to exercise the
rights of a shareholder, including the right to vote, to receive dividends, and
to participate in the assets of the Association upon liquidation, in proportion
to the fractional interest. The holder of script or warrants is not entitled to
any of these rights unless the script or warrants explicitly provide for such
rights. The script or warrants may be subject to such additional conditions as:
(1) that the script or warrants will become void if not exchanged for full
shares before a specified date; and (2) that the shares for which the script or
warrants are exchangeable may be sold at the option of the Association and the
proceeds paid to scriptholders.
The Association, at any time and from time to time, may authorize and issue debt
obligations, whether or not subordinated, without the approval of the
shareholders. Obligations classified as debt, whether or not subordinated,
which may be issued by the Association without the approval of shareholders, do
not carry voting rights on any issue, including an increase or decrease in the
aggregate number of the securities, or the exchange or reclassification of all
or part of securities into securities of another class or series.
SIXTH. The board of directors shall appoint one of its members President of the
Association, who shall be Chairman of the Board provided, however, that the
board of directors may appoint a director, in lieu of the President to be
Chairman of the Board. The board of directors shall also have the power to
appoint one or more Vice Presidents, a Secretary or Cashier who shall keep
minutes of the directors' and shareholders' meetings and be responsible for
authenticating the records of the Association, and such other officers and
employees as may be required to transact the business of the Association. A
duly appointed officer may appoint one or more officers or assistant officers if
authorized by the board of directors in accordance with the Bylaws of the
Association.
The board of directors shall have the power to:
(1) Define the duties of the officers, employees and agents of the
Association;
(2) Delegate the performance of its duties, but not the responsibility for
its duties, to the officers, employees and agents of the Association;
(3) Fix the compensation and terms and conditions of employment with its
officers and employees consistent with applicable law;
(4) Dismiss officers and employees;
(5) Require bonds from officers and employees and to fix the penalty thereof;
(6) Ratify written policies authorized by the Association's management or
committees of the board of directors;
(7) Regulate the manner in which any increase or decrease of the capital of
the Association shall be made, provided that nothing herein shall
restrict the power of shareholders to increase or decrease the capital of
the Association in accordance with law, and nothing shall raise or lower
from two-thirds the percentage required for shareholder approval to
increase or reduce the capital;
(8) Manage and administer the business and affairs of the Association;
A-13
<PAGE>
(9) Amend or repeal bylaws, except to the extent that these Articles of
Association reserve this power in whole or in part to the shareholders;
(10) Make contracts;
(11) Generally to perform all acts that are legal for a board of directors to
perform.
SEVENTH. The board of directors shall have the power to change the location of
the main office to any other place within the limits of River Falls, Wisconsin
without the approval of the shareholders but subject to the approval by the
Office of the Comptroller of the Currency, and shall have the power to establish
or change the location of any branch or branches of the Association to any other
location permitted under applicable law without the approval of the
shareholders, subject to approval by the Office of the Comptroller of the
Currency.
EIGHTH. The corporate existence of the Association shall continue until
terminated according to the laws of the United States.
NINTH. The board of directors of the Association or any three or more
shareholders owning, in the aggregate, not less than thirty percent (30%) of the
stock of the Association may call a special meeting of shareholders at any time.
Unless otherwise provided by the Bylaws or the laws of the United States or
waived by shareholders, a notice of the time, place and purpose of every annual
and special meeting of the shareholders shall be given by first-class mail,
postage prepaid, mailed at least ten (10) and no more than sixty (60) days prior
to the date of the meeting to each shareholder or record at his or her address
as shown upon the books of the Association. Unless otherwise provided by the
Bylaws, any action requiring approval of shareholders must be effected at a duly
called annual or special meeting.
TENTH. These Articles of Association may be amended at any regular or special
meeting of the shareholders by the affirmative vote of the holders of a majority
of the stock of the Association, unless the vote of the holders of a greater
amount of stock is required by law, and in that case by the vote of the holders
of such greater amount. The Association's board of directors may propose one or
more amendments to these Articles of Association for submission to the
shareholders.
In witness whereof, we have hereunto set our hands this 21 day of May, 1997.
(To be signed by all persons currently uniting to form the national bank
association.)
/s/ Philip Betzel
- -----------------------------------
/s/ Fred D. Benson
- -----------------------------------
/s/ E. J. Lund
- -----------------------------------
/s/ Jeffrey M. McCardle
- -----------------------------------
/s/ Sandra A. Wurm
- -----------------------------------
A-14
<PAGE>
EXHIBIT B
UNITED STATES CODE SECTIONS 215a(b), (c) AND (d)
REGARDING DISSENTERS' RIGHTS
B-1
<PAGE>
12USC-CH2-Section 215a. MERGER OF NATIONAL BANKS OR STATE BANKS INTO NATIONAL
BANKS
(b) Dissenting shareholders
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the share so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
(c) Valuation of shares
The value of the shares of any dissenting shareholder shall be ascertained, as
of the effective date of the merger, by an appraisal made by a committee of
three persons, composed of (1) one selected by the vote of the holders of the
majority of the stock, the owners of which are entitled to payment in cash; (2)
one selected by the directors of the receiving association; and (3) one selected
by the two so selected. The valuation agreed upon by any two of the three
appraisers shall govern. If the value so fixed shall not be satisfactory to any
dissenting shareholder who has requested payment, that shareholder may, within
five days after being notified of the appraised value of his shares, appeal to
the Comptroller, who shall cause a reappraisal to be made which shall be final
and binding as to the value of the shares of the appellant.
(d) Application to shareholders of merging associations: appraisal by
Comptroller; expenses of receiving association; sale and resale of shares; State
appraisal and merger law
If, within ninety days from the date of consummation of the merger, for any
reason one or more of the appraisers is not selected as herein provided, or the
appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be
promptly paid to the dissenting shareholders by the receiving association. The
shares of stock of the receiving association which would have been delivered to
such dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State
bank shall be determined in the manner prescribed
B-2
<PAGE>
by the law of the State in such cases, rather than as provided in this section,
if such provision is made in the State law; and no such merger shall be in
contravention of the law of the State under which such bank is incorporated.
The provisions of this subsection shall apply only to shareholders of (and stock
owned by them in) a bank or association being merged into the receiving
association.
CODIFICATION
Provisions similar to those comprising this section were contained in section 4
of act Nov. 7, 1918, ch. 209, as added July 14, 1952, ch. 722, Section 1, 66
Stat. 599 (formerly classified to section 34b of this title), prior to the
complete amendment and renumbering of act No. 7, 1918, by Pub. L. 86-230.
B-3
<PAGE>
Exhibit C
Tax Opinion of Winthrop & Weinstine, P.A.
C-1
<PAGE>
Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Telephone (612) 347-0700
Fax (612) 347-0600
Direct Dial: Reply to:
(612) 347-0681 Minneapolis
____________, 1997
The Board of Directors
First National Bancorp of River Falls, Inc.
104 East Locust Street
River Falls, Wisconsin 54022
The Board of Directors
The First National Bank of River Falls, Inc.
104 East Locust Street
River Falls, Wisconsin 54022
Ladies and Gentlemen:
You have requested that we render an opinion as to the tax consequences to
First National Bancorp of River Falls, Inc. ("Holding Company"), The First
National Bank of River Falls, Inc. ("Bank"), River Falls Interim National
Bank ("New Bank"), and the shareholders ("Shareholders") of the Bank in
connection with a corporate reorganization ("Reorganization") to form a
one-bank holding company, as described in an Agreement and Plan of Merger
dated as of May 21, 1997 by and among the Holding Company, the Bank and the
New Bank ("Reorganization Agreement") and in a certain Prospectus/Proxy
Statement dated ____________, 1997 ("Proxy Statement/Prospectus"). As
described in the Proxy Statement/Prospectus, concurrently with the
Reorganization, the Holding Company is conducting a tender offer ("Tender
Offer") for up to 1,000 shares of Bank common stock ("Bank Stock").
We acknowledge that this opinion is provided for the benefit and guidance of the
Shareholders as well as for the benefit and guidance of the Holding Company and
the Bank.
In making this opinion, we have relied on the Reorganization Agreement, the
Proxy Statement/Prospectus, and the Merger Agreement (to be executed between the
Bank and the New Bank), and on the truth and completeness of the warranties,
representations, statements, and facts contained in those documents. We have
also relied upon the truth and completeness of the following representations by
the Holding Company and the Bank:
1. The fair market value of the shares of Holding Company common stock
("Holding Company Stock") to be received by each Shareholder in the
Reorganization will be approximately equal
C-2
<PAGE>
The Boards of Directors
_________________, 1997
Page 3
to the fair market value of the shares of the Bank Stock surrendered in
exchange for the Holding Company Stock.
2. There is no plan or intention by the Shareholders who own one percent (1%)
or more of the Bank Stock, and, to the best of the knowledge of the
management of the Bank, there is no plan or intention on the part of the
remaining Shareholders, to sell, exchange, or otherwise dispose of the
Holding Company Stock to be received in the transaction in an amount that
would reduce the Shareholders' ownership of Holding Company Stock to a
number of shares having a value, as of the effective time ("Effective
Time") of the Reorganization, of less than fifty percent (50%) of the total
value of shares of Bank Stock outstanding immediately before the Effective
Time. For purposes of this representation, shares of Bank Stock exchanged
for cash or other property, surrendered by Shareholders exercising
dissenters' rights, or exchanged for cash in lieu of fractional shares of
Holding Company Stock will be treated as outstanding Bank Stock as of the
Effective Time of the Reorganization. Moreover, shares of Bank Stock and
shares of Holding Company Stock held by Bank Shareholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the Reorganization
will be considered for purposes of this representation. For purposes of this
letter, "management" shall mean the Board of Directors and executive
officers of each organization as identified in the Proxy
Statement/Prospectus.
3. The New Bank, as the surviving corporation, will acquire and hold after
the Reorganization at least ninety percent (90%) of the fair market value
of the net assets and at least seventy percent (70%) of the fair market
value of the gross assets of the Bank as of the time immediately prior to
the Effective Time of the Reorganization. (For purposes of this
representation, all payments to Shareholders who exercise their
dissenters' rights, expenses of the Reorganization, and all redemptions
and distributions, except for normal dividends, made by the Bank
immediately before the Reorganization and which are part of the plan of
Reorganization will be considered assets held by the Bank immediately
prior to the Effective Time of the Reorganization.)
4. Prior to the Reorganization, the Holding Company will own all of the issued
and outstanding stock of the New Bank.
5. The New Bank has no plan or intention to issue an additional class of stock
or to issue additional shares of its common stock that would result in the
Holding Company's ownership of less than 80% of the New Bank's common
stock.
6. The Holding Company has no plan or intention to: (a) liquidate the New
Bank; (b) merge the New Bank with or into another bank or corporation; (c)
cause the New Bank to sell or to otherwise dispose of any of the Bank's
assets, except in the ordinary course of business; or (d) sell or otherwise
dispose of any stock of the New Bank.
7. At the Effective Time of the Reorganization, the New Bank will not have
outstanding any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire stock of the New
Bank.
8. The Bank is not under the jurisdiction of a court in a case under Chapter
11 of the United States Bankruptcy Code, as amended, or a similar case.
9. Following the completion of the Reorganization, the New Bank will continue
the historic business of the Bank or use a significant portion of the Bank's
historic business assets in a business.
C-3
<PAGE>
The Boards of Directors
_________________, 1997
Page 4
10. On the date the Effective Time of the Reorganization occurs, the fair market
value of the assets of the Bank will exceed the sum of its liabilities plus
the liabilities, if any, to which the assets are subject.
11. The liabilities of the Bank assumed by the New Bank, and the liabilities to
which the transferred assets of the Bank are subject, have been incurred in
the ordinary course of the Bank's business.
12. The Holding Company has no plan or intention to redeem or otherwise
reacquire any of the Holding Company Stock issued in the Reorganization.
13. The Holding Company, the Bank, the New Bank, and the Shareholders will pay
their respective expenses, if any, incurred in connection with the
Reorganization.
14. There is no intercorporate indebtedness between the Holding Company, the
Bank, or the New Bank which will be issued, acquired, or settled at a
discount.
15. No stock of the New Bank will be issued in the Reorganization.
16. No two parties to the Reorganization are investment companies within the
meaning of Section 368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code
of 1986, as amended ("Code").
17. The management of the Holding Company and of the Bank are not aware of any
facts that might adversely affect the determination that the Reorganization
is a tax-free reorganization.
18. There are good business reasons for the Reorganization.
We have not undertaken to verify independently any of the factual matters upon
which we rely in providing this opinion. Moreover, we have assumed that no
changes have occurred or will occur with respect to the documents described
above or the representations set forth in Paragraphs 1 through 18 above.
Based upon and subject to the foregoing, it is our opinion under current law
that for federal income tax purposes:
(1) The proposed Reorganization will constitute a reorganization within the
meaning of Section 368(a)(1)(A) by reason of Section 368(a)(2)(D) of
the Code. The Reorganization will not be disqualified by reason of
the fact that Holding Company Stock is used in the Reorganization.
(Code Section 368(a)(2)(D).)
(2) No gain or loss will be recognized to the Bank on the transfer of
substantially all of its assets to the New Bank in exchange for Holding
Company Stock and the assumption by the New Bank of the liabilities of
the Bank.
(3) No gain or loss will be recognized to the Holding Company or the New
Bank upon the receipt by the New Bank of substantially all of the
assets of the Bank in exchange for Holding Company Stock and the
assumption by the New Bank of the liabilities of the Bank.
C-4
<PAGE>
The Boards of Directors
_________________, 1997
Page 5
(4) The basis of the Bank assets in the hands of the New Bank will be the
same as the basis of those assets in the hands of the Bank immediately
prior to the Effective Time of the Reorganization.
(5) The holding period of the assets of the Bank in the hands of the New
Bank will include the period during which such assets were held by the
Bank.
(6) The basis of the New Bank stock in the hands of the Holding Company
will be increased by an amount equal to the basis of the Bank assets
acquired by the New Bank in the Reorganization and will be decreased by
the amount of liabilities of the Bank assumed by the New Bank and the
amount of liabilities to which the acquired assets of the Bank are
subject.
(7) Gain, if any, will be realized by Bank Shareholders who receive both
Holding Company Stock and cash in exchange for their Bank Stock
(including cash for part of their shares sold in the Tender Offer,
and Holding Company Stock in the Reorganization for the remainder of
their Bank Stock). Gain will be recognized by each such Shareholder,
but not in excess of the amount of cash received. The determination of
whether the exchange has the effect of the distribution of a dividend
will be made on a Shareholder-by-Shareholder basis; provided, however,
that no opinion is expressed with respect to the income tax consequences
to each Shareholder of the Bank who receives cash immediately prior to,
or as a result of, the Reorganization.
(8) Gain will be recognized to those Bank Shareholders who receive solely
cash in exchange for their Bank Stock (including in the Tender Offer).
(9) Where solely cash is received by a dissenting Shareholder of the Bank
in exchange for his, her or its Bank Stock, the cash payment will be
treated as received by the Shareholder as a distribution in redemption
of his, her or its Bank Stock subject to the conditions and limitations
of Section 302 of the Code.
(10) The income tax basis of the Holding Company Stock to be received by the
Shareholders will be the same as the basis of the Bank Stock
surrendered in exchange for the Holding Company Stock.
(11) The holding period of the Holding Company Stock to be received by the
Shareholders will include the period during which the Bank Stock
surrendered in exchange for the Holding Company Stock was held,
provided that the Bank Stock is held as a capital asset on the date of
the exchange.
Our opinion is limited to the specific issues addressed. We express no opinion
and make no representation, and no inference is intended or should be drawn from
any statement in this letter, as to any other issues involving the
Reorganization, the Tender Offer or any related transactions.
Very truly yours,
WINTHROP & WEINSTINE, P.A.
By -
Michele D. Vaillancourt
C-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 180.0850 through 180.0859 of the Wisconsin Statutes permit and in
some cases require indemnification of directors, officers, employees, and agents
of a Wisconsin corporation. In general, such indemnification is required unless
the person violates a duty of loyalty or a duty of care as specifically set
forth in the statutes, Wis. Stats. Section 180.0851.
Article X of the registrant s Bylaws provides for indemnification of
officers and directors under terms and conditions that follow the statutory
language cited above. A complete copy of the Bylaws is included as Exhibit 3.2
hereto.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. Unless otherwise indicated, the following exhibits are
filed as part of this Registration Statement on Form S-4:
EXHIBIT NO. DESCRIPTION
----------- ---------------------------------------------------
2 Agreement and Plan of Merger dated as of May 21, 1997
by and among the Holding Company, the Bank, and the New
Bank (included in the Prospectus).
3.1 Articles of Incorporation of the Holding Company
(included in the Prospectus).
3.2 Bylaws of the Holding Company.*
4 Specimen stock certificate of the Holding Company.*
5 Opinion of Winthrop & Weinstine, P.A.
8 Opinion of Winthrop & Weinstine, P.A., as to certain
tax matters (included in the Prospectus).
23.1 Consent of Winthrop & Weinstine, P.A. (included in
opinion filed as Exhibit 5).
23.2 Consent of McGladrey & Pullen, LLP.
24 Power of Attorney (included on Signature Page).*
99 Form of Proxy for shareholders of the Bank.*
- -------------------------------------------
* Exhibits not refiled because already filed with original Registration
Statement on Form S-4 and not amended.
(b) No financial statement schedules are required to be filed with regard
to the Holding Company or the Bank.
II-1
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant
to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the
small business issuer 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 small
business issuer will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, subject to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(b) Not applicable.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
a company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of River Falls,
State of Wisconsin, on the 31st day of July, 1997.
FIRST NATIONAL BANCORP OF
RIVER FALLS, INC.
By:
/s/ Philip G. Betzel
--------------------------------------------
Philip G. Betzel, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed on behalf of the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
--------- -------- ----
* President and Director
- ------------------------
Philip G. Betzel
* Director
- ------------------------
Curtis Armstrong
* Director
- ------------------------
Frederick Benson
July 31, 1997
* Director
- ------------------------ *By /s/ Philip G. Betzel
Dr. Roland Hammer --------------------------
Philip G. Betzel
* Director Pro Se and as Attorney-in-Fact
- ------------------------
Ellroy Lund
* Senior Vice President and Director
- ------------------------
Jeffrey McCardle
* Director
- ------------------------
Patricia Smith Neir
* Chairman of the Board
- ------------------------
Donna Smith
* Director
- ------------------------
Sandra Smith Wurm
S-1
<PAGE>
Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
July 31, 1997
First National Bancorp of River Falls, Inc.
104 East Locust Street EXHIBIT 5
River Falls, Wisconsin 54022
Re: Registration Statement on Form S-4
Commission File No. 333-29223
Ladies and Gentlemen:
We have acted as legal counsel for First National Bancorp of River Falls, Inc.
(the "Company") in connection with the preparation of the Registration Statement
on Form S-4 (the "Registration Statement") originally filed with the Securities
and Exchange Commission on June 13, 1997 and the Proxy Statement/Prospectus
included in the Registration Statement (the "Prospectus"), relating to the
registration under the Securities Act of 1933, as amended (the "Act"), of the
proposed issuance of an aggregate of 10,000 shares (the "Shares") of common
stock, par value $100.00 per share (the "Common Stock"). The Shares are being
registered under the Act in connection with the transactions described in the
Registration Statement and Prospectus.
In connection therewith, we have examined (a) the Articles of Incorporation and
Bylaws of the Company, both as amended to date; (b) the corporate proceedings of
the Company relative to its organization and to the authorization and issuance
of the Shares; and (c) the Registration Statement and the Prospectus. In
addition to such examination, we have reviewed such other proceedings, documents
and records and have ascertained or verified such additional facts as we deem
necessary or appropriate for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. The Company has been legally incorporated and is validly existing under the
laws of the State of Wisconsin.
2. All necessary corporate action has been taken by the Company to authorize
the issuance of the Shares.
3. The Shares have been duly authorized by the Company, and upon issuance,
delivery and exchange as described in the Proxy, will be validly issued,
fully paid, and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the
<PAGE>
reference to our firm under the caption "Legal Matters" in the Prospectus.
Very truly yours,
WINTHROP & WEINSTINE, P.A.
By - /s/ Michele D. Vaillancourt
Michele D. Vaillancourt
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of our
report, dated April 2, 1997, relating to the consolidated financial statements
of First National Bank of River Falls and Subsidiary as of December 31, 1996,
and for each of the years ended December 31, 1996 and 1995. We also consent to
the reference to our firm under the captions "Experts" in the Prospectus.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
St. Paul, Minnesota
July 29, 1997
