<PAGE> 1
454,000 SHARES (MINIMUM)
554,000 SHARES (MAXIMUM)
LOGO
VILLAGE BANCORP, INC.
COMMON STOCK
-------------------------
This is a public offering of shares of common stock of Village Bancorp,
Inc. The common stock is being sold for the primary purpose of raising $5.9
million to capitalize our new bank subsidiary Village Bank and Trust in Munster,
Indiana. The minimum purchase for any investor is 800 shares. The shares are
being offered on a best efforts basis by directors and executive officers of
Village Bancorp without compensation.
There is currently no public market for our common stock. The common stock
will not be listed on the Nasdaq Stock Market or any stock exchange. The
offering price was arbitrarily determined by us and does not bear any
relationship to Village Bancorp's assets, book value, net worth or any other
recognized criteria of value.
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES SIGNIFICANT RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------------------
The shares of common stock are not savings accounts or savings deposits and
are not to be insured by the FDIC or any other government agency.
<TABLE>
<CAPTION>
PER SHARE MINIMUM MAXIMUM
--------- ---------- ----------
<S> <C> <C> <C>
Price to public and
proceeds to Village Bancorp................. $13.25 $6,015,500 $7,340,500
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
You should send your payment for shares directly to our escrow agent,
LaSalle Bank National Association, Chicago, Illinois at 135 South LaSalle
Street, Chicago, Illinois 60603, Attention: Pamela S. Ristau, Trust Department.
The escrow agent will hold the subscription proceeds until we receive
subscriptions for at least 454,000 shares and satisfy a variety of other
conditions. We plan to end the offering on August 31, 1999, unless we decide to
end it sooner or extend it. If we are unable to sell 454,000 shares of common
stock or satisfy the other conditions, the escrow agent will return all
subscription proceeds to investors with interest, and we will pay all of the
escrow agent's expenses. We may reject all or part of any subscription for any
reason.
June 25, 1999
<PAGE> 2
VILLAGE BANCORP, INC.
-------------------------
Bank locations
LOGO
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY................. 1
SUMMARY CONSOLIDATED FINANCIAL
DATA............................. 5
RISK FACTORS....................... 7
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION...... 12
THE OFFERING....................... 13
USE OF PROCEEDS.................... 16
DIVIDEND POLICY.................... 17
CAPITALIZATION..................... 18
DILUTION........................... 19
SELECTED CONSOLIDATED FINANCIAL
DATA............................. 21
PRO FORMA 1997 CONSOLIDATED
STATEMENT OF OPERATIONS.......... 23
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........ 24
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
BUSINESS........................... 48
MANAGEMENT......................... 55
PRINCIPAL STOCKHOLDERS............. 58
CERTAIN TRANSACTIONS............... 59
SUPERVISION AND REGULATION......... 60
DESCRIPTION OF CAPITAL STOCK....... 67
SHARES ELIGIBLE FOR FUTURE SALE.... 72
LEGAL MATTERS...................... 73
EXPERTS............................ 73
REPORTS TO SHAREHOLDERS............ 73
AVAILABLE INFORMATION.............. 74
INDEX TO FINANCIAL
STATEMENTS....................... F-1
</TABLE>
<PAGE> 4
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
and consolidated financial statements and related notes appearing later in this
prospectus, including the information under "Risk Factors."
VILLAGE BANCORP
Village Bancorp is a community-based bank holding company headquartered in
Prospect Heights, Illinois. We currently provide a wide range of banking
services through our bank subsidiaries, Northwest Community Bank in Prospect
Heights, Illinois and Village Bank and Trust in North Barrington, Illinois. We
intend to open a third bank also with the name Village Bank and Trust in
Munster, Indiana, which will be capitalized with proceeds of this offering.
We have made a strong commitment to provide community oriented,
full-service banking services to our customers. Our banks offer a wide array of
financial products and services for both consumers and small- to medium-sized
businesses. We provide a full range of low-cost consumer services including free
personal checking accounts, ATM services, telephone banking, residential
mortgages, credit cards, and automobile financing. Our banks also serve
owner-managed businesses by providing a high degree of personal service to
companies and their employees. We provide many types of commercial financing for
businesses, as well as a full range of deposit products. We stress personal
service and provide well-staffed teller and customer service areas without
charge to our customers.
Northwest Community Bank, which began operating in May 1995, was acquired
by our founding stockholders on June 1, 1997. In November 1997, Village Bancorp
was formed to act as the holding company for Northwest Community Bank. In
October 1998, we organized Village Bank North Barrington. We are now in the
process of forming Village Bank Munster, subject to regulatory approvals and the
successful completion of this offering.
As of March 31, 1999, Village Bancorp had total assets of $82.5 million,
total loans of $39.8 million and total deposits of $71.1 million. The ratio of
the allowance for loan losses to total loans was 1.37% at March 31, 1999. As of
March 31, 1999, Village Bancorp had an accumulated deficit of $1,202,013 due to
initial operating losses and stockholders' equity of $8,917,673.
MARKETS
Through our banks, Village Bancorp currently serves the northwestern
suburban communities of Chicago, Illinois. Northwest Community Bank's customer
base is concentrated in Arlington Heights, Prospect Heights and surrounding
metropolitan Chicago suburbs in Cook County. Village Bank North Barrington
presently serves North Barrington, Lake Zurich, Wauconda and Hawthorn Woods in
Lake County, Illinois.
Village Bank Munster will serve the Munster, Dyer, Schererville and
Highland communities in Lake County, Indiana and Lansing in Cook County,
Illinois.
We view our existing and potential market areas as encompassing the
metropolitan Chicago area, primarily the suburban communities extending from
Northwest Illinois to Northwest Indiana.
GROWTH OPPORTUNITY
The expansion of interstate banking has contributed to substantial
consolidation of the banking industry in Illinois and Indiana, including our
existing and potential market areas. Many locally
<PAGE> 5
owned or managed banks either have been acquired by large regional bank holding
companies or have been consolidated into branches of other banks. We believe
that, after consolidation, these banks no longer offer the same level of
personalized customer service.
We believe that industry consolidation has created a favorable opportunity
for community oriented, locally managed commercial banks in our existing and
potential market areas. We want to take advantage of this opportunity. We
emphasize local ownership and management and strong ties and active commitment
to the community. We believe that community banks can improve the economic
development and overall economy of their communities. We believe that community
residents recognize these benefits and that Village Bancorp will be successful
in attracting individuals and small- to medium-sized businesses as customers by
taking an active interest in their business and personal finances.
Our ability to take advantage of this market opportunity is subject to
risks and challenges. New banks face strong competition for loans and deposits
and incur significant start-up costs. New banks often take a period of years
before they generate sufficient interest income and fees to cover interest and
other expenses and become profitable. Northwest Community Bank, which was
started in 1995, became profitable in 1997. Village Bank North Barrington has
incurred losses since it was organized in 1998, and we do not expect it to be
profitable until 2000. Village Bank Munster will not likely be profitable until
at least 2001.
BUSINESS STRATEGY
We believe that our overall business strategy will support the growth of
Village Bancorp and allow us to maintain positive expansion in our markets. Key
aspects of our business strategy include the following:
- Emphasize community banking
- Increase deposits
- Expand through the creation of new banks or branches
- Expand lending
- Maintain competitive technology
- Emphasize superior customer service
See "Business -- Business Strategy" for a discussion of each of these
aspects of our business strategy.
We were formerly known as Delta Bancorp, Inc. and adopted our present name,
Village Bancorp, Inc., on April 8, 1999. Our principal executive offices are
located at 1845 East Rand Road, Prospect Heights, Illinois 60070-0936 and our
telephone number is (847) 870-8300.
2
<PAGE> 6
THE OFFERING
Common stock offered....... Minimum: 454,000 shares
Maximum: 554,000 shares
Common stock outstanding
prior to the offering.... 888,000 shares
Common stock to be
outstanding after the
offering................. Minimum: 1,342,000 shares
Maximum: 1,442,000 shares
Under our stock incentive plan, 225,000 shares of
common stock have been reserved for issuance. As of
June 1, 1999, options to purchase 106,000 shares of
common stock were outstanding under the plan, none
of which were exercisable.
Offering price per share... $13.25
Use of proceeds............ Village Bancorp will use approximately $5.9 million
in net proceeds received from the sale of shares to
capitalize Village Bank Munster.
Village Bank Munster intends to use the $5.9
million it receives from the sale of its stock to
Village Bancorp for:
- Organizational and pre-opening expenses of the
bank
- Purchase of the bank's site
- Construction and furnishing of the bank's
offices
- Working capital needs, including paying the
salaries of officers and employees and making
loans and investments
Net proceeds in excess of $5.9 million will be used
by Village Bank Munster for additional loans and
investments and by Village Bancorp for general
corporate purposes. See "Use of Proceeds."
Terms of the offering...... The offering is scheduled to expire on August 31,
1999, but Village Bancorp is reserving the right to
continue the offering up to October 31, 1999. You
are to send all subscription amounts directly to
LaSalle Bank National Association, our escrow agent
for the offering. THE ESCROW AGENT WILL NOT RELEASE
THESE FUNDS TO VILLAGE BANCORP, AND NO SHARES WILL
BE ISSUED IN THE OFFERING, UNLESS ON OR BEFORE THE
EXPIRATION DATE OF THE OFFERING WE HAVE ACCEPTED OR
RECEIVED:
- Subscriptions and payment in full for a minimum
of 454,000 shares, which will result in gross
offering proceeds of $6,015,500
- Approval from the Indiana Department of
Financial Institutions to organize Village Bank
Munster
3
<PAGE> 7
- Approval from the Federal Reserve for Village
Bancorp to acquire the stock of Village Bank
Munster
- Approval of Village Bank Munster's application
for deposit insurance from the FDIC
If the offering is not successfully completed by
October 31, 1999, your subscriptions will be
promptly returned with interest.
Plan of distribution....... The sale of shares offered hereunder will be made
by directors and executive officers of Village
Bancorp, who will not receive any fees or
commissions for such efforts. See "The Offering --
Plan of Distribution."
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA VILLAGE BANCORP, INC.
The statement of operations data, per share data and selected financial
ratios of Village Bancorp for the year ended December 31, 1998 and the period
June 1, 1997 (Date of Inception) through December 31, 1997 and the balance sheet
data as of December 31, 1998 and 1997 have been derived from the audited
financial statements of Village Bancorp appearing later in this prospectus. The
unaudited pro forma 1997 financial statement data reflects Village Bancorp's
acquisition of Northwest Community Bank as if the acquisition had occurred on
January 1, 1997. The financial information as of March 31, 1999 and for the
three months ended March 31, 1999 and 1998 is unaudited.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998 AND
FOR THE PERIOD JUNE 1, 1997
THREE MONTHS (DATE OF INCEPTION)
ENDED MARCH 31, THROUGH DECEMBER 31, 1997 PRO FORMA
--------------- --------------------------- ---------
1999 1998 1998 1997 1997
------ ------ ------------ ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income.............. $1,240 $ 791 $3,552 $1,655 $2,637
Total interest expense............. 686 403 1,781 827 1,405
------ ------ ------ ------ ------
Net interest income................ 554 388 1,771 828 1,232
Provision for loan losses.......... 87 39 242 121 164
Other income....................... 142 56 443 98 156
Other expenses..................... 974 458 2,780 918 1,609
------ ------ ------ ------ ------
Loss before income tax benefit..... (365) (53) (808) (113) (385)
Income tax expense (benefit)....... (11) (18) (59) (15) (21)
------ ------ ------ ------ ------
Net loss........................... $ (354) $ (35) $ (749) $ (98) $ (364)
====== ====== ====== ====== ======
PER SHARE DATA:
Basic loss per share of common
stock............................ $ (.40) $ (.09) $(1.46) $(0.25) $(0.91)
Book value at end of period........ 10.04 9.92 10.58 10.00 10.00
Tangible book value at end of
period........................... 9.51 8.66 10.04 8.71 8.71
SELECTED FINANCIAL RATIOS:
Return on average assets(1)........ (1.85)% (0.34)% (1.54)% (0.28)% (1.07)%
Return on average equity(1)........ (15.47) (3.51) (14.05) (8.43) (9.42)
Average equity to average assets... 11.99 9.79 10.96 3.28 11.41
Net yield on interest-earning
assets(1)........................ 3.14 4.17 3.94 4.29 3.99
Allowance for loan losses to total
loans at end of period........... 1.37 1.09 1.29 1.00 1.00
Nonperforming loans to total loans
at end of period(2).............. 0.58 0.29 0.09 0.87 0.87
Net loans charged off to average
total loans...................... -- -- 0.19 0.31 0.34
Tier 1 risk-based capital.......... 17.40 11.74 20.40 12.35 12.35
Total risk-based capital........... 18.40 12.84 25.65 16.05 16.05
</TABLE>
- -------------------------
(1) March 31 information is annualized.
(2) Includes total nonaccrual, impaired and all other loans 90 days past due.
5
<PAGE> 9
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, PRO FORMA
--------- ------------------ ---------
1999 1998 1997 1997
--------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $82,450 $72,822 $40,777 $40,777
Total earning assets................... 76,905 67,677 38,731 38,731
Average assets(1)...................... 76,395 48,652 35,406 33,873
Total loans............................ 39,807 35,655 27,502 27,502
Allowance for loan losses.............. 545 459 276 276
Total deposits......................... 71,126 61,213 35,649 35,649
Mandatorily convertible subordinated
debentures........................... 1,800 1,800 771 771
Stockholders' equity................... 8,918 9,392 3,999 3,999
Tangible book value.................... 8,449 8,915 3,486 3,486
</TABLE>
- -------------------------
(1) Average for the periods ended.
6
<PAGE> 10
RISK FACTORS
An investment in the common stock involves a significant degree of risk.
You should not invest in the common stock unless you can afford to lose your
entire investment. You should carefully consider the following risk factors, as
well as the other information contained in this prospectus, in evaluating
Village Bancorp and its business and in deciding whether to purchase any of the
common stock.
WE HAVE INCURRED LOSSES SINCE WE BEGAN OPERATIONS AND EXPECT LOSSES TO CONTINUE
Village Bancorp has a limited operating history. Our business is subject to
the risks inherent in the establishment of any new business enterprise. As a
result, you do not have access to the information that might be available to the
purchasers of securities of a financial institution with an extended operating
history. Northwest Community Bank was formed in 1995 and acquired by us in 1997.
Village Bank North Barrington commenced operations in October 1998. Village Bank
Munster is still in the process of formation and has not yet received all
necessary regulatory approvals to commence banking operations. Village Bancorp's
profitability will depend, to a significant degree, upon our bank in North
Barrington and our new bank in Munster. There is no assurance that Village
Bancorp as a whole will ever operate profitably. We have incurred losses since
we began operations. We can be expected to incur significant operating losses
over the next several years, and perhaps longer. Such losses could adversely
affect the consolidated results of operations of Village Bancorp.
Although we hope that our new bank in Munster will commence operations at
the end of the third quarter of 1999, there can be no assurance as to when, if
at all, our Munster bank will commence operations. Any delay in opening for
business will increase our pre-opening expenses and postpone our realization of
potential revenues. Such a delay will cause our accumulated deficit to increase
as a result of continuing operating expenses such as salaries and other
administrative expenses. Once it commences operations, Village Bank Munster is
expected to sustain operating losses unless and until its deposit base develops
to a level where it is able to generate significant loan-related and other
income to offset operating expenses.
INVESTORS IN THE COMMON STOCK WILL SUFFER IMMEDIATE DILUTION
If you purchase shares of common stock, you will suffer an immediate and
substantial dilution in net tangible book value per share of common stock. The
net tangible book value of Village Bancorp at March 31, 1999 was approximately
$8.4 million or $9.51 per share of common stock. Based upon an assumed public
offering price of $13.25 per share, the dilution per share to new stockholders
would be $2.55 assuming the minimum number of shares are sold in the offering
and $2.38 assuming the maximum number of shares are sold in the offering. See
"Dilution."
THE OFFERING WILL BE CANCELED IF REGULATORY APPROVALS ARE NOT RECEIVED
Village Bancorp applied to the Department of Financial Institutions of the
State of Indiana for an Indiana state bank charter to operate in Munster,
Indiana. Village Bancorp has also applied to the FDIC for deposit insurance.
Approval of the organization of Village Bank Munster by the Indiana bank
regulators and of deposit insurance by the FDIC will occur only after, among
other things, sufficient funds have been raised to capitalize Village Bank
Munster. Village Bancorp intends to raise these funds through this offering.
Such regulatory approvals may also be conditioned upon other occurrences, which
may be beyond the control of Village Bancorp. There is no assurance that final
regulatory approvals from Indiana or the FDIC will be obtained in a timely
7
<PAGE> 11
manner, or at all. If all necessary regulatory approvals have not been received
by the expiration date, the offering will be canceled, regardless of the number
of shares subscribed for in the offering. See "The Offering -- Release from
Escrow."
WE ARE DEPENDENT UPON OUR MANAGEMENT TEAM
Village Bancorp is, and for the foreseeable future will be, dependent upon
the services of:
- Thomas H. Roth, Chairman of Village Bancorp
- Gerald F. Hartley, President of Village Bancorp
- R. Kennedy Alger, President & Chief Executive Officer of Northwest
Community Bank
- John A. Reck, President and Chief Executive Officer of Village Bank North
Barrington
- Robert J. Necastro, Vice President of Village Bancorp and the proposed
President of Village Bank Munster
and other senior managers to be retained by Village Bancorp. The loss of the
services of Messrs. Roth, Hartley, Alger, Reck or Necastro could have a material
adverse effect on the consolidated operations of Village Bancorp. No key-man
life insurance policy is maintained on any director, officer or employee of
Village Bancorp or our banks. Village Bank Munster has not yet retained all of
the additional officers and employees it will need to commence operations. See
"Management -- Directors and Executive Officers."
WE FACE STRONG COMPETITION
Village Bancorp will face strong competition for deposits, loans and other
financial services from numerous Illinois, Indiana and out-of-state banks,
thrifts, credit unions and other financial institutions, as well as other
entities which provide financial services. Some of the financial institutions
and financial services organizations with which we will compete are not subject
to the same degree of regulation as our banks. Most of these competitors have
been in business for many years, have established customer bases, are
substantially larger, and have substantially higher lending limits than our
banks and will be able to offer certain services, including multiple branches
and international banking services, that our banks can offer only through
correspondents, if at all. In addition, most of these entities have greater
capital resources than our banks, which, among other things, may allow them to
price their services at levels more favorable to the customer and to provide
larger credit facilities than could our banks. Many of these entities may also
have affiliates that provide more favorable services to them than Village
Bancorp will be able to provide to our banks.
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend in part on our ability to address the needs of our customers
by using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional efficiencies in Village
Bancorp's operations. Many of our competitors have substantially greater
resources to invest in technological improvements. There can be no assurance
that Village Bancorp will be able to effectively implement these products and
services or be successful in marketing those products and services to our
customers.
8
<PAGE> 12
GOVERNMENT REGULATION MAY NEGATIVELY IMPACT OUR PROFITABILITY AND FAVOR
NONREGULATED COMPETITORS
Village Bancorp and each of our banks will be subject to extensive state
and federal legislation, regulation and supervision, including regulation by the
Office of Banks and Real Estate of the State of Illinois, the Indiana Department
of Financial Institutions, the FDIC, and the Board of Governors of the Federal
Reserve System. Changes in legislation and regulations may continue to have a
significant impact on the banking industry. Although some of the legislative and
regulatory changes may benefit Village Bancorp and our banks, others may
increase the costs of doing business and assist competitors of Village Bancorp
and our banks which are not subject to similar regulation. See "Supervision and
Regulation."
CHANGES IN INTEREST RATES AND ECONOMIC CONDITIONS MAY HAVE AN ADVERSE EFFECT ON
OUR FINANCIAL PERFORMANCE
Financial institutions may be negatively affected by changes in prevailing
economic conditions, including declines in real estate market values, rapid
changes in interest rates and the monetary and fiscal policies of the federal
government. Northwest Community Bank operates in Prospect Heights, Arlington
Heights and surrounding metropolitan Chicago suburbs. Village Bank North
Barrington operates in the North Barrington, Illinois area which includes North
Barrington, Hawthorn Woods, Lake Zurich, and Wauconda. Village Bank Munster will
operate in Munster, Indiana and the surrounding communities of Dyer,
Schererville and Highland, Indiana and Lansing, Illinois. Any decline in the
economy of the areas served by our banks would likely have an adverse impact on
Village Bancorp's consolidated results of operations.
WE DO NOT PLAN TO PAY DIVIDENDS AND OUR ABILITY TO PAY DIVIDENDS IS RESTRICTED
Village Bancorp does not plan to pay dividends for the foreseeable future.
We will initially have no source of income other than dividends that we receive
from our banks. Our ability to pay dividends to you will therefore depend on the
ability of each of our banks to pay dividends to Village Bancorp. Bank holding
companies and state chartered banks are subject to significant regulatory
restrictions on the payment of cash dividends. All of our banks have accumulated
deficits and are prohibited by law from paying dividends until the deficits are
eliminated. In light of these restrictions and the need for Village Bancorp and
our banks to retain and build capital, it will be our policy to reinvest
earnings for the period of time necessary to help support the success of our
banks. The future dividend policy of Village Bancorp will depend on Village
Bancorp's earnings, capital requirements, financial condition and other factors
that the board of directors of Village Bancorp considers relevant. See "Dividend
Policy" and "Supervision and Regulation -- Financial Institution Regulation
Generally -- Dividend Limitations."
WE ARE SUBJECT TO THE RISK THAT OUR LOANS MAY NOT BE REPAID
The risk of nonpayment of loans is inherent in retail and commercial
banking. Nonpayment of loans may have a material adverse effect on Village
Bancorp's earnings, overall financial condition and the value of our common
stock. Moreover, our banks' focus on small- to medium-sized businesses may
result in a concentration of loans to these businesses. As a result, we may
assume greater lending risks than banks which have a lesser concentration of
these loans and tend to make loans to larger companies. We will attempt to
minimize this credit exposure by carefully monitoring the concentration of our
loans within specific industries and through prudent underwriting and lending
guidelines and procedures, but there can be no assurance that such monitoring
and procedures will reduce such lending risks.
9
<PAGE> 13
OUR LOWER LENDING LIMITS MAY LIMIT OUR ABILITY TO ATTRACT BORROWERS
Each of our banks' lending limits are or are expected to be between
approximately $850,000 and $1,000,000, as calculated under applicable state
banking regulations. The combined lending limits of Village Bancorp and our
banks will be approximately $2,000,000. Accordingly, the size of the loans which
we can offer to potential customers is less than the size of loans which
competitors with larger lending limits are able to offer. This should not,
however, affect our ability to seek relationships with most of the businesses in
our markets. The majority of our commercial and real estate loans are or will be
made to sole proprietors and to owners and local real estate developers in our
primary markets where the need for loans in excess of legal lending limits will
be rare.
THERE IS NO ASSURANCE THAT WE CAN SUCCESSFULLY IMPLEMENT OUR EXPANSION STRATEGY
We may expand our markets by establishing new banks or additional branches.
If we expand, Village Bancorp is likely to experience the effects of higher
operating expenses relative to operating income, which may result in operating
losses or limit our short-term profitability. Village Bancorp's ability to
expand by establishing new banks or branch offices is dependent on our ability
to identify advantageous bank or office locations and generate new deposits and
loans from those locations that will create an acceptable level of net income
for Village Bancorp.
Our expansion strategy also may involve acquiring existing institutions.
Acquisition candidates may not be available on terms favorable to Village
Bancorp in the future. We must compete with a variety of institutions and
individuals for suitable acquisition candidates. Competition from other
institutions could affect our ability to make acquisitions, increase the price
that we pay for certain acquisitions, and increase Village Bancorp's resources
devoted to analyzing possible acquisitions. Further, acquisitions of financial
institutions are subject to regulatory approval. There can be no assurance that
potential acquisitions that meet our investment criteria will be available on
terms acceptable to us or that sufficient financing for or the required
regulatory approval of any proposed acquisitions will be obtained. Neither can
there be any assurance that we will be able to successfully operate and manage
any business we acquire so as to establish, maintain or increase profitability.
At present, Village Bancorp is not a party to any understanding, letter of
intent or binding agreement with respect to the acquisition of the stock or
assets of an existing entity.
OUR COMPUTER SYSTEMS, OR THOSE OF OUR SERVICE PROVIDERS, SUPPLIERS OR CUSTOMERS,
MAY NOT OPERATE PROPERLY ON YEAR 2000-SENSITIVE DATES
A critical issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two digit date position which represents the year (e.g., "95" is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. We are working with our software vendors to assure that
Village Bancorp is prepared for the year 2000. We do not anticipate that Village
Bancorp will incur material operating expenses or be required to invest heavily
in computer system improvements to be year 2000 compliant. Nevertheless, the
inability of Village Bancorp to successfully address year 2000 issues could
result in interruptions in Village Bancorp's business and have a material
adverse effect on Village Bancorp's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Information Systems and the Year 2000."
10
<PAGE> 14
DIRECTORS AND EXECUTIVE OFFICERS WILL HAVE THE ABILITY TO INFLUENCE STOCKHOLDER
ACTION
After the offering, our directors and executive officers will beneficially
own approximately 21.6% of the outstanding shares of common stock if the minimum
number of shares are sold and 20.1% if the maximum number of shares are sold.
Our directors and executive officers are likely to continue to exercise
substantial control over Village Bancorp's affairs. As a result, management of
Village Bancorp will, if acting together, be able to control most matters
requiring approval by the stockholders of Village Bancorp, including the
election of directors. The voting control of management would also have the
effect of delaying or preventing a change in control of Village Bancorp that was
not approved by management. See "Principal Stockholders" and "Description of
Capital Stock."
THE ARBITRARILY DETERMINED PUBLIC OFFERING PRICE MAY BE HIGHER OR LOWER THAN THE
MARKET PRICE OF THE COMMON STOCK AFTER THE OFFERING
The offering price of $13.25 per share was determined arbitrarily by us and
is not based upon earnings or any history of operations. The offering price per
share represents 1.2 times the book value per share of Village Bancorp as of
March 31, 1999, assuming the sale of the minimum shares in the offering, which
we believe is comparable to other banks with similar characteristics and size.
The offering price should not be construed as indicative of the present or
anticipated future value of the common stock. Village Bancorp did not retain an
independent investment banking firm to assist in determining the offering price.
You may not be able to resell the common stock for the offering price or any
other amount.
NO ACTIVE TRADING MARKET EXISTS OR IS EXPECTED TO DEVELOP FOR THE COMMON STOCK
Before the offering, there was no public market for the common stock. There
can be no assurance that any active trading market for the common stock will
ever develop or that there will ever be any demand for the common stock. The
common stock will not be listed on the Nasdaq Stock Market or any securities
exchange. Therefore, shares of common stock acquired in the offering may not be
readily marketable in the case of financial emergency or otherwise and you
should have no need for liquidity with respect to your investment in the common
stock.
ADDITIONAL CAPITAL RAISING MAY DECREASE YOUR PERCENTAGE OWNERSHIP
Although we believe that the offering will provide sufficient funds for the
Munster bank's operations, there can be no assurance that Village Bancorp will
not be required to raise additional funds for bank capital. Additional funds
could be necessary if:
- Operations do not proceed as anticipated
- Village Bancorp has the opportunity to organize a new bank, acquire other
banking assets or another financial institution or open a new branch
- Additional capital is required by bank regulators
Village Bancorp could raise additional equity funds on such terms as it deems
appropriate, including the possibility of raising equity capital at a lower
effective price than the subscription price for shares under this offering. The
percentage ownership in Village Bancorp of each investor would then also be
decreased. Village Bancorp, in its discretion, may consider other alternatives
to raising the necessary funds such as issuing subordinated debt. In any case,
you will not have any preemptive rights to participate in the additional fund
raising. See "Description of Capital Stock -- Common Stock."
11
<PAGE> 15
IF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS OR DELAWARE LAW DETERS A CHANGE
IN CONTROL, YOU MAY BE DEPRIVED OF AN OPPORTUNITY TO SELL YOUR SHARES AT A
PREMIUM OVER MARKET PRICES
Anti-takeover provisions of Village Bancorp's Certificate of Incorporation
and By-Laws, and the Delaware General Corporation Law, may have the effect of
impeding the acquisition or change of control of Village Bancorp by means of a
tender offer, a proxy fight, open-market purchases or otherwise in a transaction
not approved by the board of directors of Village Bancorp. These provisions will
also render the removal of the current board of directors or management of
Village Bancorp more difficult. Among other provisions, Village Bancorp's
Certificate of Incorporation and By-Laws include provisions authorizing "blank
check" preferred stock, limiting the ability to fill vacancies to the board of
directors, requiring advance notice with respect to stockholder proposals and
director nominations, eliminating the power of stockholders to act by written
consent and requiring the vote of the holders of 66 2/3% of the outstanding
shares to amend certain anti-takeover provisions in the Certificate of
Incorporation. Village Bancorp has also implemented a classified board of
directors with staggered terms. As a result of these anti-takeover provisions,
you may be deprived of opportunities to sell some or all of your shares at
prices that represent a premium over market prices. See "Description of Capital
Stock -- Anti-Takeover Effects of the Certificate of Incorporation, By-Laws and
Delaware Law."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Some of the statements contained in this prospectus under the captions
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere are "forward-looking statements."
Forward-looking statements include statements that relate to our beliefs or
expectations as to future events and statements that are not historical facts.
When used in this prospectus, the words "anticipate," "believe," "estimate," and
similar expressions generally identify forward-looking statements. Although we
believe that the assumptions these forward-looking statements are based on are
reasonable, we can give no assurance that the assumptions will be correct.
Because forward-looking statements involve this risk, there are important
factors that could cause actual results to differ materially and adversely from
those expressed or implied by the forward-looking statements. These factors,
which should be carefully considered by you, include, among other things:
- The success of our business strategy
- The sufficiency of our allowance for loan losses
- Changes in economic conditions including interest rates
- Management's ability to manage interest rate and credit risks
- The impact of future regulations
- Our handling of Year 2000 issues
- Other factors discussed under "Risk Factors"
12
<PAGE> 16
THE OFFERING
MINIMUM/MAXIMUM
Village Bancorp is offering a minimum of 454,000 shares and a maximum of
554,000 shares of its common stock for the price of $13.25 per share for a total
minimum price of $6,015,500 and a total maximum price of $7,340,500. The minimum
purchase for any investor is 800 shares of common stock, unless Village Bancorp,
in its sole discretion, accepts a subscription for a lesser number of shares.
The maximum purchase for any investor is 65,000 shares of common stock, unless
Village Bancorp, in its sole discretion, accepts a subscription for a greater
number of shares.
OFFERING PERIOD
The offering period for the shares will end when all of the shares of the
common stock are sold or 5:00 p.m. Chicago time, on August 31, 1999 whichever
occurs first. We may extend this date at our discretion until October 31, 1999.
We will promptly notify subscribers of any extensions. No written notice of any
extension of the offering period need be given prior to any extension and any
such extension will not alter the binding nature of subscriptions already
accepted by Village Bancorp. The extension of the expiration date may cause an
increase in the expenses incurred with this offering. The date on which this
offering ends plus any extension is referred to in this prospectus as the
"expiration date."
We reserve the right to end the offering at any time after 454,000 shares
have been subscribed.
If the offering is not successfully completed by October 31, 1999,
subscriber funds will be returned promptly with interest.
HOW TO SUBSCRIBE
Investors who wish to subscribe will need to complete the following
procedures:
- Complete and sign a subscription agreement
- Complete and sign a check payable to "Village Bancorp, Inc. -- Escrow
Account #628133506" in the amount of $13.25 multiplied by the number of
shares subscribed
- Send the signed subscription agreement and check directly to our escrow
agent at the following address:
LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Pamela S. Ristau, Trust Department
ALL SUBSCRIPTIONS WILL BE IRREVOCABLE UNTIL THE CLOSE OF THE OFFERING.
VILLAGE BANCORP DISCRETION
We reserve the right, in our sole discretion, to accept or reject any
subscription in whole or in part on or before the expiration date. If the
offering is over-subscribed, we retain the discretion to allocate shares among
the subscribers. We also reserve the right to accept subscriptions on a first-
come, first-served basis or on a prorated basis if we receive subscriptions for
more than 554,000 shares. We will notify subscribers within five business days
after the expiration date if their
13
<PAGE> 17
subscriptions have not been accepted. If we do not accept all or a portion of a
subscription, we will also return the unaccepted portion of the subscription
funds, with interest.
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Village Bancorp may purchase shares
in the offering to complete the offering. None of the directors and executive
officers of Village Bancorp have committed to purchase any amount of common
stock in the offering. All shares purchased by the directors and executive
officers will be for investment and not with a view to resell the shares. Any
purchases by those persons will be made on the same terms as purchases made by
other investors and will count towards the achievement of the minimum offering.
The purchase of shares by any director or executive officer of Village Bancorp
should not be relied upon by investors as a basis for evaluating the merits of
this offering or that a director's or executive officer's investment decision is
shared by public investors. See "Risk Factors -- Substantial Control by
Directors and Executive Officers."
ESCROW
Subscription proceeds are to be sent directly to our escrow agent, LaSalle
Bank National Association, located at 135 South LaSalle Street, Chicago,
Illinois 60603. The escrow agent will invest the subscription proceeds in
short-term United States Government securities, or interest bearing accounts
offered by the escrow agent or in other short-term investments as we may agree
upon with the escrow agent. The escrow agent has not investigated the
desirability or advisability of an investment in Village Bancorp, and has not
approved, endorsed, or passed upon the merits of the common stock.
RELEASE FROM ESCROW
The escrow agent will release the subscription proceeds to us when we have
received all of the following:
- Subscriptions and subscription proceeds for a total of at least 454,000
shares of common stock
- Approval from the Indiana bank regulators to operate an Indiana state
bank in Munster, Indiana
- Approval from the Federal Reserve to acquire the stock of Village Bank
Munster
- Approval from the FDIC for deposit insurance
We will not deposit in the escrow account any subscription proceeds we
receive after the above conditions are met but before this offering ends.
Instead, those funds will be available for our immediate use.
If we do not meet the conditions to release the funds from the escrow
account by the expiration date, then the escrow agent will promptly return the
subscription agreements and the full amount of all subscription funds, with
interest, to the subscribers after the expiration date.
The closing of this offering is conditioned upon our receiving regulatory
approvals to begin operating Village Bank Munster. If all necessary regulatory
approvals have not been received by the expiration date, the offering will be
canceled, regardless of the number of shares subscribed for in the offering.
14
<PAGE> 18
PLAN OF DISTRIBUTION
Offers and sales of the common stock will be made on behalf of Village
Bancorp by its officers and directors. The executive officers and directors will
receive no commissions or other remuneration in connection with such activities,
but they will be reimbursed for reasonable expenses incurred in the offering. In
reliance on Rule 3a4-1 of the Securities Exchange Act of 1934, we believe our
executive officers and directors will not be deemed to be brokers and/or dealers
under the Exchange Act. We may find it desirable to utilize the services of
brokers and/or dealers to sell the common stock. We have no present arrangements
with any brokers or dealers relating to this offering. If we use brokers or
dealers, they will sell the common stock on a best-efforts basis, and we will
pay them a commission based on the shares sold by them. We believe that the
range of possible commissions to be paid to brokers or dealers is $0.66 to $0.99
per share and that the maximum average commission payable in the offering when
all shares subject to this offering are taken into account is $0.33. We do not
expect that sales of common stock through brokers or dealers will comprise a
major part of this offering.
15
<PAGE> 19
USE OF PROCEEDS
Village Bancorp intends to raise from the offering a total of $5,905,500 to
$7,230,500, net of estimated offering expenses of $110,000. Net proceeds will be
primarily used to capitalize Village Bank Munster. The bank will use
approximately $750,000 to purchase the bank site from Village Bancorp and for
land improvements, $620,000 to construct the banking structure and approximately
$463,000 to purchase furniture, fixtures and equipment and other necessary
assets for the bank's operations. Approximately $250,000 will be used for
pre-opening expenses and initial start-up costs. Additional net proceeds of up
to $4,250,000 will be used to fund Village Bank Munster's investments in loans
and securities. Any remaining proceeds will be used by Village Bancorp for
general corporate purposes. These anticipated sources and uses of the net
proceeds based upon the minimum and maximum offering are set forth below.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------------------------ ------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SOURCES:
Gross proceeds from sale of common
stock........................... $6,015,500 $7,340,500
Offering expenses................. (110,000) (110,000)
---------- ----------
Net proceeds from sale of common
stock........................... $5,905,500 $7,230,500
========== ==========
USES:
Capitalization of Village Bank
Munster Investments............. $3,822,500 64.7% $4,250,000 58.7%
Purchase of bank site and land
improvements.................... 750,000 12.7 750,000 10.4
Construction of bank facility..... 620,000 10.5 620,000 8.6
Furniture, fixtures and
equipment....................... 463,000 7.9 463,000 6.4
Organizational and pre-opening
expense......................... 250,000 4.2 250,000 3.5
General corporate purposes........ 0 -- 897,500 12.4
---------- ----- ---------- -----
Total uses................... $5,905,500 100.0% $7,230,500 100.0%
========== ===== ========== =====
</TABLE>
16
<PAGE> 20
DIVIDEND POLICY
Village Bancorp does not plan to pay dividends for the foreseeable future.
Village Bancorp has no significant source of funds other than dividends that we
receive from our banks. Village Bancorp's ability to pay dividends to you will
therefore depend on the ability of each of the banks to pay dividends to Village
Bancorp. Bank holding companies and state chartered banks are subject to
significant regulatory restrictions on the payment of cash dividends. In light
of these restrictions and the need for Village Bancorp and our banks to retain
and build capital, it will be the policy of each of the banks' boards of
directors to reinvest earnings for the period of time necessary to help support
the success of their operations. In the future, Village Bancorp may begin
income-producing operations independent from those of the banks, which may
provide another source of income from which Village Bancorp could pay dividends
to you. Village Bancorp can give no assurance, however, as to when, if at all,
these operations may begin or whether they will be profitable. Additionally, the
future dividend policy of Village Bancorp will depend on Village Bancorp's
earnings, capital requirements, financial condition and other factors that the
board of directors of Village Bancorp considers relevant.
Under Illinois law, banks are prohibited from paying dividends in excess of
net profits, after first deducting losses and bad debts. Under Indiana law,
banks may not declare or pay dividends that would impair their capital or that
would be greater than their undivided profits. These laws will restrict the
dividends payable by any of our banks whose accumulated deficits have not been
eliminated. In addition, as FDIC-insured institutions, payment of dividends by
the banks will be subject to regulation by both the FDIC and either Illinois or
Indiana bank regulators, who are statutorily authorized to determine whether the
payment of dividends by a bank would constitute an unsafe and unsound banking
practice. In such an instance, either the FDIC or the Illinois or Indiana bank
regulators could prohibit payment of dividends. See "Supervision and
Regulation -- Financial Institution Regulation Generally -- Dividend
Limitations."
17
<PAGE> 21
CAPITALIZATION
The following table shows the indebtedness and capitalization of Village
Bancorp as of March 31, 1999, and as adjusted to reflect the issuance and sale
by Village Bancorp of 454,000 and 554,000 shares of common stock, respectively,
offered hereby at the public offering price of $13.25 per share and the
application of the estimated net proceeds as shown under "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------
ACTUAL MINIMUM MAXIMUM
----------- ----------- -----------
<S> <C> <C> <C>
SERIES ONE MANDATORILY CONVERTIBLE
SUBORDINATED DEBENTURES................ $ 1,800,000 $ 1,800,000 $ 1,800,000
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 500,000
authorized, none issued................ -- -- --
Common stock, par value $0.25 per share;
5,000,000 shares authorized; 888,000
shares outstanding; 1,342,000 to
1,442,000 shares outstanding as
projected(1)........................... 222,000 335,500 360,500
Additional paid-in capital............... 9,978,000 15,770,000 17,070,000
Accumulated deficit...................... (1,202,013) (1,202,013) (1,202,013)
Unrealized loss on securities
available-for-sale, net................ (80,314) (80,314) (80,314)
----------- ----------- -----------
Total stockholders' equity.......... 8,917,673 14,823,173 16,148,173
----------- ----------- -----------
Total capitalization.......... $10,717,673 $16,623,173 $17,948,173
=========== =========== ===========
</TABLE>
- -------------------------
(1) Under Village Bancorp's stock incentive plan, 225,000 shares of common
stock have been reserved for issuance. As of June 1, 1999, options to
purchase 106,000 shares of common stock were outstanding under the plan,
none of which were exercisable.
18
<PAGE> 22
DILUTION
The net tangible book value of Village Bancorp as of March 31, 1999 was
$8.4 million or $9.51 per share of common stock. "Net tangible book value" is
defined as the total stockholders' equity of Village Bancorp less intangible
assets. "Net tangible book value per share" is determined by dividing the net
tangible book value of Village Bancorp by the number of outstanding shares of
common stock.
After giving effect to the sale of the minimum number of shares of common
stock offered hereby at the public offering price of $13.25 per share, Village
Bancorp's pro forma net tangible book value as of March 31, 1999 would have been
$14.4 million or $10.70 per share of common stock. This represents an immediate
increase in net tangible book value of $1.19 per share to the existing
stockholders, and an immediate dilution of $2.55 per share to investors who
purchase shares of common stock in the offering. "Dilution" is the difference
between the offering price per share and the pro forma net tangible book value
per share as adjusted for the offering.
The following table illustrates this per share dilution as of March 31,
1999, which is determined by subtracting the net tangible book value per share
after the offering from the price paid by a new investor.
<TABLE>
<S> <C> <C>
Public offering price per share(1).............. $13.25
Net tangible book value per share as of March
31, 1999...................................... $9.51
Increase in net tangible book value per share
attributable to payments by new
investors(2).................................. 1.19
-----
Pro forma net tangible book value per share
after offering................................ 10.70
------
Dilution of net tangible book value per share to
new investors(3)(4)........................... $ 2.55
======
</TABLE>
- -------------------------
(1) Before deducting the estimated offering expenses.
(2) After deducting the estimated offering expenses.
(3) After giving effect to the conversion of the $1.8 million outstanding
mandatorily convertible subordinated debentures at the conversion rate of
$15.15, the pro forma net tangible book value per share after the offering
would be $11.06 and the dilution of net tangible book value per share to
new investors would be $2.19.
(4) After giving effect to the exercise of outstanding options to purchase
106,000 shares of common stock at a price of $12.50 per share, the pro
forma net tangible book value per share, excluding the conversion of
mandatorily convertible securities, after the offering would be $10.83 and
the dilution of net tangible book value per share to new investors would be
$2.42.
19
<PAGE> 23
The following table summarizes, as of March 31, 1999, the number of shares
purchased from Village Bancorp, the total consideration paid and the average
price per share paid by: (a) the directors, executive officers, and affiliated
persons of Village Bancorp who acquired such shares since June 1997 and (b)
investors in the offering assuming a public offering price of $13.25 per share:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
SHARES TOTAL PRICE
PURCHASED CONSIDERATION PER SHARE
--------- ------------- ---------
<S> <C> <C> <C>
Directors, executive officers and affiliated
persons...................................... 481,297 $5,284,763 $10.98
New investors.................................. 454,000 6,015,500 13.25
</TABLE>
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of Village Bancorp shown below
should be read in conjunction with the financial statements and related notes of
Village Bancorp and Northwest Community Bank included later in this prospectus
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The statement of operations data, per share data and
selected financial ratios for the year ended December 31, 1998 and the period
June 1, 1997 (Date of Inception) through December 31, 1997 and the balance sheet
data as of December 31, 1998 and 1997 have been derived from the audited
financial statements of Village Bancorp appearing later in this prospectus. The
unaudited pro forma 1997 data reflects Village Bancorp's acquisition of
Northwest Community Bank as if the acquisition had occurred on January 1, 1997.
See "Pro Forma 1997 Consolidated Statement of Operations." The financial
information as of March 31, 1999 and for the three months ended March 31, 1999
and 1998 is unaudited.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
AND FOR THE PERIOD
JUNE 1, 1997 (DATE OF
THREE MONTHS INCEPTION) THROUGH
ENDED MARCH 31, DECEMBER 31, 1997
---------------- --------------------- PRO FORMA
1999 1998 1998 1997 1997
------ ------ -------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income.............. $1,240 $ 791 $3,552 $1,655 $2,637
Total interest expense............. 686 403 1,781 827 1,405
------ ------ ------ ------ ------
Net interest income................ 554 388 1,771 828 1,232
Provision for loan losses.......... 87 39 242 121 164
Other income....................... 142 56 443 98 156
Other expenses..................... 974 458 2,780 918 1,609
------ ------ ------ ------ ------
Loss before income tax benefit..... (365) (53) (808) (113) (385)
Income tax expense (benefit)....... (11) (18) (59) (15) (21)
------ ------ ------ ------ ------
Net loss........................... $ (354) $ (35) $ (749) $ (98) $ (364)
====== ====== ====== ====== ======
PER SHARE DATA:
Basic loss per share of common
stock............................ $ (.40) $ (.09) $(1.46) $(0.25) $(0.91)
Book value at end of period........ 10.04 9.92 10.58 10.00 10.00
Tangible book value at end of
period........................... 9.51 8.66 10.04 8.71 8.71
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
AND FOR THE PERIOD
JUNE 1, 1997 (DATE OF
THREE MONTHS INCEPTION) THROUGH
ENDED MARCH 31, DECEMBER 31, 1997
---------------- --------------------- PRO FORMA
1999 1998 1998 1997 1997
------ ------ -------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average assets(1)........ (1.85)% (0.34)% (1.54)% (0.28)% (1.07)%
Return on average equity(1)........ (15.47) (3.51) (14.05) (8.43) (9.42)
Average equity to average assets... 11.99 9.79 10.96 3.28 11.41
Net yield on interest-earning
assets(1)........................ 3.14 4.17 3.94 4.29 3.99
Allowance for loan losses to total
loans at end of period........... 1.37 1.09 1.29 1.00 1.00
Nonperforming loans to total loans
at end of period(2).............. 0.58 0.29 0.09 0.87 0.87
Net loans charged off to average
total loans...................... -- -- 0.19 0.31 0.34
Tier 1 risk-based capital.......... 17.40 11.74 20.40 12.35 12.35
Total risk-based capital........... 18.40 12.84 25.65 16.05 16.05
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------ PRO FORMA
1999 1998 1997 1997
--------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $82,450 $72,822 $40,777 $40,777
Total earning assets................... 76,905 67,677 38,731 38,731
Average assets(3)...................... 76,395 48,652 35,406 33,873
Total loans............................ 39,807 35,655 27,502 27,502
Allowance for loan losses.............. 545 459 276 276
Total deposits......................... 71,126 61,213 35,649 35,649
Mandatorily convertible subordinated
debentures........................... 1,800 1,800 771 771
Stockholders' equity................... 8,918 9,392 3,999 3,999
Tangible book value.................... 8,449 8,915 3,486 3,486
</TABLE>
- -------------------------
(1) March 31 information is annualized.
(2) Includes total nonaccrual, impaired and all other loans 90 days past due.
(3) Average for the periods ended.
22
<PAGE> 26
PRO FORMA 1997 CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations for
the year ended December 31, 1997 has been prepared to reflect the acquisition of
Northwest Community Bank as if the acquisition had occurred on January 1, 1997,
after giving effect to the pro forma adjustments as described below. The pro
forma adjustments are based on estimates made for the purpose of preparing the
pro forma consolidated statement of operations. In the opinion of Village
Bancorp's management, the estimates used in the preparation of this pro forma
consolidated statement of operations are reasonable under the circumstances. The
transaction was accounted for as a purchase and the actual results of Northwest
Community Bank were included with those of Village Bancorp subsequent to the
date of the transaction.
The Village Bancorp pro forma consolidated statement of operations for the
year ended December 31, 1997 should be read in conjunction with the historical
financial statements and related notes of Village Bancorp and Northwest
Community Bank presented later in this prospectus.
<TABLE>
<CAPTION>
ACTUAL NORTHWEST COMMUNITY
FOR THE PERIOD BANK FOR THE PERIOD
JUNE 1, 1997 JANUARY 1, 1997
THROUGH THROUGH PRO FORMA PRO FORMA
DECEMBER 31, 1997 MAY 31, 1997(1) ADJUSTMENTS(2) 1997
----------------- ------------------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income............ $1,655 $972 $ 10 $2,637
Interest expense........... 827 471 107 1,405
------ ---- ----- ------
Net interest income........ 828 501 (97) 1,232
Provision for loan
losses................... 121 43 -- 164
------ ---- ----- ------
Net interest income after
provision for loan
losses................... 707 458 (97) 1,068
Other income............... 98 58 -- 156
Other expenses............. 918 472 219 1,609
------ ---- ----- ------
Income (loss) before income
taxes.................... (113) 44 (316) (385)
Income tax expense
(benefit)................ (15) 16 (22) (21)
------ ---- ----- ------
Net income (loss).......... $ (98) $ 28 $(294) $ (364)
====== ==== ===== ======
</TABLE>
- -------------------------
(1) Actual operating results of Northwest Community Bank for the five month
period ended May 31, 1997.
(2) Represents estimated adjustments to Village Bancorp parent company only
operating results to reflect a twelve month period of operation, as
follows:
(a) Annualized interest expense on $1.8 million mandatorily convertible
subordinated debentures.
(b) Annualized other expenses:
<TABLE>
<S> <C>
Officer compensation............ $159,000
Goodwill amortization........... 15,000
Other operating expenses........ 45,000
--------
$219,000
========
</TABLE>
23
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of
significant factors affecting the financial condition and results of operations
of Village Bancorp for the periods indicated. The discussion should be read in
conjunction with the financial statements and related notes of Village Bancorp
and Northwest Community Bank and the Selected Consolidated Financial Data
presented in this prospectus. In addition to historical information, the
following discussion and analysis contains forward-looking statements that
involve risks and uncertainties. Village Bancorp's actual results could differ
significantly from those anticipated in these forward-looking statements as a
result of certain factors, including those discussed in "Risk Factors" and
elsewhere in this prospectus.
HISTORY
Village Bancorp was formed in 1997 and serves as a bank holding company for
Northwest Community Bank and Village Bank North Barrington. Village Bancorp will
also be the parent company of Village Bank Munster. Village Bancorp, originally
organized under Illinois law, was reincorporated in Delaware on April 8, 1999.
Northwest Community Bank was organized under Illinois law as a new, or de
novo, bank in May 1995 by National Bancorp, Inc. The founding stockholders of
Village Bancorp acquired Northwest Community Bank on June 1, 1997. Northwest
Community Bank serves Arlington Heights and Prospect Heights, Illinois, and
other northwest suburbs of metropolitan Chicago. As of March 31, 1999, Northwest
Community Bank had total assets of $43.0 million, deposits of $38.7 million and
stockholder's equity of $3.9 million.
Village Bank North Barrington was organized under Illinois law as a de novo
bank on October 9, 1998. Village Bank North Barrington serves North Barrington,
Lake Zurich, Wauconda and Hawthorn Woods, Illinois. As of March 31, 1999,
Village Bank North Barrington had total assets of $38.7 million, deposits of
$33.2 million and stockholder's equity of $5.2 million.
Village Bank Munster will be organized as a de novo bank upon completion of
the offering and will serve Munster, Dyer, Schererville and Highland, Indiana,
and Lansing, Illinois.
OVERVIEW
Village Bancorp's principal business is conducted by the banks and consists
of full service community-based financial services. The profitability of Village
Bancorp's operations depends primarily on its net interest income, provision for
loan losses, other income and other expenses. Net interest income is the
difference between the income Village Bancorp receives on its loan and
investment portfolios and its cost of funds, which consists of interest paid on
deposits and borrowings. The provision for loan losses reflects the cost of
credit risk in Village Bancorp's loan portfolio. Other income consists of
service charges on deposit accounts, securities gains, loan fees and other
commissions. Other expenses include salaries and employee benefits as well as
occupancy and equipment expenses, and other noninterest expenses.
Net interest income is dependent on the amounts of and yields on
interest-earning assets as compared to the amounts of and rates on
interest-bearing liabilities. Net interest income is sensitive to changes in
market rates of interest. The provision for loan losses is dependent on
increases in the loan portfolio and management's assessment of the
collectibility of the loan portfolio under current economic conditions. Other
expenses are heavily influenced by the growth of operations, with
24
<PAGE> 28
additional employees necessary to staff and open new banks or branches and
marketing expenses necessary to promote them. Growth in the number of account
relationships directly affects expenses such as data processing costs, supplies,
postage and other miscellaneous expenses.
CONSOLIDATED RESULTS OF OPERATIONS
The following table shows the condensed consolidated statement of
operations for Village Bancorp for the three months ended March 31, 1999 and
1998, the year ended December 31, 1998, for the period June 1, 1997 (Date of
Inception) through December 31, 1997 and on a pro forma basis for the year ended
December 31, 1997 as if the acquisition of Northwest Community Bank occurred on
January 1, 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
AND FOR THE PERIOD
JUNE 1, 1997
FOR THE THREE (DATE OF INCEPTION)
MONTHS THROUGH
ENDED MARCH 31, DECEMBER 31, 1997
---------------- -------------------- PRO FORMA
1999 1998 1998 1997 1997
------ ------ -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income................... $1,240 $ 791 $3,552 $1,655 $2,637
Interest expense.................. 686 403 1,781 827 1,405
------ ------ ------ ------ ------
Net interest income............... 554 388 1,771 828 1,232
Provision for loan losses......... 87 39 242 121 164
------ ------ ------ ------ ------
Net interest income after
provision for loan losses....... 467 349 1,529 707 1,068
Other income...................... 142 56 443 98 156
Other expenses.................... 974 458 2,780 918 1,609
------ ------ ------ ------ ------
Loss before income taxes.......... (365) (53) (808) (113) (385)
Income taxes (benefit)............ (11) (18) (59) (15) (21)
------ ------ ------ ------ ------
Net loss.......................... $ (354) $ (35) $ (749) $ (98) $ (364)
====== ====== ====== ====== ======
</TABLE>
Total assets increased $9.6 million or 13.0% to $82.4 million as of March
31, 1999 from $72.8 million as of December 31, 1998. Total assets increased
$32.0 million or 78.4% to $72.8 million as of December 31, 1998 from $40.8
million as of December 31, 1997. The increases in total assets for the periods
was primarily due to the organization and growth of Village Bank North
Barrington. Village Bancorp recorded a net loss of $354,000 for the three months
ended March 31, 1999 as compared to a net loss of $35,000 for the same period in
1998 and a net loss of $749,000 for the year ended December 31, 1998 as compared
to a net loss of $98,000 for the seven months ended December 31, 1997. The
principal factors contributing to the increased net loss for the three months
ended March 31, 1999 and for fiscal 1998 are the pre-opening expenses and the
initial operating loss of Village Bank North Barrington and pre-opening and
organizational expenses incurred in the formation of Village Bank Munster.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1998
Net Interest Income. Net interest income increased $165,000 or 42.6% to
$553,000 for the three months ended March 31, 1999 from $388,000 for the same
period in 1998. Interest income
25
<PAGE> 29
increased $448,000 or 56.7% and interest expense increased $283,000 or 70.2% for
the three months ended March 31, 1999 as compared to the same period in 1998.
Interest income increased due to a $33.7 million increase in the average volume
outstanding, primarily in loans and federal funds sold, which was offset by a
145 basis point decrease in the average rate on earnings assets from 8.49% to
7.04%. The increase in interest expense was primarily due to a $26.1 million
increase in average deposits which was partially offset by a 52 basis point
decrease in rates paid to 4.90%. The net interest spread decreased 93 basis
points to 2.14% for the three months ended March 31, 1999. The decrease was
primarily due to a decline in market rates on earning assets, which was
partially offset by a decrease in premium rates paid on deposits at Village Bank
North Barrington.
Provision for Loan Losses. The provision for loan losses increased $48,000
or 123.0% to $87,000 for the three months ended March 31, 1999 from $39,000 for
the same period in 1998. The increase was due to an overall growth in the loan
portfolio. As of March 31, 1999, the allowance for loan losses totaled $545,000
or 1.4% of total loans. The amounts of the provision and the allowance for loan
losses are influenced by current economic conditions, actual loss experience,
industry trends and management's assessment of current collection risks within
the portfolio.
Other Income. Village Bancorp's other income increased $86,000 to $142,000
for the three months ended March 31, 1999 from $56,000 for the same period in
1998. Other income as a percentage of average assets was 0.7% (annualized) for
the three months ended March 31, 1999 as compared to 0.6% (annualized) for the
same period in 1998. The increase in the first three months of 1999 was
primarily due to increased service charges on deposit accounts due to increased
volume. In addition, the 1999 results included a $6,000 gain from the sale of
securities.
Other Expenses. Village Bancorp's other expenses increased $516,000 or
112.0% to $974,000 for the three months ended March 31, 1999 from $459,000 for
the same period in 1998. As a percentage of average assets, other expenses
increased to 5.1% (annualized) for the three months ended March 31, 1999 as
compared to 4.5% (annualized) for the same period in 1998. Net occupancy
expenses remained constant at 0.6% of average assets for both periods. Other
factors contributing to the increase in total other expenses were additional
staffing costs to support Village Bank North Barrington, increased data
processing fees due to volume growth, increased marketing and advertising costs
to promote Village Bank North Barrington, increased legal and professional fees
related to revising Village Bancorp's corporate structure, pre-opening and
organizational expenses for the formation of Village Bank Munster and general
increases in other categories to support the growth and expansion of Village
Bancorp.
Federal and State Income Taxes. Village Bancorp recorded an income tax
benefit of $11,000 for the three months ended March 31, 1999 and $18,000 for the
same period in 1998 due to its operating losses.
1998 COMPARED TO PRO FORMA 1997
Net Interest Income. Net interest income increased $539,000 or 43.8% to
$1,771,000 in 1998 from $1,232,000 in pro forma 1997. Interest income increased
$915,000 or 34.7% and interest expense increased $376,000 or 26.8% in 1998 as
compared to pro forma 1997. Interest income increased due to a $14.1 million
increase in the average volume outstanding, primarily in loans and federal funds
sold, which was offset by a 63 basis point decrease in the average rate on
earning assets from 8.54% to 7.91%. The increase in interest expense was
primarily due to a $9.0 million increase in average deposits which was partially
offset by a 32 basis point decrease in rates paid to
26
<PAGE> 30
5.16%. The net interest spread decreased 31 basis points to 2.75% for the year
ended December 31, 1998. The decrease was primarily due to a decline in market
rates.
Provision for Loan Losses. The provision for loan losses increased $78,000
or 47.6% to $242,000 in 1998 from $168,000 in pro forma 1997. The increase was
due to an overall growth in the loan portfolio. As of December 31, 1998, the
allowance for loan losses totaled $459,000 or 1.29% of total loans.
Other Income. Village Bancorp's other income increased $287,000 to
$443,000 in 1998 from $156,000 in pro forma 1997. Other income as a percentage
of average assets was 0.9% for the year ended 1998 as compared to 0.46% for pro
forma 1997. The increase in 1998 was primarily due to increased service charges
on deposit accounts due to increased volume. The 1998 results included a $32,000
gain from the sale of securities.
Other Expenses. Village Bancorp's other expenses increased $1,171,000 or
72.8% to $2,780,000 in 1998 from $1,609,000 in pro forma 1997. As a percentage
of average assets, other expenses increased to 5.7% in 1998 as compared to 4.8%
for pro forma 1997. Net occupancy expenses remained constant at 0.7% of average
assets for both periods. Factors also contributing to the increase in total
other expenses were additional staffing costs to support Village Bank North
Barrington, increased data processing fees due to volume growth, increased
marketing and advertising costs to promote Village Bank North Barrington,
increased legal and professional fees related to revising Village Bancorp's
corporate structure, pre-opening and organizational expenses for the formation
of Village Bank Munster and general increases in other categories to support the
growth and expansion of Village Bancorp.
Federal and State Income Taxes. Village Bancorp recorded an income tax
benefit of $59,000 in 1998 and $21,000 in pro forma 1997 due to its operating
losses. As of December 31, 1998 Village Bancorp had a federal net operating loss
carryforward of $602,000, of which $39,000 expires in 2012 and $563,000 expires
in 2018.
1998 COMPARED TO SEVEN MONTHS ENDED DECEMBER 31, 1997
Net Interest Income. Net interest income increased $943,000 or 113.9% to
$1,771,000 in 1998 from $828,000 for the seven months ended December 31, 1997.
Interest income increased $1,897,000 or 114.6% and interest expense increased
$954,000 or 115.4%. Interest income increased due to a $12.0 million increase in
the average volume outstanding, primarily in loans and federal funds sold, which
was offset by a decrease in the average rate on earning assets from 8.58% to
7.91%. The increase in interest expense was primarily due to a combination of a
$7.0 million increase in average deposits and a $1.7 million increase in average
borrowings offset by a 32 basis point decrease in rates paid to 5.16%. The net
interest spread decreased 35 basis points to 2.75% for the year ended December
31, 1998 as compared to the seven months ended December 31, 1997. The decrease
was primarily due to a decline in market rates.
Provision for Loan Losses. The provision for loan losses increased
$121,000 or 100.0% to $242,000 in 1998. The increase is due to an overall growth
in the loan portfolio. As of December 31, 1998, the allowance for loan losses
totaled $459,000 or 1.3% of total loans.
Other Income. Village Bancorp's other income increased $345,000 to
$443,000 in 1998 from $98,000 for the seven months ended December 31, 1997.
Other income as a percentage of average assets was 0.9% for the year ended 1998
as compared to 0.3% for the seven months ended December 31, 1997. The increase
in 1998 was primarily due to increased service charges on deposit accounts due
to increased volume. Furthermore, 1998 included a $32,000 gain from the sale
27
<PAGE> 31
of securities as compared to a $1,000 loss recorded for the seven months ended
December 31, 1997.
Other Expenses. Village Bancorp's total other expenses increased
$1,862,000 or 202.8% to $2,780,000 in 1998 from $918,000 for the seven months
ended December 31, 1997. The overall effect of a shorter period of operation in
1997 as compared to 1998 accounts for approximately $691,000 of the increase in
other expenses. As a percentage of average assets, other expenses were 5.7% for
the year ended 1998 as compared to 2.6% for the seven months ended December 31,
1997. Net occupancy expenses were 0.7% and 0.4% as a percentage of average
assets in 1998 and 1997, respectively. Factors also contributing to the increase
in total other expenses were additional staffing to support Village Bank North
Barrington, increased data processing fees due to volume growth, increased
marketing and advertising costs to promote Village Bank North Barrington,
increased legal and professional fees related to revising Village Bancorp's
corporate structure, pre-opening and organizational expenses for the formation
of Village Bank Munster and general increases in other categories to support the
growth and expansion of Village Bancorp.
Federal and State Income Taxes. Village Bancorp recorded an income tax
benefit of $59,000 in 1998 and $15,000 for the seven months ended December 31,
1997.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the average balances (based on daily averages),
net interest income and expense and average yields and rates for Village
Bancorp's interest-earning assets and interest-bearing liabilities.
28
<PAGE> 32
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE(3) BALANCE INTEREST RATE(3)
------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and deposits
with other financial
institutions.................... $16,244 $ 187 4.67% $ 3,975 $ 56 5.71%
Taxable securities(1)............. 17,454 229 5.33 5,541 78 5.72
Loans(2)
Commercial loans............. 8,775 197 9.10 6,155 148 9.75
Commercial real estate
loans..................... 12,025 260 8.77 8,836 204 9.36
Consumer real estate loans... 13,219 283 8.68 11,409 263 9.35
Consumer installment loans... 3,725 84 9.15 1,864 42 9.14
------- ------ ----- ------- ---- -----
Total loans............ 37,744 824 8.85 28,264 657 9.43
------- ------ ----- ------- ---- -----
Total interest-earning assets..... $71,442 1,240 7.04 $37,780 791 8.49
======= ====== ===== ======= ==== =====
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand
deposits.................. $ 2,758 12 1.76 $ 1,505 7 1.89
Money-market demand
accounts/savings
accounts.................. 10,629 96 3.66 5,942 68 4.64
Time deposits of less than
$100,000.................. 29,991 393 5.31 16,004 233 5.90
Time deposits of $100,000 or
more...................... 10,069 139 5.60 4,757 67 5.71
Public funds................. 1,419 18 5.14 590 8 5.50
------- ------ ----- ------- ---- -----
Total interest-bearing
deposits............. 54,866 658 4.86 28,798 383 5.39
Federal funds purchased........... 137 1 5.12 -- -- --
Mandatorily convertible
subordinated debentures......... 1,800 27 6.00 1,351 20 6.00
------- ------ ----- ------- ---- -----
Total interest-bearing
liabilities............... $56,803 686 4.90 $30,149 403 5.42
======= ====== ===== ======= ==== =====
Net interest income............... $ 554 $388
====== ====
Net interest spread............... 2.14 3.07
Net yield on interest-earning
assets.......................... 3.14 4.17
Interest-bearing liabilities to
interest-earning assets......... 79.51 79.80
</TABLE>
- -------------------------
(1) Average balances include unrealized gains and losses of $31,000 and $10,000
for the three months ended March 31, 1999 and 1998, $32,000 and $(29,000)
for the year ended December 31, 1998 and the period June 1 through December
31, 1997, and $(34,000) in pro forma 1997. The average rate is calculated
using average amortized cost.
(2) Non-accrual loans are excluded in average balances. Loan fees were $22,000
for each of the three months ended March 31, 1999 and 1998, $65,000 and
$28,000 for the year ended December 31, 1998 and the period June 1 through
December 31, 1997, and $93,000 in pro forma 1997.
(3) Annualized.
29
<PAGE> 33
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD JUNE 1, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997
------------------------------------------------------------ PRO FORMA
1998 1997 1997
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and
deposits with other
financial institutions.... $ 8,268 $ 415 5.02% $ 2,382 $ 77 5.54% $ 2,034 $ 112 5.50%
Taxable securities(1)....... 6,434 355 5.55 4,658 157 5.74 4,577 261 5.66
Loans(2):
Commercial loans........ 6,637 693 10.44 6,356 344 9.28 5,986 557 9.30
Commercial real estate
loans................. 9,317 858 9.21 8,322 483 9.95 7,927 798 10.07
Consumer real estate
loans................. 11,959 1,021 8.54 9,464 494 8.95 8,500 746 8.78
Consumer installment
loans................. 2,291 210 9.17 1,903 100 9.01 1,817 163 8.97
------- ------ ------- ------ ------- ------
Total loans........ 30,204 2,782 9.21 26,045 1,421 9.35 24,230 2,264 9.34
------- ------ ------- ------ ------- ------
Total interest-earning
assets................ $44,906 3,552 7.91 $33,085 1,655 8.58 $30,841 2,637 8.54
======= ------ ======= ------ ======= ------
INTEREST-BEARING
LIABILITIES:
Deposits:
Interest-bearing demand
deposits.............. $ 1,821 35 1.92 $ 1,275 15 2.02 $ 1,111 22 1.98
Money-market demand
accounts/savings
accounts.............. 7,664 322 4.20 4,438 120 4.64 4,029 178 4.42
Time deposits of less
than $100,000......... 17,027 967 5.68 14,933 515 5.91 13,819 813 5.88
Time deposits of
$100,000 or more...... 5,250 299 5.70 4,677 159 5.83 4,377 255 5.83
Public funds............ 1,064 56 5.26 500 17 5.83 500 29 5.80
------- ------ ------- ------ ------- ------
Total
interest-bearing
deposits......... 32,826 1,679 5.11 25,823 826 5.48 23,836 1,297 5.44
Mandatorily convertible
subordinated debentures... 1,700 102 6.00 29 1 6.00 1,800 108 6.00
------- ------ ------- ------ ------- ------
Total
interest-bearing
liabilities...... $34,526 1,781 5.16 $25,852 827 5.48 $25,636 1,405 5.48
======= ------ ======= ------ ======= ------
Net interest income......... $1,771 $ 828 $1,232
====== ====== ======
Net interest spread......... 2.75 3.10 3.06
Net yield on
interest-earning assets... 3.94 4.29 3.99
Interest-bearing liabilities
to interest-earning
assets.................... 76.94 78.07 83.03
</TABLE>
- -------------------------
(1) Average balances include unrealized gains and losses of $31,000 and $10,000
for the three months ended March 31, 1999 and 1998, $32,000 and $(29,000)
for the year ended December 31, 1998 and the period June 1 through December
31, 1997, and $(34,000) in pro forma 1997. The average rate is calculated
using average amortized cost.
(2) Non-accrual loans are excluded in average balances. Loan fees were $22,000
for each of the three months ended March 31, 1999 and 1998, $65,000 and
$28,000 for the year ended December 31, 1998 and the period June 1 through
December 31, 1997, and $93,000 in pro forma 1997.
(3) Annualized.
30
<PAGE> 34
CHANGES IN INTEREST INCOME AND EXPENSE
The changes in net interest income from period to period are reflective of
changes in the rate environment, changes in the composition of assets and
liabilities as to type and maturity (and the inherent rate differences related
thereto) and volume changes. Later sections of this discussion and analysis
address the changes in maturity composition of loans and investments, and in the
asset and liability repricing gaps associated with interest rate risk, all of
which contribute to changes in net interest margin.
The following table shows an analysis of volume and rate changes in
interest income and interest expense of Village Bancorp's average
interest-earning assets and average interest-bearing liabilities. The table
distinguishes between the changes related to average outstanding balances
(changes in volume holding the prior year average interest rate constant) and
the changes related to average interest rates (changes in average rate holding
the prior year average outstanding balance constant). The change in interest due
to both volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE THREE DECEMBER 31, 1998
MONTHS ENDED COMPARED TO THE PERIOD
MARCH 31, 1999 FOR THE YEAR ENDED
COMPARED TO THE JUNE 1, 1997 (DATE OF DECEMBER 31, 1998
THREE MONTHS INCEPTION) THROUGH COMPARED TO
ENDED MARCH 31, 1998 DECEMBER 31, 1997 PRO FORMA 1997
-------------------- ---------------------- --------------------
NET VOLUME RATE NET VOLUME RATE NET VOLUME RATE
---- ------ ---- ------ ------ ---- ---- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and deposits
with other financial
institutions................... $131 $141 $(10) $ 338 $ 381 $(43) $303 $343 $(40)
Taxable securities............... 151 229 (78) 198 212 (14) 94 101 (7)
Commercial loans................. 49 59 (10) 349 271 78 136 60 76
Commercial real estate loans..... 56 69 (13) 375 444 (69) 60 140 (80)
Consumer real estate loans....... 20 39 (19) 527 576 (49) 275 304 (29)
Consumer installment loans....... 42 42 -- 110 106 4 47 42 5
---- ---- ---- ------ ------ ---- ---- ---- ----
Total interest-earning
assets..................... 449 579 (130) 1,897 1,990 (93) 915 990 (75)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits....................... 5 6 (1) 20 22 (2) 13 14 (1)
Money market demand accounts/
savings accounts............... 28 42 (14) 202 236 (34) 144 161 (17)
Time deposits of less than
$100,000....................... 160 183 (23) 452 493 (41) 154 188 (34)
Time deposits of $100,000 or
more........................... 72 73 (1) 140 147 (7) 44 51 (7)
Public funds..................... 10 11 (1) 39 45 (6) 27 33 (6)
Mandatorily convertible
subordinated debentures........ 7 7 -- 101 101 -- (6) (6) (0)
Federal funds purchased.......... 1 1 -- -- -- -- -- -- --
---- ---- ---- ------ ------ ---- ---- ---- ----
Total interest-bearing
liabilities.................... 283 323 (40) 954 1,044 (90) 376 441 (65)
---- ---- ---- ------ ------ ---- ---- ---- ----
Net interest income.............. $166 $256 $(90) $ 943 $ 946 $(3) $539 $549 $(10)
==== ==== ==== ====== ====== ==== ==== ==== ====
</TABLE>
31
<PAGE> 35
OTHER INCOME AND EXPENSES
The following table shows Village Bancorp's other income.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
AND FOR THE PERIOD
JUNE 1, 1997
FOR THE THREE (DATE OF INCEPTION)
MONTHS ENDED THROUGH
MARCH 31, DECEMBER 31, 1997
------------- ------------------- PRO FORMA
1999 1998 1998 1997 1997
----- ----- ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts...... $ 82 $ 38 $307 $ 82 $134
Gains (losses) on security
transactions........................... 6 -- 32 (1) --
Other income............................. 54 18 104 17 22
---- ---- ---- ---- ----
Total other income....................... $142 $ 56 $443 $ 98 $156
==== ==== ==== ==== ====
</TABLE>
The following table shows Village Bancorp's other expenses.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998 AND
FOR THE PERIOD
JUNE 1, 1997
FOR THE THREE (DATE OF INCEPTION)
MONTHS ENDED THROUGH
MARCH 31, DECEMBER 31, 1997
--------------- ---------------------- PRO FORMA
1999 1998 1998 1997 1997
------ ------ -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Other Expenses:
Salaries and employee benefits.... $ 473 $ 218 $1,261 $ 403 $ 767
Occupancy and equipment expense... 105 65 339 140 245
Data processing fees.............. 106 33 252 63 107
Marketing......................... 48 31 177 81 119
Other supplies.................... 29 12 84 15 32
Legal and professional fees....... 58 32 185 56 60
Loan fees......................... 14 10 50 35 57
Amortization of goodwill and
organizational costs........... 19 16 63 37 63
Other expenses.................... 122 41 369 88 159
------ ------ ------ ------ ------
Total other expenses........... $ 974 $ 458 $2,780 $ 918 $1,609
====== ====== ====== ====== ======
</TABLE>
32
<PAGE> 36
FINANCIAL CONDITION
Loans
Village Bancorp's loan portfolio largely reflects the profile of the
communities in which it operates. The following table shows the composition of
the loan portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1999 1998 1997
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Commercial......................................... $ 9,981 $ 8,564 $ 6,060
Commercial real estate............................. 11,520 10,851 8,255
Consumer real estate............................... 13,381 13,155 11,071
Consumer installment............................... 4,925 3,085 2,116
------- ------- -------
Total loans, gross............................ 39,807 35,655 27,502
Allowance for loan losses.......................... (545) (459) (276)
------- ------- -------
Net loans..................................... $39,262 $35,196 $27,226
======= ======= =======
</TABLE>
Total loans increased $4.2 million to $39.8 million as of March 31, 1999
from $35.7 million as of December 31, 1998. The increase in all loan categories
is due to the initial market penetration of Village Bank North Barrington.
Total loans increased $8.2 million to $35.7 million as of December 31, 1998
from $27.5 million as of December 31, 1997. The increase in total loans was
principally due to increased commercial, commercial real estate loans and
consumer real estate loans. The initial market penetration of Village Bank North
Barrington represents $3.3 million of the recorded increase.
Commercial loans increased $2.5 million to $8.6 million as of December 31,
1998 from $6.1 million as of December 31, 1997. The increase reflected increased
demand due to a stronger economy, increased working capital and equipment
requirements by existing borrowers, new customer relationships and initial
market penetration of Village Bank North Barrington.
Commercial real estate loans increased $2.6 million to $10.9 million as of
December 31, 1998 from $8.3 million as of December 31, 1997. The increase
reflected the stronger economy, the overall improvement in the commercial real
estate market, increased commitments with existing borrowers and the initial
market penetration of Village Bank North Barrington.
Consumer real estate loans increased $2.1 million to $13.2 million as of
December 31, 1998 from $11.1 million as of December 31, 1997. The increase was
primarily in the categories of home equity loans and home equity lines of
credit.
Consumer installment loans increased $1.0 million to $3.1 million as of
December 31, 1998 from $2.1 million as of December 31, 1997. The increase was
primarily due to the initial market penetration of Village Bank North
Barrington.
Although the risk of nonpayment for any reason exists with respect to all
loans, certain other more specific risks are associated with each type of loan.
The primary risks associated with commercial loans are quality of the borrowers'
management and the impact of local economic factors. Risks associated with real
estate loans include concentrations of loans in a loan type such as commercial
or residential and fluctuating land values. Consumer loans also have risks
associated with concentrations of loans in a single type of loan. Consumer loans
additionally face the risk of a borrower's unemployment as a result of
deteriorating economic conditions.
33
<PAGE> 37
Village Bancorp attempts to balance the types of loans in its portfolio
with the objective of reducing risk. While Village Bancorp has a sizable portion
of its loan portfolio secured by real estate in one form or another, the
portfolio mix includes fixed, adjustable and floating interest rates. Village
Bancorp believes that its philosophy in extending credit is conservative in
nature, with a presumption that most credit should have both a primary and a
secondary source of repayment, and that the primary source should generally be
supported by operating cash flows, while the secondary source should generally
be disposition of collateral. Village Bancorp engages in very little unsecured
lending, and generally requires personal guarantees of principals for business
obligations. Village Bancorp practices a system of concurrence in the approval
of commercial credit whereby the documented concurrence of an officers' credit
committee (or approval by the board or a board committee, where applicable) is
obtained in addition to that of the recommending officer. This system is
intended to assure that commercial credit is subjected to an independent
objective review on at least two different levels. In addition, Village Bancorp
has an independent loan review function.
Loan Maturities
The following table shows the remaining maturities, based upon contractual
dates, for selected loan categories.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------------------------
1-5 YEARS OVER 5 YEARS
ONE YEAR ------------------ -----------------
OR LESS FIXED VARIABLE FIXED VARIABLE TOTAL
-------- ------- -------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial........................ $ 5,318 $ 3,471 $ 430 $ 553 $ 209 $ 9,981
Commercial real estate............ 4,259 4,559 1,884 552 266 11,520
Consumer real estate.............. 1,163 4,709 3,242 0 4,267 13,381
Consumer installment.............. 1,881 2,885 34 125 0 4,925
------- ------- ------ ------ ------ -------
Total loans, gross........... $12,621 $15,624 $5,590 $1,230 $4,742 $39,807
======= ======= ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------
1-5 YEARS OVER 5 YEARS
ONE YEAR ------------------ -----------------
OR LESS FIXED VARIABLE FIXED VARIABLE TOTAL
-------- ------- -------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial........................ $ 3,884 $ 3,164 $ 738 $ 542 $ 236 $ 8,564
Commercial real estate............ 5,591 4,674 327 0 259 10,851
Consumer real estate.............. 1,122 4,539 2,558 619 4,317 13,155
Consumer installment.............. 1,092 1,778 38 177 0 3,085
------- ------- ------ ------ ------ -------
Total loans, gross........... $11,689 $14,155 $3,661 $1,338 $4,812 $35,655
======= ======= ====== ====== ====== =======
</TABLE>
Nonperforming Loans
Village Bancorp discontinues the accrual of interest income on any loan
when, in the opinion of management, there is reasonable doubt as to the timely
collectibility of interest or principal. On a case-by-case basis, Village
Bancorp discontinues the accrual of interest on a loan once it becomes 90 days
past due. All accrued and uncollected interest is charged against income or the
allowance for loan losses at the time a loan is placed on nonaccrual status.
Nonaccrual loans are returned to an accrual status when, in the opinion of
management, the financial position of the borrower
34
<PAGE> 38
indicates that there is no longer any reasonable doubt as to the timely payment
of principal and interest. There are no potential problem loans as to which
management has serious doubts as to collectibility that are not included in the
following table.
The following table shows information on Village Bancorp's nonperforming
loans and other assets as of the indicated dates.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------
1999 1998 1997
--------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual and impaired loans not accruing.............. $ 29 $ 31 $239
Impaired and other loans 90 days past due and
accruing.............................................. 199 1 0
---- ---- ----
Total nonperforming loans.......................... 228 32 239
Other real estate....................................... 0 0 0
---- ---- ----
Total nonperforming assets......................... $228 $ 32 $239
==== ==== ====
Total nonperforming loans to total loans................ 0.58% 0.09% 0.87%
Total nonperforming assets to total loans and other real
estate................................................ 0.58 0.09 0.87
Total nonperforming assets to total assets.............. 0.28 0.04 0.59
</TABLE>
For 1998, gross interest income that would have been recorded if the
nonaccrual loans had been current and outstanding throughout the period was
approximately $7,200. During 1998, Village Bancorp recognized interest income on
such nonaccrual loans of $3,330. For the three months ended March 31, 1999 the
interest income on nonaccrual loans was insignificant.
Nonperforming assets were 0.04% of total assets as of December 31, 1998
compared to 0.59% of total assets as of December 31, 1997. The decrease in
nonaccrual and impaired loans resulted from the liquidation of one large loan.
The increase in impaired and other loans 90 days past due and accruing from
December 31, 1998 to March 31, 1999 relates to one loan which was brought
current during April 1999.
Analysis of Allowance for Loan Losses
An allowance for loan losses has been established to provide for those
loans that may not be repaid in their entirety. The allowance for loan losses is
maintained at a level considered by management to be adequate to provide for
potential loan losses. The allowance is increased by provisions charged to
earnings and is reduced by charge-offs, net of recoveries. The provision for
loan losses is based on past loan loss experience and management's evaluation of
the loan portfolio under current economic conditions. Loans are charged to the
allowance for loan losses when, and to the extent, they are deemed by management
to be uncollectible. The allowance for loan losses is composed of allocations
for specific loans and an unallocated portion for all other loans.
35
<PAGE> 39
The following table shows loans charged off and recovered by type of loan
and an analysis of the allowance for loan losses.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998 AND
FOR THE THREE MONTHS FOR THE PERIOD
ENDED MARCH 31, JUNE, 1997 (DATE OF
-------------------- INCEPTION) THROUGH PRO FORMA
1999 1998 DECEMBER 31, 1997 1997
-------- -------- --------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average total loans......... $37,878 $28,619 $30,329 $26,254 $24,354
Total loans at end of
period.................... 39,807 28,876 35,655 27,502 27,502
Total nonperforming and
impaired loans............ 228 85 32 239 239
Allowance at beginning of
period.................... $ 459 $ 276 $ 276 $ 0 $ --
Allowance of acquired
bank...................... -- -- -- 237 196
Charge-offs:
Commercial loans.......... 0 0 47 5 5
Consumer real estate
loans.................. 0 0 0 50 50
Commercial real estate
loans.................. 0 0 0 0 0
Consumer installment
loans.................. 1 1 12 27 29
------- ------- ------- ------- -------
Total charge-offs...... 1 1 59 82 84
Total recoveries............ 0 0 0 0 0
------- ------- ------- ------- -------
Net charge-offs............. 1 1 59 82 84
------- ------- ------- ------- -------
Provision for loan losses... 87 39 242 121 164
------- ------- ------- ------- -------
Allowance at end of
period.................... $ 545 $ 314 $ 459 $ 276 $ 276
======= ======= ======= ======= =======
Net charge-off to average
total loans............... --% --% 0.19% 0.31% 0.34%
Allowance to total loans at
end of period............. 1.37 1.09 1.29 1.00 1.00
Allowance to nonperforming
loans..................... 2.39x 3.69x 14.34x 1.15x 1.15x
</TABLE>
The allowance for loan losses was $545,000 at March 31, 1999, $459,000 at
December 31, 1998 and $276,000 at December 31, 1997. There were no recoveries
recorded in 1999, 1998 or 1997.
Net charge-offs decreased $23,000 to $59,000 or 0.2% of average loans in
1998 compared to 1997. Net charge-offs were insignificant for the three months
ended March 31, 1999 and 1998. We consider the allowance for loan losses to be
adequate to meet potential losses in the loan portfolio as of March 31, 1999.
See "-- Nonperforming Loans."
The provision for loan losses increased $121,000 or 100.0% to $242,000 for
the year ended December 31, 1998. On a comparative basis to the pro forma 1997
results, the provision for loan losses increased 47.6% or $78,000 in 1998. For
the three months ended March 31, 1999 the provision for loan losses increased
$48,000 over the comparable period in 1998. The increase in the provision for
loan losses was due to actual growth in loans and the initial funding of the
allowance for loan losses for Village Bank North Barrington.
36
<PAGE> 40
Allocation of Allowance for Loan Losses
The following table shows Village Bancorp's allocation of the allowance for
loan losses by types of loans as of the indicated dates.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY
TO GROSS TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated:
Commercial loans............... $196 25.1% $181 24.0% $110 22.0%
Commercial real estate loans... 80 28.9 67 30.4 36 30.0
Consumer real estate loans..... 70 33.6 71 36.9 39 40.3
Consumer installment loans..... 74 12.4 34 8.7 22 7.7
Unallocated.................... 125 -- 106 -- 69 --
---- ----- ---- ----- ---- -----
Total allowance for
losses................. $545 100.0% $459 100.0% $276 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
Village Bancorp has limited historical loan loss experience upon which to
base its allocation of the allowance for loan losses.
Securities
Village Bancorp manages its investment portfolio to provide a source of
both liquidity and earnings. The investment policy is reviewed by senior
management of Village Bancorp in terms of its objectives, investment guidelines
and consistency with overall performance and risk management goals. Each of the
banks' investment policy is formally reviewed and approved annually by its board
of directors. Each bank is responsible for monthly reporting and monitoring
compliance with the investment policy. Monthly reports are provided to each
bank's board of directors and the board of directors of Village Bancorp.
Existing investment policies at each of the banks set limits on amounts,
maximum term and average life for each class and grade of investment security.
Investment policies do not require ratings for U.S. Treasury bonds or notes,
agency issues or agency guaranteed mortgage-backed securities. In addition,
ratings are not required for municipal investments of limited maturities within
Village Bancorp's existing market areas.
The investment portfolio increased to 26.1% of Village Bancorp's assets at
March 31, 1999. The investment portfolio represented approximately 11.1% of
Village Bancorp's assets as of December 31, 1998. During the past two years, the
investment portfolio ranged between 14-17% of each of the banks' assets,
depending upon liquidity requirements, deposit growth and loan demand in each
market.
The total fair value of the securities portfolio was $21.5 million as of
March 31, 1999 or 99.4% of stated book value. The total fair value of the
securities portfolio was $8.1 million as of December 31, 1998 or 100.7% of
stated book value.
37
<PAGE> 41
The following tables show the composition of Village Bancorp's investment
portfolio by major category as of the indicated dates. All securities have been
categorized as available-for-sale in accordance with SFAS No. 115 as of March
31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
AMORTIZED ESTIMATED % OF
COST FAIR VALUE PORTFOLIO
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury..................................... $ 4,055 $ 4,055 18.8%
U.S. government agencies.......................... 17,577 17,456 81.2
------- ------- -----
Total........................................ $21,632 $21,511 100.0%
======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
AMORTIZED ESTIMATED % OF
COST FAIR VALUE PORTFOLIO
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury..................................... $ 3,036 $ 3,058 37.7%
U.S. government agencies.......................... 5,020 5,058 62.3
------- ------- -----
Total........................................ $ 8,056 $ 8,116 100.0%
======= ======= =====
</TABLE>
As of March 31, 1999, Village Bancorp did not hold any off-balance sheet
derivative financial instruments such as futures, forwards, or swaps.
As of March 31, 1999, Village Bancorp held no securities with a book value
exceeding 10% of stockholders' equity of a single issuer other than the U.S.
Treasury or U.S. government agencies.
Village Bancorp's securities portfolio increased $13.6 million as of March
31, 1999 compared to December 31, 1998. The growth was primarily due to the
generation of new deposits at Village Bank North Barrington, in excess of the
loan funding.
INVESTMENT MATURITIES AND YIELDS
At March 31, 1999, all securities mature in one-to-five years. U.S.
Treasury and U.S. government agencies' yields were 5.03% and 5.28%,
respectively, with an overall yield of 5.23%.
Deposits
Village Bancorp has experienced significant growth in total deposits. At
March 31, 1999, total deposits were $71.1 million which represents a $9.9
million increase compared to December 31, 1998. Total deposits averaged $64.8
million for the three month period. Total deposits were $61.2 million at
December 31, 1998 and $35.6 million at December 31, 1997. Average total deposits
were $40.5 million for the year ended December 31, 1998 and $31.3 million for
the year ended December 31, 1997. The increase in average deposits was the
result of increased marketing activity at Northwest Community Bank and the
opening of Village Bank North Barrington during October 1998, which ended March
31, 1999 with $33.2 million in deposits.
38
<PAGE> 42
The following table shows the average amount of and the average rate paid
on deposits by category.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD JUNE 1, 1997
(DATE OF INCEPTION) THROUGH
FOR THE THREE MONTHS DECEMBER 31, 1997
ENDED ---------------------------------------------
MARCH 31, 1999 1998 1997
-------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
AVERAGE OF AVERAGE OF AVERAGE OF
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits........ $ 9,917 15.3% -- $ 7,664 18.9% -- $ 5,512 17.6% --
Interest-bearing demand
deposits............... 2,758 4.3 1.76% 1,821 4.5 1.92% 1,275 4.1 2.02%
Savings and money market
accounts............... 10,629 16.4 3.66 7,664 18.9 4.20 4,438 14.2 4.64
Time Deposits:
Certificates of deposit,
under $100,000(1)...... 29,991 46.3 5.31 17,027 42.1 5.68 14,933 47.6 5.91
Certificates of deposit,
over $100,000(1)....... 10,069 15.5 5.60 5,250 13.0 5.70 4,677 14.9 5.83
Public funds............. 1,419 2.2 5.14 1,064 2.6 5.26 500 1.6 5.83
------- ----- ------- ----- ------- -----
Total time deposits...... 41,479 64.0 5.37 23,341 57.7 5.66 20,110 64.1 5.89
------- ----- ------- ----- ------- -----
Total.................... $64,783 100.0% 4.86 $40,490 100.0% 5.11 $31,335 100.0% 5.48
======= ===== ======= ===== ======= =====
</TABLE>
- -------------------------
(1) Certificates of deposit exclusive of public funds.
The following table summarizes the maturity distribution of certificates of
deposit in amounts of $100,000 or more. These deposits have been made by
individuals, businesses and public and other not-for-profit entities, most of
which are located within Village Bancorp's market area.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Three months or less............................... $ 6,715 $2,910
Over three months through twelve months............ 6,718 4,711
Over one year through three years.................. 722 1,272
Over three years................................... -- 300
------- ------
Total......................................... $14,155 $9,193
======= ======
</TABLE>
Borrowings
Village Bancorp has available overnight federal funds lines of credit with
correspondent banks. There were no outstanding borrowings at March 31, 1999 and
December 31, 1998.
CAPITAL RESOURCES
Village Bancorp monitors compliance with bank and bank holding company
regulatory capital requirements, focusing primarily on risk-based capital
guidelines. Under the risk-based capital method of capital measurement, the
ratio computed is dependent upon the amount and composition of assets recorded
on the balance sheet, and the amount and composition of off-balance sheet items,
39
<PAGE> 43
in addition to the level of capital. Included in the risk-based capital method
are two measures of capital adequacy, Tier 1, or core, capital, and total
capital, which consists of Tier 1 plus Tier 2 capital. See "Supervision and
Regulation -- Bank Holding Company Regulation" for definitions of Tier 1 and
Tier 2 capital.
The following table shows the capital amounts and ratios for Village
Bancorp and Northwest Community Bank.
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
MARCH 31, 1999 1998 1997
--------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
VILLAGE BANCORP
Tier 1 capital to risk-weighted
assets.............................. $ 8,379 17.40% $ 8,727 20.40% $ 3,491 12.35%
Tier 1 capital minimum requirement.... 1,926 4.00 1,711 4.00 1,130 4.00
Total capital to risk-weighted
assets.............................. 8,862 18.40 10,969 25.65 4,537 16.05
Total capital minimum requirement..... 3,853 8.00 3,422 8.00 2,261 8.00
Total risk-weighted assets............ $48,083 $42,775 $28,260
NORTHWEST COMMUNITY BANK
Tier 1 capital to risk-weighted
assets.............................. $ 3,707 11.60 $ 3,646 10.78 $ 3,593 12.83
Tier 1 capital minimum requirement.... 1,278 4.00 1,352 4.00 1,120 4.00
Total capital to risk-weighted
assets.............................. 4,108 12.80 4,055 11.99 3,868 13.81
Total capital minimum requirement..... 2,567 8.00 2,705 8.00 2,239 8.00
Total risk-weighted assets............ $31,978 $33,810 $28,000
</TABLE>
LIQUIDITY
Village Bancorp manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and borrowers
and to take advantage of earnings enhancement opportunities. In addition to the
normal inflow of funds from core deposit growth, together with repayments and
maturities of loans and investments, the banks have various funding arrangements
with correspondent banks providing up to $3.0 million of available funding
sources in the form of federal funds lines. The banks maintain these funding
arrangements to achieve favorable costs of funds and to enhance liquidity in the
event of deposit withdrawals.
Village Bancorp monitors and manages its liquidity position depending upon
the time period. As the time period is expanded, other data is factored in,
including estimated loan funding requirements, estimated loan payoffs,
investment portfolio maturities or calls, and anticipated deposit buildups or
runoffs.
Village Bancorp classifies all of its investment securities as
available-for-sale, thereby maintaining significant liquidity. Village Bancorp's
liquidity position is further enhanced by structuring the majority of its loan
portfolio interest payments as monthly.
Village Bancorp's cash flows are composed of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided by or used in operating
activities, consisting primarily of earnings or losses, was $(203,000) and
$(429,000) for the three months ended March 31, 1999 and 1998, respectively, and
40
<PAGE> 44
$(608,000) and $413,000 for the periods ended December 31, 1998 and 1997,
respectively. Net cash used in investing activities, consisting primarily of
federal funds sold, securities purchased, loan funding, and premises and
equipment expenditures was $9.7 million for the three months ended March 31,
1999 and $634,000 for the three months ended March 31, 1998 and $30.0 million
and $8.9 million for the periods ended December 31, 1998 and 1997, respectively.
Net cash provided by financing activities, consisting principally of deposit
growth and common stock issuance, was $9.9 million and $1.8 million for the
three month periods ended March 31, 1999 and March 31, 1998, respectively, and
$32.7 million and $9.5 million for the periods ended December 31, 1998 and 1997,
respectively. The increase in deposit growth in 1999 and 1998 was principally
due to the initial market penetration of Village Bank North Barrington.
ASSET/LIABILITY MANAGEMENT
The business of Village Bancorp and the composition of its balance sheet
consist of investment in interest-earning assets (primarily loans and U.S.
Treasury and U.S. government securities) which are primarily funded by
interest-bearing liabilities (deposits and borrowings). Village Bancorp's net
interest income is dependent on the amounts of and yields on its
interest-earning assets as compared to the amounts of and rates on its
interest-bearing liabilities. Net interest income is therefore sensitive to
changes in market rates of interest.
Village Bancorp's asset/liability management strategy is to maximize net
interest income while limiting exposure to risks associated with a volatile
interest rate environment. This strategy is implemented by Village Bancorp's
ongoing analysis and management of its interest rate risk. A principal function
of asset/liability management is to coordinate the levels of interest-sensitive
assets and liabilities to minimize net interest income fluctuations in times of
fluctuating market interest rates.
Interest rate risk results when the maturity or repricing intervals and
interest rate indices of the interest-earning assets, interest-bearing
liabilities and off-balance sheet financial instruments are different, creating
a risk that changes in the level of market interest rates will result in
disproportionate changes in the value of, and the net earnings generated from,
Village Bancorp's interest-earning assets, interest-bearing liabilities and
off-balance sheet financial instruments. Village Bancorp's exposure to interest
rate risk is managed primarily through Village Bancorp's strategy of selecting
the types and terms of interest-earning assets and interest-bearing liabilities
which generate favorable earnings, while limiting the potential negative effects
of changes in market interest rates. Since Village Bancorp's primary source of
interest-bearing liabilities is customer deposits, Village Bancorp's ability to
manage the types and terms of such deposits may be somewhat limited by customer
maturity preferences in the market areas in which Village Bancorp operates. The
rates, terms and interest rate indices of Village Bancorp's interest-earning
assets result primarily from Village Bancorp's strategy of investing in loans (a
substantial portion of which have adjustable rate terms) and securities which
permit Village Bancorp to limit its exposure to interest rate risk, together
with credit risk, while at the same time achieving a positive interest rate
spread from the difference between the income earned on interest-earning assets
and the cost of interest-bearing liabilities.
Management uses a duration model for each bank's internal asset/liability
management. The model uses cash flows and repricing information from each
individual loan and certificate of deposit, plus repricing assumptions on
products without specific repricing dates (e.g., savings and interest-bearing
demand deposits) to calculate the durations of each bank's assets and
liabilities. Investment securities are stress tested and the theoretical changes
in cash flow are key elements of Village Bancorp's model. The model also
projects the effect on Village Bancorp's earnings and
41
<PAGE> 45
theoretical value for a change in interest rates. The model computes the
duration of each bank's rate sensitive assets and liabilities, a theoretical
market value of each bank and the effects of rate changes on each bank's
earnings and market value. The banks' exposure to interest rates is reviewed on
a quarterly basis by senior management and the board of directors.
Each bank also maintains specific interest rate risk management policy
limits. Based upon simulation modeling, these guidelines include: (i) a +/-20%
change in net income upon an immediate 200 basis point change in interest rates;
and (ii) a +/-10% change in net income upon a gradual 200 basis point change in
interest rates during a twelve-month period.
INTEREST RATE SENSITIVITY ANALYSIS
Village Bancorp's overall interest rate sensitivity is demonstrated by net
interest income analysis and "gap" analysis. Net interest income analysis
measures the change in net interest income in the event of hypothetical changes
in interest rates. This analysis assesses the risk of change in net interest
income in the event of sudden and sustained 1.0% to 2.0% increases and decreases
in market interest rates. The table below presents Village Bancorp's projected
changes in net interest income for the various rate shock levels at March 31,
1999.
<TABLE>
<CAPTION>
NET INTEREST INCOME
---------------------------
AMOUNT CHANGE CHANGE
------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+200 bp..................... $456 $(97) (17.54)%
+100 bp..................... 504 (49) (8.86)
Base........................ 553 -- --
- -100 bp..................... 603 50 9.04
- -200 bp..................... 630 77 13.92
</TABLE>
As shown above, at March 31, 1999, the effect of an immediate 200 basis
point increase in interest rates would decrease Village Bancorp's net interest
income by 17.54% or approximately $97,000. The effect of an immediate 200 basis
point decrease in rates would increase Village Bancorp's net interest income by
13.92% or approximately $77,000. The volume of federal funds sold at Village
Bank North Barrington at March 31, 1999, directly impacts the results of this
rate shock analysis.
42
<PAGE> 46
"Gap" analysis is used to determine the repricing characteristics of
Village Bancorp's assets and liabilities. The following table sets forth the
interest rate sensitivity of Village Bancorp's assets and liabilities as of
March 31, 1999, and sets forth the repricing dates of Village Bancorp's
interest-earning assets and interest-bearing liabilities as of that date, as
well as Village Bancorp's interest rate sensitivity gap percentages for the
periods presented.
<TABLE>
<CAPTION>
0-3 4-12 1-5 OVER
MARCH 31, 1999 MONTHS MONTHS YEARS 5 YEARS TOTAL
- -------------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Funds sold...................... $15,587 $ -- $ -- $ -- $15,587
Securities...................... -- -- 21,511 -- 21,511
Loans........................... 19,820 2,929 15,828 1,230 39,807
------- -------- ------- ------- -------
Total interest-earning
assets.................. 35,407 2,929 37,339 1,230 76,905
------- -------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits...................... 3,157 -- -- -- 3,157
Money markets deposits.......... 4,929 -- -- -- 4,929
Savings deposits................ 6,327 -- -- -- 6,327
Time deposits................... 13,074 29,714 4,247 -- 47,035
------- -------- ------- ------- -------
Total interest-bearing
deposits................ 27,487 29,714 4,247 -- 61,448
Mandatorily convertible
subordinated debentures....... -- -- 1,800 -- 1,800
------- -------- ------- ------- -------
Total interest-bearing
liabilities............. 27,487 29,714 6,047 -- 63,248
------- -------- ------- ------- -------
Interest sensitivity gap........ $ 7,920 $(26,785) $31,292 $ 1,230 $13,657
======= ======== ======= ======= =======
Cumulative gap.................. $ 7,920 $(18,865) $12,427 $13,657 $13,657
======= ======== ======= ======= =======
Interest sensitivity gap to
total assets.................. 9.61% (32.49)% 37.95% 1.49% 16.56%
Cumulative sensitivity gap to
total assets.................. 9.61 (22.88) 15.07 16.56 16.56
</TABLE>
The asset mix of Village Bank North Barrington at March 31, 1999 directly
impacts the repricing characteristics and interest rate sensitivity of Village
Bancorp. The volatility of the "gap" analysis shown above will change as funds
sold are reinvested into higher yielding loans and securities.
Computations of the prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay rates, and should not be
relied upon as indicative of actual results. Actual values may differ from those
projections set forth above, should market conditions vary from assumptions used
in preparing the analysis. Further, the computations do not contemplate any
actions Village Bancorp may undertake in response to changes in interest rates.
The "gap" analysis is based upon assumptions as to when assets and liabilities
will reprice in a changing interest rate environment. Since such assumptions can
be no more than estimates, certain assets and liabilities indicated as maturing
or otherwise repricing within a stated period may, in fact, mature or reprice at
different times and at different volumes than those estimated. Also, the renewal
or repricing of certain assets and liabilities can be discretionary and subject
to competitive and other pressures. Therefore, the
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<PAGE> 47
gap table included above does not and cannot necessarily indicate the actual
future impact of general interest rate movements on Village Bancorp's net
interest income.
EFFECTS OF INFLATION
Inflation can have a significant effect on the operating results of all
industries. However, management believes that inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on Village Bancorp's growth,
earnings and total assets and on its need to closely monitor its equity capital
levels.
Interest rates are significantly affected by inflation, but it is difficult
to assess the impact, since neither the timing nor the magnitude of the changes
in the various inflation indices coincides with changes in interest rates.
Inflation does impact the economic value of longer term interest-bearing assets
and liabilities, but Village Bancorp attempts to limit its long-term assets and
liabilities, as indicated in the tables presented under "-- Financial Condition"
and "-- Asset/Liability Management."
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 Problem. The year 2000 issue confronting Village Bancorp,
each of our banks and our suppliers, customers, customers' suppliers and
competitors centers on the inability of computer systems to recognize the year
2000 and other year 2000 sensitive dates such as September 9, 1999, December 3,
1999 and February 29, 2000. Many existing computer programs and systems
originally were programmed with six-digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000. Like most financial service providers, Village Bancorp and its
operations may be affected significantly by the year 2000 issue because it
depends on computer-generated financial information. Software, hardware and
equipment, both within and outside our direct control, and third parties with
whom we electronically or operationally interface are likely to be affected.
These third parties include customers and third-party vendors providing data
processing, information systems management, computer systems maintenance and
credit bureau information. If computer systems are not able to identify the year
2000, many computer applications could fail or create incorrect results.
Consequently, many calculations that rely on date-related functions, could
generate significantly misstated results, and we could lose our ability to
process transactions, prepare statements or engage in similar normal business
activities. In addition, under certain circumstances, the failure to address
adequately the year 2000 issue could adversely affect the viability of our
suppliers and creditors and the creditworthiness of our borrowers. If not
adequately addressed, the year 2000 issue could ultimately have a significant
adverse impact on our products, services, and competitive condition and, in
turn, our financial condition and results of operations.
Regulatory Oversight. Financial institution regulators recently have
increased their focus on year 2000 compliance issues and have issued guidance
concerning the responsibilities of senior management and directors. The Federal
Financial Institutions Examination Council has issued several interagency
statements on the year 2000. These statements require, among other things, that
financial institutions examine the year 2000 implications of relying on vendors
and the potential impact of the year 2000 issue on their customers, suppliers
and borrowers. These statements also require each federally regulated financial
institution to survey its exposure, measure its risk, and prepare a plan to
address the year 2000 issue. In addition, the federal and state bank regulators
have guidelines to be followed to ensure resolution of any year 2000 problems.
The federal and
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<PAGE> 48
state banking agencies have asserted that year 2000 testing and certification is
a key safety and soundness issue in regulatory examinations. Consequently, an
institution's failure to address appropriately the year 2000 issue could result
in supervisory action, including the reduction of the institution's supervisory
ratings, disapproval of mergers or acquisitions, and the imposition of civil
money penalties.
State of Readiness. Village Bancorp has formally established a year 2000
plan for Northwest Community Bank and Village Bank North Barrington and has
created a project team for management of the year 2000 project. The project team
has created a plan of action for each bank that includes milestones, budget
estimates, strategies, and methodologies to track and report the status of the
project. Members of the project team also attend conferences and information
sharing sessions to gain more insight into the year 2000 issue and potential
strategies for addressing it. This phase is substantially complete.
Because Northwest Community Bank and Village Bank North Barrington were
organized relatively recently, all vendor-supplied mission critical systems are
certified as year 2000 compliant. As a result, we do not have renovation or
upgrade issues as other institutions with longer operating histories might have.
Nonetheless, we have undertaken measures to validate and test the ability of our
hardware and software to accurately process date-sensitive data. We have
substantially completed the validation testing of our mission-critical systems.
During the validation testing process, no significant year 2000 problems have
been identified relating to any mission-critical systems.
As a start-up entity, Village Bank Munster does not have existing systems
or equipment requiring year 2000 testing and remediation. We will purchase all
of our office equipment, hardware and software and obtain service commitments
only from vendors and service providers that can certify that their products and
services are year 2000 compliant. For example, we will purchase applications
software, microcomputers, teller equipment, and network file servers only from
vendors that can provide year 2000 compliance certificates relating to those
products. We plan to obtain data processing services, automatic teller machine
applications, a voice response system, document imaging solutions and bond
accounting systems from third party service providers that can certify that the
products and services they provide will be year 2000 compliant. We believe that
we will be able to obtain these products and services from vendors and service
providers that can supply the necessary certification. If we are unable to do
so, however, we will either forego acquiring the product or service until we
receive the required certification or, if the product or service is essential to
our operations, arrange for independent testing and verification of year 2000
compliance.
Although our internal systems, equipment and operations require significant
oversight relating to year 2000 issues, we believe that our customers' year 2000
readiness could also have a significant effect on our operations. For example,
if a customer with an outstanding loan from one of our banks is unable to
maintain its cash flow as a result of disruption caused by its own or its
customers' year 2000 problems, the customer could default in the repayment of
the loan, which would lead to increased loan losses. Any such losses could
exceed our allowance for loan losses. To address this concern, we have
communicated with customers on an ongoing basis regarding their year 2000
readiness and have attempted to identify at the earliest opportunity those
customers that are likely to encounter year 2000 problems. We plan to work with
these customers to ensure, to the greatest extent possible, that their year 2000
compliance issues do not disrupt our operations. We do not anticipate any
significant problems will result from customers' year 2000 readiness.
We believe that any year 2000 problems we might encounter would be
concentrated within our commercial loan portfolio. We feel that real estate loan
and consumer loan customers are generally
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not as sensitive to year 2000 problems as commercial borrowers. Our commercial
loan customers are primarily small- to medium-sized businesses which are not
reliant on high technology or capital intensive manufacturing systems that pose
year 2000 risks. As of March 31, 1999, our commercial loan portfolio represented
25.1% of our total loan portfolio. Our contact with the commercial loan
customers included a year 2000 risk self-assessment as to their dependence on
computer systems and their level of year 2000 awareness and readiness. From the
responses of our commercial loan customers, we ranked our customers potential
exposure to year 2000 issues. Based on the results of our customer responses and
our internal review of those responses, we have not identified any major
exposure or problems from year 2000 issues that might result in material losses
in our loan portfolio.
Resources Invested. Our year 2000 project team has been assigned the task
of ensuring that all systems are identified, tested, and have any changes into
service by June 30, 1999. The year 2000 project team members represent all
functional areas of Village Bancorp, including data processing, loan
administration, accounting, item processing and operations, compliance, human
resources, and marketing. The board of directors of each bank oversees the year
2000 plan and provides guidance and resources to, and receives monthly updates
from, the banks' year 2000 team.
Village Bancorp is expensing all year 2000 costs as those costs are
incurred, and such costs are being funded through operating cash flows. The
total cost of the year 2000 project since commencement has been less than
$10,000. We do not expect to expend more than minimal amounts for future data
processing and other costs related to year 2000 compliance.
Contingency Plans. We have developed back-up or contingency plans for each
of our mission-critical systems. Virtually all of Village Bancorp's
mission-critical systems are dependent upon third party vendors or service
providers. Therefore, contingency plans include selecting a new vendor or
service provider and converting to their system. In the event a current vendor's
system fails during the validation phase and it is determined that the vendor is
unable or unwilling to correct the failure, we will convert to a new system from
a pre-selected list of prospective vendors. In each case, realistic trigger
dates have been established in compliance with regulatory guidelines to allow
for orderly and successful conversions. For some systems, contingency plans
consist of using spreadsheet software or reverting to manual systems until
computer system problems can be corrected. Unlike larger financial institutions,
because Northwest Community Bank and Village Bank North Barrington were
organized relatively recently, the volume of transactions does not prohibit
utilizing a temporary manual operation for most systems.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 on derivatives will, in
2000, require all derivatives to be recorded at fair value in the balance sheet,
with changes in fair value charged or credited to income. If derivatives are
documented and effective as hedges, the change in the derivative fair value will
be offset by an equal change in the fair value of the hedged item. Under the new
standard, securities held-to-maturity can no longer be hedged, except for
changes in the issuer's creditworthiness. Therefore, upon adoption of Statement
No. 133, companies will have another one-time window of opportunity to
reclassify held-to-maturity securities to either trading or available-for-sale,
provided certain criteria are met. This Statement may be adopted early at the
start of a calendar quarter. Since Village Bancorp has no significant derivative
instruments or hedging activities, nor any securities held-to-maturity, adoption
of Statement No. 133 is not expected to have a material impact on the Village
Bancorp's financial statements. Management has not decided whether to adopt
Statement No. 133 early.
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Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans
that are securitized to be classified as trading, available-for-sale, or, in
certain circumstances, held-to-maturity. Currently, these must be classified as
trading. Since Village Bancorp has not securitized mortgage loans, Statement No.
134 is not expected to affect Village Bancorp.
American Institute of Certified Public Accountants Statement of Position
98-1, effective in 1999, sets the accounting requirement to capitalize costs
incurred to develop or obtain software that is to be used solely to meet
internal needs. Costs to capitalize are those direct costs incurred after the
preliminary project stage, up to the date when all testing has been completed
and the software is substantially ready for use. All training costs, research
and development costs, costs incurred to convert data, and all other general and
administrative costs are to be expensed as incurred. The capitalized cost of
internal-use software is amortized over its useful life and reviewed for
impairment using the criteria in Statement No. 121. Statement of Position 98-1
is not expected to have a material impact on Village Bancorp.
American Institute of Certified Public Accountants Statement of Position
98-5, also effective in 1999, requires all start-up, pre-opening, and
organization costs to be expensed as incurred. Any such costs previously
capitalized for financial reporting purposes must be written off to income at
the start of the year. Statement of Position 98-5 is not expected to have a
material impact on Village Bancorp.
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BUSINESS
VILLAGE BANCORP
Village Bancorp, a Delaware corporation, is a multi-bank holding company
registered under the Bank Holding Company Act (the Bank Holding Company Act and
the regulations thereunder are collectively referred to herein as the "BHC
Act"). We maintain our principal offices in Prospect Heights, Illinois. Village
Bancorp was organized as a holding company for Northwest Community Bank
effective June 1, 1997. In October 1998, we opened our second bank, Village Bank
and Trust, in North Barrington, Illinois. Our third bank will be located in
Munster, Indiana and also operate under the name Village Bank and Trust.
The banks operate on an autonomous basis with centralized planning and
staff support functions performed at the holding company level. Each bank faces
different levels and varied types of competition, which are addressed by the
local, decentralized nature of each bank. The banks maintain full responsibility
for day-to-day operations, including lending practices and decision-making,
pricing, sales and customer service. The banks are supported by centralized
staff services provided by Village Bancorp for accounting, auditing, financial
and strategic planning, marketing, human resources, loan review and regulatory
compliance.
THE BANKS
Northwest Community Bank, an Illinois state bank, was organized as a de
novo bank in May 1995. The bank was acquired from National Bancorp, Inc. in 1997
by Mr. Robert W. Svendsen, Sr. as part of the split-up of National Bancorp, Inc.
On June 1, 1997, Northwest Community Bank was purchased from Svendsen by Mr.
Roth, members of Northwest Community Bank's board of directors and other
individual purchasers. Northwest Community Bank maintains its banking facility
in Prospect Heights, Illinois.
Village Bank North Barrington is an Illinois state bank organized as a de
novo bank on October 9, 1998. It operates its primary banking facility in North
Barrington, Illinois. Village Bank North Barrington also maintains a branch
office in Lake Zurich, Illinois, which it opened in March 1999.
Village Bank Munster will be organized under Indiana law as a de novo bank
upon completion of the offering. It will maintain its banking facility in
Munster, Indiana.
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Shown below is selected financial and other information for Northwest
Community Bank and Village Bank North Barrington.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998 AND
THE PERIOD JUNE 1, 1997
(DATE OF INCEPTION)
FOR THE THREE THROUGH DECEMBER 31, 1997
MONTHS ENDED --------------------------- FOR THE YEAR ENDED
MARCH 31, 1999 1998 1997 DECEMBER 31, 1997
-------------- ---- ---- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NORTHWEST COMMUNITY BANK
Net income..................... $ 64 $201 $ 27 $ 55
Return on average assets(1).... 0.58% 0.46% 0.08% 0.16%
Return on average equity(1).... 6.59 5.41 0.44 1.54
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
MARCH 31, 1999 1998 1997
-------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets...................................... $42,979 $47,419 $40,221
Total loans....................................... 31,476 32,363 27,502
Total deposits.................................... 38,690 43,177 36,390
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 13, 1998
FOR THE THREE (DATE OF INCEPTION),
MONTHS ENDED THROUGH
MARCH 31, 1999 DECEMBER 31, 1998
-------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
VILLAGE BANK NORTH BARRINGTON
Net loss.......................................... $ (249) $ (581)
Return on average assets(1)....................... (3.12)% (17.56)%
Return on average equity(1)....................... (18.08) (43.46)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total assets....................................... $38,722 $24,754
Total loans........................................ 8,331 3,293
Total deposits..................................... 33,166 19,116
</TABLE>
- -------------------------
(1) Information for 1999 is annualized.
MARKETS
Our banks operate in broadly diverse markets, with varying levels of growth
rates of economic development and activity. Population trends, geographic
density and the demographic mix vary by market. The largest segments of Village
Bancorp's customer base live and work in relatively mature markets in Lake
County, Illinois and the northwest suburban areas of Cook County, Illinois.
Village Bank Munster will serve the markets in Lake County, Indiana and southern
Cook County, Illinois.
Village Bancorp considers its primary market areas to be those areas
immediately surrounding its offices for retail customers and, generally, within
a 5-7 mile radius of each bank for commercial
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relationships. Village Bancorp's business is highly concentrated in the areas in
which our banks are located. The communities in which our banks are located have
a broad spectrum of demographic characteristics. These communities include a
number of densely populated areas as well as rural areas, and some extremely
high-income areas as well as many middle-income and some low- to moderate-income
areas.
The following table shows certain information with respect to each of the
banks' primary markets:
<TABLE>
<CAPTION>
MEDIAN
HOUSEHOLD POPULATION
BANK MARKET AREAS INCOME(1) OF AREA(1)
- ---- ------------ --------- ----------
<S> <C> <C> <C>
Northwest Community Bank............... Prospect Heights, Arlington $46,572 312,944
Heights and surrounding
metropolitan Chicago suburbs
Village Bank North Barrington.......... North Barrington, Lake Zurich, 62,990 62,770
Wauconda and Hawthorn Woods
Village Bank Munster................... Munster, Dyer, Schererville and 36,098 198,428
Highland, Indiana and Lansing,
Illinois
</TABLE>
- -------------------------
(1) Information from 1990 U.S. Census data within a 5 mile radius of bank
location. NDS/UDS Data Service
We view our potential market area as encompassing the metropolitan Chicago
area, primarily the suburban communities extending from Northwest Illinois to
Northwest Indiana. According to the 1990 census, the metropolitan Chicago area
is the third largest metropolitan area in the United States with a population of
approximately 7.1 million. With approximately 550,000 manufacturing jobs, 1.1
million service jobs, 1.1 million jobs in retail/wholesale trade, transportation
and public utilities, and 300,000 jobs in finance, insurance and real estate,
the Chicago metropolitan area followed only the New York and Los Angeles
metropolitan areas in total nonagricultural wage and salary employment.
GROWTH OPPORTUNITY
The expansion of interstate banking has contributed to substantial
consolidation of the banking industry in Illinois and Indiana, including our
existing and potential market areas. Many locally owned or managed banks either
have been acquired by large regional bank holding companies or have been
consolidated into branches of other banks. We believe that, after consolidation,
these banks no longer offer the same level of personalized customer service.
Although the banking industry remains competitive, we believe that this
consolidation has created a favorable opportunity for community-oriented,
locally managed commercial banks in our existing and potential market areas. We
want to take advantage of this opportunity. We emphasize local ownership and
management and strong ties and active commitment to the community. We believe
that community banks can improve the economic development and overall economy of
their communities. We believe that community residents recognize these benefits
and that we will be successful in attracting individuals and small- to
medium-sized businesses as customers by taking an active interest in their
business and personal finances.
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BUSINESS STRATEGY
We believe that our business strategy will support the growth of Village
Bancorp and allow us to maintain positive expansion in our markets. Key aspects
of our business strategy include the following:
- Emphasize Community Banking. We strive to maintain a strong commitment
to community banking. Our goal is to attract as customers individuals and
small- to medium-sized, owner-operated businesses who wish to conduct
business with a local commercial bank that demonstrates an active
interest in their business and personal financial affairs. We believe
that our banks are able to deliver timely responses to customer requests,
provide customized financial products and services and offer customers
the personal attention of senior banking officers. We believe that our
commitment to service gives us a competitive advantage in the
marketplace.
- Increase Deposits. We have been able to attract a strong base of core
deposits from our local markets. Management of our banks has a long
history of involvement in the communities where the banks are located.
Competitive rate and fee structures and a high level of service have also
been important in increasing deposits for us.
- Expansion Through the Creation of New Banks or Branches. A key component
of our growth strategy is expansion through the creation of new banks and
branches in our target markets. The formation of Village Bank North
Barrington and Village Bank Munster are examples of this strategy. We
actively analyze those communities we believe will be supportive of a
local community bank. We consider it critically important for any new
bank that we attract local management with strong ties to the community
and promote local ownership in Village Bancorp.
- Expand Lending. Our lending philosophy is to provide a full-service
lending and deposit relationship to all customers. Part of our lending
focus is on the small- to medium-sized, owner-operated businesses. Upon
obtaining the lending relationship of the businesses, we try to expand
the relationship through extensive cross-selling efforts to the business
owners, their families, associates and employees. The cross-selling
includes special loan programs, direct payroll deposits, special deposit
packages and customized service programs. We also offer residential
mortgage loans, automobile financing, credit card loans, home equity
loans, and personal loans. We intend to maintain our emphasis on these
lending services.
- Maintain Competitive Technology. As a relatively new company, we are
able to invest in the latest technology at a much lower initial cost than
some competing institutions, which must update their systems to be
competitive. We have selected computer vendors with a history of
maintaining technological superiority which is expected to allow us to
remain at the forefront of technology at a lower long-term cost. We have,
as a result, a multitude of delivery methods, including telephone
banking, wire transfer, automatic clearing house, electronic bill payment
and ATMs.
- Emphasize Superior Customer Service. We strive to maintain an
environment where the customer is the most important element of the
business. From loan officers highly visible in the community to
accessible executive management, the customer is always viewed as the
most important person in our banks.
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PRODUCTS AND SERVICES
Deposit Products
We believe our banks offer deposit products and programs which address the
needs of customers in each of our local markets. These products include:
Checking Accounts. The banks offer a range of different checking account
products designed and priced to meet specific target segments (e.g., age and
industry groups) of the local markets served by each bank.
NOW/Money Market Accounts. The banks offer several types of premium rate
NOW (negotiable order of withdrawal) accounts and money market accounts with
interest rates indexed to the prime rate or the 180-day U.S. Treasury bill rate.
Time Deposits. Village Bancorp offers a wide range of innovative time
deposits and IRA accounts tailored to the banks' market areas at competitive
rates.
Lending Services
We aggressively seek quality loan relationships. Village Bancorp's loan
portfolio consists of commercial loans, commercial real estate loans, consumer
real estate loans (including home equity loans and home equity lines of credit)
and consumer loans. We emphasize sound credit analysis and loan documentation.
We also seek to avoid undue concentrations of loans to a single industry or
based on a single class of collateral.
Lending officers are assigned various levels of loan approval authority
based upon their respective levels of experience and expertise. Loan approval is
also subject to Village Bancorp's formal loan policy, as established by each
bank's board of directors, and to the concurrence of an officers' credit
committee (or the banks' boards of directors or a committee of the boards) in
addition to the recommendation of the lending officer. This system is intended
to assure that commercial credit requests are subjected to independent objective
review on at least two different levels.
We have concentrated our efforts on building Village Bancorp's lending
business in the following areas:
Commercial Loans. Commercial and individual loans are made to small- to
medium-sized businesses that are sole proprietorships, partnerships, and
corporations. Generally, these loans are secured with collateral, including
accounts receivable, inventory and equipment, and require personal guarantees of
the principals. Frequently, these loans are further secured with real estate
equities.
Commercial Real Estate Loans. Commercial real estate loans include loans
for acquisition, development, and construction of real estate which are secured
by the real estate involved, and other loans secured by commercial real estate,
multifamily residential properties, and other nonresidential properties. Loans
retained by Village Bancorp for its portfolio are generally short-term balloon
loans and adjustable rate mortgages with initial fixed terms of one to five
years.
Consumer Real Estate Loans. Consumer real estate loans are made to finance
residential units that will house from one to four families. Village Bancorp
originates both fixed and adjustable rate consumer real estate loans. In
addition, Village Bancorp originates loans as an agent for others on a fee
basis.
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Home equity lines of credit, included within Village Bancorp's consumer
real estate loan portfolio, are secured by the borrower's home and can be drawn
on at the discretion of the borrower. These lines of credit are generally at
variable interest rates. When made, home equity lines, combined with the
outstanding loan balance of prior mortgage loans, generally do not exceed 80% of
the appraised value of the underlying real estate collateral.
Consumer Loans. Consumer loans are collateralized loans to individuals for
various personal reasons such as automobile financing and home improvements.
Although the risk of nonpayment for any reason exists with respect to all
loans, certain other more specific risks are associated with each type of loan.
The primary risks associated with commercial loans are quality of the borrower's
management and the impact of local economic factors. Commercial loans are of
higher risk than all of our other types of loans because loan balances are
greater and repayment is dependent upon the borrower's business. Risks
associated with real estate loans include concentrations of loans in a loan type
such as commercial or residential and fluctuating land values. Residential real
estate loans are of lesser risk than commercial, commercial real estate and
consumer loans given the loan-to-value ratios for these loans and based upon the
historical performance of mortgage loans generally. Consumer loans have risks
associated with concentrations of loans in a single type of loan and the risk of
a borrower's unemployment as a result of deteriorating economic conditions.
Consumers loans are of higher risk than real estate loans, because of the type
and nature of the collateral securing these loans. Consumer loans have, however,
better overall credit risk than commercial loans.
ATMs
Each of Village Bancorp's banks maintain an ATM onsite and participate in
the Cash Station Network. The ATM equipment is owned by the banks.
COMPETITION
Village Bancorp competes in the financial services industry through the
banks. The financial services business is highly competitive. Village Bancorp
encounters strong direct competition for deposits, loans and other financial
services. Village Bancorp's principal competitors include other commercial
banks, savings banks, savings and loan associations, mutual funds, money market
funds, finance companies, credit unions, mortgage companies, private issuers of
debt obligations and suppliers of other investment alternatives, such as
securities firms.
In addition, in recent years, several major multi-bank holding companies
have entered or expanded in the Chicago metropolitan market. Generally, these
financial institutions are significantly larger than Village Bancorp and have
access to greater capital and other resources. In addition, many of Village
Bancorp's nonbank competitors are not subject to the same degree of regulation
as that imposed on bank holding companies, federally insured banks and national,
Illinois or Indiana chartered banks. As a result, such nonbank competitors have
advantages over Village Bancorp in providing certain services.
Village Bancorp addresses these competitive challenges by creating market
differentiation and by maintaining an independent community bank presence with
local decision-making within its markets. The banks compete for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations, hours and other services. The banks compete for loan
originations primarily through the interest rates and loan fees they charge, the
efficiency and quality of services they provide to borrowers, the variety of
their loan products and their trained staff of professional bankers.
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<PAGE> 57
Village Bancorp competes for qualified personnel by offering competitive
levels of compensation and by augmenting compensation with stock options
pursuant to its stock option plan. Attracting and retaining high quality
employees is important in enabling Village Bancorp to compete effectively for
market share with both our large and small competitors.
In connection with the split-up of National Bancorp, Inc., the former owner
of Northwest Community Bank, each of Mr. Roth and Northwest Community Bank
entered into a three-year noncompete agreement with Popular, Inc., formerly
BanPonce Corporation. These agreements generally provide that for the three-year
period beginning on May 31, 1997, neither Mr. Roth, or banks in which he has
more than a 5% ownership, nor Northwest Community Bank can solicit or cause to
be solicited retail or commercial banking business from customers of the former
American Midwest Bank and Trust, Melrose Park, Illinois (now known as "Banco
Popular") as of that date or hire or offer employment to any employees of
American Midwest Bank and Trust. See "-- The Banks." We do not believe that
those agreements have had or will have any significant impact on our business.
PROPERTIES
The principal offices of Village Bancorp and Northwest Community Bank are
located in an approximately 5,000 square foot leased facility at 1845 East Rand
Road, Prospect Heights, Illinois. This two-story location also houses a number
of nonaffiliated professional offices.
Village Bank North Barrington is located at 444 N. Rand Road in North
Barrington, Illinois. Village Bank North Barrington is currently operating out
of a modular facility adjacent to the site on which the new bank is being built.
Village Bank North Barrington intends to build a 10,000 square foot permanent
two-story facility on this site. Village Bank North Barrington also operates a
branch in Lake Zurich, Illinois in a 2,200 square foot leased facility.
Village Bancorp has entered into a real estate contract to purchase a 2.5
acre bank site in Munster, Indiana for Village Bank Munster. We intend to build
a 5,000 square foot permanent one-story facility on this site.
LEGAL PROCEEDINGS
Village Bancorp and the banks are from time to time parties to various
legal actions arising in the normal course of business. We believe that there is
no proceeding threatened or pending against Village Bancorp or any of the banks
which, if determined adversely, would have a material adverse effect on the
financial condition or results of operations of Village Bancorp.
EMPLOYEES
As of March 31, 1999, Village Bancorp had 27 full-time employees and 11
part-time employees. We consider our relationships with our employees to be
good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and position of each of the directors and executive officers
of Village Bancorp and names of employers, titles and dates of positions held
during the past five years are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gerald F. Hartley............................ 60 Director and President
Kevin R. Hitzeman............................ 48 Director
Rosario Ippolito............................. 72 Director
Richard P. Nevins............................ 51 Director
John A. Reck................................. 51 Director
Thomas H. Roth............................... 58 Director and Chairman of the Board
Ronald L. Spiekhout.......................... 59 Director
Michael A. Speziale.......................... 59 Director
Elizabeth A. Chartier........................ 49 Senior Vice President, Controller and
Secretary
Robert J. Necastro........................... 53 Vice President
</TABLE>
Gerald F. Hartley was appointed a director and President of Village Bancorp
on April 6, 1999. Previously, Mr. Hartley was a partner with the accounting firm
of Crowe, Chizek and Company LLP from 1986 to March 31, 1999.
Kevin R. Hitzeman has served as a director of Village Bancorp since 1997.
Mr. Hitzeman has served as President of Complete Cleaning Company, Inc. since
1974.
Rosario Ippolito was elected a director of Village Bancorp at its 1999
Annual Meeting of Shareholders. Mr. Ippolito has served as President of
International Beauty Systems, Inc. since 1973.
Richard P. Nevins was elected a director of Village Bancorp at the 1999
Annual Meeting of Shareholders. Mr. Nevins was the former President of Wisco
Alloys, Inc., a position he held from 1974 through April 1999.
John A. Reck has served as a director of Village Bancorp since 1998. He
also has served as President of Village Bank North Barrington since its
organization in October 1998. Previously, Mr. Reck served as President of First
Chicago/NBD Lake Zurich from 1994 to 1997.
Thomas H. Roth has served as director and Chairman of the Board since 1997.
Mr. Roth also served as President of Village Bancorp from 1997 until April 6,
1999. From 1981 to May 1997, Mr. Roth served as President of National Bancorp
Inc.
Ronald L. Spiekhout has served as a director of Village Bancorp since 1998.
Previously, he served as President of First National Bank of Lake Zurich from
1983 to 1993. Mr. Spiekhout is currently retired.
Michael A. Speziale has served as a director of Village Bancorp since 1997.
He has also served as Vice Chairman of Northwest Community Bank since the
beginning of 1999. Mr. Speziale served as President of Northwest Community Bank
from 1995 through February 1999.
Elizabeth A. Chartier has served as the Senior Vice President, Controller
and Secretary of Village Bancorp since 1997. Previously, Ms. Chartier served as
Vice President and Controller of National Bancorp, Inc. from 1985 to 1997.
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Robert J. Necastro has served as Vice President of Village Bancorp since
August 1998. Mr. Necastro will also serve as the President of Village Bank
Munster upon its organization. Previously, Mr. Necastro served as President of
the Lansing Illinois Banking Center of U.S. Bank since 1983.
BOARD OF DIRECTORS
The board of directors of Village Bancorp consists of eight members, of
which four are independent directors. Directors of Village Bancorp serve
staggered terms whereby one-third of the directors are elected each year at the
annual meeting of stockholders. The term of the Class I directors expires in
2000, the term of the Class II directors expires in 2001 and the term of the
Class III directors expires in 2002. After the annual meetings in such years,
each elected director will serve for a term of three years. The terms of Village
Bancorp's current directors expire as follows: Messrs. Reck and
Speziale -- 2000; Messrs. Hartley, Hitzeman and Spiekhout -- 2001; and Messrs.
Ippolito, Nevins and Roth -- 2002. Executive officers of Village Bancorp serve
at the discretion of the board of directors.
The board of directors has established an Audit Committee that recommends
the annual appointment of Village Bancorp's auditors and reviews the scope and
results of the audit and other services provided by Village Bancorp's
independent auditors. Messrs. Hitzeman, Spiekhout, Ippolito and Nevins presently
serve on the Audit Committee. Messrs. Hitzeman, Spiekhout, Ippolito and Nevins,
are members of the Compensation Committee which administers Village Bancorp's
stock incentive plan.
BOARD OF DIRECTORS' COMPENSATION
No compensation is paid to the directors of Village Bancorp or to the
members of the board of directors of the banks.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by Village Bancorp to
the President and Chairman during 1998 and 1997. No executive officer of Village
Bancorp other than Mr. Roth earned salary and bonus in excess of $100,000 in
1998 or 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
- --------------------------- ---- ---------- --------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Roth........... 1998 150,000 -- 7,500(1) -- --
President and Chairman.. 1997 75,000(2) -- -- -- --
</TABLE>
- -------------------------
(1) Automobile allowance
(2) Partial year
No stock options were granted in 1998 or 1997 by Village Bancorp to any
director or executive officer.
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<PAGE> 60
STOCK OPTION PLAN
Under Village Bancorp's 1998 Omnibus Stock Incentive Plan, stock options,
restricted stock, stock appreciation rights, performance units and performance
shares (collectively, "Awards"), may be granted to key employees and directors
of Village Bancorp. The plan was ratified by the stockholders at Village
Bancorp's 1998 Annual Meeting of Shareholders. The plan is administered,
construed and interpreted by the Compensation Committee. The Compensation
Committee may at any time alter, amend, suspend or terminate the plan.
Participants in the plan shall be selected by the Compensation Committee from
among those employees who are recommended for participation by the Chairman and
President and who, in the opinion of the Compensation Committee, are key
employees in a position to contribute materially to Village Bancorp's continued
growth and development and to its long-term financial success, and from among
the directors. Unless earlier terminated by the board of directors, the plan
will terminate on April 29, 2008.
The total number of shares of stock subject to awards under the plan may
not exceed 225,000 (of this total up to 25,000 shares may be issued in
restricted stock), and the total number of shares which may be made subject to
Awards granted under the plan in any calendar year to any single participant may
not exceed 25,000. Such numbers of shares shall be subject to adjustment upon
occurrence of certain events described in the plan. The shares to be delivered
under the plan may consist, in whole or in part, of authorized but unissued
stock or treasury stock, not reserved for any purpose.
In April 1999, Village Bancorp granted options under the plan to certain
directors and officers covering 106,000 shares of Village Bancorp common stock
with an exercise price of $12.50 per share.
401(K) PLAN
Village Bancorp maintains a 401(k) SIMPLE salary deferral plan for its
qualifying employees. Under the 401(k) plan, which is designed to be qualified
under Section 401(k) of the Internal Revenue Code, an employee is eligible to
participate in the 401(k) plan if the employee is 21 years of age and earns a
minimum of $5,000 in annual compensation. Subject to limitations, a participant
is able to elect to defer up to $6,000 of his or her compensation into the plan.
Village Bancorp may elect to make matching contributions equal to a portion of
the participating employee's contribution, subject to a maximum contribution of
no more than 3% of the participant's salary.
Under the 401(k) plan, a separate account is established for each employee.
Participants are 100% vested in employee contributions, earnings and matching
contributions. Distributions from the 401(k) plan are made upon termination of
service, disability or death in a lump sump or in annual installments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors is responsible for determining the compensation of
Village Bancorp's executive officers. Thomas H. Roth served as President and
Chairman of the board of directors during 1998 and 1997. Mr. Roth presently
serves as Chairman of the board of directors and Mr. Hartley, a director, is
President of Village Bancorp.
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<PAGE> 61
PRINCIPAL STOCKHOLDERS
The following table shows certain information regarding the beneficial
ownership of Village Bancorp's common stock as of June 1, 1999, by (i) each of
Village Bancorp's directors; (ii) each of Village Bancorp's executive officers;
and (iii) all directors and executive officers of Village Bancorp as a group. No
other persons are known by us to own beneficially more than 5% of Village
Bancorp's outstanding common stock.
<TABLE>
<CAPTION>
COMMON SHARES
OF STOCK CLASS
NAME BENEFICIALLY OWNED PERCENT
- ---- ------------------ -------
<S> <C> <C>
Gerald F. Hartley(1).................................... -- --
Kevin R. Hitzeman(2).................................... 14,800 1.7%
Rosario Ippolito(3)..................................... 40,000 4.5
Richard P. Nevins(4).................................... 8,000 *
John A. Reck(5)......................................... 15,120 1.7
Thomas H. Roth(6)....................................... 187,317 21.1
Ronald L. Spiekhout(7).................................. 14,000 1.6
Michael A. Speziale(8).................................. 10,400 1.1
Elizabeth A. Chartier(9)................................ 800 *
All Directors and Officers as a group (10 persons)...... 290,437 32.7%
</TABLE>
- -------------------------
* Less than one percent.
(1) Excludes 13,201 shares issuable upon the conversion of mandatorily
convertible subordinated debentures acquired on April 6, 1999.
(2) Excludes 3,168 shares issuable upon the conversion of mandatorily
convertible subordinated debentures.
(3) Includes 40,000 shares owned together with his spouse. Excludes 11,749
shares issuable upon the conversion of mandatorily convertible subordinated
debentures.
(4) Includes 8,000 shares owned through a defined contribution plan.
(5) Includes 15,120 shares owned through a defined contribution plan. Excludes
25,000 shares subject to currently non-exercisable options granted on April
14, 1999.
(6) Includes 24,000 shares owned through a defined contribution plan and trust.
Excludes 29,703 shares issuable upon the conversion of mandatorily
convertible subordinated debentures. Mr. Roth's mailing address is 1845
East Rand Road, Prospect Heights, Illinois, 60070-0936.
(7) Includes 6,000 shares owned together with his spouse; 8,000 shares are
owned through a defined contribution plan.
(8) Includes 400 shares owned together with his spouse; 10,000 shares are owned
through a defined contribution plan. Excludes 3,102 shares issuable upon
the conversion of mandatorily convertible subordinated debentures.
(9) Excludes 1,320 shares issuable upon the conversion of mandatorily
convertible subordinated debentures.
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<PAGE> 62
CERTAIN TRANSACTIONS
Some of the directors and executive officers of Village Bancorp are, or
have been in the past, customers of the banks, and some of the directors and
executive officers of Village Bancorp are direct or indirect owners of 10% or
more of the stock of corporations which are, or have been in the past, customers
of the banks. As such customers, they have engaged in transactions in the
ordinary course of business of the banks, including borrowings, all of which
transactions are or were on substantially the same terms (including interest
rates and collateral on loans) as those prevailing at the time for comparable
transactions with nonaffiliated persons. None of the transactions involved more
than the normal risk of collectibility or presented any other unfavorable
features. As of March 31, 1999, the banks had $1.6 million in loans outstanding
to the directors and executive officers of Village Bancorp, which amount
represented 18.0% of total stockholders' equity as of that date. See also
"Management -- Compensation Committee Interlocks and Insider Participation."
TimberRand Corp., a company owned by Mr. Roth, Village Bancorp's Chairman
and principal stockholder, held an option contract to purchase an eight acre
parcel where the main banking premises of Village Bank North Barrington are to
be located. The option was assigned to Village Bancorp at TimberRand Corp.'s
cost. Village Bancorp exercised the option on two acres to acquire the bank
site. Village Bancorp is holding the option to purchase the remaining six acres
which expires in August 1999.
TimberRand Corp. also assigned a real estate contract to Village Bancorp
for the purchase of property in Arlington Heights, Illinois, which is being
considered as a possible new site for Northwest Community Bank.
During 1997, Mr. Roth purchased a nonperforming commercial loan from
Northwest Community Bank at the principal amount outstanding of $249,000 which
approximated fair market value at that time. Mr. Roth has no other relationship
with this loan customer.
Each of the above-referenced transactions was approved or ratified by a
majority of Village Bancorp's independent directors. All future material
affiliated transactions and loans will be made or entered into on terms that are
no less favorable than those that can be obtained from unaffiliated third
parties and will also be ratified by a majority of independent directors.
Village Bancorp has, and will continue to maintain, at least two independent
directors on our board of directors.
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<PAGE> 63
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal
and state law. References under this heading to applicable statutes or
regulations are brief summaries of portions thereof which do not purport to be
complete and which are qualified in their entirety by reference to those
statutes and regulations. Any change in applicable laws or regulations may have
a material adverse effect on the business of commercial banks and bank holding
companies, including Village Bancorp and the banks. However, management is not
aware of any current recommendations by any regulatory authority which, if
implemented, would have or would be reasonably likely to have a material effect
on the liquidity, capital resources or operations of Village Bancorp or the
banks.
BANK HOLDING COMPANY REGULATION
Village Bancorp is registered as a "bank holding company" with the Federal
Reserve and, accordingly, is subject to supervision by the Federal Reserve under
the BHC Act. Village Bancorp is required to file with the Federal Reserve
periodic reports and such additional information as the Federal Reserve may
require pursuant to the BHC Act. The Federal Reserve examines Village Bancorp
and may examine the banks.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than five percent of the voting shares or
substantially all the assets of any bank or bank holding company, or for a
merger or consolidation of a bank holding company with another bank holding
company. With certain exceptions, the BHC Act prohibits a bank holding company
from acquiring direct or indirect ownership or control of voting shares of any
company which is not a bank or bank holding company and from engaging directly
or indirectly in any activity other than banking or managing or controlling
banks or performing services for its authorized subsidiaries. A bank holding
company may, however, engage in or acquire an interest in a company that engages
in activities which the Federal Reserve has determined, by regulation or order,
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Under the BHC Act and Federal Reserve regulations,
Village Bancorp and its banks are prohibited from engaging in certain tie-in
arrangements, in connection with an extension of credit, leases, sales of
property or furnishing services.
Any company, including associates and affiliates of and groups acting in
concert with such company, which purchases or subscribes for five percent or
more of Village Bancorp's common stock may be required to obtain prior approval
of the Illinois and Indiana bank regulators and the Federal Reserve. Prior
regulatory notice and approval requirements under the federal Change in Bank
Control Act, the Illinois Banking Act and the Indiana Financial Institutions Act
may also apply with respect to any person who acquires stock of Village Bancorp
such that its interest exceeds ten percent of Village Bancorp. In addition, any
corporation, partnership, trust or organized group that acquires a controlling
interest in Village Bancorp or the banks may have to obtain approval of the
Federal Reserve to become a bank holding company and thereafter be subject to
regulation as such.
It is the policy of the Federal Reserve that Village Bancorp is expected to
act as a source of financial strength to the banks and to commit resources to
support the banks. The Federal Reserve takes the position that in implementing
this policy, it may require Village Bancorp to provide such support when Village
Bancorp otherwise would not consider itself able to do so.
The Federal Reserve has adopted risk-based capital requirements for
assessing bank holding company capital adequacy. These standards define
regulatory capital and establish minimum capital
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standards in relation to assets and off-balance sheet exposures, as adjusted for
credit risks. The Federal Reserve's risk-based guidelines apply on a
consolidated basis for bank holding companies with consolidated assets of $150
million or more and on a "bank-only" basis for bank holding companies with
consolidated assets of less than $150 million, subject to certain terms and
conditions. Under the Federal Reserve's risk-based guidelines, capital is
classified into two categories. For bank holding companies, Tier 1 or "core"
capital consists of common stockholders' equity, qualifying noncumulative
perpetual preferred stock (including related surplus), qualifying cumulative
perpetual preferred stock (including related surplus) (subject to certain
limitations) and minority interests in the equity accounts of consolidated
subsidiaries, and is reduced by goodwill, certain other intangible assets and
certain investments in other corporations ("Tier 1 Capital"). Tier 2 capital
consists of the allowance for loan and lease losses (subject to certain
limitations), perpetual preferred stock and related surplus (subject to certain
conditions), "hybrid capital instruments," perpetual debt, mandatorily
convertible debt securities, term subordinated debt and intermediate-term
preferred stock (including related surplus) (subject to certain limitations),
and unrealized holding gains on equity securities (subject to certain
limitations).
Under the Federal Reserve's capital guidelines, bank holding companies are
required to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of eight percent, of which at least four percent must be in
the form of Tier 1 Capital. The Federal Reserve also requires a minimum leverage
ratio of Tier 1 Capital to total assets of three percent, except that bank
holding companies not rated in the highest category under the regulatory rating
system are required to maintain a leverage ratio of one percent to two percent
above such minimum. The three percent Tier 1 Capital to total assets ratio
constitutes the minimum leverage standard for bank holding companies, and will
be used in conjunction with the risk-based ratio in determining the overall
capital adequacy of banking organizations. In addition, the Federal Reserve
continues to consider the Tier 1 leverage ratio in evaluating proposals for
expansion or new activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes that the
foregoing standards are supervisory minimums and that banking organizations
generally are expected to operate well above the minimum ratios. These
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum levels, without significant reliance on
intangible assets.
As of March 31, 1999, Northwest Community Bank had regulatory capital in
excess of the Federal Reserve's minimum requirements. Northwest Community Bank
had a total capital to risk-weighted assets ratio of 12.80% and a Tier 1 capital
to risk-weighted assets ratio of 11.60% as of March 31, 1999. See "Note
10 -- Regulatory Matters" to Village Bancorp Inc. and Subsidiaries Notes to
Consolidated Financial Statements included herein.
BANK REGULATION
Under Illinois law, Northwest Community Bank and Village Bank North
Barrington are subject to supervision and examination by the Office of Banks and
Real Estate (the "Illinois Commissioner"). Under Indiana law, Village Bank
Munster will be subject to supervision and regulation of the Department of
Financial Institutions (the "Indiana Department"). As an affiliate of the banks,
Village Bancorp is also subject to examination by the Illinois Commissioner and
Indiana Department.
The deposits of the banks are insured by the Bank Insurance Fund ("BIF")
under the provisions of the Federal Deposit Insurance Act (the "FDIA"), and the
banks are, therefore, also subject to supervision and examination by the FDIC.
The FDIA requires that the appropriate federal
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regulatory authority approve any merger and/or consolidation by or with an
insured bank, as well as the establishment or relocation of any bank or branch
office. The FDIC also supervises compliance with the provisions of federal law
and regulations which place restrictions on loans by FDIC-insured banks to their
directors, executive officers and other controlling persons.
Furthermore, all banks are affected by the credit policies of other
monetary authorities, including the Federal Reserve, which regulate the national
supply of bank credit. Such regulation influences overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The monetary policies of the Federal Reserve have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future.
Banks located in Illinois and Indiana have traditionally been restricted as
to the number and geographic location of branches which they may establish. The
Illinois Banking Act and the Indiana Financial Institutions Act now permit banks
located in Illinois and Indiana to establish branches anywhere in Illinois and
Indiana, respectively, without regard to the location of other banks' main
offices or the number of branches previously maintained by the bank establishing
the branch.
FINANCIAL INSTITUTION REGULATION GENERALLY
Transactions with Affiliates. Transactions between a bank and its holding
company or other affiliates are subject to various restrictions imposed by state
and federal regulatory agencies. Such transactions include loans and other
extensions of credit, purchases of securities and other assets, and payments of
fees or other distributions. In general, these restrictions limit the amount of
transactions between an institution and an affiliate of such institution, as
well as the aggregate amount of transactions between an institution and all of
its affiliates, impose collateral requirements in some cases, and require
transactions with affiliates to be on terms comparable to those for transactions
with unaffiliated entities.
Dividend Limitations. As a holding company, Village Bancorp is primarily
dependent upon dividend distributions from its operating subsidiaries for its
income. Federal and state statutes and regulations impose restrictions on the
payment of dividends by Village Bancorp and the banks.
Federal Reserve policy provides that a bank holding company should not pay
dividends unless (i) the bank holding company's net income available to common
stockholders during the prior year is sufficient to fully fund the dividends and
(ii) the prospective rate of earnings retention appears consistent with the
capital needs, asset quality and overall financial condition of the bank holding
company and its subsidiaries.
Delaware law places certain limitations on the ability of Village Bancorp
to pay dividends. Village Bancorp may generally pay dividends to its
stockholders, subject to any restrictions contained in its certificate of
incorporation, from either: (1) surplus (as defined in the Delaware General
Corporation Law), or (2) in case there shall be no such surplus, out of its net
profits for the fiscal year, in which the dividend is declared and for the
preceding fiscal year.
Because a major source of Village Bancorp's revenue is dividends, Village
Bancorp receives and expects to receive from the banks, Village Bancorp's
ability to pay dividends is likely to be dependent on the amount of dividends
paid by the banks. No assurance can be given that the banks will, in any
circumstances, pay such dividends to Village Bancorp on their stock.
As Illinois state-chartered banks, neither Northwest Community Bank nor
Village Bank North Barrington may pay dividends in an amount greater than its
current net profits after deducting
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losses and bad debts out of undivided profits provided that its surplus equals
or exceeds its capital. For the purpose of determining the amount of dividends
that an Illinois bank may pay, bad debts are defined as debts upon which
interest is past due and unpaid for a period of six months or more, unless such
debts are well-secured and in the process of collection.
As an Indiana state-chartered bank, Village Bank Munster may not declare or
pay dividends that would impair its capital or that would be greater than its
undivided profits. In addition, the prior approval of the Indiana Department is
required for the payment of any dividend if the aggregate amount of all
dividends paid during such calendar year, including the proposed dividend, would
exceed the sum of its retained net income for the year to date and previous two
years.
In addition to the foregoing, the ability of Village Bancorp and the banks
to pay dividends may be affected by the various minimum capital requirements and
the capital and noncapital standards established under the Federal Deposit
Insurance Corporation Improvements Act of 1991 ("FDICIA"), as described below.
The right of Village Bancorp, its stockholders and its creditors to participate
in any distribution of the assets or earnings of its subsidiaries is further
subject to the prior claims of creditors of the respective subsidiaries.
Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the
Riegle Community Development and Regulatory Improvement Act of 1994, requires
the Federal Reserve, together with the other federal bank regulatory agencies,
to prescribe standards of safety and soundness, by regulations or guidelines,
relating generally to operations and management, asset growth, asset quality,
earnings, stock valuation, and compensation. The Federal Reserve and the other
federal bank regulatory agencies adopted, effective August 9, 1995, a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal shareholder. The Federal
Reserve and other federal bank regulatory agencies also adopted guidelines for
asset quality and earnings standards.
A range of other provisions in FDICIA include requirements applicable to:
closure of branches; additional disclosures to depositors with respect to terms
and interest rates applicable to deposit accounts; uniform regulations for
extensions of credit secured by real estate; restrictions on activities of an
investment by state-chartered banks; modification of accounting standards to
conform to generally accepted accounting principles including the reporting of
off-balance sheet items and supplemental disclosure of estimated fair market
value of assets and liabilities in financial statements filed with the bank
regulators; increased penalties in making or failing to file assessment reports
with the FDIC; greater restrictions on extensions of credit to directors,
officers and principal stockholders; and increased reporting requirements on
agricultural loans and loans to small businesses.
In August 1995, the Federal Reserve, FDIC and other federal banking
agencies published a final rule modifying their existing risk-based capital
standards to provide for consideration of interest rate risk when assessing the
capital adequacy of a bank. Under the final rule, the Federal Reserve and the
FDIC must explicitly include a bank's exposure to declines in the economic value
of its capital due to changes in interest rates as a factor in evaluating a
bank's capital adequacy.
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The Federal Reserve, the FDIC and other federal banking agencies also have
adopted a joint agency policy statement providing guidance to banks for managing
interest rate risk. The policy statement emphasizes the importance of adequate
oversight by management and a sound risk management process. The assessment of
interest rate risk management made by the banks' examiners will be incorporated
into the banks' overall risk management rating and used to determine the
effectiveness of management.
Prompt Corrective Action. FDICIA requires the federal bank regulators,
including the Federal Reserve and the FDIC, to take prompt corrective action
with respect to depository institutions that fall below certain capital
standards and prohibits any depository institution from making any capital
distribution that would cause it to be undercapitalized. Institutions that are
not adequately capitalized may be subject to a variety of supervisory actions
including, but not limited to, restrictions on growth, investment activities,
capital distributions and affiliate transactions and will be required to submit
a capital restoration plan which, to be accepted by the regulators, must be
guaranteed in part by any company having control of the institution (such as
Village Bancorp). In other respects, FDICIA provides for enhanced supervisory
authority, including greater authority for the appointment of a conservator or
receiver for undercapitalized institutions. The capital-based prompt corrective
action provisions of FDICIA and their implementing regulations apply to FDIC-
insured depository institutions. However, federal banking agencies have
indicated that, in regulating bank holding companies, the agencies may take
appropriate action at the holding company level based on their assessment of the
effectiveness of supervisory actions imposed upon subsidiary insured depository
institutions pursuant to the prompt corrective action provisions of FDICIA.
Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured
institution, each of the banks is required to pay deposit insurance premiums
based on the risk it poses to the insurance fund. The FDIC has authority to
raise or lower assessment rates on insured deposits in order to achieve certain
designated reserve ratios on the insurance funds and to impose special
additional assessments. Each depository institution is assigned to one of three
capital groups: "well capitalized", "adequately capitalized" or "under
capitalized." Within each capital group, institutions are assigned to one of
three supervisory subgroups: "A" (institutions with few minor weaknesses), "B"
(institutions that demonstrate weaknesses which, if not corrected, could result
in a significant deterioration of the institution and increased risk of loss to
the BIF) or "C" (institutions that pose a substantial probability of loss to the
BIF unless effective corrective action is taken). Accordingly, there are nine
combinations of capital groups and supervisory subgroups to which varying
assessment rates would be applicable. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned.
The FDIC may terminate deposit insurance upon a finding that an institution
or the directors or trustees of an institution have engaged in unsafe or unsound
practices, the institution is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The management of each of the banks does not know
any practice, condition or violation that might lead to termination of deposit
insurance.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 enacted
on September 30, 1996 provides that beginning with semi-annual periods after
December 31, 1996, BIF deposits will also be assessed to pay interest on the
bonds (the "FICO Bonds") issued in the late 1980s by the Financing Corporation
to recapitalize the now defunct Federal Savings & Loan Insurance Corporation.
For purposes of the assessments to pay interest on the FICO Bonds, BIF deposits
will be assessed at a rate of 20% of the assessment rate applicable to SAIF
deposits until December 31, 1999. After the earlier of December 31, 1999 or the
date on which the last savings
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association ceases to exist, full pro rata sharing of FICO assessments will
begin. It has been estimated that the rates of assessment for the payment of
interest on the FICO Bonds will be approximately 1.3 basis points for
BIF-assessable deposits and approximately 6.4 basis points for SAIF-assessable
deposits. The payment of the assessment to pay interest on the FICO Bonds should
not materially affect the banks.
Federal Reserve System. The banks are subject to Federal Reserve
regulations requiring depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve regulations generally require three percent
reserves on the first $46.5 million of transaction accounts and $1,345,000
million plus ten percent on the remainder. The first $4.9 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve) are exempted
from the reserve requirements. The banks are in compliance with the foregoing
requirements.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), a
financial institution has a continuing and affirmative obligation, consistent
with the safe and sound operation of such institution, to help meet the credit
needs of its entire community, including low- and moderate-income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires each federal
banking agency, in connection with its examination of a financial institution,
to assess and assign one of four ratings to the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by the institution, including applications
for charters, branches and other deposit facilities, relocations, mergers,
consolidations, acquisitions of assets or assumptions of liabilities, and
savings and loan holding company acquisitions. The CRA also requires that all
institutions make public disclosure of their CRA ratings. Northwest Community
Bank received a "satisfactory" rating on its most recent CRA performance
evaluation. Village Bank North Barrington has not been subject to a CRA
performance evaluation.
In April 1995, the Federal Reserve and other federal banking agencies
adopted amendments revising their CRA regulations. Among other things, the
amended CRA regulations substitute for the prior process-based assessment
factors a new evaluation system that would rate an institution based on its
actual performance in meeting community needs. In particular, the system focuses
on three tests: (i) a lending test, to evaluate the institution's record of
making loans in its assessment areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing and programs benefiting low- or moderate-income individuals and
businesses; and (iii) a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices. The amended CRA
regulations also clarify how an institution's CRA performance would be
considered in the application process.
Brokered Deposits. Well-capitalized institutions are not subject to
limitations on brokered deposits, while an adequately capitalized institution is
able to accept, renew or rollover brokered deposits only with a waiver from the
FDIC and subject to certain restrictions on the yield paid on such deposits.
Undercapitalized institutions are not permitted to accept brokered deposits.
Enforcement Actions. Federal and state statutes and regulations provide
financial institution regulatory agencies with great flexibility to undertake
enforcement action against an institution that fails to comply with regulatory
requirements, particularly capital requirements. Possible enforcement actions
range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance.
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Interstate Banking and Branching Legislation. On September 29, 1994, the
Riegle-Neal Interstate Banking and Efficiency Act of 1994 (the "Interstate
Banking Act") was enacted. Under the Interstate Banking Act, adequately
capitalized and adequately managed bank holding companies will be allowed to
acquire banks across state lines subject to certain limitations. In addition,
under the Interstate Banking Act, since June 1, 1997, banks have been permitted,
under some circumstances, to merge with one another across state lines and
thereby create a main bank with branches in separate states. After establishing
branches in a state through an interstate merger transaction, a bank may
establish and acquire additional branches at any location in the state where any
bank involved in the interstate merger could have established or acquired
branches under applicable federal and state law.
Illinois adopted legislation, effective September 29, 1995, permitting
interstate mergers beginning on June 1, 1997. It is anticipated that this
interstate merger and branching ability will increase competition and further
consolidate the financial institutions industry. In 1996, Indiana authorized
out-of-state banks to establish branch offices in Indiana, subject to certain
conditions.
MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of banks and bank holding companies are affected by general
economic conditions and also by the fiscal and monetary policies of federal
regulatory agencies, including the Federal Reserve. Through open market
transactions, variations in the discount rate and the establishment of reserve
requirements, the Federal Reserve exerts considerable influence over the cost
and availability of funds obtainable for lending or investing.
The above monetary and fiscal policies and resulting changes in interest
rates have affected the operating results of all commercial banks in the past
and are expected to do so in the future. The banks and Village Bancorp cannot
fully predict the nature or the extent of any effects which fiscal or monetary
policies may have on their business and earnings.
ACQUISITION AND OWNERSHIP OF COMMON STOCK MAY BE RESTRICTED BY BANK REGULATORS
Any person or group who purchases 10% or more of Village Bancorp's common
stock in the offering, or hereafter acquires additional securities such that its
interest in Village Bancorp exceeds 10%, may be required to obtain approval of
the Federal Reserve under the Change in Bank Control Act and the approval of the
Illinois Commissioner or Indiana Department. Further, any corporation,
partnership, trust or organized group that acquires a controlling interest in
Village Bancorp may have to obtain approval of the Federal Reserve to become a
bank holding company and thereafter be subject to regulation as such.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Village Bancorp is authorized to issue 5,000,000 shares of common stock,
$0.01 par value, of which 888,000 shares were outstanding prior to the offering.
Effective April 8, 1999, the par value was changed from $0.25 to $0.01 per
share. The outstanding shares of common stock currently are, and the shares of
common stock to be issued in the offering will be (when issued and delivered in
accordance with the terms and conditions of the offering), fully paid and
nonassessable. Each holder of record of common stock is entitled to one vote per
share on all matters voted upon by Village Bancorp's stockholders. Upon
completion of the public offering, holders of shares of common stock will have
no preemptive, redemption or cumulative voting rights. In the event of
liquidation, the holders of shares of common stock are entitled to share ratably
in any assets of Village Bancorp retained after payment in full of creditors
and, if any preferred stock is then authorized, issued and outstanding, after
payment to holders of such preferred stock but only to the extent of any
liquidation preference. As of June 1, 1999, Village Bancorp had approximately
200 holders of record of its common stock.
Dividends. The holders of common stock are entitled to receive and share
equally in such dividends, if any, declared by the board of directors out of
funds legally available therefor. Village Bancorp may pay dividends if, as and
when declared by the board of directors. See "Dividend Policy" and "Supervision
and Regulation -- Financial Institution Regulation Generally -- Dividend
Limitations." If Village Bancorp issues preferred stock, the holders thereof may
have a priority over the holders of the common stock with respect to dividends.
Voting Rights. The holders of common stock possess voting rights in
Village Bancorp. Stockholders elect Village Bancorp's board of directors and act
on such other matters as are required to be presented to them under the Delaware
General Corporation Law ("DGCL") or Village Bancorp's Certificate of
Incorporation or as are otherwise presented to them by the board of directors.
Each holder of common stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. Accordingly,
holders of more than fifty percent of the outstanding shares of common stock
will be able to elect all of the directors to be elected each year. Although
there are no present plans to do so, if Village Bancorp issues preferred stock,
holders of the preferred stock may also possess voting rights. See
"-- Anti-Takeover Effects of the Certificate of Incorporation, By-Laws and
Delaware Law."
Liquidation. In the event of any liquidation, dissolution or winding up of
Village Bancorp, the holders of the common stock would be entitled to receive,
after payment or provision for payment of all debts and liabilities of Village
Bancorp, all assets of Village Bancorp available for distribution. If preferred
stock is issued, the holders thereof may have a priority over the holders of the
common stock in the event of any liquidation or dissolution.
Preemptive Rights and Redemption. Holders of the common stock will not be
entitled to preemptive rights with respect to any shares which may be issued by
Village Bancorp in the future. The common stock is not subject to mandatory
redemption by Village Bancorp.
PREFERRED STOCK
The board of directors is authorized, by the Certificate of Incorporation,
to issue 500,000 shares of preferred stock, $0.01 par value, in one or more
series with respect to which the board, without stockholder approval, may
determine voting, conversion and other rights which could adversely affect the
rights of the holders of common stock. Effective April 8, 1999, the par value
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was changed from $1.00 to $0.01 per share. The rights of the holders of the
common stock would generally be subject to the prior rights of the preferred
stock with respect to dividends, liquidation preferences and other matters.
Preferred stock could be issued by Village Bancorp to raise capital or to
finance acquisitions. The issuance of preferred stock under certain
circumstances could have the effect of delaying or preventing a change in
control of Village Bancorp. Village Bancorp has no present plans to issue any
shares of preferred stock.
MANDATORILY CONVERTIBLE SUBORDINATED DEBENTURES
Village Bancorp has outstanding $1.8 million of Series One Mandatorily
Convertible Subordinated Debentures. Each debenture bears interest at the rate
of 6.0% per annum payable quarterly on the last day of March, June, September,
and December, until the maturity date of December 31, 2002. On the maturity
date, the debentures shall automatically convert to common stock on the basis of
one share of common stock for each $15.15 in principal amount of debentures so
converted. The holder of a debenture may voluntarily elect at any time to
convert a debenture to common stock.
Upon certain "trigger events," the debentures automatically convert to
common stock. The trigger events consist of a merger, consolidation, or other
reorganization of Village Bancorp in which Village Bancorp is not the survivor.
If the effective date of a trigger event was on the first, second, third, or
fourth anniversary of the date of issuance, the debentures would convert at
$12.20, $12.90, $13.65, and $14.40 per share, respectively, of common stock.
ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION, BY-LAWS AND DELAWARE
LAW
General. Provisions of the Certificate of Incorporation, By-Laws and the
DGCL may have the effect of impeding the acquisition of control of Village
Bancorp by means of a tender offer, a proxy fight, open-market purchase or
otherwise in a transaction not approved by the board of directors. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the board of directors but which individual stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current board of directors or management of Village Bancorp more
difficult.
The provisions of the Certificate of Incorporation and By-Laws described
below are designed to reduce, or have the effect of reducing, the vulnerability
of Village Bancorp to an unsolicited proposal for the restructuring or sale of
all or substantially all of the assets of Village Bancorp or an unsolicited
takeover attempt which is unfair to stockholders. The following description of
the provisions of the Certificate of Incorporation and By-Laws of Village
Bancorp is necessarily general and is qualified in its entirety by reference to
the Certificate of Incorporation and By-Laws of Village Bancorp.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 5,000,000 shares of common stock and 500,000 shares of preferred
stock. The shares of common stock and preferred stock have been authorized in an
amount which provides the board of directors with flexibility to effect, among
other things:
- transactions
- financings
- acquisitions
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- stock dividends
- stock splits
- employee stock options
However, these authorized shares may also be used by the board of directors
consistent with its fiduciary duty to deter future attempts to gain control of
Village Bancorp. The board of directors also has sole authority to determine the
terms of any one or more series of preferred stock, including:
- voting rights
- conversion rates
- liquidation preferences
As a result of the ability to fix voting rights for a series of preferred stock,
the board of directors has the power to the extent consistent with its fiduciary
duty to issue a series of preferred stock to persons friendly to management in
order to attempt to block a merger or other transaction by which a third party
seeks control, and thereby assist the incumbent board of directors and
management to retain their respective positions.
Classified Board of Directors; Filling of Board Vacancies and Qualifying
Shares. Village Bancorp has a classified board of directors with staggered
terms. The board of directors is divided into three classes, each of which
contains approximately one-third of the whole number of the members of the board
of directors. Each class serves a staggered three-year term, with approximately
one-third of the total number of directors being elected each year. Under the
DGCL, members of a staggered board may only be removed for cause unless the
Certificate of Incorporation provides otherwise. The Certificate of
Incorporation does not provide for removal of directors without cause. The
staggered board is intended to provide for continuity of the board of directors
and to make it more difficult and time consuming for a stockholder group to
fully use to its voting power to gain control of the board of directors without
the consent of the incumbent board of directors.
The By-Laws provide that the number of the directors shall be fixed from
time to time by the board of directors. Currently, the number of directors on
the board is fixed at eight. The By-Laws also provide that any vacancy occurring
on the board of directors, including a vacancy created by an increase in the
number of directors, will be filled for the remainder of the unexpired term by a
majority vote of the directors then in office.
Cumulative Voting; Action by Written Consent and Stockholder Meetings. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. The Certificate of Incorporation and By-Laws also provide that any
action required or permitted to be taken by the stockholders must be effected at
an annual or special meeting and may not be effected by written consent in lieu
of a meeting. The By-Laws provide that special meetings of the stockholders may
only be called by the President of Village Bancorp.
Delaware Business Combination Statute. Section 203 of the DGCL provides
that, subject to certain exceptions specified therein, an "interested
stockholder" of a Delaware corporation shall not engage in any business
combination, including mergers or consolidations or acquisitions of additional
shares of the corporation, with the corporation for a three-year period
following the time that such stockholder becomes an interested stockholder
unless:
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- prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding certain shares)
- at or subsequent to such time the business combination is approved by the
board of directors of the corporation and authorized at an annual or
special meeting of stockholders, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder
Except as otherwise specified in Section 203, an interested stockholder is
defined to include any person that is (x) the owner of 15% or more of the
outstanding voting stock of the corporation, or (y) is an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date of determination; and the affiliates and associates of any
such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. Village Bancorp has not
elected to be exempt from the restrictions imposed under Section 203. The
provisions of Section 203 may encourage persons interested in acquiring Village
Bancorp to negotiate in advance with the Board of directors of Village Bancorp
since the stockholder approval requirement would be avoided if a majority of the
directors then in office approves either the business combination or the
transaction which results in any such person becoming an interested stockholder.
Such provisions also may have the effect of preventing changes in the management
of Village Bancorp. It is possible that such provisions could make it more
difficult to accomplish transactions which Village Bancorp's stockholders may
otherwise deem to be in their best interests.
Shareholder Approval for certain Corporate Transactions. The Certificate
of Incorporation provides that the affirmative vote of at least 66 2/3% of the
voting power of all outstanding shares of each class of stock is required for:
- approval of any merger or consolidation involving Village Bancorp
- issuance or transfer of all of its securities for cash, securities or
other property
- the sale of all or substantially all of the assets or property of Village
Bancorp
- any plan of liquidation, dissolution or recapitalization of Village
Bancorp
- any reclassification of its securities
Amendment of the Certificate of Incorporation and By-Laws. The Certificate
of Incorporation provides that the affirmative vote of the holders of at least
66 2/3% of the voting stock, voting together as a single class, is required to
amend provisions of the Certificate of Incorporation:
- requiring a supermajority vote for certain corporate transactions
- prohibiting stockholder action without a meeting
- specifying the vote required to amend such provisions
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The By-Laws, which may be amended by the stockholders or the board of directors,
requires the affirmative vote of the holders of at least 66 2/3% of the common
stock to amend the By-Law sections dealing with:
- special meetings
- elimination of written action by stockholders
- notice of stockholder business
- number, tenure and qualifications of directors
- vacancies and newly created directorships on the board of directors
- amendments by stockholders
By-Law Provisions. The By-Laws of Village Bancorp also require a
stockholder who intends to nominate a candidate for election to the board of
directors, or to raise new business at an annual stockholder meeting, to provide
advance notice of at least 120 days to Village Bancorp. The notice provision
requires a stockholder who desires to raise new business at an annual
stockholder meeting to provide certain information to Village Bancorp concerning
the nature of the new business, the stockholder and that stockholder's interest
in the business matter. Similarly, a stockholder wishing to nominate any person
for election as a director must provide Village Bancorp with certain information
concerning the nominee and the proposing stockholder.
The provisions described above are intended to reduce Village Bancorp's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its board of directors.
Attempts to take over corporations have become increasingly common. An
unsolicited, nonnegotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the board
of directors believes it is in the best interests of Village Bancorp and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage nonnegotiated takeover attempts. It is also the view of the board of
directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price that reflects the true value of Village
Bancorp and that otherwise is in the best interest of all stockholders.
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
Village Bancorp's Certificate of Incorporation contains a provision that
limits the liability of directors for breaches of their fiduciary duties as
directors to the full extent permitted by the DGCL. As a result, directors will
not be liable, in certain circumstances, to Village Bancorp or the stockholders
for monetary damages arising from a breach of their fiduciary duties as
directors. Such limitation does not, however, affect the liability of a
director: (i) for any breach of the director's duty of loyalty to Village
Bancorp or the stockholders; (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL; or (iv) for any transaction from which the director
derives an improper personal benefit. The Certificate of Incorporation provides
that Village Bancorp shall indemnify its officers and directors to the fullest
extent permitted by applicable law.
The By-Laws provide that Village Bancorp will indemnify, to the full extent
permitted under the DGCL, any person made or threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by
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reason of the fact that he is or was a director, officer, employee or agent of
Village Bancorp, or is or was serving at Village Bancorp's request as a
director, officer, employee or agent of another corporation or other enterprise
against liabilities and expenses reasonably incurred or paid by such person in
connection with such action, suit or proceeding. Expenses incurred in defending
a civil, criminal, administrative, investigative or other action, suit or
proceeding may be paid by Village Bancorp in advance of a final disposition in
accordance with the DGCL. The indemnification and advancement of expenses
provided by the By-Laws are not to be deemed exclusive of any other rights to
which any person indemnified may be entitled under any by-law, statute,
agreement, vote of stockholders, or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and will continue as to a person who has ceased to be such
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person. Village Bancorp may purchase
and maintain insurance on behalf of any indemnified person against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not Village Bancorp would have the power to
indemnify him against such liability under the By-Laws. The provisions of the
By-Laws are deemed a contract between Village Bancorp and each director,
officer, employee and agent who serves in any such capacity at any time while
the By-Laws and relevant provisions of the DGCL, or other applicable law, if
any, are in effect, and any repeal or modification of any such law or of the
By-Laws will not affect any right or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole or in
part upon such state of facts.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Village
Bancorp as a result of the foregoing provisions, or otherwise, Village Bancorp
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities other than the payment by Village Bancorp of expenses incurred or
paid by a director, officer or controlling person of Village Bancorp 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, Village Bancorp will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
TRANSFER AGENT AND REGISTRAR
Village Bancorp serves as the transfer agent and registrar for its common
stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, Village Bancorp will have a minimum of
1,342,000 and a maximum of 1,442,000 shares of common stock outstanding. Except
for shares purchased by "affiliates" of Village Bancorp, any shares issued in
the offering will be freely tradeable without restriction. An additional 238,400
shares will be freely tradeable after November 1999, and 359,163 shares, which
can now be resold only to Illinois residents, will be freely tradeable beginning
in August 1999.
Affiliates of Village Bancorp must comply with the resale limitations of
Rule 144 issued under the Securities Act. Rule 144 defines an affiliate of a
company as a person who directly or indirectly controls, or is controlled by, or
is under common control with, the company. Affiliates of a
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company generally include its directors, officers and principal shareholders.
Each of Village Bancorp's affiliates who hold common stock may sell, within any
three-month period, a number of shares of common stock that does not exceed the
greater of (i) 1% of the outstanding shares of common stock or (ii) if the
common stock is trading on the Nasdaq Stock Market or an exchange, Village
Bancorp's average weekly trading volume during the four calendar weeks preceding
the affiliate's proposed sale. Sales by affiliates under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about Village Bancorp.
Prior to the offering, there has not been a public market for the common
stock, and we cannot predict the effect, if any, that the sale of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. Nevertheless, sales of substantial amounts of common stock on the
public market could adversely affect prevailing market prices and the ability of
Village Bancorp to raise equity capital in the future.
The common stock will not be listed on the Nasdaq Stock Market or any
securities exchange.
LEGAL MATTERS
Certain legal matters in connection with this offering are being passed
upon for Village Bancorp by Vedder, Price, Kaufman & Kammholz, Chicago,
Illinois.
EXPERTS
The consolidated financial statements of Village Bancorp, Inc. and
subsidiaries as of December 31, 1998 and 1997 and for the year ended December
31, 1998 and for the period June 1, 1997 (Date of Inception) through December
31, 1997, and the financial statements of Northwest Community Bank as of
December 31, 1998 and 1997 and for the years ended December 31, 1998 and 1997
included in this prospectus have been audited by Crowe, Chizek and Company LLP,
independent auditors. These financial statements are included herein in reliance
on their reports given upon the authority of that firm as experts in accounting
and auditing.
REPORTS TO SHAREHOLDERS
Upon the effective date of the Registration Statement on Form SB-2 that
registers the shares of common stock offered by this prospectus with the SEC,
Village Bancorp will be subject to certain of the reporting requirements of the
Exchange Act, as currently in effect, which include requirements to file annual
reports on Form 10-KSB and quarterly reports on Form 10-QSB with the SEC. This
reporting obligation will exist for at least one year and will continue for two
fiscal years thereafter, except that these reporting obligations may be
suspended for any subsequent fiscal year if at the beginning of the year the
common stock is held of record by less than 300 persons. Village Bancorp will
furnish its shareholders with annual reports containing audited financial
information for each fiscal year on or before the date of the annual meeting of
stockholders. Village Bancorp's fiscal year ends on December 31. Additionally,
Village Bancorp will also furnish such other reports as it may determine to be
appropriate or as otherwise may be required by law.
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AVAILABLE INFORMATION
Village Bancorp has filed a Registration Statement on Form SB-2 under the
Securities Act with the SEC in connection with the common stock offered by this
prospectus. This prospectus omits certain information, exhibits and undertakings
set forth in the Registration Statement which Village Bancorp has filed with the
SEC. Such materials may be inspected and copied upon payment of prescribed rates
at the public reference facilities of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Regional Office of the SEC at the following
locations: Seven World Trade Center, Suite 1300, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Information
regarding the operation of the public reference facilities may be obtained by
calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site
(http://www.sec.gov) that contains registration statements, reports, proxy and
information statements and other information regarding registrants, such as
Village Bancorp, that file electronically with the SEC. For further information
with respect to Village Bancorp, reference is hereby made to the Registration
Statement and the exhibits thereto. Statements contained in this prospectus
concerning the provisions of any contract, agreement or other document are not
necessarily complete, and in each instance reference is made to the copy of that
contract, agreement or other document filed as an exhibit to the Registration
Statement for a full statement of the provisions thereof. These statements are
qualified in all respects by these references.
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INDEX TO FINANCIAL STATEMENTS
VILLAGE BANCORP, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997
and March 31, 1999 (unaudited)............................ F-3
Consolidated Statements of Operations and Comprehensive
Income for the year ended December 31, 1998 and for the
period June 1, 1997 (Date of Inception) through December
31, 1997 and for the three months ended March 31, 1999
(unaudited) and 1998 (unaudited).......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the year ended December 31, 1998 and for the period
June 1, 1997 (Date of Inception) through December 31, 1997
and the three months ended March 31, 1999 (unaudited)..... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and for the period June 1, 1997 (Date of
Inception) through December 31, 1997 and for the three
months ended March 31, 1999 (unaudited) and 1998
(unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
NORTHWEST COMMUNITY BANK
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-25
Balance Sheets as of December 31, 1998 and 1997............. F-26
Statements of Operations for the years ended December 31,
1998 and 1997............................................. F-27
Statements of Changes in Shareholder's Equity for the years
ended December 31, 1998 and 1997.......................... F-28
Statements of Cash Flows for the years ended December 31,
1998 and 1997............................................. F-29
Notes to Financial Statements............................... F-30
</TABLE>
F-1
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Village Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Village
Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations and comprehensive income, changes in
shareholders' equity, and cash flows for the year ended December 31, 1998 and
for the period June 1, 1997 (date of inception) through December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Village
Bancorp, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1998 and for the period June 1, 1997 through December 31, 1997, in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 8, 1999, except for
Note 19 as to which the
date is April 6, 1999
F-2
<PAGE> 80
VILLAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
1999 1998 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents...................... $ 3,096,608 $ 3,124,278 $ 1,078,599
Federal funds sold............................. 15,587,235 23,905,881 5,700,000
Securities available-for-sale.................. 21,511,166 8,116,114 5,528,906
Loans.......................................... 39,806,762 35,655,446 27,502,208
Allowance for loan losses...................... (544,686) (458,564) (275,740)
----------- ----------- -----------
39,262,076 35,196,882 27,226,468
Leasehold improvements and equipment, net...... 1,609,697 1,326,519 331,379
Goodwill and core deposit intangibles.......... 468,548 477,449 513,053
Accrued interest and other assets.............. 915,121 675,189 398,579
----------- ----------- -----------
$82,450,451 $72,822,312 $40,776,984
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing....................... $ 9,678,175 $11,095,805 $ 7,364,931
Interest-bearing.......................... 61,448,270 50,117,093 28,283,822
----------- ----------- -----------
71,126,445 61,212,898 35,648,753
Mandatorily convertible subordinated
debentures................................ 1,800,000 1,800,000 771,000
Accrued interest and other liabilities....... 606,333 417,012 358,318
----------- ----------- -----------
73,532,778 63,429,910 36,778,071
Shareholders' equity
Preferred stock -- $1 par value;
authorized 500,000 shares; none issued
Common stock................................. 222,000 222,000 100,000
Additional paid-in capital................... 9,978,000 9,978,000 4,000,000
Accumulated deficit.......................... (1,202,013) (847,528) (98,443)
Accumulated other comprehensive income....... (80,314) 39,930 (2,644)
----------- ----------- -----------
8,917,673 9,392,402 3,998,913
----------- ----------- -----------
$82,450,451 $72,822,312 $40,776,984
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 81
VILLAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, PERIOD ENDED DECEMBER 31,
--------------------- -------------------------
1999 1998 1998 1997
---------- -------- ----------- -----------
(UNAUDITED) (NOTE 2)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees.................. $ 823,548 $656,883 $2,781,964 $1,421,146
Securities............................. 229,024 78,513 355,309 156,646
Deposits with other financial
institutions........................ -- -- 36,424 --
Federal funds sold..................... 186,842 55,606 378,600 76,790
---------- -------- ---------- ----------
1,239,414 791,002 3,552,297 1,654,582
Interest expense
Deposits............................... 657,562 382,416 1,678,803 826,129
Other.................................. 28,358 20,528 101,862 1,143
---------- -------- ---------- ----------
685,920 402,944 1,780,665 827,272
---------- -------- ---------- ----------
NET INTEREST INCOME...................... 553,494 388,058 1,771,632 827,310
Provision for loan losses................ 86,800 39,000 241,600 121,100
---------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................ 466,694 349,058 1,530,032 706,210
Other income
Securities gains (losses), net......... 6,377 -- 32,094 (1,367)
Service charges on deposit accounts.... 82,638 38,741 306,648 82,832
Other income........................... 53,162 17,568 103,945 17,009
---------- -------- ---------- ----------
142,177 56,309 442,687 98,474
Other expense
Salaries and employee benefits......... 473,364 217,511 1,261,442 403,140
Occupancy and equipment expense........ 105,151 65,151 338,562 139,836
Other expenses......................... 395,741 175,848 1,180,300 375,451
---------- -------- ---------- ----------
974,256 458,510 2,780,304 918,427
---------- -------- ---------- ----------
LOSS BEFORE INCOME TAXES................. (365,385) (53,143) (807,585) (113,743)
Income taxes (benefit)................... (10,900) (18,500) (58,500) (15,300)
---------- -------- ---------- ----------
NET LOSS................................. (354,485) (34,643) (749,085) (98,443)
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes........................... (120,244) 5,163 42,574 (2,644)
---------- -------- ---------- ----------
TOTAL COMPREHENSIVE INCOME............... $ (474,729) $(29,480) $ (706,511) $ (101,087)
========== ======== ========== ==========
Basic loss per share of common stock..... $ (.40) $ (.09) $ (1.46) $ (.25)
========== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 82
VILLAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
COMMON PAID-IN ACCUMULATED HENSIVE
STOCK CAPITAL DEFICIT INCOME TOTAL
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock..... $100,000 $4,000,000 $ -- $ -- $4,100,000
Comprehensive income
Unrealized loss on
securities
available-for-sale, net
of income taxes......... (2,644) (2,644)
Net loss................... (98,443) (98,443)
----------
Total comprehensive
income............... (101,087)
-------- ---------- ----------- --------- ----------
Balance at December
31, 1997.......... 100,000 4,000,000 (98,443) (2,644) 3,998,913
Issuance of common stock..... 122,000 5,978,000 -- -- 6,100,000
Comprehensive income
Change in unrealized gain
(loss) on securities
available-for-sale, net
of income taxes......... 42,574 42,574
Net loss................... (749,085) (749,085)
----------
Total comprehensive
income............... (706,511)
-------- ---------- ----------- --------- ----------
Balance at December
31, 1998.......... 222,000 9,978,000 (847,528) 39,930 9,392,402
Comprehensive income
Change in unrealized gain
(loss) on securities
available-for-sale, net
of income taxes......... (120,244) (120,244)
Net loss................... (354,485) (354,485)
----------
Total comprehensive
income............... (474,729)
-------- ---------- ----------- --------- ----------
Balance at March 31,
1999
(unaudited)....... $222,000 $9,978,000 $(1,202,013) $ (80,314) $8,917,673
======== ========== =========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 83
VILLAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, PERIOD ENDED DECEMBER 31,
--------------------------- ---------------------------
1999 1998 1998 1997
------------ ------------ ------------ ------------
(UNAUDITED) (NOTE 2)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................. $ (354,485) $ (34,643) $ (749,085) $ (98,443)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Amortization of intangibles............ 8,901 8,901 35,604 20,769
Depreciation........................... 32,664 22,130 95,406 47,943
Securities (gains) losses, net......... (6,377) -- (32,094) 1,367
Gain on sale of equipment.............. -- -- -- (5,353)
Loss on sale of other real estate
owned............................... -- -- 13,229 --
Net premium amortization on
securities.......................... 18,606 4,523 26,932 8,962
Provision for loan losses.............. 86,800 39,000 241,600 121,100
Decrease (increase) in accrued interest
and other assets.................... (196,500) (405,015) (277,973) 156,244
Increase (decrease) in accrued interest
and other liabilities............... 207,823 (63,428) 38,124 159,912
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities.............. (202,568) (428,532) (608,257) 412,501
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in federal funds
sold................................... 8,318,646 750,000 (18,205,881) (5,300,000)
Proceeds from sales and maturities of
securities available-for-sale.......... 2,036,690 -- 5,553,594 5,003,398
Purchase of securities
available-for-sale..................... (15,626,149) -- (8,071,133) (6,043,784)
Net increase in loans.................... (4,151,994) (1,374,038) (8,435,243) (3,810,953)
Cash received as the result of
acquisition of subsidiary bank......... -- -- -- 1,327,537
Proceeds from sale of other real estate
owned.................................. -- -- 210,000 --
Proceeds from sale of equipment.......... -- -- -- 11,000
Bank premises and equipment
expenditures........................... (315,842) (10,461) (1,090,546) (38,801)
------------ ------------ ------------ ------------
Net cash used in investing
activities........................ (9,738,649) (634,499) (30,039,209) (8,851,603)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................. 9,913,547 806,796 25,564,145 8,746,701
Proceeds from issuance of common stock... -- -- 6,100,000 --
Proceeds from issuance of convertible
debentures............................. -- 1,014,000 1,029,000 771,000
------------ ------------ ------------ ------------
Net cash provided by financing
activities........................ 9,913,547 1,820,796 32,693,145 9,517,701
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents............................ (27,670) 757,765 2,045,679 1,078,599
Cash and cash equivalents at beginning of
period................................. 3,124,278 1,078,599 1,078,599 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................. $ 3,096,608 $ 1,836,364 $ 3,124,278 $ 1,078,599
============ ============ ============ ============
Supplemental schedule of noncash
investing activities
Loans transferred to other real estate
owned............................... $ -- $ -- $ 223,229 $ --
============ ============ ============ ============
Purchase of Northwest Community Bank
Fair value of assets acquired....... $ 30,602,786
Stock issued........................ (4,100,000)
------------
Liabilities assumed............... $ 26,502,786
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 84
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 1 -- NATURE OF OPERATIONS
The accompanying consolidated financial statements include the accounts of
Village Bancorp, Inc., formerly Delta Bancorp, Inc., (the "Company") and its
wholly-owned subsidiaries, Northwest Community Bank and Village Bank and Trust
in North Barrington (the "Banks"). All significant intercompany transactions and
balances have been eliminated in consolidation.
Prior to June 1, 1997, Northwest Community Bank was a wholly-owned
subsidiary of National Bancorp, Inc. Effective May 31, 1997, Northwest Community
Bank's shares were sold to one of National Bancorp, Inc.'s shareholders and
other investors as part of a reorganization plan. Subsequent thereto, Delta
Bancorp, Inc. was formed and became Northwest Community Bank's 100% owned parent
through a one-for-one share exchange of common stock. Delta Bancorp, Inc. then
changed its name to Village Bancorp, Inc. (see note 19).
The following unaudited pro forma financial information for the Company
gives effect to the Northwest Community Bank acquisition as if it had occurred
on January 1, 1997. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
<TABLE>
<S> <C>
Net interest income.................................... $1,232,000
Net loss............................................... (364,000)
Net loss per share..................................... (.91)
</TABLE>
The Company's only significant activity is ownership of the Banks.
Northwest Community Bank is a commercial bank which was organized under the laws
of the state of Illinois on May 3, 1995. Village Bank and Trust in North
Barrington is a commercial bank which was organized under the laws of the state
of Illinois on October 9, 1998. The Banks provide financial services to
commercial and retail customers in Lake County and the northwest suburban area
of Cook County, Illinois.
While management monitors the revenue streams of the various Company
products and services, operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accounting policies followed by the Company and
the methods of applying those policies conform with generally accepted
accounting principles and with general practice within the banking industry. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Actual results could differ from those estimates.
F-7
<PAGE> 85
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
The financial statements as of March 31, 1999 and for the three month
periods ended March 31, 1999 and 1998 are unaudited, but in the opinion of
management, reflect all adjustments, consisting only of normal recurring items,
necessary for a fair presentation.
The Company commenced operations on June 1, 1997. Accordingly, amounts
reported in the 1997 consolidated statements of operations and comprehensive
income, cash flows, and changes in shareholders' equity are for the period June
1, 1997 through December 31, 1997.
Securities: Securities are classified as held-to-maturity when management
has the positive intent and the Company has the ability to hold those securities
to maturity. They are stated at cost, adjusted for amortization of premiums and
accretion of discounts. All other securities are classified as
available-for-sale because the Company may decide to sell those securities for
changes in market interest rates, liquidity needs, changes in yields on
alternative investments, and for other reasons. These securities are carried at
fair value. Unrealized gains and losses on securities available-for-sale are
charged or credited to a valuation allowance which is included as a separate
component of shareholders' equity. Realized gains and losses on disposition are
based on the net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method.
Loans: Loans are stated at the principal amount outstanding, net of the
allowance for loan losses. Interest income on loans is reported on the accrual
basis over the term of the loan based on the amount of principal outstanding.
Where there is doubt as to the ability of the debtor to meet the terms of the
loan contract or the loan is not adequately secured, the accrual of interest is
discontinued. Loan fees and direct loan origination costs are deferred and
amortized over the term of the loan as a yield adjustment.
Allowance for Loan Losses: The Company has established an allowance for
loan losses to provide for those loans which may not be repaid in their
entirety. The allowance is increased by provisions for loan losses charged to
expense and decreased by charge-offs, net of recoveries. Although a loan is
charged off by management when deemed uncollectible, collection efforts may
continue and future recoveries may occur.
The allowance is maintained by management at a level considered to be
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective and
ultimate losses may vary from current estimates. These estimates are reviewed
periodically, and as adjustments become necessary, they are reported in earnings
in the periods in which they become known.
Loans considered to be impaired are reduced to the present value of
expected cash flows or to the fair value of the collateral by allocating a
portion of the allowance for loan losses to such loans. Interest payments on
impaired loans are generally applied to principal, unless the loan principal is
considered to be fully collectible, in which case interest is recognized on the
cash basis.
Bank Premises and Equipment: Bank premises and equipment are stated at
cost, less accumulated depreciation and amortization. Provisions for
depreciation and amortization are
F-8
<PAGE> 86
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
computed on the straight-line method over the estimated service lives of the
related assets. The cost of maintenance and repairs is charged to income as
incurred; significant repairs are capitalized.
Income Taxes: The Company recognizes deferred tax assets and liabilities
for temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities and expected benefits of operating
loss and credit carryforwards. Deferred taxes are recognized for the estimated
taxes ultimately payable or recoverable based on enacted tax laws. Changes in
enacted tax rates or laws will be reflected in the financial statements in the
periods they occur. A valuation allowance is maintained for deferred tax assets
which may not ultimately be realized.
Intangible Assets: Goodwill and core deposit intangibles result from the
application of purchase accounting principles to the acquisition of subsidiary
banks and are being amortized over 15 years using the straight-line method.
Earnings Per Share: Earnings (loss) per share are computed under Statement
of Financial Accounting Standards No. 128, which became effective during 1997.
Basic earnings (loss) per share is based on net income (loss) divided by the
weighted average number of common shares outstanding during the period. The
weighted average number of common shares outstanding was 888,000 for the three
month period ended March 31, 1999, 400,000 for the three month period ended
March 31, 1998 and 512,307 and 400,000 for the periods ended December 31, 1998
and 1997, respectively. Diluted earnings per share are not presented because the
inclusion of potentially dilutive securities is anti-dilutive.
Comprehensive Income: Under recently enacted Statement of Financial
Accounting Standards No. 130, comprehensive income is required to be reported
for all periods presented. Comprehensive income includes both net income and
other comprehensive income. Other comprehensive income includes, among other
components, the change in unrealized gains and losses on securities
available-for-sale.
Cash Equivalents: For purposes of reporting cash flows, the Company
considers amounts due from banks to be cash equivalents.
NOTE 3 -- SECURITIES
The amortized cost and fair value of debt securities are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury securities.............. $ 4,055,140 $ 6,818 $ (7,221) $ 4,054,737
U.S. government agencies securities... 17,577,705 9,598 (130,874) 17,456,429
----------- ------- --------- -----------
$21,632,845 $16,416 $(138,095) $21,511,166
=========== ======= ========= ===========
</TABLE>
F-9
<PAGE> 87
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury securities.............. $ 3,036,041 $22,084 $ -- $ 3,058,125
U.S. government agencies securities... 5,019,573 38,416 -- 5,057,989
----------- ------- --------- -----------
$ 8,055,614 $60,500 $ -- $ 8,116,114
=========== ======= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury securities.............. $ 5,027,804 $ 2,275 $ (8,204) $ 5,021,875
U.S. government agencies securities... 505,109 1,922 -- 507,031
----------- ------- --------- -----------
$ 5,532,913 $ 4,197 $ (8,204) $ 5,528,906
=========== ======= ========= ===========
</TABLE>
The amortized cost and fair value of debt securities by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalty.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
Due after one year through five
years.............................. $21,632,845 $21,511,166 $8,055,614 $8,116,114
=========== =========== ========== ==========
</TABLE>
Proceeds from sales of securities available-for-sale and the gross realized
gains and losses on such sales were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
----------------------- -----------------------
1999 1998 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Proceeds from sales.................... $2,030,312 -- $5,053,594 $5,003,398
Gross realized gains................... 6,377 -- 32,094 17,302
Gross realized losses.................. -- -- -- (18,669)
</TABLE>
Securities with a carrying value of approximately $1,635,000, $1,031,000
and $507,000 at March 31, 1999 and December 31, 1998 and 1997, respectively,
were pledged to secure public deposits and for other purposes as required or
permitted by law.
F-10
<PAGE> 88
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 4 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
1999 1998 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Commercial loans............................ $ 9,981,047 $ 8,563,760 $ 6,060,311
Commercial real estate loans................ 11,519,522 10,851,688 8,255,143
Real estate mortgage loans.................. 13,381,234 13,154,983 11,070,948
Installment loans........................... 4,924,959 3,085,015 2,115,806
----------- ----------- -----------
Total loans............................... $39,806,762 $35,655,446 $27,502,208
=========== =========== ===========
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
------------------- -------------------
1999 1998 1998 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of period............. $458,564 $275,740 $275,740 $ --
Allowance of acquired bank............... -- -- -- 236,908
Provision for loan losses................ 86,800 39,000 241,600 121,100
Loans charged off........................ (678) (570) (58,776) (82,268)
-------- -------- -------- --------
Balance, end of period................. $544,686 $314,170 $458,564 $275,740
======== ======== ======== ========
</TABLE>
The balance of impaired loans at March 31, 1999 and December 31, 1998 and
1997 was $29,262, $30,931 and $239,495, respectively, which includes non-accrual
loans of approximately the same amount. There were no specific allocations of
the allowance for loan losses for these loans at March 31, 1999 and December 31,
1998 and 1997. The average balance of impaired loans was $43,126, $162,000,
$138,905 and $227,737 for the three months ended March 31, 1999 and 1998 and for
the periods ended December 31, 1998 and 1997, respectively. Interest income of
$3,330 and $0 was recognized on impaired loans on the cash basis for the periods
ended December 31, 1998 and 1997, respectively. Interest income recognized on
impaired loans on the cash basis was insignificant for the three months ended
March 31, 1999 and 1998.
F-11
<PAGE> 89
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 5 -- BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1999 1998 1997
----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
Land............................................. $ 506,748 $ 506,748 $ --
Construction in progress......................... 557,237 411,504 --
Leasehold improvements........................... 86,479 86,479 66,584
Furniture and equipment.......................... 767,487 597,378 312,738
---------- ---------- --------
1,917,951 1,602,109 379,322
Accumulated depreciation and amortization........ 308,254 275,590 47,943
---------- ---------- --------
$1,609,697 $1,326,519 $331,379
========== ========== ========
</TABLE>
NOTE 6 -- EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Company established a 401(k) SIMPLE salary
deferral plan covering substantially all employees. Eligible employees may elect
to make tax deferred contributions within a specific range of their compensation
as defined in the plan. The Banks contribute an amount equal to the employee's
contribution up to 3% of the employee's compensation. Contributions to the plan
were $9,948 and $0 for the three months ended March 31, 1999 and 1998 and
$17,202 for the year ended December 31, 1998.
During 1998, the Company's shareholders approved the 1998 Omnibus Stock
Incentive Plan. The total number of shares subject to awards under the plan may
not exceed 225,000. There were no awards granted at March 31, 1999.
NOTE 7 -- RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Banks, their families, and
companies in which they are principal owners are loan customers of the Banks.
A summary of loans made by the Banks in the ordinary course of business to
or for the benefit of executive officers, directors, and their related interests
is as follows:
<TABLE>
<S> <C>
Balance at January 1, 1998............................. $1,119,400
New loans.............................................. 464,100
Repayments............................................. (539,800)
----------
Balance at December 31, 1998........................... 1,043,700
New loans.............................................. 954,100
Repayments............................................. (413,000)
----------
Balance at March 31, 1999 (unaudited).................. $1,584,800
==========
</TABLE>
F-12
<PAGE> 90
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 8 -- INCOME TAXES
The provision for income taxes included in the consolidated statements of
operations consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
--------------------- ---------------------
1999 1998 1998 1997
--------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Currently payable (refundable)....... $ -- $ -- $ -- $ (935)
Deferred............................. (104,880) (18,500) (311,594) (28,365)
Change in valuation allowance........ 93,980 -- 253,094 14,000
--------- -------- --------- --------
$ (10,900) $(18,500) $ (58,500) $(15,300)
========= ======== ========= ========
</TABLE>
The difference between the provision for income taxes shown in the
statement of operations and amounts computed by applying the statutory federal
income tax rate of 34% to income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
--------------------- ---------------------
1999 1998 1998 1997
--------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income taxes (benefit) computed at
the statutory rate................. $(124,230) $(18,069) $(274,580) $(38,700)
Permanent differences................ 8,350 (431) 22,690 9,400
State taxes, net of federal
benefit............................ 11,000 -- (59,704) --
Valuation allowance.................. 93,980 -- 253,094 14,000
--------- -------- --------- --------
$ (10,900) $(18,500) $ (58,500) $(15,300)
========= ======== ========= ========
</TABLE>
F-13
<PAGE> 91
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
Deferred income tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Gross deferred tax assets
Allowance for loan losses........................ $186,000 $152,891 $ 82,065
Net operating loss carryforward.................. 335,000 262,681 22,925
Unrealized loss on securities
available-for-sale............................ 41,000 -- 1,363
Other............................................ 2,850 3,397 --
-------- -------- --------
564,850 418,969 106,353
Valuation allowance.............................. (367,464) (276,019) (22,925)
-------- -------- --------
197,386 142,950 83,428
Gross deferred tax liabilities
Depreciation..................................... (37,450) (35,514) (32,285)
Unrealized gain on securities
available-for-sale............................ -- (20,570) --
Other............................................ -- -- (781)
-------- -------- --------
(37,450) (56,084) (33,066)
-------- -------- --------
Net deferred tax asset........................ $159,936 $ 86,866 $ 50,362
======== ======== ========
</TABLE>
Cash paid for income taxes in 1997 was $41,500. In 1998, a cash refund in
the amount of $39,000 was received for income taxes.
The Company has a federal net operating loss carryforward of $602,000 of
which $39,000 expires in 2012 and $563,000 expires in 2018.
NOTE 9 -- LEASES
At March 31, 1999, Northwest Community Bank was obligated under two
noncancelable leases for its operating facility which expire in 2002. One lease
provides for annual rentals of $45,120 while the other lease provides for
increased rents annually at a rate of 4% over the prior year base amount plus
executory costs such as maintenance, insurance, and real estate taxes. The
leases contain one five-year renewal option.
F-14
<PAGE> 92
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
Minimum rental payments required under the operating leases subsequent to
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
(UNAUDITED)
<S> <C>
1999.................................................... $ 69,286
2000.................................................... 94,273
2001.................................................... 96,239
2002.................................................... 65,798
--------
$325,596
========
</TABLE>
Rental expense under all operating leases was $47,124 and $28,822 for the
three months ended March 31, 1999 and 1998 and $153,739 for the year ended
December 31, 1998 and $62,624 for the period June 1, 1997 through December 31,
1997.
NOTE 10 -- REGULATORY MATTERS
The Company and its subsidiary banks are subject to various capital
requirements administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
banks must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices.
Quantitative measures established by regulation to ensure capital adequacy
require banks and holding companies to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets and Tier I capital to average
assets. If banks do not meet these minimum capital requirements, as defined,
bank regulators can initiate certain actions that could have a direct material
effect on a bank's financial statements. Management believes, as of March 31,
1999, that the Company and its subsidiary banks meet all capital adequacy
requirements to which they are subject.
As of March 31, 1999, the most recent notification received from the
Federal Deposit Insurance Corporation categorized the Company's largest bank as
well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since this notification that management
believes have changed the institution's category. To be categorized as well
capitalized, banks must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table below.
F-15
<PAGE> 93
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
The actual capital amounts and ratios as of March 31, 1999 and December 31,
1998 for the Company and Northwest Community Bank, the Company's largest bank,
are presented in the following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
TO BE CORRECTIVE
ADEQUATELY ACTION
ACTUAL CAPITALIZED PROVISIONS
--------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 1999
Total capital (to risk-weighted assets)
Company................................ $ 8,862 18.4% $3,853 8.0% $4,816 10.0%
Northwest Community Bank............... 4,108 12.8 2,567 8.0 3,209 10.0
Tier I capital (to risk-weighted assets)
Company................................ $ 8,379 17.4% $1,926 4.0% $2,889 6.0%
Northwest Community Bank............... 3,707 11.6 1,278 4.0 1,917 6.0
Tier I capital (to average assets)
Company................................ $ 8,379 11.0% $3,047 4.0% $3,809 5.0%
Northwest Community Bank............... 3,707 8.4 1,765 4.0 2,207 5.0
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
TO BE CORRECTIVE
ADEQUATELY ACTION
ACTUAL CAPITALIZED PROVISIONS
--------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Total capital (to risk-weighted assets)
Company................................ $10,969 25.7% $3,422 8.0% $4,277 10.0%
Northwest Community Bank............... 4,055 12.0 2,705 8.0 3,388 10.0
Tier I capital (to risk-weighted assets)
Company................................ $ 8,727 20.4% $1,711 4.0% $2,566 6.0%
Northwest Community Bank............... 3,646 10.8 1,352 4.0 2,033 6.0
Tier I capital (to average assets)
Company................................ $ 8,727 12.5% $2,787 4.0% $3,484 5.0%
Northwest Community Bank............... 3,646 8.0 1,823 4.0 2,279 5.0
</TABLE>
F-16
<PAGE> 94
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 11 -- TIME DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 and over
as of March 31, 1999 and December 31, 1998 and 1997 approximated $14,155,000,
$9,193,000 and $6,053,000, respectively. Interest expense related to deposits in
denominations of $100,000 and over approximated $170,000 and $67,000 for the
three months ended March 31, 1999 and 1998, and $349,000 in 1998 and $177,000
for the period June 1, 1997 through December 31, 1997.
At March 31, 1999, scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<S> <C>
March 31, 2000........................................ $42,788,026
March 31, 2001........................................ 2,891,744
March 31, 2002........................................ 756,410
March 31, 2003........................................ 598,955
-----------
$47,035,135
===========
</TABLE>
Cash paid for all interest was $527,000 and $422,000 for the three months
ended March 31, 1999 and 1998 and $1,747,000 and $734,000 for the periods ended
December 31, 1998 and 1997.
NOTE 12 -- MANDATORILY CONVERTIBLE SUBORDINATED DEBENTURES
The Company's Board of Directors approved the issuance of $1,800,000 of
Series One Mandatorily Convertible Subordinated Debentures. The offering was
fully subscribed and all subscriptions were accepted by the Company. The Series
One debentures bear interest at 6%, mature on December 31, 2002, and are
convertible into common stock at any time prior to maturity at $15.15 per share.
Under certain circumstances, known as "trigger events," the debentures
automatically convert on terms consistent with the mandatory conversion ratio.
The trigger events consist of a merger, consolidation, or other reorganization
of the Company in which the Company is not the survivor. If the effective date
of the trigger events were on the first, second, third, and fourth anniversary
dates of the issuance, the debentures would convert at $12.20, $12.90, $13.65,
and $14.40 per share of common stock.
NOTE 13 -- OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit, and unused lines of 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. Commitments generally have fixed expiration dates
or other termination clauses and may require the payment of fees. Standby
letters of credit and financial guarantees written are conditional commitments
issued by the banks to guarantee the performance of a customer to a third party.
Credit risk is the principal risk associated with these instruments. The
contractual amounts of these instruments represent the credit risk should the
instrument be fully drawn upon and the customer fails completely to perform as
contracted. In order to control the credit risk associated with entering into
commitments and issuing letters of credit, the Company
F-17
<PAGE> 95
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
subjects such activity to the same credit quality and monitoring controls as its
lending activities. The contractual amounts of these credit-related instruments
are summarized in the following table by category of instrument. Because many of
these instruments expire without being drawn upon in whole or in part, the
amounts do not necessarily represent future cash requirements.
<TABLE>
<CAPTION>
CONTRACT AMOUNT
-------------------------------------
DECEMBER 31,
MARCH 31, -----------------------
1999 1998 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Unused lines of credit....................... $8,996,504 $8,086,218 $6,359,467
Standby letters of credit.................... 390,280 418,462 369,271
Commitments to extend credit................. 3,715,000 2,028,000 1,333,900
</TABLE>
At December 31, 1998 commitments to extend credit included one $212,000
commitment with a fixed rate of 7.0%.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of loans to local businesses,
municipalities, and consumers in Lake County and the northwest suburban area of
Cook County, Illinois; securities; correspondent bank accounts; and federal
funds sold.
NOTE 14 -- RECAPITALIZATION
Effective March 18, 1998, the Company's shareholders approved an increase
in the number of authorized common shares from 500,000 to 5,000,000 shares and
changed the par value from $1.00 to $.25 per share. The Board of Directors
approved a four-for-one stock split effected in the form of a 300% stock
dividend in contemplation of an intrastate public offering of the Company's
common stock.
A summary of common stock at March 31, 1999 and December 31, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Authorized shares.............................. 5,000,000 5,000,000 500,000
Par value per share............................ $.25 $.25 $1.00
Shares issued and outstanding.................. 888,000 888,000 100,000
</TABLE>
In addition, see Note 19 regarding the April 6, 1999 reincorporation and
name change.
NOTE 15 -- CONTINGENCIES
On December 3, 1998, the Company entered into a contract to purchase a 2.46
acre parcel of land for construction of a banking facility in northwest Indiana.
The purchase price is approximately $750,000.
F-18
<PAGE> 96
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
The Company has entered into contracts to construct a banking facility for
the newly opened Village Bank and Trust in North Barrington at an estimated cost
of approximately $2,174,000.
NOTE 16 -- COMPREHENSIVE INCOME
Changes in the components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
------------------ -----------------
1999 1998 1998 1997
--------- ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Unrealized holding gains (losses) during the
year....................................... $(175,811) $7,822 $96,600 $(5,373)
Less income taxes (benefit).................. (59,776) 2,659 32,844 (1,827)
--------- ------ ------- -------
(116,035) 5,163 63,756 (3,546)
Reclassified adjustments for gains (losses)
realized in net income..................... 6,377 -- 32,094 (1,367)
Less income taxes (benefit).................. 2,168 -- 10,912 (465)
--------- ------ ------- -------
4,209 -- 21,182 (902)
--------- ------ ------- -------
Effect on other comprehensive income......... $(120,244) $5,163 $42,574 $(2,644)
========= ====== ======= =======
</TABLE>
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments. Except for its
investment portfolio, no active market exists for the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective and judgmental in nature and, therefore, the results may not be
precise. The subjective factors include, among other things, estimates of cash
flows, risk characteristics, credit quality and interest rates, all of which are
subject to change. Since the fair value is estimated as of the balance sheet
date, the amounts which will actually be realized or paid upon settlement or
maturity of the various financial instruments could be significantly different.
Cash and Cash Equivalents and Federal Funds Sold
For these short-term instruments, the carrying amount approximates fair
value.
Investments
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities. The carrying amount of
accrued interest receivable approximates its fair value.
Loans
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for
F-19
<PAGE> 97
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
the same remaining maturities. For variable rate loans, the carrying amount is a
reasonable estimate of fair value. For loans where collection of principal is in
doubt, an allowance for losses has been estimated. Loans with similar
characteristics were aggregated for purposes of the calculations. The carrying
amount of accrued interest approximates its fair value.
Deposits
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the reporting
date (i.e., their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
Mandatorily Convertible Subordinated Debentures
For the Series One Mandatorily Convertible Subordinated Debentures, the
carrying amount approximates fair value.
Commitments to Extend Credit, Standby Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit and lines of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
F-20
<PAGE> 98
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
The following table presents estimated fair values of the Company's
financial instruments as of March 31, 1999 and December 31, 1998 and 1997:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------ ------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------- -------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents..... $ 3,097 $ 3,097 $ 3,124 $ 3,124 $ 1,079 $ 1,079
Federal funds sold............ 15,587 15,587 23,906 23,906 5,700 5,700
Securities
available-for-sale......... 21,511 21,511 8,116 8,116 5,529 5,529
Loans, less allowance for loan
losses..................... 39,262 39,267 35,197 35,268 27,226 27,234
Accrued interest receivable... 370 370 281 281 206 206
Financial liabilities
Deposits
Noninterest-bearing........... 9,678 9,678 11,096 11,096 7,365 7,365
Interest-bearing.............. 61,448 61,545 50,117 50,245 28,284 28,302
Mandatorily convertible
subordinated debentures.... 1,800 1,800 1,800 1,800 771 771
Accrued interest payable...... 480 480 250 250 216 216
</TABLE>
F-21
<PAGE> 99
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 18 -- PARENT COMPANY FINANCIAL STATEMENTS
The following are condensed balance sheets and statements of operations and
cash flows for Village Bancorp, Inc. without subsidiaries:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
1999 1998 1997
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................. $ 193,358 $ 536,082 $ 741,270
Deposits with other financial
institutions............................ 513,362 513,362 --
Investment in subsidiary banks............ 9,047,239 9,352,943 3,590,042
Goodwill and core deposit intangible...... 468,548 477,449 513,053
Accrued interest and other assets......... 513,221 381,426 42,838
----------- ----------- ----------
Total assets......................... $10,735,728 $11,261,262 $4,887,203
=========== =========== ==========
LIABILITIES
Mandatorily convertible subordinated
debentures.............................. $ 1,800,000 $ 1,800,000 $ 771,000
Accrued interest and other liabilities.... 18,055 68,860 117,290
----------- ----------- ----------
Total liabilities.................... 1,818,055 1,868,860 888,290
SHAREHOLDERS' EQUITY
Common stock.............................. 222,000 222,000 100,000
Additional paid-in-capital................ 9,978,000 9,978,000 4,000,000
Accumulated deficit....................... (1,202,013) (847,528) (98,443)
Accumulated other comprehensive income of
subsidiary bank......................... (80,314) 39,930 (2,644)
----------- ----------- ----------
Total shareholders' equity........... 8,917,673 9,392,402 3,998,913
----------- ----------- ----------
Total liabilities and
shareholders' equity......... $10,735,728 $11,261,262 $4,887,203
=========== =========== ==========
</TABLE>
F-22
<PAGE> 100
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
---------------------- ----------------------
1999 1998 1998 1997
--------- --------- --------- ---------
(UNAUDITED) (NOTE 2)
<S> <C> <C> <C> <C>
Interest income.................... $ 16,856 $ 13,378 $ 92,859 $ 848
Operating expenses
Salaries and employee benefits... 118,675 66,791 257,456 81,132
Amortization of goodwill and core
deposit intangible............ 8,901 8,901 35,604 20,769
Interest expense................. 26,630 20,528 101,862 1,001
Other expense.................... 82,475 30,088 226,649 54,897
--------- --------- --------- ---------
236,681 126,308 621,571 157,799
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME (LOSS) OF
SUBSIDIARIES..................... (219,825) (112,930) (528,712) (156,951)
Income tax benefit................. (50,800) (40,400) (159,300) (32,000)
--------- --------- --------- ---------
LOSS BEFORE EQUITY IN UNDISTRIBUTED
INCOME (LOSS) OF SUBSIDIARIES.... (169,025) (72,530) (369,412) (124,951)
Equity in undistributed net income
(loss) of subsidiaries........... (185,460) 37,887 (379,673) 26,508
--------- --------- --------- ---------
NET LOSS........................... (354,485) (34,643) (749,085) (98,443)
Change in unrealized gain (loss) on
securities held by bank
subsidiaries..................... (120,244) 5,163 42,574 (2,644)
--------- --------- --------- ---------
TOTAL COMPREHENSIVE INCOME......... $(474,729) $ (29,480) $(706,511) $(101,087)
========= ========= ========= =========
</TABLE>
F-23
<PAGE> 101
VILLAGE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
----------------------- ----------------------
1999 1998 1998 1997
--------- ----------- ----------- --------
(UNAUDITED) (NOTE 2)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................. $(354,485) $ (34,643) $ (749,085) $(98,443)
Adjustments to reconcile net loss to net
cash used in operating activities
Amortization of intangibles............ 8,901 8,901 35,604 20,769
Equity in undistributed net (income)
loss of subsidiaries................ 185,460 (37,887) 379,673 (26,508)
Increase in accrued interest and other
assets.............................. (152,366) (228,999) (318,018) (42,838)
Increase (decrease) in accrued interest
and other liabilities............... (30,234) (66,821) (69,000) 117,290
--------- ----------- ----------- --------
Net cash used in operating
activities....................... (342,724) (359,449) (720,826) (29,730)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries............... -- -- (6,100,000) --
Increase in deposits with other financial
institutions........................... -- (1,319,166) (513,362) --
--------- ----------- ----------- --------
Net cash used in investing
activities....................... -- (1,319,166) (6,613,362) --
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock... -- -- 6,100,000 --
Proceeds from issuance of convertible
debentures............................. -- 1,014,000 1,029,000 771,000
--------- ----------- ----------- --------
Net cash provided by financing
activities....................... -- 1,014,000 7,129,000 771,000
--------- ----------- ----------- --------
Increase (decrease) in cash and cash
equivalents............................ (342,724) (664,615) (205,188) 741,270
Cash and cash equivalents at beginning of
period................................. 536,082 741,270 741,270 --
--------- ----------- ----------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................. $ 193,358 $ 76,655 $ 536,082 $741,270
========= =========== =========== ========
</TABLE>
NOTE 19 -- REINCORPORATION AND NAME CHANGE
On April 6, 1999, the shareholders of Delta Bancorp, Inc. approved a plan
of merger by which Delta Bancorp, Inc. was merged into a newly formed Delaware
corporation. Concurrent with the merger, the corporation's name was changed to
Village Bancorp, Inc. In addition, the par value of the corporation's preferred
and common stock was changed from $1.00 and $0.25, respectively, to $0.01 per
share.
F-24
<PAGE> 102
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Northwest Community Bank
Prospect Heights, Illinois
We have audited the accompanying balance sheets of Northwest Community Bank
(a wholly-owned subsidiary of Village Bancorp, Inc.) as of December 31, 1998 and
1997, and the related statements of operations, changes in shareholder's equity,
and cash flows for the years then ended. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Northwest Community Bank at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 8, 1999
F-25
<PAGE> 103
NORTHWEST COMMUNITY BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 2,060,294 $ 1,078,599
Federal funds sold....................................... 4,600,000 5,700,000
Securities available-for-sale............................ 8,116,114 5,528,906
Loans.................................................... 32,362,939 27,502,208
Allowance for loan losses................................ (425,564) (275,740)
----------- -----------
31,937,375 27,226,468
Leasehold improvements and equipment, net................ 258,248 331,379
Accrued interest and other assets........................ 446,962 355,741
----------- -----------
$47,418,993 $40,221,093
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Deposits
Noninterest-bearing................................. $10,575,315 $ 7,406,201
Interest-bearing.................................... 32,601,263 28,983,822
----------- -----------
43,176,578 36,390,023
Accrued interest and other liabilities................. 408,493 241,028
----------- -----------
43,585,071 36,631,051
Shareholder's equity
Common stock -- $10 par value; authorized, issued and
outstanding, 100,000 shares......................... 1,000,000 1,000,000
Additional paid-in capital............................. 3,000,000 3,000,000
Accumulated deficit.................................... (206,008) (407,314)
Accumulated other comprehensive income................. 39,930 (2,644)
----------- -----------
3,833,922 3,590,042
----------- -----------
$47,418,993 $40,221,093
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 104
NORTHWEST COMMUNITY BANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Interest income
Loans, including fees.................................... $2,761,346 $2,264,326
Securities, taxable...................................... 355,309 261,535
Federal funds sold....................................... 246,801 101,529
---------- ----------
3,363,456 2,627,390
Interest expense
Deposits................................................. 1,635,083 1,297,346
Other.................................................... -- 249
---------- ----------
1,635,083 1,297,595
---------- ----------
NET INTEREST INCOME........................................ 1,728,373 1,329,795
Provision for loan losses.................................. 208,600 163,800
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........ 1,519,773 1,165,995
Other income
Securities gains, net.................................... 32,094 394
Service charges on deposit accounts...................... 304,313 133,209
Other income............................................. 101,192 22,193
---------- ----------
437,599 155,796
Other expense
Salaries and employee benefits........................... 688,918 526,060
Occupancy and equipment expense.......................... 278,534 245,261
Other expenses........................................... 687,814 463,464
---------- ----------
1,655,266 1,234,785
---------- ----------
INCOME BEFORE INCOME TAXES................................. 302,106 87,006
Income taxes............................................... 100,800 31,700
---------- ----------
NET INCOME................................................. $ 201,306 $ 55,306
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 105
NORTHWEST COMMUNITY BANK
STATEMENTS OF CHANGES IN
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME TOTAL
---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1997.................... $1,000,000 $3,000,000 $(462,620) $(17,641) $3,519,739
Comprehensive income
Change in unrealized
gain (loss) on
securities
available-for-sale,
net of $7,726 of
income taxes......... 14,997 14,997
Net income.............. 55,306 55,306
----------
Total comprehensive
income.................. 70,303
---------- ---------- --------- -------- ----------
Balance at December 31,
1997.................... 1,000,000 3,000,000 (407,314) (2,644) 3,590,042
Comprehensive income
Change in unrealized
gain (loss) on
securities
available-for-sale,
net of $21,932 of
income taxes......... 42,574 42,574
Net income.............. 201,306 201,306
----------
Total comprehensive
income............ 243,880
---------- ---------- --------- -------- ----------
Balance at December 31,
1998.................... $1,000,000 $3,000,000 $(206,008) $ 39,930 $3,833,922
========== ========== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 106
NORTHWEST COMMUNITY BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 201,306 $ 55,306
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation........................................... 91,671 77,634
Securities gains....................................... (32,094) (394)
Gain on sale of equipment.............................. -- (5,353)
Loss on sale of other real estate owned................ 13,229 --
Net premium amortization on securities................. 26,932 9,504
Provision for loan losses.............................. 208,600 163,800
Decrease (increase) in accrued interest and other
assets.............................................. (92,584) 143,584
Increase in accrued interest and other liabilities..... 146,895 35,479
----------- ------------
Net cash provided by operating activities........... 563,955 479,560
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in federal funds sold................ 1,100,000 (3,900,000)
Proceeds from sales and maturities of securities
available-for-sale..................................... 5,553,594 7,989,533
Purchase of securities available-for-sale................ (8,071,133) (9,028,126)
Net decrease (increase) in loans......................... (5,142,736) (8,028,323)
Proceeds from sale of other real estate owned............ 210,000 --
Proceeds from sale of equipment.......................... -- 11,000
Leasehold improvements and equipment expenditures........ (18,540) (69,725)
----------- ------------
Net cash used in investing activities............... (6,368,815) (13,025,641)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits................. 6,786,555 12,370,472
----------- ------------
Increase (decrease) in cash and cash equivalents......... 981,695 (175,609)
Cash and cash equivalents at beginning of period......... 1,078,599 1,254,208
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 2,060,294 $ 1,078,599
=========== ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest............................................ $ 1,681,834 $ 1,249,949
Income taxes (refunds received)..................... (7,000) 41,500
Schedule of noncash activities
Transfers from loans to other real estate owned........ 223,229 --
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 107
NORTHWEST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS
Northwest Community Bank (the "Bank") is a commercial bank which was
organized under the laws of the state of Illinois on May 3, 1995. The Bank
provides financial services to commercial and retail customers in the northwest
suburban area of Cook County, Illinois. Prior to June 1, 1997, the Bank was a
wholly-owned subsidiary of National Bancorp, Inc. Effective May 31, 1997, the
Bank's shares were sold to one of National Bancorp, Inc.'s shareholders and
other investors as part of a reorganization plan. Subsequent thereto, Village
Bancorp, Inc. was formed and became the Bank's 100% owned parent through a
one-for-one share exchange of common stock.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accounting policies followed by the Bank and
the methods of applying those policies conform with generally accepted
accounting principles and with general practice within the banking industry. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Securities: Securities are classified as held-to-maturity when management
has the positive intent and the Bank has the ability to hold those securities to
maturity. They are stated at cost, adjusted for amortization of premiums and
accretion of discounts. All other securities are classified as
available-for-sale because the Bank may decide to sell those securities for
changes in market interest rates, liquidity needs, changes in yields on
alternative investments, and for other reasons. These securities are carried at
fair value. Unrealized gains and losses on securities available-for-sale are
charged or credited to a valuation allowance which is included as a separate
component of shareholder's equity. Realized gains and losses on disposition are
based on the net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method.
Loans: Loans are stated at the principal amount outstanding, net of the
allowance for loan losses. Interest income on loans is reported on the accrual
basis over the term of the loan based on the amount of principal outstanding.
Where there is doubt as to the ability of the debtor to meet the terms of the
loan contract or the loan is not adequately secured, the accrual of interest is
discontinued. Loan fees and direct loan origination costs are deferred and
amortized over the term of the loan as a yield adjustment.
Allowance for Loan Losses: The Bank has established an allowance for loan
losses to provide for those loans which may not be repaid in their entirety. The
allowance is increased by provisions for loan losses charged to expense and
decreased by charge-offs, net of recoveries. Although a loan is charged off by
management when deemed uncollectible, collection efforts may continue and future
recoveries may occur.
The allowance is maintained by management at a level considered to be
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective and
ultimate losses may vary
F-30
<PAGE> 108
NORTHWEST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
from current estimates. These estimates are reviewed periodically, and as
adjustments become necessary, they are reported in earnings in the periods in
which they become known.
Loans considered to be impaired are reduced to the present value of
expected cash flows or to the fair value of the collateral by allocating a
portion of the allowance for loan losses to such loans. Interest payments on
impaired loans are generally applied to principal, unless the loan principal is
considered to be fully collectible, in which case interest is recognized on the
cash basis.
Leasehold Improvements and Equipment: Leasehold improvements and equipment
are stated at cost, less accumulated depreciation and amortization. Provisions
for depreciation and amortization are computed on the straight-line method over
the estimated service lives of the related assets. The cost of maintenance and
repairs is charged to income as incurred; significant repairs are capitalized.
Income Taxes: Income taxes are provided in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." SFAS No. 109 generally provides that deferred tax assets and liabilities
are recognized for temporary differences between the financial reporting basis
and the tax basis of the Bank's assets and liabilities and expected benefits of
operating loss carryforwards and tax credit carryforwards. Deferred taxes are
recognized for the estimated taxes ultimately payable or recoverable based on
enacted tax laws. Changes in enacted tax rates or laws will be reflected in the
financial statements in the periods they occur.
Comprehensive Income: Under recently enacted Statement of Financial
Accounting Standards No. 130, comprehensive income is required to be reported
for all periods. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive income includes, among other
components, the change in unrealized gains and losses on securities
available-for-sale.
Cash Equivalents: For purposes of reporting cash flows, the Bank considers
amounts due from banks to be cash equivalents.
NOTE 3 -- SECURITIES
The amortized cost and fair value of debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury securities.................. $3,036,041 $22,084 $ -- $3,058,125
U.S. government agencies securities....... 5,019,573 38,416 -- 5,057,989
---------- ------- ------- ----------
$8,055,614 $60,500 $ -- $8,116,114
========== ======= ======= ==========
</TABLE>
F-31
<PAGE> 109
NORTHWEST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury securities.................. $5,027,804 $ 2,275 $(8,204) $5,021,875
U.S. government agencies securities....... 505,109 1,922 -- 507,031
---------- ------- ------- ----------
$5,532,913 $ 4,197 $(8,204) $5,528,906
========== ======= ======= ==========
</TABLE>
The amortized cost and fair value of debt securities, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalty.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
Due after one through five years........................... $8,055,614 $8,116,114
========== ==========
</TABLE>
Proceeds from sales of securities available-for-sale and the gross realized
gains and losses on such sales were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Proceeds from sales........................................ $5,053,594 $7,989,533
Gross realized gains....................................... 32,094 20,904
Gross realized losses...................................... -- (20,510)
</TABLE>
Securities with a carrying value of approximately $1,031,000 and $507,000
at December 31, 1998 and 1997, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
NOTE 4 -- LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commercial loans......................................... $ 6,997,527 $ 6,060,311
Commercial real estate loans............................. 10,322,984 8,255,143
Real estate mortgage loans............................... 12,536,156 11,070,948
Installment loans........................................ 2,506,272 2,115,806
----------- -----------
Total loans......................................... $32,362,939 $27,502,208
=========== ===========
</TABLE>
F-32
<PAGE> 110
NORTHWEST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Balance, beginning of year.................................. $275,740 $196,000
Provision for loan losses................................... 208,600 163,800
Loans charged off........................................... (58,776) (84,060)
-------- --------
Balance, end of year................................... $425,564 $275,740
======== ========
</TABLE>
The balance of impaired loans at December 31, 1998 and 1997 was $30,931 and
$239,495, respectively, which includes non-accrual loans of approximately the
same amount. There were no specific allocations of the allowance for loan losses
for these loans at December 31, 1998 and 1997. The average balance of impaired
loans was $138,905 and $227,737 for years ended December 31, 1998 and 1997,
respectively. Interest income of $3,330 and $0 was recognized on impaired loans
on the cash basis for the years ended December 31, 1998 and 1997.
NOTE 6 -- LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Leasehold improvements...................................... $ 86,479 $ 86,479
Furniture and equipment..................................... 443,623 430,137
-------- --------
530,102 516,616
Accumulated depreciation and amortization................... 271,854 185,237
-------- --------
$258,248 $331,379
======== ========
</TABLE>
NOTE 7 -- INCOME TAXES
The provision for income taxes, included in the statements of operations
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Currently payable........................................... $159,891 $60,405
Deferred.................................................... (59,091) (28,705)
-------- -------
$100,800 $31,700
======== =======
</TABLE>
F-33
<PAGE> 111
NORTHWEST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the provision for income taxes shown in the
statements of operations and amounts computed by applying the statutory federal
income tax rate of 34% to income before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Income taxes computed at the statutory rate................. $102,716 $29,582
Permanent differences....................................... (1,916) 2,118
-------- -------
$100,800 $31,700
======== =======
</TABLE>
Deferred income tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Gross deferred tax assets
Allowance for loan losses................................. $140,107 $72,025
Unrealized loss on securities available-for-sale.......... -- 1,363
Other..................................................... 3,014 4,447
-------- -------
143,121 77,835
Gross deferred tax liabilities
Depreciation.............................................. (35,031) (27,473)
Unrealized gain on securities available-for-sale.......... (20,570) --
-------- -------
(55,601) (27,473)
-------- -------
Net deferred tax asset................................. $ 87,520 $50,362
======== =======
</TABLE>
The Bank's 1998 taxable income is included in the 1998 consolidated income
tax return of its parent, computed as though the Bank filed a separate return.
The Bank's 1997 taxable income is included in the consolidated income tax return
of its parent for the period June 1, 1997 through December 31, 1997, computed as
though the Bank filed a separate return. At December 31, 1998 and 1997, the Bank
had a tax transfer payable to its parent in the amount of $157,454 and $32,100,
respectively.
For years prior to June 1, 1997, the Bank's taxable income (loss) was
included in the consolidated income tax return of National Bancorp, Inc., the
former parent. The Bank's provision for income taxes was computed as though it
filed a separate return. Amounts currently payable or refundable represent
transactions between the Bank and its parent.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, Village Bancorp, Inc. established a 401(k)
SIMPLE salary deferral plan covering substantially all Bank employees. Eligible
employees may elect to make tax deferred contributions within a specified range
of their compensation as defined in the plan. The Bank contributed an amount
equal to the employee's contribution up to 3% of the employee's compensation.
Contributions to the plan were $9,272 for the year ended December 31, 1998.
F-34
<PAGE> 112
NORTHWEST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Bank, their families, and
companies in which they are principal owners, are loan customers of the Bank.
A summary of loans made by the Bank in the ordinary course of business to
or for the benefit of executive officers, directors, and their related interests
is as follows:
<TABLE>
<S> <C>
Balance at January 1, 1998............................. $1,119,000
New loans.............................................. 444,000
Repayments............................................. (539,000)
----------
Balance at December 31, 1998........................... $1,024,000
==========
</TABLE>
NOTE 10 -- LEASES
At December 31, 1998, the Bank was obligated under two noncancelable
operating leases for its operating facility which expire in 2002. One lease
provides for annual rentals of $45,120 while the other lease provides for
increased rents annually at a rate of 4% over the prior year base amount plus
executory costs such as maintenance, insurance, and real estate taxes. The
leases contain one five-year renewal option.
Minimum rental payments required under the above operating leases
subsequent to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
1999.................................................. $ 92,382
2000.................................................. 94,273
2001.................................................. 96,239
2002.................................................. 65,798
--------
$348,692
========
</TABLE>
Rental expense under all operating leases was $115,034 and $107,734 for the
years ended December 31, 1998 and 1997, respectively.
NOTE 11 -- REGULATORY MATTERS
The Bank is subject to various capital requirements administered by the
federal banking agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices.
Quantitative measures established by regulation to ensure capital adequacy
require banks and holding companies to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets and Tier I capital to average
assets. If banks do not meet these minimum capital requirements, as defined,
bank regulators can initiate certain actions that could have a direct material
effect on a bank's financial statements. Management believes, as of December 31,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
F-35
<PAGE> 113
NORTHWEST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, the most recent notification received from the
Federal Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since this notification that management believes have
changed the institution's category. To be categorized as well capitalized, banks
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below.
The actual capital amounts and ratios as of December 31, 1998, for the
Bank, are presented in the following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
TO BE UNDER PROMPT
ADEQUATELY CORRECTIVE
ACTUAL CAPITALIZED ACTION PROVISIONS
-------------- -------------- ------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------- ------ ----- ------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted
assets).............................. $4,055 12.0% $2,705 8.0% $3,388 10.0%
Tier I capital (to risk-weighted
assets).............................. $3,646 10.8% $1,352 4.0% $2,033 6.0%
Tier I capital (to average assets)..... $3,646 8.0% $1,823 4.0% $2,279 5.0%
</TABLE>
NOTE 12 -- TIME DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 and over
as of December 31, 1998 and 1997 approximated $5,570,000 and $6,753,000,
respectively. Interest expense related to deposits in denominations of $100,000
and over approximated $318,000 and $284,000 for the years ended December 31,
1998 and 1997, respectively.
At December 31, 1998, scheduled maturities of certificates of deposit were
as follows:
<TABLE>
<S> <C>
December 31, 1999................................... $16,583,589
December 31, 2000................................... 2,523,683
December 31, 2001................................... 774,787
December 31, 2002................................... 684,599
-----------
$20,566,658
===========
</TABLE>
NOTE 13 -- OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit, and unused lines of 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. Commitments generally have fixed expiration dates
or other termination clauses and may require the payment of fees. Standby
letters of credit and financial guarantees written are conditional commitments
issued by the banks to guarantee the performance of a customer to a third party.
Credit risk is the principal risk associated with these instruments. The
contractual amounts of these instruments represent the credit risk should the
instrument be fully drawn upon and the customer fail completely to perform as
contracted. In order to control the credit risk associated with
F-36
<PAGE> 114
NORTHWEST COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
entering into commitments and issuing letters of credit, the Bank subjects such
activity to the same credit quality and monitoring controls as its lending
activities. The contractual amounts of these credit-related instruments are
summarized in the following table by category of instrument. Because many of
these instruments expire without being drawn upon in whole or in part, the
amounts do not necessarily represent future cash requirements.
<TABLE>
<CAPTION>
CONTRACT AMOUNT
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk
Unused lines of credit................................. $6,924,927 $6,359,467
Standby letters of credit.............................. 418,462 369,271
Commitments to extend credit........................... 1,816,000 1,333,900
</TABLE>
Financial instruments which potentially subject the Bank to concentrations
of credit risk consist principally of loans to local businesses, municipalities,
and consumers in the northwest suburban area of Cook County, Illinois;
securities; correspondent bank accounts; and federal funds sold.
NOTE 14 -- COMPREHENSIVE INCOME
Changes in the components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Unrealized holding gains (losses) during the year........... $96,600 $23,117
Less income taxes........................................... 32,844 7,860
------- -------
63,756 15,257
Reclassification adjustments for gains realized in net
income.................................................... 32,094 394
Less income taxes........................................... 10,912 134
------- -------
21,182 260
------- -------
Effect on other comprehensive income........................ $42,574 $14,997
======= =======
</TABLE>
F-37
<PAGE> 115
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LOGO
454,000 SHARES (MINIMUM)
554,000 SHARES (MAXIMUM)
VILLAGE BANCORP, INC.
COMMON STOCK
PROSPECTUS
-------------------------
June 25, 1999
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