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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 0-15059
HERITAGE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
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ILLINOIS 36-3139645
(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
17500 SOUTH OAK PARK AVENUE 60477
TINLEY PARK, ILLINOIS (Zip code)
(Address of principal executive offices)
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(708) 532-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, $.625 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of February 23, 1996, 7,963,559 common shares, $.625 par value, were
outstanding, and the aggregate market value of common shares (based on the last
sale price of the registrant's common shares on February 23, 1996) held by
non-affiliates was approximately $112,700,000. See "Item 5. Market for
Registrant's Common Shares and Related Shareholder Matters".
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT INTO FORM 10-K PART:
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Portions of the Proxy Statement for 1996 Annual
Meeting of Shareholders to be held on April 23,
1996 III
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HERITAGE FINANCIAL SERVICES, INC.
FORM 10-K TABLE OF CONTENTS
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PART I
Item 1 Business.................................................................... 3
Item 2 Properties.................................................................. 10
Item 3 Legal Proceedings........................................................... 11
Item 4 Submission of Matters to a Vote of Security Holders......................... 11
PART II
Item 5 Market for Registrant's Common Shares and Related Shareholder Matters....... 13
Item 6 Selected Financial Data..................................................... 14
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 15
Item 8 Financial Statements and Supplementary Data................................. 32
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 55
PART III
Item 10 Directors and Executive Officers of the Registrant.......................... 55
Item 11 Executive Compensation...................................................... 55
Item 12 Security Ownership of Certain Beneficial Owners and Management.............. 55
Item 13 Certain Relationships and Related Transactions.............................. 55
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 55
SIGNATURES.............................................................................. 56
Exhibit Index............................................................... 57
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PART I
ITEM 1. BUSINESS
REGISTRANT
The registrant, Heritage Financial Services, Inc., is an Illinois
corporation which was incorporated on July 2, 1984, and a bank holding company
which is subject to the federal Bank Holding Company Act of 1956, as amended. On
July 2, 1984, its predecessor by merger, County Bankshares, Inc., a Delaware
corporation incorporated September 8, 1981, was merged into the registrant in
order to reincorporate in Illinois. The stockholders of the predecessor thereby
automatically became the shareholders of the registrant. Unless the context
otherwise requires, as used hereafter the "Company" refers to Heritage Financial
Services, Inc., its predecessor, County Bankshares, Inc. and its subsidiaries.
The Company was organized for the purpose of becoming a multi-bank holding
company by acquiring and operating Illinois commercial banks. The Company's
current subsidiaries are Heritage Bank, First National Bank of Lockport and
Heritage Trust Company which operate from fifteen banking offices located in
southwest suburban Chicago. See "Subsidiaries" below.
The Company derives substantially all its income from its principal
subsidiary, Heritage Bank. The Company's primary source of cash is dividends
from Heritage Bank. The amount of dividends paid by Heritage Bank is determined
in relation to its earnings and capital position and the cash requirements of
the Company. Also see "Supervision and Regulation -- Dividends" below.
Financial information relating to the Company only is set forth in "Note 15
- - -- Condensed Financial Statements -- Parent Company" of the Notes to
Consolidated Financial Statements included under Item 8 of this document.
SUBSIDIARIES
Prior to October, 1991, the Company owned and operated four bank
subsidiaries: Heritage Bank and Trust Company, Blue Island, Illinois, Heritage
Bank of Oak Lawn, Oak Lawn, Illinois, Heritage Bank Crestwood, Crestwood,
Illinois and Heritage Bank Tinley Park, Tinley Park, Illinois. In October, 1991,
the four bank subsidiaries were merged into one bank, now known as Heritage Bank
("Heritage Bank" or the "Bank").
On January 10, 1992, the Company acquired all of the issued and outstanding
common stock of 1st Heritage Bank, Country Club Hills, Illinois, for $6.9
million in cash. In October, 1992, 1st Heritage Bank was merged into the Bank
and is operated as a branch. On December 11, 1992, the Bank purchased the
banking facility and assumed approximately $6 million of deposit liabilities of
First Chicago Bank for Savings, Frankfort, Illinois. The Frankfort banking
office is also operated as a branch. On December 18, 1992, the Company acquired
all of the issued and outstanding common stock of Alsip Bank and Trust, Alsip,
Illinois, for approximately $8 million in cash. In April, 1993, Alsip Bank and
Trust was merged into the Bank and is operated as a branch.
On July 8, 1994, the Company acquired all of the issued and outstanding
common stock of Midlothian State Bank, Midlothian, Illinois, for $16.5 million
in cash. At the date of acquisition Midlothian State Bank had total assets of
$116 million. Midlothian State Bank was merged into the Bank in October, 1994,
and its banking facilities are operated as branches of the Bank.
On February 2, 1996, the Company acquired all of the issued and outstanding
common stock of the First National Bank of Lockport ("Lockport"), Lockport,
Illinois, for $16.8 million in cash. At the date of acquisition the bank had
total assets of $102 million. The Company intends that Lockport will transfer
substantially all of its assets and liabilities to Heritage Bank in the second
quarter of 1996 and will operate Lockport's facility as a branch. Lockport will
continue to exist as a national bank conducting a trust business.
The Company also owns and operates Heritage Trust Company, an Illinois
trust company, located in Tinley Park, Illinois.
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DESCRIPTION OF BUSINESS
General
The Company conducts a full service banking business through the Bank and
Heritage Trust Company. The Bank offers a complete range of financial products
and services to individuals, businesses and municipal customers. These products
and services include checking, savings, NOW and money market accounts and
certificates of deposit; commercial, real estate and consumer loans; mutual
funds, annuities and discount brokerage; corporate cash management services,
safe deposit and night depository facilities; and other services tailored for
both individual and corporate customers. Automated teller machines ("ATMs"),
which provide 24-hour banking services to customers, are installed at all
branches. The Bank is member of the "Cash Station" system of ATMs which operates
a substantial number of ATMs in the Chicago metropolitan area.
The Bank also offers electronic banking services to commercial and retail
customers. The Bank's Business Express software allows commercial and municipal
customers to access accounts and initiate a number of transactions via on-line
personal computers. Heritage's Phone Banker is an automated telephone system
which provides customers access to account balance and transaction information
and interest rates on most retail loan and deposit products. In 1996, an
automated loan application feature has been added to the Phone Banker system
which allows customers to apply for a number of retail loan products.
Heritage Trust Company offers a number of fiduciary, custodial and
investment management services to individuals, corporations and municipalities
at any of the Bank's locations. It also administers (as trustee and in other
fiduciary and representative capacities) pension, profit sharing, 401K and other
employee benefit plans, and personal trusts and estates.
Lending
The Bank concentrates its lending activities in the following areas:
commercial and industrial and commercial real estate loans, residential real
estate loans and home equity loans and lines of credit. The Bank maintains
comprehensive underwriting and credit policies which cover all aspects of
commercial and retail lending. The Bank conducts substantially all of its
lending activities in the southwest suburbs of Chicago and, to a lesser extent
the Chicago metropolitan area.
For over 25 years, the Bank's primary organizational emphasis has been
commercial lending. At December 31, 1995, approximately 50% of the Bank's loan
portfolio was comprised of commercial and industrial loans, commercial real
estate loans and construction loans. Commercial loans are provided on either a
secured or unsecured basis to corporations, partnerships and individuals for
working capital, business acquisitions, equipment purchases, plant expansion and
commercial/industrial real estate financing. The Bank's lending limit to a
single borrower exceeds $10 million, sufficient to satisfy the credit needs of
most of the businesses located in its market area.
A majority of the commercial portfolio represents loans to small to
mid-size companies in businesses such as light manufacturing, wholesale,
distribution and other service industries. The Company believes the commercial
loan portfolio is well diversified by industry. The Bank has no energy or
agricultural loans, loans to foreign countries or loans which would be
classified as highly leveraged transactions.
In recent years the Bank has expanded its marketing and origination
activities for consumer loans to supplement the growth of the loan portfolio,
attract new retail customers and increase the number of relationships with
existing customers. At December 31, 1995, residential real estate loans and home
equity loans comprised 48% of the loan portfolio. Residential real estate loans
represent single-family, first mortgages secured by properties primarily located
in southwest suburban Chicago. Home equity loans represent second mortgages
secured by residential real estate properties located in Cook County and the
adjacent collar counties. In addition to originating residential loans for its
portfolio, the Bank originates home loans for sale to secondary market
investors.
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Market Information and Community Banking
The Company's primary market area is southwest suburban Cook County, and to
a lesser extent adjacent Will County, Illinois. For many years there has been
significant economic and population growth in the outlying areas of southwest
Cook County and in parts of Will County. The market for banking and financial
services may be characterized as competitive due to the number of financial
institutions located in the area.
The Company's banking offices are located in both rapidly growing
residential areas as well as in stable neighborhoods of established suburbs. The
general profile of retail banking customers consists of blue and white collar
workers with excellent savings habits. Retail banking customers, along with
commercial and municipal customers, provide the Company with stable sources of
core deposits to fund its loans and investments.
The market area has a diverse economic base including manufacturing
businesses, service industries, wholesalers and distributors. This diversity has
contributed to the stability and success of the Company's lending business when
compared to other areas of the country which have experienced economic declines.
There has been no material deterioration in real estate property values within
the Company's market areas since there was neither rapid price appreciation nor
excessive building during the mid-to-late 1980's.
The Company's marketing strategy continues to be based on its perception of
the ongoing need for community banks -- financial institutions located for
convenience with well-trained personnel committed to providing personalized
quality service to customers. This philosophy, combined with the Company's
commercial lending expertise, has allowed it to grow within the southwest
suburban Chicago market area and has contributed to the Company's overall
profitability.
Neither the Company nor any of its subsidiaries is dependent for a material
part of its business upon a single customer, or a very few customers, the loss
of any one of which would have a materially adverse effect on the Company. The
Bank's customers are not concentrated in any one industry, and many of them do
business on a national basis, reducing the lending risk associated with
downturns in particular industries or geographic areas.
Acquisitions and Expansion
In 1981, a strategic decision was made to form a holding company and expand
operations through acquisitions. Since then, the Company has purchased Crestwood
Bank in 1983, Heritage Bank of Oak Lawn in 1984, Bremen Bank and Trust in 1986,
1st Heritage Bank and Alsip Bank and Trust in 1992, Midlothian State Bank in
1994 and the First National Bank of Lockport in 1996. With the acquisition of
these banks, the Company expanded its network for gathering stable deposits and
reinforced its presence in the southwest metropolitan Chicago market. The
Company intends to continue to seek acquisitions in its existing or adjoining
market areas, to the extent suitable candidates may be identified. However,
there is no assurance that any further acquisitions will be made.
As an additional means of accessing new market areas, the Company has also
grown through the development and acquisition of strategically positioned
branches. In 1989, two branch offices were opened in Cook County and one branch
was opened in adjacent Will County. In 1992, Heritage Bank purchased the branch
facility and deposits of First Chicago Bank for Savings, located in Will County.
In 1995 a branch office was opened in Monee, located in Will County. The Company
believes that branch expansion has strengthened its current market position and
will enhance the future growth of loans and retail core deposits. In the future,
the Company may continue to grow through selective branching as a means of
entering new markets or increasing its market share.
Competition
The Company encounters significant competition in all of its activities. It
competes for commercial and individual deposits, loans and trust business with
local and regional banks, savings and loan associations, savings banks and other
financial institutions, including mortgage banking companies, finance companies
and credit unions. The Company faces additional competition in attracting
deposits from money market funds,
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mutual funds and other investment funds. In addition, a number of large national
companies, including manufacturers, insurance companies and brokerage firms have
expanded in the area of financial services, have substantially greater financial
resources than the Company and compete with the Company for loans and deposits.
To compete in the banking and financial services industry, the Company is
committed to delivering high quality financial products in a professional manner
at a competitive price. The Company believes that competition for its products
and services is based principally on location, convenience, service and price.
The price factors primarily relate to interest rates and fees charged on loans,
interest rates paid on deposits and service charges on deposits. While the
pricing of products and services is an important element in competing for
customers, the Company also believes that the delivery of quality service as
well as convenience will continue to be at least as important in retaining and
expanding its customer base. See "Description of Business -- Market Information
and Community Banking" above.
SUPERVISION AND REGULATION
General
Bank holding companies and banks are extensively regulated under federal
and state laws and regulations. As a result, the business, financial condition
and prospects of the Company and its subsidiaries can be affected not only by
management decisions and general economic conditions, but also by applicable
statutes and regulations and other regulatory pronouncements and policies
adopted by regulatory agencies with authority over the Company and its
subsidiaries. The effect of such statutes, regulations and other pronouncements
and policies can be significant, cannot be predicted with a high degree of
certainty and can change over time. Finally, such statutes, regulations and
other pronouncements are intended to protect the Banks' depositors and the
deposit insurance systems, not the Company's shareholders.
The federal and state laws and regulations generally applicable to
financial institutions regulate, among other things, the scope of business,
investments, reserves against deposits, capital levels relative to operations,
the nature and amount of and collateral for loans, the establishment of branches
and mergers and acquisitions.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). Under the Bank Holding Company Act, and the
regulations promulgated thereunder, the Company is required to file annual
reports and quarterly reports of its operations and such additional information
as the Federal Reserve Board may require. It is also subject to examination by
the Federal Reserve Board which has jurisdiction to regulate the terms of
certain debt issues of the Company and the authority to impose capital and
reserve requirements.
The Bank is a state bank chartered under the Illinois Banking Act. It is
subject to regulation and examination by the Illinois Commissioner of Banks and
Trust Companies ("Commissioner") and by the Federal Deposit Insurance
Corporation ("FDIC") under the provisions of the Federal Deposit Insurance Act.
Lockport is a national bank that is subject to regulation and examination by the
Office of the Comptroller of the Currency ("OCC") and the FDIC. Heritage Trust
Company is an Illinois chartered trust company subject to regulation and
examination by the Commissioner.
The Bank and the First National Bank of Lockport are also subject to
certain restrictions under the Federal Reserve Act and the Federal Deposit
Insurance Act on loans and extensions of credit to the Company or its
subsidiaries, investments in the stock or other securities of the Company or its
other subsidiaries, or advances to any borrower collateralized by such stock or
other securities.
References under this "Supervision and Regulation" 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.
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Recent Legislation
In recent years Congress has enacted significant legislation which has
changed the statutory requirements affecting bank holding companies and banks
and broadened the regulatory powers of the federal regulatory agencies. To a
great extent, these changes have resulted from the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
FIRREA, among other things, significantly increased the enforcement powers
of federal regulatory agencies, substantially changed the federal deposit
insurance system and provided that all commonly controlled FDIC insured
depository institutions may be held liable for any loss incurred by the FDIC
resulting from a failure of, or any assistance given by the FDIC to, any of such
commonly controlled institutions.
FDICIA revised sections of the Federal Deposit Insurance Act affecting bank
regulation, deposit insurance and provisions for funding the Bank Insurance Fund
("BIF"). FDICIA also contained, among other things, several supervisory reforms,
including required annual regulatory examinations of depository institutions,
annual independent audits and related management reports on internal controls;
the adoption of safety and soundness standards on matters such as loan
underwriting and documentation, and compensation and other employee benefits;
the establishment of a risk-based deposit insurance system; and mandated
consumer protection disclosures with respect to deposit accounts. To date many
of the provisions of FDICIA have been implemented through the adoption of
regulations by bank regulators. While the implementation of FDICIA provisions
have resulted in increased compliance costs, they have not materially affected
the Company's operating results or financial condition.
FDICIA also required that banking agencies, including the FDIC, revise
their capital standards to take into account interest rate risk exposure. On
August 2, 1995, the agencies issued a proposed policy statement that established
a proposed supervisory framework to measure and monitor the level of interest
rate risk at individual banks. The framework will facilitate the agencies'
assessment of a bank's risk exposure and capital adequacy. Under the proposed
framework, a supervisory model will be used to measure the change in a bank's
economic or market value of capital assuming a 2% immediate increase or decrease
in interest rates. The framework would also take into account the results of a
bank's internal model if that model provides a measure of the change in a bank's
economic value. The results of the supervisory and internal model would be one
factor that the agencies will consider in their assessments of the quality of
the bank's capital adequacy for interest rate risk. Other factors that the
agencies will consider include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level of
other risks at the bank for which capital is needed. The regulators anticipate
that the proposed framework will provide a basis to issue a rule that would
establish an explicit minimum capital requirement for interest rate risk. The
agencies have stated that they will implement the capital rule at some future
date once the agencies and banking industry have gained more experience with the
proposed supervisory measurement and assessment process. At this time, the
Company cannot predict what impact the supervisory framework will have on its
future capital requirements. While the Company believes that its interest rate
risk management process is adequate and its interest rate risk exposure is not
significant, the results of the FDIC's assessment could be different and may be
a basis for requiring the Bank to maintain additional capital.
Deposit Insurance
As an FDIC-insured institution, the Bank is required to pay deposit
insurance premiums to the FDIC. Under FDICIA, the FDIC was authorized to
implement a risk-based deposit insurance assessment system. The FDIC was also
granted authority to establish semiannual assessment rates on BIF-member banks
so as to maintain BIF at the designated reserve ratio as defined in FDICIA.
Effective January 1, 1994, a risk-based insurance premium system was
implemented. Under the risk-based system, each insured depository institution is
placed into one of nine risk categories and assessed insurance premiums
accordingly. In 1994 these premiums ranged from .23% to .31% of deposits,
depending on an institution's capital level and risk classification. The Bank's
premiums were assessed at the rate of .23% of deposits for the year ended
December 31, 1994. In the second quarter of 1995, the FDIC announced that BIF
had reached the designated
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reserve ratio of insured deposits. Effective June 1, 1995, the FDIC reduced the
premium assessment range, and the Bank's assessment rate was lowered from .23%
of deposits to .04% of deposits. For the semiannual assessment period ending
June 30, 1996, the FDIC further reduced the assessment rate from .04% of
deposits to zero for "well capitalized" institutions. Since the Bank is
currently considered a "well capitalized" institution under the FDIC's capital
definition, its deposit insurance premiums are expected to be substantially less
in 1996. See "Supervision and Regulation -- Capital Adequacy " below.
Capital Adequacy
Under the regulatory framework of the Federal Deposit Insurance Act, as
amended by FDICIA, the Federal Reserve and the FDIC have adopted risk-based
capital guidelines and ratio requirements for bank holding companies and banks.
The risk-based capital guidelines are intended to provide a fair and consistent
framework for comparing capital positions of all banking institutions. The
guidelines define capital for risk-based capital purposes and categorize assets
and off-balance sheet items into broad risk categories. The aggregate dollar
value of each risk category is multiplied by a risk weight associated with that
category. Risk-based capital ratios are calculated by dividing qualified capital
by the aggregate of weighted risk categories.
For purposes of implementing the "prompt corrective action" requirements of
FDICIA, the regulatory authorities adopted regulations which established five
capital categories. The capital categories, ranging from well capitalized to
critically undercapitalized, are based upon the level of risk-based capital
measures. Since December 31, 1992, financial institutions must maintain the
following minimum risk-based capital ratios: Tier 1 capital to average assets
(leverage ratio) of 4%, Tier 1 capital to risk-weighted assets of 4% and total
risk-based capital to risk-weighted assets of 8%. To be considered
"well-capitalized", financial institutions must maintain the following
risk-based capital ratios: leverage ratio of 5%, Tier 1 capital to risk-weighted
assets of 6% and total risk-based capital to risk-weighted assets of 10%. At
December 31, 1995, the capital ratios of the Company and the Bank exceeded the
thresholds required to meet the "well capitalized" capital category. On a
consolidated basis, the Company's leverage ratio at December 31, 1995 was 7.75%.
The consolidated Tier 1 and total risk-based capital ratios were 13.41% and
14.66%, respectively. At December 31, 1995, the Bank's leverage ratio was 7.51%
and its Tier 1 and total risk-based capital ratios were 12.95% and 14.20%,
respectively.
Dividends
The Company has paid a cash dividend every quarter since it became a bank
holding company in 1982. The Company's shareholders are entitled to receive such
dividends as are declared by the Board of Directors, which considers payment of
dividends quarterly. The dividend policy of the Company is designed to balance
the shareholder interest in current return with the need to retain adequate
capital to support future asset growth. While the Company anticipates paying
quarterly cash dividends in the future, the timing and amount of dividends will
depend upon the earnings, capital requirements and financial condition of the
Company as well as general economic conditions and other relevant factors
affecting the Company. The ability of the Company to pay dividends is dependent
upon its receipt of dividends from the Bank. Regulatory authorities limit the
amount of dividends which can be paid by the Bank without prior approval from
such regulatory authorities. At December 31, 1995, the amount of undistributed
earnings of the Bank available for the payment of dividends within such
limitations is more than adequate to fund dividends paid by the Company. For
further information on the Bank's dividend restrictions, see "Note 15 --
Condensed Financial Statements -- Parent Company" of the Notes to Consolidated
Financial Statements included under Item 8 of this document.
Acquisitions and Expansion
The Bank Holding Company Act requires the Company to obtain the prior
approval of the Federal Reserve Board before merging with or consolidating into
another bank holding company, acquiring substantially all the assets of any bank
or bank holding company or acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any bank or bank holding company. In its
approval process, the Federal Reserve Board is required to weigh the expected
benefit to the public, such as greater convenience and increased competition,
against the risks of possible adverse effects, such as undue concentration of
resources,
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decreased or unfair competition, conflicts of interest or unsound banking
practices. The Federal Reserve Board also gives consideration to the Bank's
compliance with the Community Reinvestment Act ("CRA"), including the rating
assigned by the FDIC. CRA obligates each financial institution to address the
credit needs of its entire community, including low- and moderate-income areas.
See "CRA" below.
The Bank Holding Company Act also prohibits the Company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank and from engaging in
any business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries. The Company, however, may
engage in, and may own shares of companies engaged in, certain businesses
determined by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. The Bank
Holding Company Act does not place territorial restrictions on the activities of
non-bank subsidiaries of bank holding companies.
The enactment of FIRREA in 1989 amended the Bank Holding Company Act by
permitting bank holding companies to acquire and operate savings and loan
associations or purchase branch deposits of a thrift (subject to certain
limitations). In 1989, the Illinois Bank Holding Company Act of 1957, as amended
(the "Illinois Act"), and the Illinois Banking Act were also amended to reflect
a series of thrift recovery amendments ("Thrift Amendments"). The Thrift
Amendments were designed to permit an Illinois bank, subject to certain
limitations, to acquire branches of failed, failing or undercapitalized thrifts
and operate them as branches of a bank. The enactment of FIRREA and Thrift
Amendments expanded the options of the Company to grow through acquisition of
thrifts or branches of thrifts.
On December 1, 1990, the Illinois Act authorized full interstate banking
between banks and bank holding companies located in Illinois and banks and bank
holding companies located in any other state. The Illinois Act further provides
that no bank holding company with a ratio of total capital to total assets of
less than 7% (as measured by the Federal Reserve Board) may acquire control of
any Illinois bank. Although the Company's current capital ratio exceeds 7%, the
Illinois Act could, in the future, affect the Company's ability to expand
significantly through the future acquisition of Illinois banks.
Traditionally, all banks in Illinois have been restricted as to the number
and geographic location of branches which they could establish. In June, 1993,
Illinois law was amended to eliminate all branching restrictions. Accordingly,
banks located in Illinois are permitted to establish branches anywhere in
Illinois without regard to the location of other banks' main offices or the
number of branches previously established. See "Description of Business --
Acquisitions and Expansion" above.
On September 29, 1994, the Riegle-Neal Interstate Bank and Branching
Efficiency Act of 1994 ("IBBA") was signed into law. In general, IBBA permits
bank holding companies that are adequately capitalized and adequately managed to
acquire banks located in any other state after September 29, 1995, provided that
the acquisition does not result in the bank holding company controlling more
than 10% of the deposits in the United States, or 30% or more of the deposits in
the state in which the bank to be acquired is located. IBBA also allows
interstate branching and merging of existing banks beginning June 1, 1997.
States may elect to prohibit interstate branching and merger transactions if
they enact legislation after September 29, 1994, and before June 1, 1997, that
applies equally to all out-of-state banks and expressly prohibits mergers
involving out-of-state banks. This state "opt out" provision does not apply to
bank holding company acquisitions. The State of Illinois has enacted legislation
opting in IBBA effective June 1, 1997.
CRA
On April 19, 1995, federal banking agencies adopted a new rule amending
CRA. The new CRA rule became effective July 1, 1995 under a phased-in
implementation schedule. Beginning January 1, 1996, financial institutions are
required to collect and periodically report certain information on loans.
Effective July 1, 1997, all institutions will be evaluated under the new CRA
performance tests which will include the following: (1) the lending test, which
will evaluate an institution's record of helping to meet its assessment area's
credit needs through its lending activities by evaluating home mortgage, small
business and community development lending; (2) an investment test, which will
evaluate a financial institution's record of meeting
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assessment area credit needs through qualified investments within its assessment
area; and (3) a service test, by which the FDIC will analyze the availability
and effectiveness of a financial institution's system for delivering retail
banking services and the extent and innovativeness of its community development
services. The FDIC will assign a rating of outstanding, satisfactory, needs to
improve or substantial noncompliance, depending upon an institution's
performance under each of the tests. Regulatory agencies will take into account
a financial institution's rating when considering its application for approval
of mergers, acquisitions and relocations of main or branch offices and may deny
an application based on an unsatisfactory CRA rating.
Monetary/Fiscal Policies and Economic Conditions
The earnings of bank holding companies and their subsidiary banks are
affected by general economic conditions and also by the monetary and fiscal
policies of governmental authorities, including, in particular, those of the
Federal Reserve Board which influences conditions in the money and capital
markets through, among other means, open market operations in US Government
securities, varying the discount rate on bank borrowings and setting reserve
requirements against bank deposits. Such operations and policies are designed to
affect interest rates and the growth in bank credit, investments and deposits.
The monetary and fiscal policies of the Federal Reserve Board have affected
the operating results of all commercial banks in the past and are expected to do
so in the future. The Company cannot predict the nature or the extent of any
effect which economic conditions or fiscal or monetary policies may have on its
business and earnings.
Securities Laws
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934 (the "1934 Act"). These requirements include the
obligation to file with the Securities and Exchange Commission annual, quarterly
and other reports. In addition, the Company is subject to the proxy rules
promulgated pursuant to the 1934 Act, and its directors, officers and principal
shareholders are subject to the "short swing profits" and reporting provisions
of Sections 16(a) and 16(b) of the 1934 Act.
EMPLOYEES
As of December 31, 1995, the Company and its subsidiaries had approximately
434 full-time equivalent employees. The Company and its subsidiaries provide a
variety of employment benefits, and management of the Company considers its
employee relations to be excellent.
MISCELLANEOUS
The Company's subsidiaries utilize the name "Heritage", including use
pursuant to license agreement. Other financial institutions not part of the
Company also use the name "Heritage".
ITEM 2. PROPERTIES
At December 31, 1995, the Company had 14 banking locations, of which 11
were owned and three were leased. The Bank also leases certain space which
houses its operations center. Of the total banking locations, 11 are located in
southwest suburban Cook County and three are located in adjacent Will County.
All bank-owned properties are free-standing buildings that provide adequate
customer parking and drive-up facilities. The leased banking facilities are
located in or near retail shopping centers and most maintain drive-up
facilities. All of these offices are considered by management to be well
maintained and adequate for the purpose intended. See "Note 7 -- Premises and
Equipment" of the Notes to Consolidated Financial Statements included under Item
8 of this document for further information on properties.
10
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
Information in response to this item is incorporated by reference to "Note
13 -- Commitments and Contingent Liabilities -- Litigation" of the Notes to
Consolidated Financial Statements included under Item 8 of this document.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information about each of the
Company's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY AND SUBSIDIARIES
- - ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Richard T. Wojcik............. 57 Chairman of the Board and Chief Executive Officer of the
Company, Heritage Bank, First National Bank of Lockport
and Heritage Trust Company and President of Heritage
Trust Company
Frederick J. Sampias.......... 48 President and a Director of the Company, Heritage Bank
and First National Bank of Lockport and Vice Chairman of
Heritage Trust Company
Ronald P. Groebe.............. 56 Senior Executive Vice President, Secretary and a
Director of the Company, Heritage Bank and First
National Bank of Lockport and Secretary and a Director
of Heritage Trust Company
Ramesh L. Ajwani.............. 49 Executive Vice President of Heritage Bank
John E. Barry................. 51 Executive Vice President of Heritage Bank and a Director
of Heritage Trust Company
Paul A. Eckroth............... 38 Executive Vice President of the Company and Heritage
Bank, Treasurer of the Company and Vice President and
Controller of the First National Bank of Lockport
Susan G. Peterson............. 46 Executive Vice President of Heritage Bank and a Director
of Heritage Trust Company
Albert A. Stroka.............. 53 Executive Vice President and General Counsel of Heritage
Bank
</TABLE>
Mr. Wojcik has been Chairman of the Board and Chief Executive Officer of
the Company and Heritage Bank and Chairman of the Board and President of
Heritage Trust Company for more than the past five years. He was also Chairman
and Chief Executive Officer of Heritage Bank Crestwood and Chairman and a
Director of Heritage Bank of Oak Lawn and Heritage Bank Tinley Park until such
banks' merger into Heritage Bank in October 1991. Mr. Wojcik currently serves as
Chairman of the Board and a Director of the First National Bank of Lockport and
served in such positions for Heritage Bank Country Club Hills from January 1992
until that bank's merger into Heritage Bank in October 1992, Heritage Bank Alsip
from December 1992 until that bank's merger into Heritage Bank in April 1993 and
Heritage Bank Midlothian from July 1994 until that bank's merger into Heritage
Bank in October 1994.
Mr. Sampias has been President and a Director of the Company and Heritage
Bank and Vice Chairman and a Director of Heritage Trust Company for more than
the past five years. He was also a Director of Heritage Bank Crestwood, Heritage
Bank of Oak Lawn and Heritage Bank Tinley Park until such banks' merger into
Heritage Bank in October 1991. Mr. Sampias currently serves as President and a
Director of the First National Bank of Lockport and served in such positions for
Heritage Bank Country Club Hills from January 1992 until that bank's merger into
Heritage Bank in October 1992, Heritage Bank Alsip from
11
<PAGE> 12
December 1992 until that bank's merger into Heritage Bank in April 1993 and
Heritage Bank Midlothian from July 1994 until that bank's merger into Heritage
Bank in October 1994.
Mr. Groebe has been a Director of the Company, Heritage Bank and Heritage
Trust Company for more than the past five years. He has been the Senior
Executive Vice President of the Company and Heritage Bank since April 1993 and
prior to that was Executive Vice President of the Company and Heritage Bank for
more than five years. He was also a Director of Heritage Bank Crestwood,
Heritage Bank of Oak Lawn and Heritage Bank Tinley Park until such banks' merger
into Heritage Bank in October 1991. Mr. Groebe served as Executive Vice
President, Secretary and a Director of Heritage Bank Country Club Hills from
January 1992 until that bank's merger into Heritage Bank in October 1992 and
Heritage Bank Alsip from December 1992 until that bank's merger into Heritage
Bank in April 1993. He currently serves as Senior Executive Vice President,
Secretary and a Director of the First National Bank of Lockport and served in
such positions for Heritage Bank Midlothian from July 1994 until that bank's
merger into Heritage Bank in October 1994.
Mr. Ajwani has been an Executive Vice President of Heritage Bank for more
than the past five years. He has also served as a Vice President of the Company
from January 1988 until April 1991 when he became a Senior Vice President. He
served in that capacity until April 1992.
Mr. Barry became President and a Director of Heritage Bank Crestwood (then
Crestwood Bank) shortly after its acquisition by the Company in September 1983.
He also became President and a Director of Heritage Bank Tinley Park in early
1991. He served as President and a Director of both banks until their merger
into Heritage Bank in October 1991. At that time he became an Executive Vice
President of Heritage Bank. Mr. Barry has been a Director of Heritage Trust
Company for more than the past five years.
Mr. Eckroth has been Treasurer of the Company for more than the past five
years. He became Executive Vice President of the Company in April 1993 and prior
to that was Senior Vice President. Mr. Eckroth became Executive Vice President
of Heritage Bank in June 1993. Prior to that he was Senior Vice President of
Heritage Bank since October 1991. He has also served as Controller of Heritage
Bank Crestwood, Heritage Bank of Oak Lawn and Heritage Bank Tinley Park until
such banks' merger into Heritage Bank in October 1991. Mr. Eckroth currently
serves as Vice President and Controller of the First National Bank of Lockport.
He served as Controller of Heritage Bank Country Club Hills from January 1992
until that bank's merger into Heritage Bank in October 1992 and of Heritage Bank
Alsip from December 1992 until that bank's merger into Heritage Bank in April
1993. He also served as Executive Vice President and Treasurer of Heritage Bank
Midlothian from July 1994 until that bank's merger into Heritage Bank in October
1994.
Ms. Peterson has been an Executive Vice President of Heritage Bank since
June 1993. Prior to that she was Senior Vice President of Heritage Bank
beginning in January 1992. Ms. Peterson joined the Company as Vice President in
August 1987 and served in that capacity until April 1992. She became a Director
of Heritage Trust Company in January 1993.
Mr. Stroka has been an Executive Vice President and General Counsel of
Heritage Bank since June 1993. Prior to that he was Senior Vice President and
General Counsel of Heritage Bank since October 1991. Mr. Stroka joined the
Company in October 1986 upon its acquisition of Bremen Bank and Trust Company
where he served as Senior Vice President, General Counsel and Secretary.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
For purposes of the calculation of aggregate market value of the common
shares held by nonaffiliates of the Company as set forth on the cover page of
this report, the Company did not consider Carl C. Greer to be an affiliate.
Conversely, for purposes of such calculation, 446,925 shares (as of December 31,
1995) which may be voted by certain officers of the Company as trustees of a
profit sharing trust for the Company and subsidiaries were included in the
shares considered held by affiliates.
The Company's common shares are traded on the NASDAQ National Market System
under the symbol HERS. Stock price quotations can be found in the Wall Street
Journal and other major daily newspapers. At December 31, 1995, there were
approximately 805 holders of record of the Company's shares.
The following sets forth the dividends paid, common share prices and number
of shares traded during each quarter of 1995 and 1994, as reported by NASDAQ:
<TABLE>
<CAPTION>
MARKET PRICE RANGE NUMBER
DIVIDENDS -------------------------- OF SHARES
PAID HIGH LOW CLOSE TRADED
--------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
1995
4th Quarter..................................... $ .11 $19.50 $18.75 $19.25 114,564
3rd Quarter..................................... .11 19.50 17.25 19.00 488,171
2nd Quarter..................................... .11 18.00 16.50 17.25 128,609
1st Quarter..................................... .11 17.50 15.75 17.25 289,042
1994
4th Quarter..................................... $ .09 $18.00 $15.75 $16.50 261,196
3rd Quarter..................................... .09 19.00 17.75 18.50 613,772
2nd Quarter..................................... .09 19.75 15.75 19.00 386,582
1st Quarter..................................... .09 16.75 15.75 16.25 440,408
</TABLE>
The Company's shareholders are entitled to receive such dividends as are
declared by the board of directors, which considers payment of dividends
quarterly. Dividends are declared and paid quarterly in accordance with annual
dividend policies established by the board of directors. The ability of the
Company to pay dividends, as well as fund its operations and service debt, is
dependent upon receipt of dividends from Heritage Bank ("Bank"). Regulatory
authorities limit the amount of dividends which can be paid by the Bank without
prior approval from such authorities. At December 31, 1995, the amount of
undistributed earnings of the Bank available for the payment of dividends within
such limitations is more than adequate to fund the anticipated cash requirements
of the Company. For further discussion of the Bank's dividend restrictions and
capital requirements see "Note 15 -- Condensed Financial Statements -- Parent
Company" of the Notes to Consolidated Financial Statements included under Item 8
of this document.
On January 16, 1996, the board of directors increased the annual dividend
rate to 52 cents per share and declared a quarterly cash dividend of 13 cents
per share payable February 13, 1996 to shareholders of record on January 31,
1996. While the Company anticipates paying quarterly dividends of 13 cents per
share in the future, there can be no assurance that any such dividends will be
paid by the Company or that such dividends will not be reduced or eliminated in
the future. The timing and amount of dividends will depend upon the earnings,
capital requirements and financial condition of the Company as well as general
economic conditions and other relevant factors affecting the Company. Also see
"Supervision and Regulation -- Dividends" included under Item 1 of this
document.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a five year comparison of selected financial data.
The financial data reflects the balances and results of operations of
acquisitions which occurred in 1994 and 1992. Per share data has been adjusted
to reflect a two-for-one stock split declared in April, 1992.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS (in thousands)
Interest income.............................. $73,860 $60,158 $55,259 $55,463 $56,166
Interest expense............................. 33,364 22,116 21,122 25,155 29,379
------- ------- ------- ------- -------
Net interest income....................... 40,496 38,042 34,137 30,308 26,787
Provision for loan losses.................... 200 90 500 650 1,475
Other income................................. 6,971 6,487 6,101 5,234 4,520
Other expense................................ 27,670 26,218 24,220 21,910 19,966
------- ------- ------- ------- -------
Income before income taxes................ 19,597 18,221 15,518 12,982 9,866
Income tax expense........................... 6,303 5,804 4,493 3,364 2,112
------- ------- ------- ------- -------
Net income................................ $13,294 $12,417 $11,025 $ 9,618 $ 7,754
======= ======= ======= ======= =======
PER COMMON SHARE DATA
Fully diluted net income..................... $ 1.60 $ 1.50 $ 1.34 $ 1.18 $ .96
Cash dividends............................... .44 .36 .32 .30 .28
Book value at year end....................... 12.19 10.50 9.57 8.48 7.55
Market price at year end..................... 19.25 16.50 16.00 13.25 10.25
FINANCIAL RATIOS
Net interest margin (TE)..................... 4.58% 4.90% 4.82% 4.82% 4.99%
Return on average assets..................... 1.31 1.39 1.33 1.30 1.20
Return on average shareholders' equity....... 15.10 15.81 15.77 15.48 13.92
Dividend payout ratio........................ 26.27 22.93 22.73 24.44 28.28
Average equity to average assets............. 8.65 8.78 8.45 8.37 8.65
Tangible capital to total assets............. 7.75 7.41 7.87 7.48 8.12
Total capital to risk-adjusted assets........ 14.66 13.73 14.45 12.86 13.82
LOAN QUALITY
Net charge-offs (recoveries) to average
loans..................................... .08% (.03)% .13% (.09)% .19%
Allowance for loan losses to loans........... 1.49 1.66 1.68 1.70 1.33
Nonperforming loans to loans................. .85 1.04 1.03 1.48 1.80
Nonperforming assets to loans plus OREO...... .98 1.15 1.15 1.61 2.03
YEAR END BALANCES (in millions)
Total assets................................. $1,066 $953 $834 $824 $653
Net loans.................................... 561 516 448 448 381
Total deposits............................... 915 824 727 729 568
Total shareholders' equity................... 97 83 75 66 59
AVERAGE BALANCES (in millions)
Total assets................................. $1,018 $895 $827 $742 $644
Total loans.................................. 545 489 454 421 384
Total deposits............................... 877 776 724 649 560
Total shareholders' equity................... 88 79 70 62 56
</TABLE>
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Heritage Financial Services, Inc. and subsidiaries (the "Company") for the
years ended December 31, 1995, 1994 and 1993. This discussion and analysis
should be read in conjunction with the consolidated financial statements,
related notes and selected financial data appearing elsewhere in this report.
On July 8, 1994, the Company acquired all of the common stock of Midlothian
State Bank ("Midlothian") for $16.5 million in cash. At the date of acquisition
Midlothian had total assets of $116 million. Midlothian was merged into Heritage
Bank in October 1994. The acquisition was accounted for as a purchase and,
accordingly, Midlothian's results of operations have been included in the
consolidated statements of income since the acquisition date.
OVERVIEW
In 1995 the Company achieved record net income and earnings per share. For
the year, net income was $13.3 million, up 7% from $12.4 million in 1994. In
1994 net income increased 13% from $11.0 million in 1993. Fully diluted net
income per share was $1.60 compared with $1.50 in 1994 and $1.34 in 1993. The
Company's return on average assets in 1995 was 1.31%, compared to 1.39% in 1994
and 1.33% in 1993. The return on average equity was 15.10% in 1995 compared to
15.81% in 1994 and 15.77% in 1993.
The growth in earnings in 1995 was primarily due to an increase in net
interest income and a reduction in FDIC deposit insurance premiums. The
improvement in net interest income was attributable to the increases in the
volumes of earning assets and interest-bearing liabilities, reflecting strong
internal growth during the year. A decline in the net interest spread partially
offset the positive impact of volume growth.
In 1994 the growth in net interest income and containment of operating
expenses were the major factors contributing to the increase in net income. The
increase in net interest income was due to the growth in the volumes of earning
assets and interest-bearing liabilities. The growth in volume was primarily due
to the additional earning assets and interest-bearing liabilities from
Midlothian.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The largest source of operating revenue for the Company is net interest
income. Net interest income represents the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities. The amount of interest income is dependent upon
many factors including the volume and mix of earning assets, the general level
of interest rates and the dynamics of changes in interest rates. The cost of
funds necessary to support earning assets varies with the volume and mix of
interest-bearing liabilities and the rates paid to attract and retain such
funds.
For purposes of this discussion and analysis, the interest earned on
tax-exempt assets is adjusted to an amount comparable to interest subject to
normal income taxes. The adjustment is referred to as the tax equivalent ("TE")
adjustment.
15
<PAGE> 16
The Company's average balances, interest income and expense and rates
earned or paid for major balance sheet categories are set forth in the following
table (in thousands):
TABLE 1 DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST, RATES AND NET YIELDS
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ---- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and
interest-bearing
deposits................. $ 40,761 $ 2,378 5.83% $ 45,147 $ 1,926 4.27% $ 31,051 $ 921 2.97%
Taxable securities......... 287,951 18,881 6.56 233,642 12,844 5.50 221,488 12,021 5.43
Non-taxable
securities(1)............ 72,482 6,838 9.43 63,178 6,443 10.20 60,136 6,173 10.27
---------- ------- -------- ------- -------- -------
Total securities......... 360,433 25,719 7.14 296,820 19,287 6.50 281,624 18,194 6.46
Loans(2):
Commercial and
industrial(1).......... 136,339 13,057 9.58 132,852 11,136 8.38 135,983 10,622 7.81
Real estate(1)........... 318,413 27,380 8.60 281,981 24,231 8.59 267,231 24,019 8.99
Consumer................. 89,986 8,122 9.03 74,465 6,240 8.38 50,459 4,266 8.45
---------- ------- -------- ------- -------- -------
Total loans............ 544,738 48,559 8.91 489,298 41,607 8.50 453,673 38,907 8.58
---------- ------- -------- ------- -------- -------
Total earning assets... 945,932 76,656 8.10 831,265 62,820 7.56 766,348 58,022 7.57
------- ------- -------
Cash and due from banks.... 37,149 35,156 31,931
Other assets(3)............ 34,990 28,491 29,203
---------- -------- --------
Total assets........... $1,018,071 $894,912 $827,482
========== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts............. $ 76,245 $ 1,631 2.14% $ 74,294 $ 1,596 2.15% $ 66,615 $ 1,766 2.65%
Money market accounts.... 85,096 3,421 4.02 70,289 2,029 2.89 77,674 2,202 2.83
Saving deposits.......... 209,799 6,256 2.98 235,481 6,623 2.81 220,682 6,884 3.12
Time deposits............ 361,911 20,208 5.58 261,382 10,961 4.19 239,663 9,811 4.09
---------- ------- -------- ------- -------- -------
Total interest-bearing
deposits............. 733,051 31,516 4.30 641,446 21,209 3.31 604,634 20,663 3.42
Securities sold under
agreements to
repurchase............... 41,749 1,661 3.98 30,284 710 2.34 23,944 338 1.41
Notes payable.............. 2,689 187 6.95 3,130 197 6.29 2,862 121 4.23
---------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.......... 777,489 33,364 4.29 674,860 22,116 3.28 631,440 21,122 3.35
------- ------- -------
Demand deposits............ 144,388 134,286 119,241
Other liabilities.......... 8,175 7,234 6,875
Shareholders' equity....... 88,019 78,532 69,926
---------- -------- --------
Total liabilities and
shareholders'
equity............... $1,018,071 $894,912 $827,482
========== ======== ========
Net interest income.... $ 43,292 $ 40,704 $ 36,900
======= ======= =======
Net interest spread........ 3.81% 4.28% 4.22%
Impact of non-interest
bearing funds............ .77% .62% .60%
---- ----- -----
Net yield on interest
earning assets........... 4.58% 4.90% 4.82%
==== ===== =====
</TABLE>
- - -------------------------
(1) Interest income and rates are presented on a tax equivalent basis, assuming
a federal income tax rate of 35%.
(2) Includes fees on loans of $1,187 in 1995, $1,090 in 1994, and $1,175 in
1993.
(3) For presentation purposes in this table, other assets includes nonaccrual
loans, the allowance for loan losses and, in 1995 and 1994, the net
unrealized gain (loss) on securities available-for-sale.
16
<PAGE> 17
Changes in net interest income may also be analyzed by segregating the
volume and rate components of interest income and interest expense. The
following table summarizes the approximate relative contribution of changes in
average volume and interest rates to changes in net interest income (TE) for the
past two years (in thousands):
TABLE 2 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1994 COMPARED TO 1993
---------------------------- ---------------------------
CHANGE IN CHANGE IN
INTEREST DUE TO INTEREST DUE TO
----------------- TOTAL ----------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Federal funds sold and
interest-bearing deposits......... $ (202) $ 654 $ 452 $ 511 $ 494 $1,005
Taxable securities................... 3,270 2,767 6,037 452 371 823
Non-taxable securities(1)............ 901 (506) 395 310 (40) 270
------ ------- ------- ------ ------- ------
Total securities................ 4,171 2,261 6,432 762 331 1,093
------ ------- ------- ------ ------- ------
Loans:
Commercial and industrial(1)...... 299 1,622 1,921 (249) 763 514
Real estate(1).................... 3,035 114 3,149 1,309 (1,097) 212
Consumer.......................... 1,374 508 1,882 2,012 (38) 1,974
------ ------- ------- ------ ------- ------
Total loans..................... 4,708 2,244 6,952 3,072 (372) 2,700
------ ------- ------- ------ ------- ------
Total interest income........... 8,677 5,159 13,836 4,345 453 4,798
------ ------- ------- ------ ------- ------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW accounts...................... 42 (7) 35 189 (359) (170)
Money market accounts............. 486 906 1,392 (213) 40 (173)
Savings deposits.................. (750) 383 (367) 443 (704) (261)
Time deposits..................... 4,990 4,257 9,247 902 248 1,150
------ ------- ------- ------ ------- ------
Total interest-bearing
deposits..................... 4,768 5,539 10,307 1,321 (775) 546
Securities sold under agreements to
repurchase........................ 335 616 951 106 266 372
Notes payable........................ (29) 19 (10) 27 49 76
------ ------- ------- ------ ------- ------
Total interest expense.......... 5,074 6,174 11,248 1,454 (460) 994
------ ------- ------- ------ ------- ------
Net interest income............. $3,603 $(1,015) $ 2,588 $2,891 $ 913 $3,804
====== ======= ======= ====== ======= ======
</TABLE>
- - -------------------------
(1) Interest income is presented on a tax equivalent basis assuming a federal
income tax rate of 35%.
On a tax equivalent basis, net interest income increased $2.6 million, or
6% in 1995, compared to an increase of $3.8 million, or 10% in 1994. As set
forth in Table 2, the improvement in net interest income in 1995 was due to
increases in the volume of earning assets and interest-bearing liabilities,
partially offset by the effect of changes in interest rates. In 1994 the
increase in net interest income was largely due to the increases in the volume
of earning assets and interest-bearing liabilities. To a lesser extent, changes
in interest rates in 1994 also contributed to the growth in net interest income.
In 1995 average earning assets increased by $115 million, or 14%, and
average interest-bearing liabilities increased $103 million, or 15%, compared
with 1994 (Table 1). The higher volumes of earning assets and interest-bearing
liabilities were primarily the result of strong deposit growth in 1995. In 1994
average earning assets increased by $65 million, or 8%, and average
interest-bearing liabilities increased $43 million, or 7%, compared with 1993.
Growth in the volume of earning assets and interest-bearing liabilities was
primarily attributable to the acquisition of Midlothian in July. As a percentage
of average earning assets, the level of average interest-bearing liabilities was
82.2% in 1995 compared to 81.2% in 1994 and 82.4% in 1993.
17
<PAGE> 18
The mix of average earning assets remained relatively unchanged in 1995 and
1994. As a percentage of average earning assets, average loans decreased
slightly from 59.2% in 1993 to 57.6% in 1995 while average securities increased
from 36.7% in 1993 to 38.1% in 1995. The decrease in average loans primarily
reflects a relatively faster rate of growth in deposits versus loans. While the
composition of earning assets remained fairly constant, the mix of
interest-bearing liabilities has changed. As a percentage of average
interest-bearing liabilities, average time deposits increased from 38.0% in 1993
to 46.5% in 1995 while average savings decreased from 34.9% in 1993 to 27.0% in
1995. The shift in funding sources was primarily due to a 250 basis point
increase in short-term market interest rates in 1994 and early 1995. The overall
rise in market rates caused the Company as well as other financial institutions
to raise rates paid on time deposits. As a result, the interest rate
differential between savings and time deposits widened, and customers
transferred funds from savings to time deposits. Considering the current level
of interest rates offered on time deposits, the Company believes that further
shifting of savings deposits may occur which would increase the cost of its
interest-bearing liabilities.
On a tax equivalent basis, the net interest spread decreased to 3.81% in
1995 compared to 4.28% in 1994. The change in the net interest spread reflected
an increase of .54% in the yield on average earning assets that was more than
offset by an increase of 1.01% in the rate paid on interest-bearing liabilities.
The increase in the yield on earning assets primarily reflected higher rates
earned on new loans and securities and rate sensitive assets such as federal
funds sold, adjustable-rate securities and floating rate loans. Higher rates
paid on interest-bearing liabilities were primarily due to increases in interest
rates paid on time deposits, money market accounts and short-term borrowings.
Changes in the deposit mix and premium rates paid on short-term time deposit
promotions also contributed to the increase in funding costs in 1995.
Another factor causing the decrease in the net interest spread in 1995 was
the flattening of the treasury yield curve. As the yield curve flattens, the
spreads between long-term and short-term market interest rates compress.
Generally a flattening yield curve reduces the interest spreads earned on new
loans and securities compared to the cost of funds sold. Interest-bearing
liabilities are affected less since a portion of these liabilities reprice off
the short end of the yield curve. Based on current economic conditions and
levels of market interest rates, a flat yield curve environment may continue
which could further compress the net interest spreads.
In 1994 the tax equivalent net interest spread increased to 4.28% compared
to 4.22% in 1993. As interest rates increased in 1994, the volume and extent of
repricing earning assets were greater than interest-bearing liabilities which
favorably impacted the net interest spread. The change in the net interest
spread reflected a decrease of .01% in the yield on earning assets compared to a
.07% decrease in the rate paid on interest-bearing liabilities. The lower yield
on earning assets reflected higher rates earned on interest sensitive assets,
such as prime floating loans, adjustable-rate securities and federal funds sold,
which was more than offset by lower rates earned on real estate loans. The
decrease in the rate paid on interest-bearing liabilities generally reflected
lower interest rates paid on savings and NOW accounts, partially offset by
higher costs for time deposits and short-term borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1995 was $200,000 compared to $90,000 in
1994 and $500,000 in 1993. The higher provision in 1995 primarily resulted from
an increase in net charge-offs during the year. In 1994 the decrease in the
provision was due to favorable net charge-off experience and reductions in
potential risks associated with nonperforming loans. For information on loss
experience and nonperforming loans see the "Nonperforming Assets" and "Allowance
for Loan Losses and Impaired Loans" sections below.
18
<PAGE> 19
OTHER INCOME
An important source of the Company's revenue is derived from other income.
The following table sets forth the major components of other income for the last
three years (in thousands):
TABLE 3 OTHER INCOME
<TABLE>
<CAPTION>
$ CHANGE
FROM PRIOR
YEAR
-------------
1995 1994 1993 1995 1994
------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Service charges on deposits........................... $4,097 $3,832 $3,860 $265 $(28)
Income for trust services............................. 737 707 681 30 26
Investment product fees............................... 909 939 522 (30) 417
Other operating income................................ 1,005 997 1,021 8 (24)
Securities gains...................................... 223 12 17 211 (5)
------ ------ ------ ---- ----
Total other income............................... $6,971 $6,487 $6,101 $484 $386
====== ====== ====== ==== ====
</TABLE>
Service charges on deposits, the primary component of other income,
increased 7% in 1995 compared to a decrease of 1% in 1994. The increase in
service charge income in 1995 was primarily due to the additional fee income of
Midlothian. In 1994 the decrease in income was due to increased earnings credits
on commercial checking accounts which resulted in a reduction of service charges
collected. In 1994 the Company also began to offer service charge discounts to
retail depositors in exchange for truncation of checks. While lower service
charge revenue was recognized, postage and other expenses related to the
distribution of customer statements was also reduced. These decreases in service
charges more than offset the additional service fee income of Midlothian.
Income from trust services increased 4% in both 1995 and 1994 reflecting
the continued growth of employee benefit plans and other asset management
accounts serviced by Heritage Trust Company. At December 31, 1995, total
customer trust assets were approximately $152 million.
Income from investment product fees is derived from sales of third-party
mutual funds and annuities through arrangements with licensed broker-dealers. In
1995 fees declined 3% reflecting a lower volume of product sales. In 1994 higher
fees were due to increased customer demand and an expansion of product
offerings.
Net securities gains in 1995 were $223,000 compared to net gains of $12,000
in 1994 and $17,000 in 1993. In 1995 the Company realized gains of $177,000 from
the sale of $8 million of adjustable-rate mortgage pools classified as
available-for-sale. These securities were sold to reduce potential prepayment
risk of pools that were scheduled to reprice. The Company also realized net
gains of $46,000 from calls of municipal securities. In 1994 and 1993 securities
gains were limited to calls of municipal securities.
OTHER EXPENSE
The major categories of other expense include salaries and employee
benefits, occupancy and equipment expenses and other operating expenses
associated with the day-to-day operations of the Company. In general, the
increases in most expense categories in 1995 and 1994 were attributable to
Midlothian. However, the growth of operating expenses has been contained in part
due to the realization of certain economies of scale from the Midlothian
acquisition and management's ongoing efforts to reduce costs through investments
in technology and competitive bidding.
19
<PAGE> 20
The following table sets forth the major components of other expense for
the last three years (in thousands):
TABLE 4 OTHER EXPENSES
<TABLE>
<CAPTION>
$ CHANGE
FROM PRIOR YEAR
-----------------
1995 1994 1993 1995 1994
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits............ $15,146 $14,373 $13,234 $ 773 $1,139
Net occupancy expense..................... 2,618 2,395 2,153 223 242
Equipment expense......................... 1,569 1,550 1,384 19 166
Data processing expense................... 817 750 775 67 (25)
Federal deposit insurance premiums........ 958 1,683 1,539 (725) 144
Amortization of intangible assets......... 1,613 1,374 1,113 239 261
Stationery and supplies................... 700 616 558 84 58
Legal and professional fees............... 681 561 541 120 20
Marketing and promotion................... 528 389 329 139 60
Other operating expenses.................. 3,040 2,527 2,594 513 (67)
------- ------- ------- ------ ------
Total other expense..................... $27,670 $26,218 $24,220 $1,452 $1,998
======= ======= ======= ====== ======
</TABLE>
Salaries and employee benefits, the largest component of other expense,
increased 5% in 1995 compared to 9% in 1994. The increases in both years were
primarily attributable to the additional expenses of Midlothian and annual merit
increases paid to employees. In 1995 higher expenses were partially offset by a
decrease in profit sharing expense, reflecting a lower contribution rate. In
1994 higher costs also resulted from increases in profit sharing benefits and
payroll taxes. At December 31, 1995, the number of full-time equivalent ("FTE")
employees totaled 434 compared to 440 and 377 at December 31, 1994 and 1993,
respectively. The increase in the number of FTE employees in 1994 was primarily
due to the additional employees of Midlothian.
Occupancy expense increased 9% in 1995 and 11% in 1994. Higher costs in
both years primarily resulted from the additional expenses of Midlothian. The
increase in 1995 expense was also attributable to higher utility costs and the
costs of the Monee branch which opened in August 1995. In 1994 the growth in
occupancy expense was also due to higher real estate taxes.
Data processing expense increased 9% in 1995 compared to a decrease of 3%
in 1994. Higher expense in 1995 reflected general price increases in third-party
data processing services and the additional costs to process Midlothian
activity. In 1994 the Company purchased equipment that resulted in the
elimination of third-party costs associated with printing and records
maintenance. The decrease in these costs was partially offset by additional
expenses of Midlothian, which was merged into Heritage Bank in October 1994.
Prior to the conversion Midlothian operated its own in-house data processing
system.
Equipment expense increased 1% in 1995 and 12% in 1994. The slight increase
in 1995 expense reflected an increase in depreciation expense partially offset
by lower maintenance and rental costs associated with Midlothian's data
processing system. In 1995 the board of directors approved the purchase of a
bank-wide platform system at a cost of approximately $770,000. The additional
equipment and software will be installed by mid-1996 and will be depreciated
over a period of five years. The new system is designed to increase operating
efficiencies and productivity and enhance customer service and sales.
The significant decrease in deposit insurance expense in 1995 was due to a
reduction in the FDIC assessment rate from 23 cents to 4 cents per $100 of
deposits as of June 1, 1995. In 1994 and 1993 deposit insurance premiums were
assessed at the rate of 23 cents per $100 of deposits.
The increases in the amortization of intangible assets in 1995 and 1994
resulted from the acquisition of Midlothian. Legal and professional fees were
higher in 1995 due to additional legal costs associated with the Company's
pending litigation. The increase in marketing and promotion expense in 1995 was
primarily attributable to increased advertising of loan and deposit promotions.
20
<PAGE> 21
The growth in other operating expenses in 1995 was primarily due to
increases of $140,000 in loan servicing and OREO expenses, $157,000 in
communication and postage expenses and $49,000 in employee training costs. In
1994 the modest increase in other operating expenses was generally effected by
the reduction or elimination of duplicate operating costs from Midlothian. The
growth in expenses also reflected decreases of $116,000 in loan servicing and
OREO expenses and $54,000 in corporate insurance premiums.
INCOME TAXES
Income tax expense increased $499,000 in 1995 and $1,311,000 in 1994. The
Company's effective tax rate (income tax expense divided by income before taxes)
was 32.2% in 1995, 31.9% in 1994 and 29.0% in 1993. Higher income tax expense in
both years was principally due to the increases in pre-tax earnings. In 1994 the
increase in taxes was also the result of a decline in the amount of federal and
state tax-exempt interest income.
ANALYSIS OF BALANCE SHEETS
LOANS
The loan portfolio is the largest category of the Company's earning assets.
The following table summarizes the composition of the loan portfolio for the
last five years (in thousands):
TABLE 5 COMPOSITION OF LOANS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------- ---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and $130,508 23% $124,351 24% $127,499 28% $133,198 29% $137,298 36%
industrial...............
Commercial real estate..... 145,080 25 142,833 27 138,471 30 126,353 28 116,339 30
Construction............... 8,645 2 6,096 1 5,055 1 8,004 2 6,646 2
Residential real estate.... 200,323 35 162,246 31 133,178 29 137,431 30 74,833 19
Home equity................ 73,525 13 72,394 13 33,132 7 29,908 6 18,233 5
Other consumer............. 13,782 2 20,078 4 19,824 5 21,466 5 32,344 8
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total.................... $571,863 100% $527,998 100% $457,159 100% $456,360 100% $385,693 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The Company's primary organizational emphasis is commercial lending. A
majority of the commercial loan portfolio represents loans to small and mid-size
companies in businesses such as light manufacturing, wholesale, distribution and
other service operations. Commercial and industrial loans consist primarily of
secured loans made for business working capital and purchases of inventory and
equipment. Commercial real estate loans generally represent intermediate-term
mortgages (five to ten years) made to finance owner-occupied property, plant
expansion or the acquisition of income-producing property. While most of the
Company's commercial borrowers operate in the southwest suburbs of Chicago, a
number of these customers conduct business nationally.
Combined, commercial and industrial, commercial real estate and
construction loans increased $11 million or 4% in 1995 compared to an increase
of $2 million or 1% in 1994. The increase in the commercial portfolio was
generally due to lower interest rates, stronger economic conditions and
continued development within the markets the Company serves. However, increased
competition and aggressive pricing by competitors have tempered the growth of
commercial loans.
Residential real estate loans primarily represent single-family, first
mortgages with intermediate terms secured by properties primarily located in the
Company's general market area. In 1995 this portfolio increased $38 million or
23% compared to $29 million or 22% in 1994. The growth in residential real
estate loans in 1995 was primarily due to management's decision to increase the
level of fixed-rate assets in light of the Company's asset/liability mix and
interest rate sensitivity position. A majority of the new loans originated in
1995 were 15-year conventional loans and 30-year bi-weekly loans. In 1994 the
increase in residential real estate loans includes approximately $28 million of
loans acquired with Midlothian.
21
<PAGE> 22
Home equity loans represent second mortgages secured by residential real
estate properties primarily located in Cook County and the adjacent collar
counties. At December 31, 1995, approximately $23 million, or 31%, of home
equity loans are floating rate advances under equity lines of credit. The
remaining balance of the portfolio consists of fixed-rate installment loans with
terms of five to 15 years. The growth in home equity loans in 1994 includes
approximately $36 million of fixed-rate equity loans acquired with Midlothian.
The maturity distribution and interest rate sensitivity of commercial and
industrial, commercial real estate and construction loans at December 31, 1995
are set forth below (in thousands):
TABLE 6 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
MATURITY(1)
------------------------------------------------
WITHIN AFTER
1 YEAR(2) 1-5 YEARS 5 YEARS TOTAL
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Commercial and industrial........................ $ 82,660 $ 42,241 $ 5,607 $130,508
Commercial real estate........................... 23,767 101,573 19,740 145,080
Construction..................................... 8,645 -- -- 8,645
-------- -------- ------- --------
Total....................................... $ 115,072 $ 143,814 $25,347 $284,233
======== ======== ======= ========
Fixed rate loans................................. $ 41,324 $ 126,866 $19,305 $187,495
Variable rate loans.............................. 73,748 16,948 6,042 96,738
-------- -------- ------- --------
Total....................................... $ 115,072 $ 143,814 $25,347 $284,233
======== ======== ======= ========
</TABLE>
- - -------------------------
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, loans where scheduled
payments are 90 days or more past due and other real estate owned. The Company
places loans on nonaccrual status when management believes, after considering
the borrower's financial condition and other relevant factors, that future
collection of principal or interest in accordance with contractual terms may be
doubtful. Loans 90 days or more past due are transferred to nonaccrual status
unless they are well secured and in the process of collection. Other real estate
owned includes properties acquired through foreclosure or deed in lieu of
foreclosure. The properties are recorded at the lower of the book value of the
loan or fair value, less estimated costs to sell.
The following table sets forth the aggregate amount of the Company's
nonperforming assets for the last five years (in thousands):
TABLE 7 NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................... $3,919 $4,272 $4,299 $5,999 $4,375
Loans past due 90 days or more................. 938 1,201 409 731 2,551
------ ------ ------ ------ ------
Total nonperforming loans................. 4,857 5,473 4,708 6,730 6,926
Other real estate owned........................ 760 563 524 602 930
------ ------ ------ ------ ------
Total nonperforming assets................ $5,617 $6,036 $5,232 $7,332 $7,856
====== ====== ====== ====== ======
Restructured loans............................. -- $ 582 -- -- --
====== ====== ====== ====== ======
Nonperforming loans to loans................... .85% 1.04% 1.03% 1.48% 1.80%
Nonperforming assets to loans plus OREO........ .98% 1.15% 1.15% 1.61% 2.03%
</TABLE>
The largest nonperforming loan at December 31, 1995 is a nonaccrual loan
secured by vacant land in the amount of $498,000. The borrower is in the process
of selling the vacant parcels for residential real estate construction. Proceeds
from the sale of lots are partially applied to the nonaccrual loan balance. The
composition of the remaining nonperforming loans primarily consists of loans
secured by local commercial real estate or residential real estate of which no
single loan exceeds $350,000. Other real estate owned primarily consists of
residential real estate. At December 31, 1995, the largest OREO property was a
residential property with a carrying value of $263,000.
22
<PAGE> 23
Restructured loans at December 31, 1994 consisted of two loans totaling
$582,000. The loans are currently in compliance with their modified terms and
are on full accrual status. In addition to the loans classified as nonperforming
at December 31, 1995 other loans with a total principal balance of approximately
$3.3 million were identified by management to be possible problem loans. While
these borrowers are in compliance with present repayment terms, their financial
conditions have caused management to believe that their loans may result in
classification as past due or nonaccrual loans at some future time. These loans
have been considered in the evaluation and recognition of impaired loans
described below.
At December 31, 1995, the Company has a tax-exempt obligation with a
carrying value of $351,000 (par value $450,000) which is currently in default as
to required interest payments. In 1992, the Company recorded a partial
write-down of $180,000 on this security due to a market value decline which was
deemed to be other than temporary. Interest income on this security is
recognized on a cash basis.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The allowance for loan losses is maintained at a level management believes
to be adequate to provide for known and potential risks inherent in the
Company's loan portfolio. On a quarterly basis, management assesses the adequacy
of the allowance for loan losses. Management's evaluation of the adequacy of the
allowance considers such factors as prior loss experience, loan delinquency
levels and trends, loan portfolio growth and reviews of impaired loans and the
value of underlying collateral securing these loans. A provision for loan losses
is charged to income to increase the allowance to a level deemed to be adequate,
but not excessive, based on management's evaluation. When a loan or a part
thereof is considered by management to be uncollectible, a charge is made
against the allowance. Recoveries of previously charged-off loans are credited
back to the allowance. The following table summarizes the changes in the
allowance for loan losses for the last five years (in thousands):
TABLE 8 ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................. $8,720 $7,655 $7,755 $5,127 $4,393
Allowance of acquired banks.................... -- 850 -- 1,598 --
------ ------ ------ ------ ------
Provision for loan losses...................... 200 90 500 650 1,475
------ ------ ------ ------ ------
Loans charged off:
Commercial and industrial.................... 348 100 571 444 474
Commercial real estate....................... 351 182 310 129 585
Construction................................. -- -- -- -- --
Residential real estate...................... 61 127 96 229 371
Home equity.................................. 52 23 18 11 43
Other consumer............................... 53 108 112 182 174
------ ------ ------ ------ ------
Total charge-offs......................... 865 540 1,107 995 1,647
------ ------ ------ ------ ------
Recoveries on loans previously charged off:
Commercial and industrial.................... 234 97 379 321 540
Commercial real estate....................... 36 477 35 903 265
Construction................................. -- -- -- -- --
Residential real estate...................... 111 43 32 55 3
Home equity.................................. -- -- -- -- --
Other consumer............................... 41 48 61 96 98
------ ------ ------ ------ ------
Total recoveries.......................... 422 665 507 1,375 906
------ ------ ------ ------ ------
Net charge-offs (recoveries).............. 443 (125) 600 (380) 741
------ ------ ------ ------ ------
Balance at end of period....................... $8,477 $8,720 $7,655 $7,755 $5,127
====== ====== ====== ====== ======
Net charge-offs (recoveries) to average
loans........................................ .08% (.03)% .13% (.09)% .19%
Allowance for loan losses to loans............. 1.49% 1.66% 1.68% 1.70% 1.33%
Allowance for loan losses to nonperforming
loans........................................ 175% 159% 163% 115% 74%
</TABLE>
For many years the Company has minimized credit risk by adhering to sound
underwriting and credit review policies. These policies are reviewed at least
annually, and changes are approved by the board of directors. Senior management
is actively involved in business development efforts and the maintenance and
monitoring of credit underwriting and approval. Loans and lines of credit over
$2 million are reviewed and
23
<PAGE> 24
approved by the executive committee of the Bank's board of directors. The
Company's loan review system and controls are designed to identify, monitor and
address asset quality problems in an accurate and timely manner. The Bank's loan
review committee meets monthly to assess delinquent and problem loans and
develop collection strategies to minimize potential loan losses. On a monthly
basis, the board of directors reviews the status of problem loans. In addition
to internal policies and controls, regulatory authorities and the Company's
independent auditors periodically review asset quality and the overall adequacy
of the allowance for loan losses as integral parts of their examinations.
The Company has generally recorded lower loan loss provisions over the past
three years due to improvements in loan quality, reductions in potential risks
associated with nonperforming loans and favorable net charge-off experience. The
loan loss provisions in 1992 and 1994 were also influenced by large recoveries
of previously charged-off commercial real estate loans. Excluding the large
recoveries, the Company's net charge-off ratios would have been .12% in 1992 and
.06% in 1994. While the amount of net charge-offs increased in 1995 versus 1994,
it is still relatively low when compared to the overall growth in the loan
portfolio and prior loss experience.
At December 31, 1995, the allowance for loan losses as a percentage of
loans was 1.49% compared to 1.66% at year-end 1994. The decrease in the level of
the allowance was primarily due to the growth in the loan portfolio since
December 31, 1994. As a percentage of nonperforming loans, the allowance
increased to 175% at December 31, 1995 compared to 159% at December 31, 1994.
The increase in the allowance coverage of nonperforming loans was due to the
reduction in the balance of nonperforming loans at December 31, 1995.
The following table sets forth an allocation of the Company's allowance for
loan losses for the last five years (in thousands):
TABLE 9 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES(1)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commercial and industrial...................... $2,077 $2,570 $2,905 $3,105 $2,477
Commercial real estate......................... 4,100 4,500 3,300 3,000 1,600
Construction................................... -- -- -- -- --
Residential real estate........................ 1,550 1,100 1,100 1,300 700
Home equity and other consumer................. 750 550 350 350 350
------ ------ ------ ------ ------
Total........................................ $8,477 $8,720 $7,655 $7,755 $5,127
====== ====== ====== ====== ======
</TABLE>
- - -------------------------
(1) See Table 5 for the percentage of each loan category to total loans.
At December 31, 1995, changes in the allocation of the allowance to
individual loan categories were primarily the result of the growth in loan
portfolios, changes in management's risk assessment and assignment of
unallocated reserves and the adoption of the new impaired loan accounting
standard. Notwithstanding management's allocation of the allowance, the entire
allowance for loan losses is available to absorb losses in any particular
category of loans.
Impaired Loans
In 1995 the Company adopted the provisions of Statement of Financial
Accounting Standards No. ("SFAS") 114, "Accounting by Creditors for Impairment
of a Loan" as amended by SFAS 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures". SFAS 114 requires the Company to
establish a valuation allowance when it is probable that all principal and
interest due under the contractual terms of a loan will not be collected. Under
the Company's impaired loan accounting policy, all loans, except for home equity
loans and other consumer loans, are subject to impairment recognition on a
quarterly basis. The Company generally considers most loans 90 days or more past
due and all nonaccrual loans to be impaired. Loan impairment is measured based
on the present value of expected future cash flows or the fair value of
collateral if the loan is collateral dependent. The new accounting method
differs from the
24
<PAGE> 25
Company's prior policy by requiring that a valuation allowance be established
for uncollectible interest in addition to the principal amounts of impaired
loans. The adoption of SFAS 114 and 118 did not have a material effect on the
Company's financial position or results of operations since the Company
historically established valuation allowances based on a problem loan's expected
cash flows or the fair value of underlying collateral.
The following table sets forth the recorded investment in impaired loans
and the related valuation allowance for each loan category as of December 31,
1995 (in thousands):
TABLE 10 IMPAIRED LOANS
<TABLE>
<CAPTION>
AMOUNT OF IMPAIRED LOANS
-----------------------------------
NO VALUATION VALUATION AMOUNT OF
ALLOWANCE ALLOWANCE VALUATION
REQUIRED REQUIRED TOTAL ALLOWANCE
------------ --------- ------ ---------
<S> <C> <C> <C> <C>
Commercial and industrial............................ $ 271 $ 796 $1,067 $ 285
Commercial real estate............................... 3,312 1,410 4,722 486
Residential real estate.............................. 1,104 134 1,238 51
------ ------ ------ ----
Total impaired loans............................... $4,687 $ 2,340 $7,027 $ 822
====== ====== ====== ====
</TABLE>
Of the total amount of impaired loans, $3,986,000 were measured using the
present value of expected future cash flows and $3,041,000 were measured based
on the fair value of collateral. The average recorded investment in impaired
loans for the year ended December 31, 1995 was approximately $7,357,000.
Interest income recognized on impaired loans totaled $311,000.
The amount of impaired loans is not directly comparable with the amount of
nonperforming loans previously disclosed in Table 7. The primary differences
between nonperforming loans and impaired loans are: i.) all loan categories are
considered in determining nonperforming loans while impaired loan recognition is
limited to commercial and industrial loans, commercial real estate loans and
residential real estate loans; and ii.) impaired loan recognition considers not
only loans 90 days or more past due and nonaccrual loans but also may include
possible problem loans other than delinquent loans. Included in the total
balance of impaired loans at December 31, 1995 were $334,000 of loans 90 days or
more past due and $3,423,000 of nonaccrual loans.
SECURITIES
The Company's overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types and
maturities of securities purchased are primarily based on the Company's current
and projected liquidity and interest rate sensitivity positions. The following
table sets forth the year-end carrying values of securities for the last three
years (in thousands):
TABLE 11 COMPOSITION OF SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
REMICs and CMOs........................ $121,695 29% $ 67,361 22% $105,916 37%
Pass-through obligations and pools..... 61,359 15 52,338 17 31,312 11
Adjustable-rate mortgage pools......... 93,198 22 86,541 28 52,737 18
State and municipal securities........... 97,807 24 60,190 20 63,455 22
Asset-backed securities.................. 34,511 8 31,278 10 31,469 11
Other securities......................... 7,045 2 10,580 3 4,414 1
-------- --- -------- --- -------- ---
Total securities.................... $415,615 100% $308,288 100% $289,303 100%
======== === ======== === ======== ===
</TABLE>
25
<PAGE> 26
Mortgage-backed securities consist of mortgage pass-through securities
directly or implicitly backed by the full faith and credit of the United States
government. A majority of mortgage-backed securities represent investments in
fixed-rate, current pay tranches of real estate mortgage investment conduits
("REMICs") and collateralized mortgage obligations ("CMOs"). Asset-backed
securities generally represent interests in pools of short-term loans or
receivables, such as auto, home equity and credit card loans. All asset-backed
securities are AAA rated bonds with weighted average maturities of one to four
years.
For the past three years the Company has emphasized investments in
fixed-rate and adjustable-rate mortgage-backed securities based on the relative
yield advantage of such securities over other investment alternatives with
similar maturity characteristics. At December 31, 1995, mortgage-backed
securities comprised 66% of total securities compared to 67% in 1994 and 66% in
1993. In 1993 and 1994 the Company diversified the mix and repricing
characteristics of the mortgage-backed portfolio by purchasing adjustable-rate
mortgage ("ARM") pools. As market interest rates increased throughout 1994, the
Company limited the purchases of fixed-rate CMOs and REMICs. The growth in
mortgage-backed pass-through obligations in 1994 reflects approximately $19
million of securities acquired with Midlothian. As market interest rates
stabilized in 1995, the Company shifted its emphasis back to fixed-rate CMOs and
REMICs with average lives ranging from three to six years. In 1995 the Company
also purchased a number of bank-qualified tax-exempt securities with maturities
primarily ranging from seven to 10 years.
In 1994 the Company adopted SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities". SFAS 115 requires that all debt and equity
securities be classified as held-to-maturity, available-for-sale or trading.
Securities the Company has the ability and intent to hold to maturity are
classified as held-to-maturity and are carried at amortized cost. Securities
that may be sold as part of liquidity management, interest rate risk strategies
or in response to or in anticipation of changes in interest rates and prepayment
risk, or for other similar factors, are classified as available-for-sale.
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report on the implementation of SFAS 115. As part of the
application of the Special Report, companies were allowed a one-time opportunity
to reclassify securities, including securities classified as held-to-maturity.
In accordance with the Special Report, the Company transferred all of its
taxable securities classified as held-to-maturity at December 31, 1995 to
available-for-sale. The transfer was made to provide greater flexibility in
managing the investment portfolio. At the date of transfer, the securities had
an aggregate market value of $207 million and an unrealized gain of $1.9
million. In the future the Company intends to classify taxable securities as
available-for-sale and tax-exempt securities as held-to-maturity. At December
31, 1995, $318 million or 77% of the securities portfolio was classified as
available-for-sale. The net unrealized gain on these securities was $2.7
million.
At December 31, 1995, concentrations of securities of a single issuer
consisted of investments in tax-exempt obligations issued by the Village of
Alsip. The amortized cost and market value of these securities were $8,611,000
and $9,140,000, respectively. In addition to securities, the Company has granted
tax-exempt loans to the Village of Alsip which totaled $4,806,000 at December
31, 1995. All securities and loans are secured by the general taxing authority
of the Village of Alsip except for $472,000 in securities which are secured
solely by revenue from certain real estate taxes. Some loans are further secured
by real estate or other marketable collateral. The Company has no other
securities of any one issuer, excluding mortgage-backed securities, that exceed
10% of shareholders' equity.
The maturities and average yields of the Company's securities as of
December 31, 1995, are presented in the following table. The balance and yield
of fixed-rate mortgage-backed securities and asset-backed securities are
presented based on current estimated principal cash flows of such securities. At
the time of acquisition, most mortgage-backed and asset-backed securities were
purchased with expected weighted average maturities of two to six years. The
balance and yield of ARM securities are presented in the "Within 1 Year"
maturity
26
<PAGE> 27
period since these securities reprice at least annually. Yields on state and
municipal securities are stated on a tax equivalent basis assuming a federal
income tax rate of 35% (in thousands):
TABLE 12 SECURITIES MATURITIES AND YIELDS
<TABLE>
<CAPTION>
MATURING
---------------------------------------------------------------
WITHIN AFTER 10
1 YEAR 1-5 YEARS 5-10 YEARS YEARS TOTAL
-------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
REMICs and CMOs..................... $ 21,482 $ 79,516 $ 10,877 $ 9,820 $121,695
6.02% 6.80% 6.72% 6.80% 6.65%
Pass-through obligations and
pools............................ 12,425 37,929 8,428 2,577 61,359
7.09% 6.80% 7.10% 7.00% 6.91%
Adjustable-rate mortgage pools...... 93,198 -- -- -- 93,198
6.33% 6.41%
Asset-backed securities............... 10,995 20,800 2,716 -- 34,511
6.68% 6.70% 6.60% 6.69%
State and municipal securities........ 9,291 27,322 56,320 4,874 97,807
9.57% 9.49% 8.25% 10.23% 8.82%
Other securities...................... 4,437 2,064 544 -- 7,045
6.90% 6.63% 6.83% 6.82%
-------- -------- ------- ------- --------
Total securities................. $151,828 $ 167,631 $ 78,885 $ 17,271 $415,615
6.59% 7.22% 7.85% 7.80% 7.13%
-------- -------- ------- ------- --------
</TABLE>
DEPOSITS
Funding of the Company's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Company
continues to focus its marketing strategies and emphasis on retail core
deposits, the major component of funding sources. The following table summarizes
the composition of major deposit categories for the last three years (in
thousands):
TABLE 13 COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits.......................... $161,400 18% $143,378 17% $124,553 17%
NOW accounts............................. 71,467 8 78,654 10 68,833 10
Money market deposits.................... 103,940 11 66,889 8 73,705 10
Savings deposits......................... 201,542 22 232,100 28 232,016 32
Time deposits............................ 376,943 41 302,569 37 228,278 31
-------- --- -------- --- -------- ---
Total deposits...................... $915,292 100% $823,590 100% $727,385 100%
======== === ======== === ======== ===
</TABLE>
At December 31, 1995, total deposits increased $92 million or 11% compared
to year-end 1994. The increase reflected strong internal growth, primarily in
the time deposit and money market account categories. Together these deposit
accounts increased $111 million in 1995. Approximately $50 million of the growth
resulted from a seven month, premium-rate certificate of deposit promotion
offered in March and April of 1995. At December 31, 1994, total deposits
increased $96 million or 13% compared to year-end 1993. The growth was
principally due to deposit funds provided from Midlothian.
27
<PAGE> 28
As previously discussed in the analysis of net interest income, the
composition of deposits has changed over the past three years. In 1994 and 1995
the deposit mix reflected a shift of funds from savings deposits to time
deposits. The shift was principally due to the widening of the interest rate
differential between savings and time deposits. While it has been the Company's
experience that savings deposits are relatively insensitive to changes in
interest rates, the Company believes that further shifting of savings may occur
based on the current level of interest rates offered on time deposits. The
potential shift of savings has been considered and incorporated in the Company's
asset/liability analysis and measurement of interest rate risk.
The following table sets forth the maturity distribution of time deposits
of $100,000 or more for the past three years (in thousands):
TABLE 14 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
3 months or less................................................. $35,001 $34,765 $28,724
Over 3 months but within 6 months................................ 19,967 12,779 8,867
Over 6 months but within 12 months............................... 14,663 8,094 7,925
Over 12 months................................................... 12,687 21,102 10,480
------- ------- -------
Total....................................................... $82,318 $76,740 $55,996
======= ======= =======
</TABLE>
SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to
repurchase and notes payable. Information relating to short-term borrowings for
the last three years is presented below (in thousands):
TABLE 15 SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
At December 31:
Securities sold under agreements to repurchase............. $47,002 $33,018 $25,904
Notes payable.............................................. -- 6,500 --
------- ------- -------
Total................................................... $47,002 $39,518 $25,904
======= ======= =======
Average interest rate................................... 3.88% 3.98% 1.05%
Maximum Outstanding at Any Month-end During the Year:
Securities sold under agreements to repurchase............. $51,553 $34,184 $30,662
Notes payable.............................................. 5,000 8,000 5,000
------- ------- -------
Total................................................... $56,553 $42,184 $35,662
======= ======= =======
Averages for the Year:
Securities sold under agreements to repurchase............. $41,749 $30,284 $23,944
Notes payable.............................................. 2,689 3,130 2,862
------- ------- -------
Total................................................... $44,438 $33,414 $26,806
======= ======= =======
Average interest rate................................... 4.16% 2.71% 1.71%
</TABLE>
Securities sold under agreements to repurchase primarily represent
borrowings originated as part of cash management services offered to corporate
customers. At December 31, 1995 these borrowings totaled $38.2 million and
matured in one day. The remaining balance of securities sold under agreements to
repurchase represents term repurchase agreements issued to customers that mature
within 90 days.
Notes payable represent borrowings by the Company to partially fund bank
acquisitions. At December 31, 1995, all notes were repaid. For more information
on acquisitions and borrowings, see "Note 2 -- Acquisition" and "Note 8 -- Notes
Payable" of the Notes to Consolidated Financial Statements included under Item 8
of this document.
28
<PAGE> 29
INTEREST RATE RISK
The Company seeks to maximize its net interest margin within an acceptable
level of interest rate risk. Interest rate risk can be defined as the amount of
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities.
A principal objective of the Company's asset/liability management effort is
to balance the various factors that generate interest rate risk, thereby
maintaining the interest rate sensitivity of the Company within acceptable risk
levels. To measure its interest rate sensitivity position, the Company utilizes
a simulation model that facilitates the forecasting of net interest income under
a variety of interest rate and growth scenarios. Simulation modeling is
performed over time horizons of one and two years. To manage interest rate risk,
the Company assesses its current risk position in light of interest rate
forecasts and develops and implements specific lending, funding and investment
strategies. Strategies are monitored and evaluated to determine if they achieve
the desired risk reduction objectives. The Company may also use derivative
financial instruments, including interest rate swaps, caps, floors, futures and
options, to manage interest rate risk. To date such instruments have not been
utilized.
The Company's asset/liability policy has established guidelines that limit
to 5% the amount of forecasted net interest income at risk over a twelve month
period, assuming a 300 basis point fluctuation in market interest rates. If the
projected change in net interest income is greater than 5%, management is
required to implement strategies to reduce this risk. At December 31, 1995, the
Company's forecast of interest rate risk indicated that its sensitivity to
changes in interest rates in a one-year period was less than 5%.
In the banking industry, a traditional measurement of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various time intervals. The following table sets forth the Company's interest
rate repricing gaps for selected maturity periods at December 31, 1995 (in
thousands):
TABLE 16 GAP TABLE
<TABLE>
<CAPTION>
RATE SENSITIVE PERIOD
---------------------------------------------------------
1-90 91-365 1-2 OVER
DAYS DAYS YEARS 2 YEARS TOTAL
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earning assets:
Loans
Fixed-rate.......................... $ 19,669 $ 46,572 $ 54,372 $333,375 $453,988
Variable-rate....................... 109,652 4,782 883 2,558 117,875
Securities
Fixed-rate (1)...................... 14,124 44,759 63,764 196,033 318,680
Variable-rate....................... 55,402 41,533 -- -- 96,935
Short-term investments................. 5,611 -- -- -- 5,611
-------- --------- -------- --------- ---------
Total earning assets................ 204,458 137,646 119,019 531,966 993,089
-------- --------- -------- --------- ---------
Interest-bearing liabilities:
Time deposits.......................... 108,956 192,335 40,060 35,592 376,943
Money market deposits.................. 103,940 -- -- -- 103,940
NOW accounts and savings deposits 6,600 19,800 20,000 226,609 273,009
(2).................................
Short-term borrowings.................. 47,002 -- -- -- 47,002
-------- --------- -------- --------- ---------
Total interest-bearing 266,498 212,135 60,060 262,201 800,894
liabilities.......................
-------- --------- -------- --------- ---------
Incremental asset (liability) gap...... $(62,040) $ (74,489) $ 58,959 $269,765 $192,195
======== ========= ======== ========= =========
Cumulative asset (liability) gap....... $(62,040) $(136,529) $(77,570) $192,195
======== ========= ======== =========
</TABLE>
- - -------------------------
(1) Maturity volumes of mortgage-backed and asset-backed securities are
reflected based on current estimated cash flows.
(2) Historically the Company's NOW accounts and savings deposits have been
relatively insensitive to interest rate changes. However, the Company
considers a portion of savings deposits to be rate sensitive based on
historical growth trends and management's expectations.
29
<PAGE> 30
While the gap analysis provides an indication of interest rate sensitivity,
experience has shown that it does not fully capture the true dynamics of
interest rate changes. Essentially, the analysis presents only a static
measurement of asset and liability volumes based on contractual maturity, cash
flow estimates or repricing opportunity. It fails to reflect the differences in
the timing and degree of repricing of assets and liabilities due to interest
rate changes. In analyzing interest rate sensitivity, management considers these
differences and incorporates other assumptions and factors, such as balance
sheet growth and prepayments, to better measure interest rate risk.
LIQUIDITY
Liquidity management in banking involves the ability to generate funds to
support asset growth and meet cash flow requirements of customers and other
obligations. Liquidity of Heritage Bank, is primarily maintained by daily
investments in federal funds sold, monthly cash flows from mortgage-backed and
asset-backed securities and maturities of other securities. At December 31,
1995, federal funds sold and securities having contractual maturities of one
year or less totaled $14 million. In addition to these funds, the Bank expects
to receive approximately $68 million of payments on mortgage-backed and
asset-backed securities over the next twelve months. These cash flow projections
are based on the consensus prepayment estimates of securities brokers. For the
three and twelve months ended December 31, 1995, the aggregate principal
payments received on these securities totaled approximately $14 million and $43
million, respectively.
The Bank's immediate liquidity needs have historically been met by federal
funds sold and cash flows from securities. Other sources of potential liquidity
include the sale of securities classified as available-for-sale, borrowings up
to $35 million under informal federal funds lines with correspondent banks and
advances under a $112 million credit facility with the Federal Home Loan Bank.
For the parent company, Heritage Financial Services, Inc.("HFS"), liquidity
means having cash available to pay shareholder dividends, to service debt and to
fund operating expenses. The ability of HFS to pay dividends, as well as fund
its operations and service debt, is dependent upon receipt of dividends from
Heritage Bank. Regulatory authorities limit the amount of dividends which can be
paid by Heritage Bank without prior approval from such authorities. At December
31, 1995, the amount of undistributed earnings of Heritage Bank available for
the payment of dividends within such limitations is more than adequate to fund
the anticipated cash requirements of HFS. For further discussion of Heritage
Bank's dividend restrictions and capital requirements, see "Note 15 -- Condensed
Financial Statements -- Parent Company" of the Notes to Consolidated Financial
Statements included under Item 8 of this document.
1996 ACQUISITION
On February 2, 1996, the Company acquired all of the issued and outstanding
shares of the First National Bank of Lockport ("Lockport") for $16.8 million in
cash. The acquisition was funded with $2.8 million in cash and borrowings of $14
million under a revolving line of credit facility with an unrelated financial
institution. The acquisition will be accounted for as a purchase and,
accordingly, the results of operations of Lockport will be included in the
consolidated financial statements beginning on the acquisition date. At December
31, 1995, Lockport had total assets of approximately $103 million. For more
information on the Company's credit facility, see "Note 8 -- Notes Payable" of
the Notes to Consolidated Financial Statements included under Item 8 of this
document.
CAPITAL
At December 31, 1995 total shareholders' equity increased to $96.8 million,
up $13.7 million or 16% from December 31, 1994. In 1994 shareholders' equity
increased $8.2 million or 11% compared with year-end 1993. The growth in equity
in both years reflects the retention of current year earnings, less dividends
paid, plus the proceeds from the exercise of stock options. The change in both
years also resulted from changes in the composition and market value of
securities available-for-sale. At December 31, 1995, shareholders' equity
included a net unrealized gain adjustment of $1.6 million compared to a net
unrealized loss of $2.1 million at year-end 1994.
30
<PAGE> 31
In 1995 the Company paid dividends of 44 cents per share, an increase of
22% over the 1994 annual dividend rate. On January 16, 1996, the board of
directors increased the annual dividend rate 18% to 52 cents per share, payable
quarterly at the rate of 13 cents per share. The dividend policy of the Company
is designed to balance the shareholder interest in current return with the need
to retain adequate capital to support future asset growth.
The capital ratios of the Company and Heritage Bank are presently in excess
of the requirements necessary to meet the "well capitalized" capital category
established by bank regulators. At December 31, 1995, the Company's consolidated
Tier 1 and total risk-based capital ratios were 13.41% and 14.66%, respectively.
The Company's leverage ratio at year-end was 7.75%. While the Company's
risk-based capital and leverage ratios will decline in 1996 as a result of the
acquisition of Lockport, its ratios will exceed the ratios required to be
considered "well capitalized".
Presently the Company has no commitments for material capital expenditures
other than the acquisition of Lockport described above. Management believes that
the Company has sufficient financing options available to satisfy or fund
commitments that may arise in the future.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is
effective for financial statements issued for fiscal years beginning after
December 15, 1995. SFAS 121 requires that long-lived assets and certain
identifiable intangibles that are used in operations be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets might not be recoverable. Management believes the adoption of SFAS 121
will not have a material effect on the Company's financial condition or results
of operations.
In May 1995, FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights", which is effective for fiscal years beginning after December 15, 1995.
SFAS 122 provides guidance on the accounting for mortgage servicing rights and
the evaluation and recognition of impairment of mortgage servicing rights.. The
provisions of SFAS 122 will not currently impact the Company since it sells
mortgage loans to investors on a servicing released basis.
In October 1995, FASB issued SFAS 123, "Accounting for Stock-Based
Compensation", which is effective for transactions entered into after December
31, 1995. The disclosure requirements of SFAS 123 are effective for financial
statements issued for fiscal years beginning after December 15, 1995, or for the
fiscal year for which the statement is initially adopted for recognizing
compensation costs. SFAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments based on the fair value of those instruments. The statement
also requires that companies with stock-based plans make detailed disclosures
about the plan and instrument terms and assumptions used in measuring the fair
value of stock-based grants. The Company will elect not to adopt the new fair
value accounting method in 1996. However the Company will expand its disclosure
of stock-based compensation plans and disclose pro forma data for new grants of
stock-based instruments.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 ,
----------------------
1995 1994
---------- --------
<S> <C> <C>
ASSETS
Cash and due from banks............................................... $ 44,268 $ 36,870
Federal funds sold and interest-bearing deposits...................... 5,611 49,286
---------- --------
Total cash and cash equivalents................................ 49,879 86,156
Securities:
Held-to-maturity (market value: $99,306 in 1995 and $228,416 in
1994)............................................................ 97,456 236,810
Available-for-sale (at market value)................................ 318,159 71,478
---------- --------
Total securities............................................... 415,615 308,288
Loans, net of unearned income......................................... 569,494 524,815
Less: allowance for loan losses..................................... (8,477) (8,720)
---------- --------
Net loans...................................................... 561,017 516,095
Premises and equipment................................................ 16,304 17,079
Goodwill and core deposit intangibles................................. 13,554 15,080
Other assets.......................................................... 9,999 10,152
---------- --------
Total assets................................................... $1,066,368 $952,850
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits....................................................... $ 161,400 $143,378
NOW accounts.......................................................... 71,467 78,654
Money market accounts................................................. 103,940 66,889
Savings deposits...................................................... 201,542 232,100
Time deposits......................................................... 376,943 302,569
---------- --------
Total deposits................................................. 915,292 823,590
Securities sold under agreements to repurchase........................ 47,002 33,018
Notes payable......................................................... -- 6,500
Other liabilities..................................................... 7,291 6,631
---------- --------
Total liabilities.............................................. 969,585 869,739
---------- --------
Shareholders' Equity
Preferred shares -- no par value; shares authorized: 12,000,000;
shares issued: none.............................................. -- --
Common shares -- $.625 par value; shares authorized: 16,000,000;
shares issued: 7,939,359 in 1995 and 7,915,972 in 1994........... 4,962 4,947
Surplus............................................................. 17,499 17,385
Retained earnings................................................... 72,681 62,879
Net unrealized gains (losses) on securities, net of tax............. 1,641 (2,100)
---------- --------
Total shareholders' equity..................................... 96,783 83,111
---------- --------
Total liabilities and shareholders' equity..................... $1,066,368 $952,850
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees................................... $48,156 $41,200 $38,453
Securities:
Taxable.............................................. 18,881 13,151 12,021
Exempt from federal income taxes..................... 4,445 3,881 3,864
Federal funds sold and interest-bearing deposits........ 2,378 1,926 921
------- ------- -------
TOTAL INTEREST INCOME................................ 73,860 60,158 55,259
------- ------- -------
INTEREST EXPENSE
Deposits................................................ 31,516 21,209 20,663
Securities sold under agreements to repurchase.......... 1,661 710 338
Notes payable........................................... 187 197 121
------- ------- -------
TOTAL INTEREST EXPENSE............................... 33,364 22,116 21,122
------- ------- -------
NET INTEREST INCOME.................................. 40,496 38,042 34,137
Provision for loan losses................................. 200 90 500
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................. 40,296 37,952 33,637
------- ------- -------
OTHER INCOME
Service charges on deposit accounts..................... 4,097 3,832 3,860
Income for trust services............................... 737 707 681
Investment product fees................................. 909 939 522
Other operating income.................................. 1,005 997 1,021
Securities gains........................................ 223 12 17
------- ------- -------
TOTAL OTHER INCOME................................... 6,971 6,487 6,101
------- ------- -------
OTHER EXPENSE
Salaries and employee benefits.......................... 15,146 14,373 13,234
Net occupancy expense................................... 2,618 2,395 2,153
Equipment expense....................................... 1,569 1,550 1,384
Federal deposit insurance premiums...................... 958 1,683 1,539
Data processing expense................................. 817 750 775
Amortization of intangible assets....................... 1,613 1,374 1,113
Other operating expenses................................ 4,949 4,093 4,022
------- ------- -------
TOTAL OTHER EXPENSE.................................. 27,670 26,218 24,220
------- ------- -------
INCOME BEFORE INCOME TAXES........................... 19,597 18,221 15,518
Income tax expense........................................ 6,303 5,804 4,493
------- ------- -------
NET INCOME........................................... $13,294 $12,417 $11,025
======= ======= =======
NET INCOME PER COMMON SHARE:
Primary................................................. $1.60 $1.50 $1.34
Fully diluted........................................... $1.60 $1.50 $1.34
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Primary................................................. 8,309,004 8,284,833 8,224,105
Fully diluted........................................... 8,330,164 8,287,851 8,252,102
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET
UNREALIZED
PREFERRED COMMON RETAINED GAINS (LOSSES)
SHARES SHARES SURPLUS EARNINGS ON SECURITIES TOTAL
--------- ------ ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993............. -- $4,896 $16,746 $ 44,790 $66,432
Net income......................... -- -- -- 11,025 11,025
Cash dividends ($.32 per share).... -- -- -- (2,506) (2,506)
------- ------ ------- ------- -------- -------
BALANCE, DECEMBER 31, 1993........... -- 4,896 16,746 53,309 74,951
Adoption of SFAS No. 115, net of
related taxes of $124........... -- -- -- -- $ 187 187
Net income......................... -- -- -- 12,417 -- 12,417
Cash dividends ($.36 per share).... -- -- -- (2,847) -- (2,847)
Common shares issued upon exercise
of stock options................ -- 51 639 -- -- 690
Change in net unrealized gains
(losses) on securities, net of
related taxes of $(1,508)....... -- -- -- -- (2,287) (2,287)
------- ------ ------- ------- -------- -------
BALANCE, DECEMBER 31, 1994........... -- 4,947 17,385 62,879 (2,100) 83,111
Net income......................... -- -- -- 13,294 -- 13,294
Cash dividends ($.44 per share).... -- -- -- (3,492) -- (3,492)
Common shares issued upon exercise
of stock options................ -- 15 114 -- -- 129
Change in net unrealized gains
(losses) on securities, net of
related taxes of $2,468......... -- -- -- -- 3,741 3,741
------- ------ ------- -------- -------- -------
BALANCE, DECEMBER 31, 1995........... -- $4,962 $17,499 $ 72,681 $ 1,641 $96,783
======= ====== ======= ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................... $ 13,294 $12,417 $ 11,025
Adjustments to reconcile net income to net cash provided by
operating activities:
Discount accretion on securities........................ (978) (843) (875)
Deferred loan fee accretion............................. (311) (325) (250)
Provision for loan losses............................... 200 90 500
Securities gains........................................ (223) (12) (17)
Depreciation and amortization........................... 1,690 1,634 1,501
Deferred income taxes................................... (464) (659) (545)
Net amortization of purchase accounting adjustments..... 2,085 1,751 1,857
(Increase) decrease in accrued interest income.......... (1,249) 400 584
Increase (decrease) in accrued interest expense......... 703 365 (121)
Other, net.............................................. (459) 87 (1,335)
--------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 14,288 14,905 12,324
--------- -------- ---------
INVESTING ACTIVITIES
Securities held-to-maturity:
Proceeds from maturities, repayments and calls............ 51,333 44,407 153,717
Purchases................................................. (114,787) (70,754) (171,759)
Securities available-for-sale:
Proceeds from maturities, repayments and calls............ 14,391 43,875 --
Proceeds from sales....................................... 7,962 4,920 --
Purchases................................................. (58,834) (14,556) --
Net (increase) decrease in loans............................. (45,985) 3,107 (1,491)
Purchases of premises and equipment.......................... (1,288) (1,255) (1,607)
Proceeds from the sale of premises and equipment............. 29 249 --
Proceeds from sales of other real estate owned............... 645 617 545
Cash and cash equivalents of acquisition less than the
purchase price............................................ -- (11,509) --
--------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (146,534) (899) (20,595)
--------- -------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW and money
market accounts and savings deposits...................... 17,328 (37,287) 22,548
Net increase (decrease) in time deposits..................... 74,520 34,476 (23,945)
Net increase in securities sold under agreements to
repurchase................................................ 13,984 7,114 9,220
Proceeds from notes payable.................................. -- 8,000 --
Principal payments on notes payable.......................... (6,500) (1,500) (5,000)
Proceeds from stock option exercises......................... 129 690 --
Dividends paid............................................... (3,492) (2,847) (2,506)
--------- -------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.......... 95,969 8,646 317
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (36,277) 22,652 (7,954)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................. 86,156 63,504 71,458
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................... $ 49,879 $86,156 $ 63,504
========= ======== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid................................................ $ 32,807 $21,546 $ 21,419
Income taxes paid............................................ 7,005 6,469 5,470
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Securities transferred from held-to-maturity to
available-for-sale........................................ $205,290 $ -- $ --
Loans transferred to other real estate owned................. 735 534 310
Loans made in connection with the disposition of other real
estate owned.............................................. -- 1,634 --
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and conform to prevailing practices
within the banking industry. The significant accounting and reporting policies
of Heritage Financial Services, Inc. and subsidiaries are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Heritage
Financial Services, Inc. and its wholly-owned subsidiaries, Heritage Bank (the
"Bank") and Heritage Trust Company (collectively, the "Company"). Significant
intercompany accounts and transactions are eliminated in consolidation. Certain
amounts in the 1994 and 1993 consolidated financial statements have been
reclassified to conform to the 1995 presentation.
NATURE OF OPERATIONS
The Company is a bank holding company which provides a full range of
banking and trust services to individuals and business customers located in the
southwest metropolitan Chicago market. The Company's primary business is the
extension of credit to commercial, real estate and consumer loan customers in
its market area. Funding of the Company's assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Company
encounters significant competition for loans and deposits from other financial
institutions and non-bank companies. The Company is regulated by federal and
state banking agencies and undergoes periodic examinations by those agencies.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
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 as of the date of the financial
statements, as well as the reported amounts of income and expenses during the
reported periods. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows in the Statements of Cash Flows, cash
and cash equivalents include cash and due from banks, federal funds sold and
interest-bearing deposits at other institutions. Generally, federal funds are
sold for one-day periods and interest-bearing deposits generally mature in 90
days or less. Included in the 1994 Statement of Cash Flows is the cash portion
of an acquisition, net of cash and cash equivalents acquired. In connection with
the acquisition, the Company acquired assets with an aggregate fair value of
$116,140,000 and assumed deposits and other liabilities of $99,668,000.
INVESTMENT SECURITIES
In 1994 the Company adopted Statement of Financial Accounting Standards No.
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities". SFAS 115 requires that all debt and equity securities be classified
as held-to-maturity, available-for-sale or trading. Securities the Company has
the ability and intent to hold to maturity are classified as held-to-maturity
and are carried at amortized cost. Securities that may be sold as part of
liquidity management, interest rate risk strategies or in response to or in
anticipation of changes in interest rates and prepayment risk, or for other
similar factors, are classified as available-for-sale. Unrealized gains and
losses, net of tax, on securities available-for-sale are reported as a net
amount in a separate category of shareholders' equity. The amortization of
premiums and accretion of discounts are recognized as adjustments to interest
income in a manner which approximates the level yield
36
<PAGE> 37
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
method. Realized gains and losses on securities sold are computed based on the
adjusted cost of the specific securities sold.
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report on the implementation of SFAS 115. As part of the
application of the Special Report, companies were allowed a one-time opportunity
to reclassify securities, including securities classified as held-to-maturity.
In accordance with the Special Report, the Company transferred all of its
taxable securities classified as held-to-maturity at December 31, 1995 to
available-for-sale. At the date of transfer, the securities had an aggregate
market value of $207 million and an unrealized gain of $1,928,000. In the future
the Company intends to classify taxable securities as available-for-sale and
tax-exempt securities as held-to-maturity.
LOANS
Interest income on nondiscounted loans is recognized based upon the
principal amount outstanding during the period. Interest income on discounted
loans is recognized based on methods that approximate a level yield. The accrual
of interest income is discontinued when it appears that future collection of
principal or interest in accordance with contractual terms may be doubtful. When
a loan is placed on nonaccrual status, interest previously accrued and deemed
uncollectible is reversed and charged against current year income. Interest
income on nonaccrual loans is recognized on a cash basis. Loan origination fees
in excess of incremental direct costs are deferred and recognized over the term
of the loan using the level yield method.
IMPAIRED LOANS
As of January 1, 1995, the Company adopted the provisions of SFAS 114,
"Accounting by Creditors for Impairment of a Loan" as amended by SFAS 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". SFAS 114 requires the Company to establish a valuation allowance
when it is probable that all the principal and interest due under the
contractual terms of a loan will not be collected. Under the Company's impaired
loan accounting policy, all loans, except for home equity loans and other
consumer loans, are subject to impairment recognition on a quarterly basis. The
Company generally considers most loans 90 days or more past due and all
nonaccrual loans to be impaired. Loan impairment is measured based on the
present value of expected future cash flows or the fair value of collateral if
the loan is collateral dependent.
Interest income on impaired loans is recognized in a manner consistent with
prior income recognition policies. For all impaired loans other than nonaccrual
loans, interest income is recorded on an accrual basis. Interest income on
nonaccrual loans is recognized on a cash basis. The adoption of SFAS 114 and
SFAS 118 did not have a material effect on the Company's financial position or
results of operations since the Company has historically established valuation
allowances based on a problem loan's expected cash flows or the fair value of
underlying collateral.
SFAS 114 changed the definition of in-substance foreclosures ("ISFs").
Under SFAS 114, ISF recognition is limited to circumstances in which the debtor
surrenders collateral to the creditor and the creditor receives physical
possession of the collateral. The Company adopted a new definition concurrent
with the adoption of the other provisions of SFAS 114. At December 31, 1994, the
Company had no ISFs and therefore no reclassification adjustments were made to
those financial statements.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is an amount which is available to absorb
potential credit losses. The allowance is maintained at a level management
believes to be adequate to provide for known and potential risks inherent in the
Company's loan portfolio. Management's quarterly evaluation of the adequacy of
the allowance considers such factors as prior loss experience, loan delinquency
levels and trends, loan portfolio
37
<PAGE> 38
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
growth and reviews of impaired loans and the underlying collateral securing
these loans. A provision for loan losses is charged to income to increase the
allowance to a level deemed to be adequate, but not excessive, based on
management's evaluation. When a loan or a part thereof is considered by
management to be uncollectible, a charge is made against the allowance.
Recoveries of previously charged off loans are credited back to the allowance.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization have been computed principally
using the straight-line method. Rates of depreciation are generally based on the
following useful lives: building -- 40 to 50 years; building improvements,
furniture and equipment -- 3 to 15 years.
OTHER REAL ESTATE OWNED
Other real estate owned represents properties acquired through foreclosure
or deed in lieu of foreclosure. These properties are recorded at the lower of
the book value of the loan or fair value, less estimated costs to sell. The
excess, if any, of the loan amount over fair value is charged to the allowance
for loan losses. Subsequent declines in the fair value of other real estate
owned, along with related operating expenses, are charged to other operating
expenses.
INTANGIBLE ASSETS
The net assets of subsidiaries acquired in purchase transactions have been
recorded at fair value at the acquisition date. The values of the acquired
deposit base intangibles recognized in purchase transactions are being amortized
on a straight-line basis over periods ranging from 5 to 8 years. Goodwill,
representing the cost in excess of the fair value of net assets acquired, is
being amortized on a straight-line basis over periods ranging from 15 to 25
years. Management reviews intangible assets for possible impairment if there is
a significant event that detrimentally affects operations. Impairment is
measured by comparing the carrying amount of intangibles to the current and
estimated future net income of businesses acquired.
INCOME TAXES
The Company files consolidated federal and state income tax returns.
Accordingly, no income tax is applicable to the dividends received by Heritage
Financial Services, Inc. from its subsidiaries. Deferred tax assets and
liabilities are recorded based on the expected tax effect of future taxable
income or deductions resulting from differences in the financial statement and
tax bases of assets and liabilities and the expected tax effect of carryforwards
for tax purposes.
EARNINGS PER SHARE
Primary and fully diluted earnings per common share are computed by
dividing net income by the weighted average number of common shares outstanding
and common equivalent shares assumed to be issued under the Company's stock
option plan. Common share equivalents attributable to stock options are computed
based on the treasury stock method.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument is a futures, forward, swap, or option
contract, or other financial instrument with similar characteristics. At
December 31, 1995, the Company's derivative financial instruments were limited
to fixed-rate and variable-rate loan commitments.
38
<PAGE> 39
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In March, 1995, FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is
effective for financial statements issued for fiscal years beginning after
December 15, 1995. SFAS 121 requires that long-lived assets and certain
identifiable intangibles that are used in operations be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets might not be recoverable. Management believes the adoption of SFAS 121
will not have a material effect on the Company's financial condition or results
of operations.
In May, 1995, FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights", which is effective for fiscal years beginning after December 15, 1995.
SFAS 122 provides guidance on the accounting for mortgage servicing rights and
the evaluation and recognition of impairment of mortgage servicing rights. The
provisions of SFAS 122 will not currently impact the Company since it sells
mortgage loans to investors on a servicing released basis.
In October, 1995, FASB issued SFAS 123, "Accounting for Stock-Based
Compensation", which is effective for transactions entered into after December
31, 1995. The disclosure requirements of SFAS 123 are effective for financial
statements issued for fiscal years beginning after December 15, 1995, or for the
fiscal year for which the statement is initially adopted for recognizing
compensation costs. SFAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments based on the fair value of those instruments. The statement
also requires that companies with stock-based plans make detailed disclosures
about the plan and instrument terms and assumptions used in measuring the fair
value of stock-based grants. The Company will elect not to adopt the new fair
value accounting method in 1996. However the Company will expand its disclosure
of stock-based compensation plans and disclose pro forma data for new grants of
stock-based instruments.
NOTE 2 -- ACQUISITION
In July, 1994, the Company acquired all of the issued and outstanding
shares of Midlothian State Bank for $16,545,000 in cash. The acquisition was
funded with cash and borrowings of $8,000,000 under a revolving line of credit
facility. The acquisition was accounted for as a purchase and, accordingly, the
results of operations of Midlothian State Bank were included in the consolidated
financial statements beginning on the acquisition date.
The following unaudited pro forma results of operations assume that the
Midlothian State Bank acquisition had occurred at the beginning of each period
presented. In addition to combining the historical results of Midlothian State
Bank and the Company, the pro forma results include adjustments for the
estimated effect of purchase accounting, interest on borrowed funds and the
earning asset impact of cash used to fund a portion of the purchase price. The
pro forma information is not necessarily indicative of the results which would
have occurred if the acquisitions had been in effect in 1994 and 1993 (in
thousands, except earnings per share):
<TABLE>
<CAPTION>
Pro Forma Data 1994 1993
------- -------
<S> <C> <C>
Net interest income................................................ $40,611 $39,592
Net income......................................................... 12,377 11,572
Net income per share............................................... 1.49 1.40
</TABLE>
39
<PAGE> 40
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- CASH AND DUE FROM BANKS
The Company's banking subsidiary is required to maintain vault cash and
non-interest-bearing balances with the Federal Reserve Bank to satisfy reserve
requirements. The average reserve requirement balances for the years ended
December 31, 1995 and 1994 were $15,353,000 and $13,713,000, respectively.
NOTE 4 -- SECURITIES
The amortized cost and estimated market values of securities
held-to-maturity are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
State and municipal obligations................... $ 97,456 $2,184 $ (334) $ 99,306
======== ====== ======= ========
DECEMBER 31, 1994
U.S. Treasury and governmental agencies........... $ 1,701 $ -- $ (30) $ 1,671
State and municipal obligations................... 59,875 764 (344) 60,295
Mortgage-backed securities:
REMICs and CMOs................................ 52,916 -- (3,528) 49,388
Adjustable rate mortgage pools................. 47,939 -- (1,900) 46,039
Pass-through obligations and pools............. 41,630 285 (2,325) 39,590
Asset-backed securities........................... 31,278 11 (1,308) 29,981
Other securities.................................. 1,471 -- (19) 1,452
-------- ------ ------- --------
Total.......................................... $ 236,810 $1,060 $ (9,454) $228,416
======== ====== ======= ========
</TABLE>
The amortized cost and estimated market values of securities
available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
U.S. Treasury and governmental agencies........... $ 2,002 $ 9 $ -- $ 2,011
State and municipal obligations................... 270 81 -- 351
Mortgage-backed securities:
REMICs and CMOs................................ 120,858 1,471 (634) 121,695
Adjustable rate mortgage pools................. 92,041 1,318 (161) 93,198
Pass-through obligations and pools............. 60,788 994 (423) 61,359
Asset-backed securities........................... 34,445 253 (187) 34,511
Other securities.................................. 5,030 4 -- 5,034
-------- ------ ------- --------
Total.......................................... $ 315,434 $4,130 $ (1,405) $318,159
======== ====== ======= ========
DECEMBER 31, 1994
U.S. Treasury securities.......................... $ 4,912 $ -- $ (16) $ 4,896
State and municipal obligations................... 270 45 -- 315
Mortgage-backed securities:
REMICs and CMOs................................ 14,976 46 (577) 14,445
Adjustable rate mortgage pools................. 39,312 35 (745) 38,602
Pass-through obligations and pools............. 11,320 12 (624) 10,708
Other securities.................................. 2,512 -- -- 2,512
-------- ------ ------- --------
Total.......................................... $ 73,302 $ 138 $ (1,962) $ 71,478
======== ====== ======= ========
</TABLE>
40
<PAGE> 41
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities with carrying values of $141,153,000 and $125,155,000 at
December 31, 1995 and 1994, respectively, were pledged principally to secure
public fund deposits and securities sold under agreements to repurchase.
Proceeds from the sale of securities available-for-sale were $7,962,000 in
1995 and $4,920,000 in 1994. In 1995 gross gains from these sales were $177,000.
In 1994 no gains or losses were recognized on securities sales since the
amortized cost of the securities equaled the market value at the time of sale.
In 1995 calls of securities resulted in gross gains of $47,000 and gross losses
of $1,000. In 1994 calls of securities resulted in gross gains of $12,000. In
1993 calls of securities resulted in gross gains of $25,000 and gross losses of
$8,000. Income tax expense recognized on net securities gains was $93,000 in
1995, $5,000 in 1994 and $7,000 in 1993.
The following table summarizes the contractual maturities of securities
held-to-maturity and available-for-sale at December 31, 1995. Expected
maturities may differ from contractual maturities because certain issuers have
the right to call or prepay these obligations without penalties. The stated
maturities of mortgage-backed and asset-backed securities are presented in total
since the principal cash flows of these securities are not received at a single
maturity date (in thousands):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- --------
<S> <C> <C>
HELD-TO-MATURITY:
Due in one year or less............................................... $ 7,363 $ 7,448
Due after one year through five years................................. 27,771 28,557
Due after five years through ten years................................ 55,218 55,704
Due after ten years................................................... 7,104 7,597
-------- --------
Total held-to-maturity............................................. $ 97,456 $ 99,306
======== ========
AVAILABLE-FOR-SALE:
Due in one year or less............................................... $ 4,937 $ 4,937
Due after one year through five years................................. 1,552 1,564
Due after five years through ten years................................ 543 544
Due after ten years................................................... 270 351
-------- --------
Subtotal........................................................... 7,302 7,396
Mortgage-backed securities............................................ 273,687 276,252
Asset-backed securities............................................... 34,445 34,511
-------- --------
Total available-for-sale........................................... $ 315,434 $318,159
======== ========
</TABLE>
41
<PAGE> 42
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- LOANS
The following table summarizes loan balances by category as of December 31,
1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Commercial and industrial............................................... $130,508 $124,351
Commercial real estate.................................................. 145,080 142,833
Construction............................................................ 8,645 6,096
Residential real estate................................................. 200,323 162,246
Home equity............................................................. 73,525 72,394
Other consumer.......................................................... 13,782 20,078
-------- --------
Gross loans........................................................... 571,863 527,998
Less: unearned income................................................... (2,369) (3,183)
-------- --------
Loans, net of unearned income......................................... $569,494 $524,815
======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
$3,919,000 and $4,272,000 at December 31, 1995 and 1994, respectively. If
interest on those loans had been accrued at their original terms, such income
would approximate $197,000 in 1995 and $172,000 in 1994. The amount of interest
accrued on these loans and included in interest income was $71,000 in 1995 and
$96,000 in 1994. Restructured loans in compliance with their modified terms were
zero at December 31, 1995 and $582,000 at December 31, 1994.
Real estate loans with carrying values of $12,863,000 and $9,842,000 at
December 31, 1995 and 1994, respectively, were pledged to secure public fund
deposits.
Certain directors and executive officers of the Company and companies with
which they are affiliated have obtained loans from the Bank on various
occasions. All loans and loan commitments have been made in the ordinary course
of business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons. The aggregate balance of these loans was $10,134,000 at
December 31, 1995 and $12,541,000 at December 31, 1994. During 1995, $6,849,000
of new loans were made and repayments were $9,256,000.
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The changes in the allowance for loan losses for the years ended December
31, 1995, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year........................................ $8,720 $7,655 $7,755
Allowance of acquired bank...................................... -- 850 --
Provision for loan losses....................................... 200 90 500
Loan charge-offs................................................ (865) (540) (1,107)
Loan recoveries................................................. 422 665 507
------ ------ ------
Balance, end of year.............................................. $8,477 $8,720 $7,655
====== ====== ======
</TABLE>
42
<PAGE> 43
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the recorded investment in impaired loans
and the related valuation allowance for each loan category as of December 31,
1995 (in thousands):
<TABLE>
<CAPTION>
AMOUNT OF IMPAIRED LOANS
-------------------------------------
NO VALUATION VALUATION AMOUNT OF
ALLOWANCE ALLOWANCE VALUATION
REQUIRED REQUIRED TOTAL ALLOWANCE
------------ --------- ------ ---------
<S> <C> <C> <C> <C>
Commercial and industrial........................ $ 271 $ 796 $1,067 $ 285
Commercial real estate........................... 3,312 1,410 4,722 486
Residential real estate.......................... 1,104 134 1,238 51
------ ------ ------ ----
Total impaired loans........................... $4,687 $ 2,340 $7,027 $ 822
====== ====== ====== ====
</TABLE>
At December 31, 1995, $3,423,000 of nonaccrual loans were included in the
total balance of impaired loans. Of the total amount of impaired loans,
$3,986,000 were measured using the present value of expected future cash flows
and $3,041,000 were measured based on the fair value of collateral. The average
recorded investment in impaired loans for the year ended December 31, 1995, was
approximately $7,357,000. Interest income recognized on impaired loans in 1995
totaled $311,000.
NOTE 7 -- PREMISES AND EQUIPMENT
The following is a summary of the Company's premises and equipment as of
December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Land................................................................... $ 4,613 $ 4,786
Buildings and improvements............................................. 15,957 16,023
Furniture and equipment................................................ 14,401 13,456
-------- --------
Total cost........................................................ 34,971 34,265
Less: accumulated depreciation and amortization........................ (18,667) (17,186)
-------- --------
Premises and equipment, net....................................... $ 16,304 $ 17,079
======== ========
</TABLE>
The Company leases certain banking facilities under noncancelable operating
leases which expire on various dates from 1996 through 2000. The leases contain
renewal options for varying terms expiring between 2001 through 2007 and require
the payment of property taxes, insurance and related expenses. The Company also
leases certain equipment under cancelable and noncancelable leases with terms of
up to three years. Total rent expense under operating leases amounted to
$234,000 in 1995, $224,000 in 1994, and $189,000 in 1993. Aggregate amounts of
minimum rental commitments under noncancelable operating leases are $518,000 and
for each of the years subsequent to December 31, 1995, are $141,000 (1996),
$138,000 (1997), $136,000 (1998), $72,000 (1999), and $31,000 (2000).
NOTE 8 -- NOTES PAYABLE
Notes payable, which were repaid in 1995, represented borrowings under a
$15 million unsecured revolving line of credit. At December 31, 1994, the
weighted average interest rate of notes payable was 6.96%. In December, 1995,
the Company entered into a new $20 million unsecured revolving line of credit
established with an unrelated financial institution. Borrowings under the line
will be structured as revolving notes and bear interest at either prime floating
or may, at the Company's option, be fixed at 1% above the London Interbank
Offered Rate (LIBOR) for terms up to one year. Periodic interest payments will
be required on revolving notes. Under the loan agreement, any unpaid principal
balance of revolving notes as of January 1, 1998 will be converted into a term
loan. The Company will be required to make quarterly principal reductions
beginning January 1, 1998.
43
<PAGE> 44
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- COMMON AND PREFERRED SHARES
In 1987 shareholders authorized 12,000,000 no par value preferred shares.
The preferred shares may be issued in one or more series by the Board of
Directors, which has been given the authority to establish or change the number
of shares of each series, fix the designation and relative powers, preferences
and rights and restrictions. At December 31, 1995 and 1994 there were no
preferred shares issued.
In March, 1993, the Company filed a Registration Statement on Form S-8
registering 959,000 common shares for issuance pursuant to the Company's stock
option plans. Common shares issued pursuant to the exercise of stock options
totaled 23,387 in 1995 and 81,700 in 1994. In 1993 no common shares were issued
for stock option exercises.
NOTE 10 -- STOCK OPTION PLANS
In April, 1991, shareholders approved the 1990 Executive Equity Incentive
Plan ("the Plan") which provides for the grant to certain officers and key
employees of the Company of incentive and non-qualified stock options, tandem
stock appreciation rights, stand-alone stock appreciation rights and limited
stock appreciation rights, with respect to not more than 450,000 common shares.
The Plan replaced the 1987 Stock Option Plan ("Prior Plan") for grants of stock
options after September, 1990. The Prior Plan provided for options of up to
750,000 common shares. Options outstanding under the Prior Plan retain the terms
as set forth at the time such options were granted. The Plan and the Prior Plan
("Option Plans") are administered by a Committee of the Board of Directors.
The exercise prices of stock options granted under Option Plans were equal
to the market prices on the dates of grant, and each such option has a maximum
duration of ten years. Each option generally becomes exercisable in up to four
annual installments, commencing one year from the date of grant.
At December 31, 1995 and 1994 there were outstanding options for the
purchase of 710,463 and 723,550 shares, respectively, with exercise prices
ranging from $5.55 to $16.50 per share in 1995 and $5.55 to $16.25 per share in
1994. In 1995 options for 10,300 shares were granted at an exercise price of
$16.50, and in 1994 options for 60,700 shares were granted at an exercise price
of $16.25. In 1995 options for 23,387 shares were exercised at prices ranging
from $5.55 to $6.40. In 1994 options for 81,700 shares were exercised at prices
ranging from $5.55 to $13.50. In 1994 options for 12,450 shares with exercise
prices ranging from $6.75 to $13.50 were canceled. At December 31, 1995 and
1994, options for 607,688 and 560,750 shares, respectively, were exercisable at
prices ranging from $5.55 to $16.25 per share in 1995 and $5.55 to $13.50 per
share in 1994.
NOTE 11 -- PROFIT SHARING PLAN
The Company and its subsidiaries have a noncontributory profit sharing plan
which covers substantially all employees who meet certain age and employment
requirements. The contribution to the plan is made in accordance with a
resolution passed by the Board of Directors. Charges to expense with respect to
the plan for the years ended December 31, 1995, 1994 and 1993 amounted to
$940,000, $1,211,000 and $989,000, respectively.
44
<PAGE> 45
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1995, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current:
Federal......................................................... $5,370 $5,078 $3,908
State........................................................... 1,397 1,385 1,130
------ ------ ------
Total current................................................ 6,767 6,463 5,038
------ ------ ------
Deferred:
Federal......................................................... (439) (598) (522)
State........................................................... (25) (61) (23)
------ ------ ------
Total deferred............................................... (464) (659) (545)
------ ------ ------
Total income tax expense..................................... $6,303 $5,804 $4,493
====== ====== ======
</TABLE>
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate for the years ended December 31, 1995, 1994 and 1993 is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate.................................. 35% 35% 35%
Tax-exempt interest income, less disallowed interest expense.......... (8) (8) (11)
Federal tax benefit on state income taxes............................. (3) (3) (3)
Amortization of goodwill.............................................. 1 1 1
-- -- --
Federal income tax effective rate..................................... 25% 25% 22%
State income tax effective rate....................................... 7 7 7
-- -- --
Total effective income tax rate.................................. 32% 32% 29%
== == ==
</TABLE>
The tax effects of temporary differences which comprise the significant
portions of the Company's deferred tax assets and deferred tax liabilities as of
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.............................................. $ 3,283 $ 3,181
Net unrealized losses on securities.................................... -- 1,384
Loan fees.............................................................. 438 676
State net operating loss carryforward.................................. 273 317
Compensation expense................................................... 513 459
Other.................................................................. 251 223
------- -------
4,758 6,240
------- -------
Deferred tax liabilities:
Purchase accounting adjustments........................................ (2,259) (2,777)
Net unrealized gains on securities..................................... (1,084) --
Depreciation........................................................... (50) (94)
Other.................................................................. (1) (2)
------- -------
(3,394) (2,873)
------- -------
Net deferred tax assets............................................. $ 1,364 $ 3,367
======= =======
</TABLE>
No valuation allowances were established at December 31, 1995 and 1994. In
1994 the change in net deferred taxes reflected $844,000 of net deferred tax
liabilities from an acquisition. State net operating loss carryforwards at
December 31, 1995 expire under current law as follows: $1,666,000 in 2002,
$1,596,000 in 2003, $815,000 in 2004, $806,000 in 2005 and $866,000 in 2006.
45
<PAGE> 46
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- COMMITMENTS AND CONTINGENT LIABILITIES
Credit
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include lines of credit, letters of credit and other
commitments to extend credit. Each of these instruments involves, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The Company uses the same credit
policies and requires similar collateral in approving lines of credit and
commitments and issuing letters of credit as it does in making loans. The
exposure to credit losses on financial instruments is represented by the
contractual amount of these instruments; however, the Company does not
anticipate any losses from these instruments.
The off-balance sheet financial instruments whose contract amounts
represent credit risk at December 31, 1995 and 1994 are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Commitments to extend credit:
Unused lines of credit:
Commercial and other................................................ $ 59,571 $50,101
Home equity......................................................... 17,010 14,446
Commitments to originate credit........................................ 31,445 24,894
-------- -------
Total............................................................. $108,026 $89,441
======== =======
Letters of credit........................................................ $ 6,555 $ 5,209
======== =======
</TABLE>
Lines of credit are agreements by which the Bank agrees to provide a
borrowing accommodation up to a stated amount as long as there is no violation
of any condition established in the loan agreement. The borrower may
periodically reduce or retire amounts drawn under a line and subsequently redraw
these amounts. Lines of credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Commitments to originate credit represent approved commercial and real
estate loans which generally are expected to be funded within ninety days.
Letters of credit are conditional commitments issued by the Company to
guarantee the financial performance of customers to third parties. Letters of
credit are primarily issued to facilitate trade or support borrowing
arrangements and generally expire in one year or less. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending credit facilities to customers.
Concentrations of Credit Risks
In addition to financial instruments with off-balance sheet risk, the
Company, to a certain extent, is exposed to varying risks associated with
concentrations of credit. Concentrations of credit risk generally exist if an
individual or number of counterparties are engaged in similar activities and
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by economic or other
conditions.
At December 31, 1995, approximately 66% of the securities portfolio is
comprised of mortgage-backed securities which consist of pass-through securities
directly or implicitly backed by the full faith and credit of the United States
government. Concentrations of securities of a single issuer consisted of
investments in tax-exempt obligations issued by the Village of Alsip. At
December 31, 1995, the amortized cost and market value of Village of Alsip
securities were $8,611,000 and $9,140,000, respectively. In addition to
securities, the Company has granted tax-exempt loans to the Village of Alsip
which totaled $4,806,000 at December 31,
46
<PAGE> 47
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1995. All securities and loans are secured by the general taxing authority of
the respective issuer except for $472,000 in securities which are secured solely
by revenue from certain real estate taxes. Some loans are further secured by
real estate or other marketable collateral.
The Company conducts substantially all of its lending activities in the
southwest suburbs of Chicago and, to a lesser extent, the Chicago metropolitan
area. Loans granted to businesses are primarily secured by business assets,
owner-occupied real estate or personal assets of commercial borrowers. Loans to
individuals are primarily secured by automobiles, residential real estate or
other personal assets. Since the Company's borrowers and its loan collateral
have geographic concentration in the Chicago metropolitan area, the Company
could have exposure to a decline in the local economy and real estate market.
However, management believes that the diversity of its customer base and local
economy, its knowledge of the local market, and its proximity to customers
limits the risk of exposure to adverse economic conditions.
Litigation
On May 16, 1995, Federal Insurance Company ("Federal"), a subrogee of SSM
Health Care ("SSM"), filed a lawsuit against the Bank in the United States
District Court for the Northern District of Illinois alleging that the Bank had
made unauthorized wire transfers. The wire transfers were made at the request of
a former SSM officer who allegedly diverted the funds and defrauded SSM. As the
insurer of SSM, Federal honored SSM's claim of loss incurred as a result of the
employee defalcation. The lawsuit seeks damages in the amount of $1,247,500 plus
interest and legal costs. Management believes it has meritorious defenses and is
vigorously defending its position. Management also believes, after discussions
with counsel, that the outcome of this litigation will not have a material
impact on the Company's financial position or results of operations.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
As a financial institution, most of the Company's assets and liabilities
are considered financial instruments. However, many of the Company's financial
instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction.
Presented below are the carrying amounts and estimated fair values of the
Company's financial instruments as of December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents........................... $ 49,879 $ 49,879 $ 86,156 $ 86,156
Securities:
Held-to-maturity................................. 97,456 99,306 236,810 228,416
Available-for-sale............................... 318,159 318,159 71,478 71,478
Loans, net.......................................... 561,017 568,682 516,095 509,689
Interest receivable................................. 6,587 6,587 5,338 5,338
Financial Liabilities:
Demand deposits..................................... 161,400 161,400 143,378 143,378
NOW, money market and savings deposits.............. 376,949 376,949 377,643 377,643
Time deposits....................................... 376,943 377,287 302,569 298,336
Securities sold under agreements to repurchase...... 47,002 47,002 33,018 33,018
Notes payable....................................... -- -- 6,500 6,500
Interest payable.................................... 2,796 2,796 2,093 2,093
</TABLE>
47
<PAGE> 48
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment was used by the Company in
interpreting market data to develop the estimates of fair value. In addition,
significant estimations and present value calculations were used by the Company
for purposes of this disclosure. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and estimation
methodologies may have a material effect on the estimated fair value amounts.
The Company has used an entry-value market perspective as a basis of
estimating the fair value of most financial instruments. For purposes of fair
value disclosures the carrying values of cash and cash equivalents, accrued
interest receivable, demand deposits, NOW accounts, money market accounts,
savings deposits, securities sold under agreements to repurchase, notes payable
and interest payable are assumed to approximate fair value since these assets
and liabilities have no stated maturity or are relatively short-term financial
instruments.
Investment securities have been valued using quoted market prices, dealer
quotes and prices from independent pricing services that specialize in matrix
pricing and modeling techniques.
Net loans with stated maturities have been valued using present value
discounted cash flow techniques. The discount rates used to calculate the fair
values of loans were the applicable risk-adjusted spreads to the US Treasury
curve to approximate current entry-value interest rates applicable to each
category. No adjustment was made to the entry-value interest rates for changes
in credit of performing loans for which there are no known credit concerns. The
Company believes that the risk factor embedded in the entry-value interest rates
results in a fair valuation of such loans on an entry-value basis. It is assumed
that the fair value of floating rate loans approximates the recorded book value.
For real estate loans, contractual cash flows were adjusted for anticipated
prepayments. For loans delinquent ninety days or more and nonaccrual loans, fair
value is assumed to equal the recorded book value less specific reserves which
have been allocated to these financial instruments.
Time deposits with stated maturities have been valued using present value
discounted cash flow techniques. The discount rates used to calculate the fair
value of time deposits were the market rates currently offered for deposits of
similar remaining maturities.
There is no material difference between the contract amount and the
estimated fair value of off-balance sheet items which are primarily comprised of
unfunded loan commitments which are either floating-rate or generally funded
within ninety days.
48
<PAGE> 49
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 -- CONDENSED FINANCIAL STATEMENTS -- PARENT COMPANY
The following presents the condensed Balance Sheets as of December 31, 1995
and 1994, and Statements of Income and Statements of Cash Flows for each of the
three years ended December 31, 1995, for Heritage Financial Services, Inc. (in
thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
BALANCE SHEETS
Cash...................................................................... $ 636 $ 707
Investment in bank subsidiary............................................. 94,878 87,959
Investment in non-bank subsidiary......................................... 1,588 1,406
Other assets.............................................................. 187 148
------- -------
Total assets....................................................... $97,289 $90,220
======= =======
Notes payable............................................................. $ -- $ 6,500
Other liabilities......................................................... 506 609
Shareholders' equity...................................................... 96,783 83,111
------- -------
Total liabilities and shareholders' equity......................... $97,289 $90,220
======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Income:
Dividends from bank subsidiary................................. $10,500 $13,000 $ 8,950
Other income................................................... 40 24 8
Expenses:
Interest on notes payable...................................... 187 197 121
Salaries and employee benefits................................. 559 464 520
Other expenses................................................. 320 368 341
------- ------- -------
Income before income taxes and equity in undistributed earnings
of subsidiaries................................................ 9,474 11,995 7,976
Income tax benefit............................................... (460) (395) (385)
Equity in undistributed earnings of subsidiaries................. 3,360 27 2,664
------- ------- -------
Net income................................................ $13,294 $12,417 $11,025
======= ======= =======
</TABLE>
49
<PAGE> 50
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income.................................................... $13,294 $ 12,417 $11,025
Adjustments to reconcile net income to cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries......... (3,360) (27) (2,664)
Depreciation and amortization............................ -- 2 1
Increase (decrease) in accrued expenses.................. (48) 98 140
Other, net............................................... (94) 70 (1,193)
------- -------- -------
Net cash provided by operating activities.................. 9,792 12,560 7,309
------- -------- -------
Investing Activities:
Acquisition of bank subsidiary................................ -- (16,545) --
------- -------- -------
Net cash used in investing activities...................... -- (16,545) --
------- -------- -------
Financing Activities:
Proceeds from notes payable................................... -- 8,000 --
Principal payments on notes payable........................... (6,500) (1,500) (5,000)
Proceeds from stock option exercises.......................... 129 690 --
Dividends paid................................................ (3,492) (2,847) (2,506)
------- -------- -------
Net cash provided by (used in) financing activities........ (9,863) 4,343 (7,506)
------- -------- -------
Net increase (decrease) in cash................................. (71) 358 (197)
Cash at beginning of year....................................... 707 349 546
------- -------- -------
Cash at end of year............................................. $ 636 $ 707 $ 349
======= ======== =======
Supplemental disclosures:
Interest paid................................................. $284 $100 $129
Income tax benefit received................................... 460 395 385
</TABLE>
Regulatory authorities limit the amount of dividends which can be paid by
the Bank to Heritage Financial Services, Inc. without prior approval from such
authorities. At December 31, 1995, $30,232,000 of undistributed earnings of the
Bank were available for payment of dividends to the Heritage Financial Services,
Inc. without prior regulatory approval, subject to reduction for maintenance of
minimum capital ratios as required by banking regulators. At December 31, 1995,
the Bank is required to have minimum Tier 1 and Total risk-based capital ratios
of 4.00% and 8.00%, respectively. The Bank's actual ratios at that date were
12.95% and 14.20%, respectively. The Bank is also required to have a minimum
Tier 1 leverage ratio of 4.00%. The Bank's actual leverage ratio at December 31,
1995, was 7.51%.
NOTE 16 -- SUBSEQUENT EVENT (UNAUDITED)
On February 2, 1996, the Company acquired all of the issued and outstanding
shares of the First National Bank of Lockport ("Lockport") for $16.8 million in
cash. The acquisition was funded with $2.8 million in cash and borrowings of $14
million under a revolving line of credit facility with an unrelated financial
institution (see Note 8 -- Notes Payable). The acquisition will be accounted for
as a purchase and, accordingly, the results of operations of Lockport will be
included in the consolidated financial statements beginning on the acquisition
date. At December 31, 1995, Lockport had total assets of approximately $103
million.
50
<PAGE> 51
HERITAGE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth condensed quarterly results of operations for 1995
and 1994 (in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995
Interest income......................................... $17,141 $18,377 $19,114 $19,228
Interest expense........................................ 7,165 8,397 8,906 8,896
------- ------- ------- -------
Net interest income................................... 9,976 9,980 10,208 10,332
Provision for loan losses............................... 50 50 50 50
Other income............................................ 1,731 1,808 1,695 1,737
Other expense........................................... 7,096 7,058 6,678 6,838
Income tax expense...................................... 1,500 1,465 1,730 1,608
------- ------- ------- -------
Net income............................................ $ 3,061 $ 3,215 $ 3,445 $ 3,573
======= ======= ======= =======
Net income per common share:
Primary............................................... $.37 $.39 $.41 $.43
Fully diluted......................................... $.37 $.39 $.41 $.43
1994
Interest income......................................... $13,191 $13,915 $16,327 $16,725
Interest expense........................................ 4,612 4,820 6,065 6,619
------- ------- ------- -------
Net interest income................................... 8,579 9,095 10,262 10,106
Provision for loan losses............................... 50 -- 40 --
Other income............................................ 1,508 1,641 1,638 1,700
Other expense........................................... 6,001 6,086 7,028 7,103
Income tax expense...................................... 1,229 1,478 1,591 1,506
------- ------- ------- -------
Net income............................................ $ 2,807 $ 3,172 $ 3,241 $ 3,197
======= ======= ======= =======
Net income per common share:
Primary............................................... $.34 $.38 $.39 $.39
Fully diluted......................................... $.34 $.38 $.39 $.39
</TABLE>
51
<PAGE> 52
MANAGEMENT'S REPORT
Management of Heritage Financial Services, Inc. and subsidiaries (the
Company) has prepared and is responsible for the integrity and fairness of the
financial statements and other financial information included in this annual
report. The financial statements are prepared in accordance with generally
accepted accounting principles and, when appropriate, include amounts based on
management's estimates and judgment.
To meet its responsibility both for the integrity and fairness of these
financial statements and information, management maintains accounting systems
and related internal accounting controls. These systems and controls provide for
an appropriate division of responsibility and are designed to provide reasonable
assurance that transactions are properly authorized and recorded, that assets
are safeguarded and financial records are reliably maintained.
The Company monitors the effectiveness and compliance of its internal
control systems through a continuous program of internal audits. Management has
reviewed the recommendations of its internal auditors and Arthur Andersen LLP,
independent auditors, and has responded in an appropriate, cost-effective
manner.
The Audit Committee of the Board of Directors, composed of three outside
directors, meets periodically with the Company's internal auditors and the
independent auditors to review matters relative to financial reporting, internal
accounting controls and the scope and results of audits. In addition, reports of
examination conducted by federal and state regulatory agencies are reviewed by
management and the Board of Directors.
RICHARD T. WOJCIK PAUL A. ECKROTH
Chairman and CEO Executive Vice President and Treasurer
52
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Heritage Financial Services, Inc.:
We have audited the accompanying consolidated balance sheet of Heritage
Financial Services, Inc. and subsidiaries as of December 31, 1995 and the
related consolidated statement of income, changes in shareholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 Heritage
Financial Services, Inc. and subsidiaries as of December 31, 1995, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 18, 1996
53
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Heritage Financial Services, Inc.:
We have audited the accompanying consolidated balance sheet of Heritage
Financial Services, Inc. and subsidiaries as of December 31, 1994, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the two years in the period ended December 31, 1994.
These financial statements are the responsibility of the management of Heritage
Financial Services, Inc. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Heritage Financial Services,
Inc. and subsidiaries at December, 31, 1994, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1994 in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements
effective January 1, 1994, Heritage Financial Services, Inc. changed its method
of accounting for securities.
DELOITTE & TOUCHE LLP
Chicago, Illinois
January 19, 1995
54
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The disclosure called for by paragraph (a) of Regulation S-K Item 304 has
been previously reported (on Form 8-K dated February 15, 1995) as that term is
defined in Rule 12b-2 under the Exchange Act. As a result, pursuant to the
Instructions to Item 304 such disclosure need not be provided here.
PART III
ITEMS 10, 11, 12 AND 13
The Company has filed a definitive proxy statement with the Securities and
Exchange Commission pursuant to Regulation 14A under the 1934 Act not later than
120 days after the close of the Company's fiscal year ended December 31, 1995.
Accordingly, pursuant to General Instruction G(3), the information called for by
Part III of Form 10-K (except for the Section "Executive Officers of the
Registrant" included in Part I hereof) has been omitted and is incorporated
herein by reference from the proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement
schedules of the registrant are filed as a part of this document under Item 8.
Financial Statements and Supplementary Data:
Consolidated Balance Sheets -- December 31, 1995 and 1994
Consolidated Statements of Income -- For the Years Ended December 31,
1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity -- For the
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows -- For the Years Ended December
31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements -- For the Years Ended
December 31, 1995, 1994 and 1993
Quarterly Financial Data
(a)(3) -- Exhibits
(a)(3) -- The exhibits required by Item 601 of Regulation S-K and filed
herewith are listed in the Exhibit Index which follows the Signature Page and
immediately precedes the exhibits filed. The management contracts, compensatory
plans and arrangements which are required to be filed are listed in the Exhibit
Index as Exhibit Numbers 10(a) - 10(g) inclusive.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during the
quarter ended December 31, 1995.
55
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Heritage Financial Services, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
on this the 6th day of March, 1996.
HERITAGE FINANCIAL SERVICES, INC.
(Registrant)
by /s/ Richard T. Wojcik
------------------------------------
Richard T. Wojcik
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 6th day of March, 1996 by the following
persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE AND TITLE
- - ---------------------------------------------
by /s/ Richard T. Wojcik
------------------------------------------
Richard T. Wojcik, Chairman of the Board
(Principal Executive Officer) and Director
by /s/ Frederick J. Sampias
------------------------------------------
Frederick J. Sampias, President and
Director
by /s/ Paul A. Eckroth
------------------------------------------
Paul A. Eckroth, Executive Vice President
and Treasurer (Principal Financial and
Accounting Officer)
by
------------------------------------------
John J. Gallagher, Director
by /s/ Ronald P. Groebe
------------------------------------------
Ronald P. Groebe, Director
SIGNATURE AND TITLE
- - ---------------------------------------------
by /s/ Lael W. Mathis*
------------------------------------------
Lael W. Mathis, Director
by /s/ Jack Payan*
------------------------------------------
Jack Payan, Director
by /s/ Arthur E. Sieloff*
------------------------------------------
Arthur E. Sieloff, Director
by /s/ John L. Sterling*
------------------------------------------
John L. Sterling, Director
by
------------------------------------------
Chester Stranczek, Director
by /s/ Arthur G. Tichenor*
------------------------------------------
Arthur G. Tichenor, Director
by /s/ Dominick J. Velo*
------------------------------------------
Dominick J. Velo, Director
*Signed by /s/ Frederick J. Sampias
--------------------------------
Frederick J. Sampias
Attorney-in-Fact
56
<PAGE> 57
HERITAGE FINANCIAL SERVICES, INC.
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE
- - ------ -----------------------------------------------------------------------------------
<C> <S>
2(a) Merger Agreement dated as of April 25, 1994, by and between Midlothian State Bank
and Heritage Bank Midlothian and joined in by Heritage Financial Services, Inc.
(incorporated by reference to the Registrant's Current Report on Form 8-K dated
July 8, 1994).
2(b) Supplemental Agreement dated as of April 25, 1994, by and among Ollie J. Yates,
Eugene J. Winston, Peter J. Feil, Joseph Krol and Henry J. Milen ("Sellers"),
Midlothian State Bank and Heritage Financial Services, Inc. (incorporated by
reference to the Registrant's Current Report on Form 8-K dated July 8, 1994).
2(c) Stock Purchase Agreement dated September 28, 1995, by and among Heritage Financial
Services, Inc., Old Kent Financial Corporation and Old Kent-Illinois, Inc. and List
of exhibits thereto (filed herewith).
3(a) Articles of Incorporation of the Registrant (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
3(b) By-laws of the Registrant (incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994).
4(a) Articles of Incorporation (See Exhibit 3(a) above).
4(b) Specimen Common Share Certificate (incorporated by reference to the Registrant's
Registration Statement (No. 33-8693) on Form S-1, effective October 14, 1986, File
No. 0-15059).
4(c) By-laws (See Exhibit 3(b) above).
9(a) Voting Trust Agreement dated as of December 31, 1985 among Carl C. Greer as voting
trustee and individually; James A. Henshall, Jr., Herbert A. Vance, Jr., Melinda
Martin Vance, Joyce Martin Brown, and Eloise W. Martin, all individually; trustees
of the testamentary trusts created under the Will of Harold T. Martin, Deceased;
and certain corporations and Amendment dated as of September 10, 1986 (incorporated
by reference to the Registrant's Registration Statement (No. 33-8693) on Form S-1,
effective October 14, 1986, File No. 0-15059).
9(b) Extension of Voting Trust Agreement dated as of December 31, 1985 (filed herewith).
10(a) 1987 Stock Option Plan, including Amendment (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10(b) 1990 Executive Equity Incentive Plan (incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990).
10(c) Indemnification Agreement dated June 12, 1990 between the Registrant and Ronald P.
Groebe (incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990) and Schedule of Indemnification Agreements
executed by other Directors of the Registrant (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
10(d) Amended and Restated Employment Agreement dated as of January 19, 1995 between the
Registrant and Ronald P. Groebe and Schedule of Employment Agreements executed by
Richard T. Wojcik, Frederick J. Sampias and Paul A. Eckroth (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994).
</TABLE>
57
<PAGE> 58
HERITAGE FINANCIAL SERVICES, INC.
EXHIBIT INDEX (CONTINUED)
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE
- - ------ -----------------------------------------------------------------------------------
<C> <S>
10(e) (i) Agreement to Substitute Deferred Compensation Trust and (ii) Deferred
Compensation Trust Under Heritage Financial Services Plan(s), each dated as of
January 19, 1995 between the Registrant and Dominick J. Velo as Trustee
(incorporated by reference to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994).
10(f) Amended and Restated Employment Termination Benefits Agreement dated as of January
19, 1995 between the Registrant and John E. Barry (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
10(g) Amended and Restated Limited Employment Termination Benefits Agreement dated as of
January 19, 1995 between the Registrant and Ramesh L. Ajwani and Schedule of
Amended and Restated Limited Employment Termination Benefits Agreements between the
Registrant and Each of Susan G. Peterson and Albert A. Stroka (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994).
10(h) Lease agreement, dated May 1, 1989, between Heritage Bank Crestwood and Marbil
(incorporated by reference to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1989).
10(i) Lease agreement, dated May 1, 1989, between Heritage Bremen Bank and Trust Company
and Leo Koszulinski (incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1989).
11 Statement Re Computation of Per Share Earnings (filed herewith).
21 Subsidiaries of Registrant (filed herewith).
23(a) Consent of Arthur Andersen LLP (filed herewith).
23(b) Consent of Deloitte & Touche LLP (filed herewith).
24 Power of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
- - -------------------------
Heritage Financial Services, Inc. will furnish those of the above exhibits
which are filed herewith to requesting security holders.
58
<PAGE> 1
EXHIBIT 2(C)
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made this 28th day of
September, 1995, by and among HERITAGE FINANCIAL SERVICES, INC., an Illinois
corporation (hereinafter called "Buyer"), OLD KENT FINANCIAL CORPORATION, a
Michigan corporation (hereinafter called "OKFC"), and OKFC's wholly-owned
subsidiary OLD KENT-ILLINOIS, INC., a Delaware corporation (hereinafter called
"Seller").
PRELIMINARY RECITALS
1. Seller desires to sell and Buyer desires to purchase 100% of the stock
of the First National Bank of Lockport, a national banking association located
at 800 South State Street, Lockport, Illinois 60441 (the "Bank"). Such sale and
purchase is hereinafter referred to as the "Acquisition".
2. This Agreement provides for the Acquisition, records the representations
and warranties made by Seller, OKFC and Buyer in connection with the
Acquisition, sets forth certain covenants and agreements of the parties and sets
forth other provisions relating to the Acquisition.
3. Buyer is a bank holding company pursuant to the federal Bank Holding
Company Act of 1956, as amended. Buyer is also a public company subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended.
4. OKFC, a public company and a bank holding company pursuant to the
federal Bank Holding Company Act of 1956, as amended, is the sole stockholder of
Seller which is in turn the sole stockholder of the Bank. OKFC and the Bank are
"Affiliates" of Seller (as defined in Subsection 16.8.2). Buyer and OKFC
exchanged letters dated July 13 and 20, 1995, respectively, regarding the
Acquisition, which letters are superseded and replaced by this Agreement.
5. OKFC is entering into this Agreement in order to provide certain
representations, warranties, indemnities and covenants and to guarantee the
performance of the representations, warranties, indemnities, covenants and other
obligations of its subsidiary Seller under this Agreement.
NOW, THEREFORE, the parties hereto AGREE as follows:
1. PREAMBLE; PRELIMINARY RECITALS. The preamble and preliminary recitals
set forth above are hereby incorporated in and made a part of this Agreement.
2. PURCHASE AND SALE. In reliance upon the representations, warranties,
covenants and agreements contained herein, and subject to the terms and
conditions of this Agreement, on the Closing Date (as hereinafter defined), in
consideration of the purchase price hereinafter set forth, Seller shall sell,
transfer, convey and assign to Buyer 100% of the shares of stock of the Bank, so
that Buyer shall receive all such shares, consisting in the aggregate of 116,799
shares of common capital stock, par value $5.00 per share, of the Bank, free and
clear of any and all liens, claims, charges, encumbrances or clouds on title, of
any kind or nature whatsoever (the "Bank Stock").
3. PURCHASE PRICE.
3.1 Subject to the terms and conditions of this Agreement, including,
without limitation, subsection 3.2, the total purchase price for 100% of
the Bank Stock shall equal $16,750,000, payable in cash by wire transfer of
immediately available funds to an account designated by OKFC a reasonable
time in advance; provided, that all Acquisition expenses of the Bank,
Seller and OKFC, as provided in Subsection 6.2 below, including, without
limitation, broker fees, legal, accounting, tax and any related shareholder
costs, shall be paid by OKFC or Seller.
3.2 The purchase price in subsection 3.1 above assumes that: (i) the
Bank shall not have issued or repurchased any shares of stock or declared
and/or paid any dividends or made any other distributions of
<PAGE> 2
stockholders' equity from April 30, 1995 through the Closing Date (as
hereinafter defined); and (ii) prior to the Closing Date, OKFC, Seller or
an Affiliate has purchased the Bank's indirect auto loan portfolio for cash
at book value, less unearned discount, as provided in Subsection 6.31.
4. CLOSING.
4.1 CLOSING AND CLOSING DATE. Unless otherwise agreed to in writing,
the Acquisition contemplated by this Agreement shall be consummated and
closed (the "Closing") at the Law Offices of Joel S. Corwin, 150 S. Wacker
Drive, Suite 500, Chicago, Illinois 60606, or at such other location as may
be mutually agreed upon by Seller and Buyer, on a date (the "Closing Date")
which is after all required regulatory approvals have been obtained and all
applicable waiting periods have expired, as may be mutually agreed upon by
Seller and Buyer. The deliveries below to be made at the Closing shall be
considered to be made simultaneously.
4.2 DELIVERIES BY SELLER, OKFC AND THE BANK AT CLOSING. At the Closing
(unless another time is specifically stated), Seller, OKFC and the Bank
shall deliver to Buyer the following:
4.2.1 A certificate of good standing for the Bank, dated a date not
more than seven days prior to the Closing Date, from the Comptroller of
the Currency.
4.2.2 Financial statements of the Bank as required by Subsection
6.6 hereof.
4.2.3 Certificates executed by the President (or a Vice President)
and Secretary of each of Seller and OKFC to the effect that Seller's or
OKFC's (as applicable) representations and warranties set forth in this
Agreement are true and correct on the date of this Agreement and are
true and correct in all material respects on and as of the Closing Date
as if remade on and as of the Closing Date (except as to those
representations and warranties made with respect to a specified date or
event, which shall be certified as still being true and correct in all
material respects as of such date or event) and that all covenants and
agreements to be kept and performed by it from the date hereof to and
including the Closing Date have been kept and performed in all material
respects.
4.2.4 The opinion of Warner Norcross & Judd LLP, counsel for
Seller, OKFC and the Bank, dated the Closing Date in the form of Exhibit
A. Exhibit A and all other lettered exhibits referred to in this
Agreement are attached to, and by reference incorporated in and made a
part of, this Agreement.
4.2.5 Copies of the Articles of Association and By-Laws of the
Bank, accompanied by a certificate of the President and the Cashier of
the Bank to the effect that such Articles of Association and By-Laws are
accurate and complete as of the Closing Date.
4.2.6 Certified copies of resolutions adopted by the Board of
Directors and sole stockholder of Seller and the Board of Directors of
OKFC, in each case authorizing the execution, delivery and performance
of this Agreement and the transactions contemplated herein.
4.2.7 The covenants not to compete dated the Closing Date and
signed on behalf of Seller and OKFC in the form of Exhibit B
("Noncompetition Agreements").
4.2.8 Certificate or certificates for all the shares of Bank Stock,
in each case duly endorsed, or with stock powers duly endorsed, for
transfer to Buyer, all of which shares shall be free and clear of any
and all liens, claims and encumbrances.
4.2.9 The executed resignations of such officers and directors of
the Bank as Buyer shall have requested at least 30 days prior to the
Closing Date.
4.2.10 If the merger of Seller into OKFC described in Subsection
16.5.1 occurs prior to the Closing, a Certificate of Merger evidencing
the merger and such other documents relating to such merger as may be
reasonably requested by Buyer.
4.2.11 Such other documents and instruments as may be reasonably
requested by Buyer in order to close the Acquisition.
2
<PAGE> 3
4.3 DELIVERIES BY BUYER AT CLOSING. At the Closing (unless another
time is specifically stated), Buyer shall deliver to Seller:
4.3.1 A certified copy of resolutions adopted by the Board of
Directors of Buyer authorizing the execution, delivery and performance
of this Agreement and the transactions contemplated herein.
4.3.2 Copy of the approval of the transaction contemplated herein
which may have been received by Buyer from the Board of Governors of the
Federal Reserve System or the Federal Reserve Bank of Chicago.
4.3.3 A certificate executed by the President and Secretary of
Buyer to the effect that its representations and warranties set forth in
this Agreement are true and correct on the date of this Agreement and
are true and correct in all material respects on and as of the Closing
Date as if remade on and as of the Closing Date (except as to those
representations and warranties made with respect to a specified date or
event, which shall be certified as still being true and correct in all
material respects as of such date or event) and that all covenants and
agreements to be kept and performed by it from the date hereof to and
including the Closing Date have been kept and performed in all material
respects.
4.3.4 The opinion of counsel for Buyer, dated the Closing Date, in
the form of Exhibit C.
4.3.5 Such other documents and instruments as may be reasonably
requested by Seller in order to close the Acquisition.
4.4 PRE-CLOSING; AVAILABILITY OF CLOSING DOCUMENTS. The form of
documents proposed to be delivered at the Closing shall be made available
for examination by the respective parties not later than 12:00 noon, local
time, on the business day prior to the Closing Date (the "Pre-Closing
Date") at a pre-closing (the "Pre-Closing") to be held at the Law Offices
of Joel S. Corwin, 150 S. Wacker Drive, Suite 500, Chicago, Illinois 60606,
or at such other location as may be mutually agreed upon by Seller and
Buyer.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER. Buyer represents,
warrants and covenants to Seller and OKFC as follows in this Section 5. Such
representations, warranties and covenants shall be true and complete on the date
hereof, shall be deemed made again on and as of the Pre-Closing Date and the
Closing Date, and as so remade shall be true and complete in all material
respects and shall survive the Closing hereunder as provided in Subsection 16.3.
5.1 CORPORATE STATUS AND POWER. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Illinois and has full corporate power to enter into and perform this
Agreement.
5.2 CORPORATE AUTHORIZATIONS. The directors of Buyer have taken all
actions necessary to authorize the execution and delivery of this Agreement
and consummation of the transactions provided for herein, and such
execution, delivery and performance do not conflict with or violate Buyer's
articles of incorporation or by-laws or any contract, agreement or other
instrument to which Buyer is a party, or any judgment or decree to which
Buyer is subject.
5.3 COMMISSIONS, FEES AND EXPENSES. Buyer has not taken any action
which would give rise to any claim against Seller or OKFC for a brokerage
commission, finder's fee or other like payment as a result of this
Agreement or the transactions contemplated herein. Buyer shall pay all its
expenses in connection with this Agreement and the transactions
contemplated herein.
5.4 EFFECTIVE AGREEMENT. Subject to the receipt of any and all
necessary regulatory approvals, the execution, delivery and performance of
this Agreement by Buyer, and the consummation of the transactions
contemplated hereby, will not create a conflict, result in a breach,
constitute a violation or default, result in the acceleration of payment or
other obligations, or create a lien, charge or encumbrance, under any of
the provisions of the charter or by-laws of Buyer, under any judgment,
decree or order, under any law, rule or regulation of any government or
agency thereof, or under any agreement,
3
<PAGE> 4
contract or instrument to which Buyer is subject, where such conflict,
breach, violation, default, acceleration or lien, singly or in combination,
would have a material adverse effect on Buyer's ability to perform its
obligations hereunder. This Agreement is legally binding on and enforceable
against Buyer in accordance with its terms.
5.5 DUE DILIGENCE. Buyer has not during its investigation prior to the
date of this Agreement discovered any facts or circumstances which have
caused it to conclude that a material breach of the representations and
warranties in Section 6 has occurred.
5.6 DISCLOSURE. No representation, warranty, covenant or other
statement of Buyer made in this Agreement, or contained in any certificate,
schedule or other document referred to herein or furnished to Seller or
made available for inspection by it (or to be so furnished or made
available for inspection) in connection with this Agreement contains or
shall contain any untrue statement of a material fact or omits or shall
omit to state any material fact necessary in order to make the statements
contained therein, in light of the circumstances in which they are made,
not misleading.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AND OKFC. Seller and
OKFC jointly and severally represent, warrant and covenant to Buyer as follows
in this Section 6. Such representations, warranties and covenants shall be true
and complete on the date hereof, shall be deemed made again on and as of the
Pre-Closing Date and the Closing Date, and as so remade shall be true and
complete in all material respects and shall survive the Closing hereunder as
provided in Subsection 16.3.
6.1 ORGANIZATION AND EXISTENCE OF THE BANK; SUBSIDIARY. The Bank is a
national banking association duly organized, validly existing and in good
standing under the laws of the United States and has all requisite power
and authority, corporate and otherwise, to own, operate and lease its
properties and to carry on its business substantially as it has been and is
being conducted on the date of this Agreement. The Bank is duly authorized
to conduct a general banking business and to exercise trust powers and is
an insured bank as defined in the Federal Deposit Insurance Act. The
character of the properties owned or leased by the Bank and the nature of
the business transacted by it do not require that the Bank be qualified to
do business in any other jurisdiction. The Bank has only one subsidiary,
First Safe Deposit Company, which is a wholly owned subsidiary of the Bank,
is a non-operating company organized under the laws of the State of
Illinois and has no assets or liabilities.
6.2 COMMISSIONS, FEES AND EXPENSES. None of Seller, OKFC nor the Bank
has taken any action which would give rise to any claim against Buyer for a
brokerage commission, finder's fee or other like payment as a result of
this Agreement or the transactions contemplated herein. Each of Seller and
OKFC shall pay all their respective expenses and the expenses of the Bank
in connection with this Agreement and the transactions contemplated herein;
and none of the expenses of Seller, OKFC and/or the Bank (including, but
not limited to, broker fees, legal, accounting, tax, Bank employee
severance and any related shareholder costs) incurred in connection with or
as a result of the sale of the Bank and/or the preparation or consummation
of this Agreement or the transactions contemplated herein shall be or shall
have been charged to, payable by or paid by the Bank or all such expenses
shall be deducted from the purchase price otherwise payable by Buyer.
6.3 CAPITALIZATION; DIVIDENDS.
6.3.1 The Bank has authorized capital of 116,799 shares of common
capital stock, par value $5 per share, and no others, all of which
shares are issued and outstanding. All of the issued and outstanding
shares of capital stock are validly issued, fully paid and
non-assessable, except as provided in Section 55 of the National Bank
Act, 12 USC sec.55. There are no outstanding warrants, options,
subscriptions, contracts, rights or other arrangements or commitments
obligating the Bank to issue any additional shares of the Bank's capital
stock, nor are there securities, debts, obligations or rights
outstanding which are convertible into shares of the Bank.
6.3.2 The Board of Directors of the Bank has not authorized or
declared any dividend which has not been paid. From and after April 30,
1995 the Bank has not issued or repurchased any shares
4
<PAGE> 5
of stock or declared and/or paid any dividends or made any other
distributions of stockholders' equity.
6.4 STOCK OWNERSHIP; RIGHT TO TRANSFER FREE OF ENCUMBRANCES; VOTING
RIGHTS
6.4.1 Seller owns and holds of record 116,799 shares of Bank Stock,
which amounts to 100% of the stock of the Bank. On the Closing Date,
assuming Buyer's receipt of regulatory approval, Seller shall have the
absolute right, power and authority to sell and to transfer all of the
shares of Bank Stock attributed to it in this Subsection 6.4.1 free and
clear of any liens, mortgages, encumbrances, pledges, charges, lawsuits,
injunctions or other orders, judgments, restrictions or agreements of
any kind or character whatsoever which could in any manner affect the
title of Seller to said shares or prevent the legal and lien-free sale
and transfer of same.
6.4.2 No lien under any provision of the Internal Revenue Code or
other laws of the United States, or of any State, has been filed, and
Seller has no notice, knowledge or information concerning any pending or
threatened lien, charge, claim or assessment, which might in any respect
affect Seller's title to the Bank Stock or the right of Seller to sell
or transfer the same, and upon delivery of the Bank Stock to Buyer on
the Closing Date, valid title to the Bank Stock and the unencumbered
right to vote such shares, subject to no voting trust, proxy, power of
attorney or other agreement with respect to voting of such shares, will
pass to Buyer free and clear of any and all liens, claims, charges and
encumbrances.
6.5 THIRD-PARTY CLAIMS. There is no investigation, action,
arbitration, suit, proceeding or claim, pending or, to Seller's or OKFC's
knowledge, threatened, against Seller, OKFC or the Bank which could have a
material adverse effect on the consummation of the Acquisition, the
performance of Seller's and/or OKFC's obligations hereunder, or on the
aggregate value of the Bank Stock being purchased, before or by any
federal, state, municipal or other governmental department, commission,
board, agency or instrumentality, domestic or foreign.
6.6 FINANCIAL STATEMENTS AND ANALYSES.
6.6.1 (a) Seller has delivered to Buyer and included in the
Disclosure Schedule (separately identified by the parties as referred to
in this Agreement) true and complete copies of balance sheets and
statements of income, statements of nonperforming assets, and analyses
of the allowance for loan losses, of the Bank as of and for the periods
ended December 31, 1994, May 31, 1995 ("Interim Date") and August 31,
1995. Such financial statements and analyses, as delivered to Buyer, are
in accordance with the books and records of the Bank and present fairly
the financial condition of the Bank as of the dates of such balance
sheets and the results of operations for the periods then ended, all in
accordance with generally accepted accounting principles, except as
specifically disclosed in the Disclosure Schedule.
(b) At least five (5) days prior to the Closing Date, Seller shall
furnish Buyer with a balance sheet and statement of nonperforming assets
of the Bank as of the most recent month end preceding the Closing Date
and a statement of income, statement of changes in stockholders' equity
and an analysis of the allowance for loan losses for the period January
1, 1995 to and including the date of the balance sheet. Such financial
statements and analysis, as delivered to Buyer, shall be in accordance
with the books and records of the Bank and present fairly the financial
condition of the Bank as of the date of such balance sheet and the
results of operation for the period then ended, all in accordance with
generally accepted accounting principles, applied consistently with
those used in the preparation of the financial statements referred to in
Subsection 6.6.1(a) above.
6.6.2 (a) Seller has delivered to Buyer and included in the
Disclosure Schedule true and complete copies of the Bank's Call Reports
as of and for the periods ended December 31, 1993 and 1994, and March 31
and June 30, 1995, all as filed with the Federal Deposit Insurance
Corporation ("FDIC"). Such reports are in accordance with the books and
records of the Bank and present fairly the financial condition of the
Bank as of the dates of such balance sheets and the results of
operations for the periods then ended, all in conformity with applicable
regulatory accounting
5
<PAGE> 6
principles applied consistently throughout the periods indicated (except
as otherwise noted in such reports).
(b) At least five (5) days (and not more than 20 days) prior to the
Closing Date, Seller shall furnish Buyer with true and complete copies
of the Bank's most recent Call Report filed with the FDIC. Such reports
are in accordance with the books and records of the Bank and present
fairly the financial condition of the Bank as of the date of such
balance sheet and the results of operation for the period then ended,
all in conformity with applicable regulatory accounting principles
applied consistently throughout the periods indicated (except as
otherwise noted in such reports).
6.7 UNDISCLOSED LIABILITIES; CHANGES. As of the date of this
Agreement, except as specifically disclosed in the Disclosure Schedule and
except for the liabilities reflected in the balance sheet as of the Interim
Date delivered to Buyer, the Bank has no material liabilities of any
nature, whether accrued, absolute, contingent or otherwise. Since the
Interim Date to and including the date of this Agreement, there has not
been any material adverse change in the assets, liabilities, earnings or
net worth of the Bank and the Bank has conducted its business only in the
ordinary and regular course. No facts or circumstances have been discovered
from which it reasonably appears that there is a significant risk and
reasonable probability that there will occur a material adverse change in
the business, income, or financial condition of the Bank for reasons
specific to the Bank and not applicable to the banking industry in general.
6.8 TITLE TO PROPERTIES. The Bank is the owner of, and has good and
marketable title to, all the property and assets reported on its balance
sheet as of the Interim Date and thereafter acquired, free and clear of all
mortgages, liens, pledges, charges or encumbrances (collectively "Liens"),
except for: (i) pledges and liens given to secure deposits and other
banking liabilities arising in the ordinary course of business; (ii)
properties, interests and assets sold or otherwise disposed of subsequent
to the Interim Date in the ordinary course of business; and (iii) Liens, if
any, shown in the Disclosure Schedule. The Bank owns all real estate that
it occupies. Exhibit D contains (a) accurate common and legal descriptions
of all real estate owned by the Bank; and (b) an accurate description of
the Bank's title to such real estate. None of the Bank's real estate (as
described in Exhibit D) is subject to any condition, restriction or zoning
ordinance preventing or restricting the use thereof for the business
presently carried on or proposed to be carried on there by the Bank. Except
as shown in the Disclosure Schedule, none of Seller, OKFC nor the Bank has
received notice of violation of any applicable zoning regulation, ordinance
or other law, order, regulation or requirement relating to the operations
or property of the Bank; and to the best of the knowledge of Seller and
OKFC no such violation presently exists and all buildings or other
structures owned or used by the Bank conform to all applicable ordinances,
codes and regulations.
6.9 BANK EXAMINATIONS.
6.9.1 The last compliance report and report of examination of the
Bank by the Comptroller of the Currency were as of December 19, 1992 and
December 31, 1994, respectively; Seller has caused the Bank to make
available to Buyer true and complete copies of the compliance report and
the report of examination.
6.9.2 The last Comptroller of the Currency examinations of the
Bank's trust operations and its Community Reinvestment Act compliance
were as of May 15, 1995 and December 31, 1992, respectively; Seller has
caused the Bank to make available to Buyer true and complete copies of
the reports of such examinations.
6.9.3 Except as shown on the Disclosure Schedule, all violations of
any law or regulation disclosed in any of the reports referred to in
this Subsection 6.9 have been remedied and corrected, and to the
knowledge of Seller and OKFC, the Bank is not in material violation of
any law or regulation relating to its properties or operation.
6.10 GOVERNMENTAL REGULATION. The Bank holds all material licenses,
certificates, permits, franchises, insurance and rights, including without
limitation, FDIC insurance, from all appropriate federal, state or other
public authorities necessary for the conduct of its business; and, between
the date
6
<PAGE> 7
hereof and the Closing Date, inclusive, the Bank shall maintain all such
licenses, certificates, permits, franchises, insurance and rights. Except
as shown in the Disclosure Schedule, to the best of Seller's and OKFC's
knowledge, the Bank has conducted its business so as to comply in all
material respects with all material applicable federal, state and local
statutes, regulations, ordinances or rules, particularly, but not by way of
limitation, applicable banking laws, federal and state securities laws, and
laws and regulations concerning truth-in-lending, truth-in-savings, insider
loans, usury, fair credit reporting, consumer protection, occupational
safety, fair employment practices and fair labor standards.
6.11 SECURITIES. Except as shown in the Disclosure Schedule, (a) all
securities held by the Bank are rated at least A by both Moodys and
Standard & Poors, (b) none of the securities held by the Bank is pledged
and (c) none of the securities held by the Bank has been sold under
agreements to repurchase.
6.12 CHARTER, BY-LAWS AND MINUTE BOOKS. Seller has delivered to Buyer
true and correct copies of the charter and by-laws of the Bank, all as
amended to the date hereof. Seller and the Bank have also made available at
the Bank the minute books of the Bank for examination by Buyer or Buyer's
counsel. The minute books of the Bank contain records of all meetings of
the Board of Directors and stockholders of the Bank since May 1, 1994.
Neither Seller nor OKFC has any reason to believe that the minute books of
the Bank do not contain records of all meetings of the Board of Directors
and stockholders of the Bank since its date of organization.
6.13 BANK ACCOUNTS. The Bank maintains with other banks the bank
accounts listed for it on the Disclosure Schedule and no others.
6.14 CONDUCT OF BUSINESS PENDING CLOSING. From and after the date
hereof, to and including the Closing Date, and except as required by this
Agreement or consented to by Buyer in writing or as both (i) previously
committed to and (ii) specifically described in the Disclosure Schedule,
Seller shall cause the Bank to: (a) maintain its property and assets in
their present state of repair, order and condition, reasonable wear and
tear and damage by fire or other casualty excepted; (b) maintain its books,
accounts and records in accordance with generally accepted accounting
principles consistently applied; (c) substantially comply with all laws
applicable to the conduct of its business; (d) conduct its business only in
the usual, regular and ordinary course consistent with sound banking
practice, and not make any purchase or sale or introduce any method of
management or operation in respect to such business or property, except in
a manner consistent with sound banking practice; (e) make no change in its
charter or by-laws; (f) maintain and keep in full force and effect all fire
and other insurance on property and assets, all directors and officers,
bankers blanket bond, liability, casualty and other insurance, and all
bonds on personnel, presently carried by it; (g) not sell, mortgage,
subject to lien, pledge or encumber or otherwise dispose of any of its
property and assets otherwise than in the ordinary course of business
(other than the Bank's sale of its indirect auto loan portfolio at book
value, less unearned discount, to OKFC, Seller or an Affiliate); (h) not
redeem or otherwise acquire or agree to redeem or otherwise acquire any of
its capital stock; (i) not authorize any additional shares of stock, not
make any change in the number of shares of its capital stock issued and
outstanding, and not grant any option or commitment relating to its capital
stock; (j) use its best efforts to preserve its business organization
intact, to keep available the services of the Bank's present officers and
employees and to preserve the good will of its customers and others having
business relations with it; (k) not enter into any employment agreement,
not appoint or elect any directors or officers of the Bank who do not, as
of the date of this Agreement, hold such positions with the Bank, and not
increase the compensation of any present officer or director of the Bank;
(l) not declare and/or pay any dividends, nor make any other distribution
of stockholders' equity or otherwise in respect of any shares of its
capital stock; (m) not make any borrowings except in the ordinary course of
business (indebtedness maturing more than one year after its creation,
other than certificates of deposit normally issued by the Bank, is not for
the purpose of this Agreement considered as being in the "ordinary
course"); (n) not enter into any transaction of any kind whatsoever,
including, without limitation, loans or commitments for loans, with any of
the individuals or entities referred to in Subsection 6.19 hereof except in
the ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and not involving more than a
normal risk of collectability; (o) maintain the Bank's reserve for loan
losses at a level
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adequate to provide for known and potential risks inherent in the loan
portfolio; (p) not grant any powers of attorney or enter into any other
agreement authorizing any person to act as agent of the Bank, except with
respect to representation by lawyers incident to the ordinary course of its
business; (q) not make any new loan or renew or rewrite any existing loan
in the principal amount of $100,000 or more; (r) not purchase or sell any
investment security; (s) not materially change the terms, service charges
or interest rates offered on deposit accounts; (t) not accept or renew any
certificate of deposit at a rate .50% (50 basis points) greater than the
rates currently offered by the Bank for the same term; (u) not enter into
or renew any lease or purchase any furniture or equipment or enter into any
contract to construct, repair or remodel the Bank's premises; (v) without
first consulting with Buyer, not renew or enter into any new license,
service or maintenance agreement which is not terminable upon 30 days
notice without penalty; (w) not sell or otherwise transfer to Seller, any
Affiliate or other Financial Services Organizations (as defined in
subsection 6.29 below) all or a portion of the Bank's customer database
(list of the Bank's loan, deposit and other customers and related
information); and (x) not enter into any other transactions other than in
the ordinary course of business. The Bank's costs, if any, for the
foregoing shall not be considered "expenses of the Bank in connection with
this Agreement" as provided in Subsection 6.2.
For purposes of the Bank's obtaining the required written consent
pursuant to this Subsection 6.14, the Bank may send a written notice to
Buyer by fax to the attention of Frederick J. Sampias (fax 708-532-8926)
and Paul A. Eckroth (fax 708-636-2183) describing the matter for which
consent is requested. Buyer shall promptly notify the Bank of its decision
regarding the Bank's proposed action by acknowledging and returning the
notice by fax. Buyer's consent shall be deemed to have been given to any
requested action if no written response is received by the Bank (i) by 5:00
p.m. on any business day if Buyer received the Bank's request by 12:00 noon
on that business day; or (ii) by 12:00 noon on any business day if Buyer
received the Bank's request by 5:00 p.m. on the preceding business day, in
each case only if either of the above individuals was present on such day.
6.15 TAXES. OKFC, Seller and/or the Bank have filed all federal, state
and local income, withholding, excise, sales, property and other tax
returns or reports required to be filed. The Bank has paid all taxes due
from it or for which it is liable for periods covered by such returns or
reports. Except as shown in the Disclosure Schedule, there are included in
the financial statements of the Bank referred to in Subsection 6.6 hereof
adequate current and deferred reserves for the payment of all accrued but
unpaid taxes, including interest and penalties (if any), whether or not
disputed, for the periods then ended and all fiscal years prior thereto.
There are no unexpired waivers by the Bank of the statutes of limitations
in effect with respect to any taxes. Neither the Bank nor Seller, OKFC or
another Affiliate on behalf of the Bank, has executed or filed with the
Internal Revenue Service any agreement extending the period for assessment
and/or collection of any tax and is not a party to any action or proceeding
by any governmental authority for assessment or collection of taxes. No
claim for assessment or collection of taxes has been asserted against the
Bank. Except for 1995 taxes not yet due, neither Seller nor OKFC has any
knowledge of any unpaid taxes which are or could become a lien on the
properties and assets of the Bank. Except as shown in the Disclosure
Schedule, all tax liabilities and net operating losses for income tax
purposes of the Bank have been properly accounted for and computed and
entered in the Bank's financial statements and in Seller's or OKFC's tax
returns.
6.16 LITIGATION; VIOLATION OF LAWS. Except as shown in the Disclosure
Schedule, there are no legal, administrative or other proceedings,
investigations, judgments, injunctions, cease and desist orders or claims
(or to Seller's or OKFC's knowledge inquiries), pending, outstanding,
threatened or recommended, against or related to the Bank or any of its
properties, assets or business or the transactions contemplated by this
Agreement, and neither Seller nor OKFC knows or has reasonable grounds to
know of any basis for any such proceedings, investigations, inquiries,
claims, judgments, injunctions or cease and desist orders. Except as shown
in the Disclosure Schedule, the Bank has not entered into any cease and
desist orders, memoranda of agreement or understanding or other agreements
with any banking or other regulatory authorities relating to the operations
or condition of the Bank or the disposition of any of its assets. The Bank
is not in violation of any statutes or regulations applicable to the
conduct of its business, the violation of which would have a material
adverse effect on the Bank's business. The Bank
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has not received notification from any agency or department of federal,
state or local government (1) asserting a violation of any such statute or
regulation, (2) threatening to revoke any license, franchise, permit or
government authorization or (3) restricting or in any way limiting its
operations.
6.17 BANK CONTRACTS; LETTERS OF CREDIT; COMMITMENTS; LOANS.
6.17.1 Except as shown in the Disclosure Schedule, the Bank has no
contracts, agreements, instruments, commitments, understandings, plans
or arrangements to which the Bank is a party or by which it or any of
its property is bound, whether or not made in the ordinary course of
business, including, without limitation, leases, employment contracts,
bonus, deferred compensation, savings, profit sharing, severance pay,
pension or retirement plans or arrangements, but excluding loans, lines
of credit, loan commitments and letters of credit, from the Bank.
6.17.2 Except as shown in the Disclosure Schedule, the Bank has not
issued, nor is it bound by or committed at any time or on the happening
of any event to pay on, any letter or letters of credit.
6.17.3 Except as shown in the Disclosure Schedule, the Bank has not
issued any loan commitments or otherwise committed to loan funds.
6.17.4 Except as shown in the Disclosure Schedule, the Bank has
made no loans to others nor issued or authorized any lines of credit.
6.17.5 Except for defaults specifically described in the Disclosure
Schedule, neither the Bank nor any other party is in substantial default
under any of the items referred to in this Subsection 6.17, and no claim
of any such default has been made. The Bank is not liable as a
guarantor, surety or endorser on any contract or obligation of any other
person or other legal entity.
6.18 INSURANCE. The Bank has customary insurance coverage and fidelity
bonds on its assets and employees and against public and other liability,
as shown on the Disclosure Schedule, adequate to cover any loss,
replacement or liabilities, subject to the deductibles as indicated on the
Disclosure Schedule.
6.19 CONFLICTS OF INTEREST. Except as shown in the Disclosure
Schedule, neither Seller nor OKFC nor any officer or director of either of
them or of the Bank (i) owns 10% or more of any class of securities of, or
has an equity interest of 10% or more in, any firm, corporation or other
entity which has any significant business relationship (other than as a
depositor of $25,000 or less at any one time or as a borrower of $1,000 or
less) with the Bank, (ii) owns, or has any significant interest (other than
as a depositor of $25,000 or less at any one time or as a borrower of
$1,000 or less) in, any right, property or asset of a value of more than
$1,000 which is utilized or required by the Bank in connection with owning
or operating its properties or assets, or carrying on or conducting its
business or affairs or (iii) has any other significant business
relationship (other than as a depositor of $25,000 or less at any one time
or as a borrower of $1,000 or less) with the Bank. Except as shown in the
Disclosure Schedule, to Seller's or OKFC's knowledge, none of Seller, OKFC
or any other Affiliate and no Bank officer or director or relative thereof
(first cousins or closer) has any of the ownership interests or
relationships referred to in the preceding sentence. The names and
addresses of each officer and director of the Bank, together with the
current compensation paid to each officer and director of the Bank, are set
forth in the Disclosure Schedule. All outstanding loans and extensions of
credit made by the Bank to any person or entity so named or, to Seller's or
OKFC's knowledge, any relative of any such person not more remote than
first cousin: (i) were made in the ordinary course of business; (ii) were
made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with other persons; and (iii) did not involve more than a normal risk of
collectability. The Disclosure Schedule sets forth all such loans and
extensions of credit together with any outstanding commitments, whether
written or oral, to lend any funds to any such persons.
6.20 FIDUCIARY RESPONSIBILITIES. Except as set forth in the report of
trust examination listed in subsection 6.9.2, to the best of the knowledge
of Seller and OKFC, the Bank has performed all of its duties, if any, in
its capacity as trustee, executor, administrator, registrar, guardian,
custodian, escrow
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agent, receiver or other fiduciary in a manner which complies in all
material respects with all applicable laws, regulations, orders,
agreements, wills, instruments and common law standards.
6.21 POWERS OF ATTORNEY. Except with respect to representation by
lawyers incident to the ordinary course of its business, there are no
outstanding powers of attorney, or any other agreements authorizing any
person to act as agent, of the Bank.
6.22 CERTAIN LOANS. All loan charge-offs required or recommended by
any state or federal regulatory authority in any of the reports listed in
subsection 6.9 have been made. All transfers of loans to a non-performing
loan category required by any state or federal regulatory authority have
been made, and included in the Disclosure Schedule is a list of all of the
Bank's non-performing loans.
6.23 COMMUNICATIONS WITH OTHERS. None of Seller, OKFC and the Bank nor
any of such entities' directors or officers, shall, from and after the date
of this Agreement so long as this Agreement is in effect, directly or
indirectly, negotiate, deal with or communicate with any other potential
purchaser or acquirer of or for the sale or acquisition of shares of the
Bank, nor, during such period, will any of Seller, OKFC, the Bank or such
directors or officers consider, accept, solicit or encourage any proposal
with respect thereto, and none of Seller, OKFC, the Bank nor such directors
or officers has taken any such action since July 13, 1995; provided, if the
transaction contemplated by this Agreement cannot be consummated because of
Buyer's breach of this Agreement or because necessary regulatory approval
is finally denied despite the best efforts of the parties, then, in any
such case any or all of Seller, OKFC, the Bank and such directors and
officers may immediately negotiate or otherwise deal with any other
potential purchaser or acquirer.
6.24 PENSION AND PROFIT SHARING PLANS.
6.24.1 (a) Included in the Disclosure Schedule is a list of each
"employee benefit plan" (as such term is defined under Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), employment agreement and each other employee relations or
benefit plan, policy, program, practice, agreement or arrangement
sponsored, maintained or contributed to by the Bank, Seller or OKFC, and
under which any current or former employee of the Bank participates or a
beneficiary of a current or former employee of the Bank is entitled to
any benefit (all of the foregoing, collectively the "Plans" and
individually a "Plan").
(b) Except as described in the Disclosure Schedule, each such Plan
which is an "employee pension benefit plan" (as such term is defined
under ERISA Section 3(2)) intended to qualify under the Internal Revenue
Code of 1986, as amended (the "Code"), so qualifies and has received a
favorable determination letter as to its qualification, which letter
includes those provisions or changes required under the Tax Reform Act
of 1986.
(c) Other than the Plans described in subparagraph (a), none of the
Bank, Seller and OKFC maintains any other qualified or nonqualified
retirement plan(s) for the benefit of the Bank's employees. Except as
shown in the Disclosure Schedule, none of the Bank, Seller and OKFC has
previously maintained any other qualified or nonqualified retirement
plan(s) for the benefit of the Bank's employees. None of the Bank,
Seller and OKFC has ever been and none is now a contributing employer in
a multi-employer pension plan, and the benefits provided by the
aforesaid Plans are not subject to the terms of any collective
bargaining agreement.
(d) There are no claims, actions, suits or requests for arbitration
or mediation pending against any Plan listed on the Disclosure Schedule,
or against Seller, OKFC or the Bank with respect to any such Plan, other
than routine claims for benefits in the ordinary course of
administration.
6.24.2 As stated in the Disclosure Schedule, Seller (but not the
Bank) maintains a defined contribution plan and trust previously
maintained by Edgemark Financial Corporation (the "Edgemark Plan"),
which is one of the Plans referred to above. Seller has terminated the
Edgemark Plan and will distribute its full benefits prior to the Closing
Date in accordance with the Edgemark Plan's provisions, and in
compliance with all applicable laws and regulations. Neither the Bank
nor
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Buyer shall assume any administrative, financial, reporting (including
tax reporting) or other responsibility with respect to the Edgemark Plan
or its termination, and Seller shall retain all such responsibilities
and obligations as if the Acquisition had not taken place.
6.24.3 With respect to any "employee welfare benefit plan," any
"employee pension benefit plan," or any "employee benefit plan" within
the respective meanings of Sections 3(1), 3(2) and 3(3) of ERISA,
maintained by Seller, OKFC, any other Affiliate and/or the Bank wholly
or partially for the benefit of the Bank and/or its employees or to
which any of such entities has made payments or contributions on behalf
of the employees of the Bank prior to Closing (each referred to as an
"Employee Benefit Plan"):
(a) Seller, OKFC and the Bank, each Employee Benefit Plan and
all trusts created thereunder are in substantial compliance with
ERISA, including Sections 601-608 concerning continuation of health
care coverage, and all other applicable laws and regulations insofar
as such laws and regulations apply to such plans and trusts.
(b) Seller, OKFC and the Bank, and each Employee Benefit Plan
which is intended to be a qualified plan under Section 401(a) of the
Code, and all trusts created thereunder are in substantial compliance
with the applicable provisions of the Code, including Section 4980B
concerning continuation of health care coverage, or any other federal
or state law requiring the provision or continuance of health or
medical benefits.
(c) Seller, OKFC and the Bank and each defined benefit pension
plan and trust sponsored by any or all of them has complied in all
material respects with all applicable laws and regulations with
respect to the Pension Benefit Guaranty Corporation ("PBGC"),
including the timely payment of all required insurance premiums.
(d) No Employee Benefit Plan and no trust created thereunder has
been involved, subsequent to June 30, 1974, in any nonexempt
"prohibited transaction" as defined in Section 4975 of the Code and
in Sections 406, 407 and 408 of ERISA.
(e) No Employee Benefit Plan which is a qualified plan under
Section 401(a) of the Code and no trust created thereunder has been
terminated, partially terminated, curtailed, discontinued, or merged
into another plan or trust subsequent to June 30, 1974, except in
compliance with notice and disclosure to the Internal Revenue Service
("IRS") and the PBGC, where applicable, as required by the Code and
ERISA. With respect to each such termination, all termination
procedures have been completed and there are no pending or potential
liabilities to the PBGC, to the plans, or to participants under such
terminated plans. Each such termination, partial termination,
curtailment, discontinuance, or consolidation has been accompanied by
the issuance of a current favorable determination letter by the IRS
and, where applicable, has been accompanied by plan termination
proceedings with and through the PBGC. Further, there has been no
"reportable event," as such term is defined under Title IV of ERISA.
(f) No Employee Benefit Plan is a "multiemployer plan" within
the meaning of Section 3(37)(A) or 4001(a)(3) of ERISA.
(g) No Employee Benefit Plan in effect as of August 1, 1995, is
a "defined benefit plan" within the meaning of Section 3(35) of
ERISA, except for the one Plan specifically referred to as such in
the Disclosure Schedule.
(h) Seller, OKFC and the Bank have made when due all
contributions required under any Employee Benefit Plan, under
applicable laws and regulations and otherwise, and each has paid all
insurance and annuity premiums with respect to any or all Employee
Benefit Plans when due. Except as specifically provided in the
Disclosure Schedule, the Bank owes no amounts to Seller, OKFC, any
Plan administrator or any other person with respect to any Employee
Benefit Plan. All contributions due with respect to any Employee
Benefit Plan for the plan year ended December 31, 1994 and prior
years and for the first two fiscal quarters of 1995 have been timely
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made in full by the Bank, and the estimated contributions due for the
remainder of 1995 are set forth in the Disclosure Schedule.
(i) There are no payments which have become due from any
Employee Benefit Plan, the trusts created thereunder, or from Seller,
OKFC or the Bank which have not been paid through normal
administrative procedures to the plan participants or beneficiaries
entitled thereto, except for claims for benefits for which
administrative claims procedures under such plan have not been
exhausted.
(j) No Employee Benefit Plan which is intended to be a qualified
plan under Section 401(a) of the Code and no trust created thereunder
has incurred, subsequent to June 30, 1974, an "accumulated funding
deficiency" as defined in Section 412(a) of the Code and Section 302
of ERISA (whether or not waived). Further, the value of the assets of
each defined benefit pension plan referred to in the Disclosure
Schedule is not exceeded by the present value of all accrued vested
benefits under such plan by more than $50,000.
(k) Seller and/or OKFC have filed or caused to be filed, and
will continue to file or cause to be filed, in a timely manner all
filings pertaining to each Employee Benefit Plan with the IRS, the
United States Department of Labor, and the PBGC as prescribed by the
Code or ERISA, or regulations issued thereunder. All such filings, as
amended, were complete and accurate in all material respects as of
the dates of such filings, and there were no misstatements or
omissions in any such filing which, as of the making of this
representation and warranty, would presently be material to the
financial condition, net income, business, properties, operations, or
prospects of the Bank.
(l) The Bank has no filing obligations pertaining to any
Employee Benefit Plan.
6.24.4 Buyer's and Bank's remedies for any breach of Subsections
6.24.3(a)-(l) shall include all legal and equitable remedies, including
without limitation indemnification, but shall not include termination of
this Agreement.
6.25 ENVIRONMENTAL MATTERS.
6.25.1 For purposes of this Agreement, "Hazardous Substances" has
the meaning set forth in Section 9601 of the Comprehensive Environmental
Response Compensation and Liability Act of 1980, 42 U.S.C.A. Section
9601 et seq. ("CERCLA") and also includes any substance now or hereafter
regulated by or subject to any Environmental Laws (as defined below) and
any other pollutant, contaminant, or waste, including, without
limitation, petroleum, asbestos, radon, and polychlorinated biphenyls.
6.25.2 For purposes of this Agreement, "Environmental Laws" means
all laws (civil or common), ordinances, rules, regulations and orders
that: (i) regulate air, water, soil, and solid waste management,
including the generation, release, containment, storage, handling,
transportation, disposition, or management of Hazardous Substances; (ii)
regulate or prescribe requirements for air, water, or soil quality;
(iii) are intended to protect public health or the environment; or (iv)
establish liability for the investigation, removal, or cleanup of, or
damage caused by, any Hazardous Substance.
6.25.3 To OKFC's and Seller's knowledge, except as specifically
described in the Disclosure Schedule, with respect to: (i) the real
estate owned or leased by the Bank and used in the conduct of its
business; (ii) other real estate owned by the Bank; (iii) real estate
held and administered in trust by the Bank; and (iv) any real estate
formerly owned or leased by the Bank or any subsidiary of the Bank (for
purposes of this Section, properties described in any of (i) through
(iv) are collectively referred to as "Premises"):
(a) None of the Premises is constructed of, or contains as a
component part, any material which (either in its present form or as
it may reasonably be expected to change through aging or normal use)
releases or may release any substance, whether gaseous, liquid, or
solid, that is a
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Hazardous Substance or is known to be (either by single exposure or
by repeated or prolonged exposure) injurious or hazardous to the
health of persons occupying the Premises. Without limiting the
generality of this Section, the Premises are, and during all
applicable limitation periods have been, free of asbestos except to
the extent properly sealed or encapsulated in compliance with all
applicable Environmental Laws and all workplace safety and health
laws and regulations.
(b) No part of the Premises has been used for the generation,
manufacture, handling, storage, disposal, or management of Hazardous
Substances, other than small quantities of commonly available
janitorial and cleaning supplies which do not require reporting under
any Environmental Law.
(c) The Premises do not contain, and have never contained, any
underground storage tanks.
(d) The Premises do not contain and are not contaminated by any
Hazardous Substance from any source at a level which would warrant
the imposition of clean-up liability under any Environmental Law.
(e) There is no action, suit, investigation, liability, inquiry,
or other proceeding, ruling, order, notice of potential liability, or
citation involving the Bank or any subsidiary of the Bank pending,
threatened, or previously asserted under, or as a result of any
actual or alleged failure to comply with any requirement of, any
Environmental Law. There is no factual basis for any of the
foregoing. Without limiting the generality of this Section, there is
no basis for any claim against or involving the Bank or any
subsidiary of the Bank, or any of their respective properties or
assets, under Section 107 of CERCLA or any similar provision of any
other Environmental Law.
6.25.4 To OKFC's and Seller's knowledge, with respect to any real
estate securing any outstanding loan or related security interest and
any owned real estate acquired in full or partial satisfaction of a debt
previously contracted:
(a) The Bank and each of its subsidiaries has complied in all
material respects with their policies (as such policies may have been
in effect from time to time and as disclosed in the Disclosure
Schedule), and all applicable laws and regulations, concerning the
investigation of each such property to determine whether or not there
exists or is reasonably likely to exist any Hazardous Substance on,
in, or under such property and whether or not a release of a
Hazardous Substance has occurred at or from such property.
(b) No such property contains or is contaminated by any
Hazardous Substance from any source at a level which would warrant
the imposition of clean-up liability under any Environmental Law.
6.25.5 OKFC and/or Seller previously engaged an environmental
consultant to conduct a preliminary ("Phase I") environmental assessment
of each of the parcels of real estate used in the operation of the
Bank's and its subsidiaries' business. OKFC and Seller have supplied
Buyer with a copy of the consultant's report of such environmental
assessments dated December 23, 1993 (the "Report"), as described in the
Disclosure Schedule. Except as expressly stated in the Report, no
environmental conditions were found, suspected, or would tend to be
indicated by the Report which are contrary to the representations and
warranties set forth in the other subsections of this Subsection 6.25
(such conditions hereinafter "Conditions"). As a result, no follow-up to
the Phase I assessment and no post-Phase I assessments were ordered or
performed. Neither OKFC nor Seller has any reason to believe that (i)
the matters subject to the environmental assessment which was the basis
for the Report have materially changed since the date of the assessment
or (ii) any Conditions have arisen subsequent to such date. Buyer
acknowledges that it is free to obtain a Phase I assessment at its
expense.
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6.26 CORPORATE STATUS AND POWER. OKFC and Seller are corporations duly
organized, validly existing and in good standing under the laws of the
States of Michigan and Delaware, respectively, and Seller is duly qualified
to transact business in, and is in good standing under the laws of, the
State of Illinois. Each of OKFC and Seller has full corporate power to
enter into and perform this Agreement.
6.27 AUTHORIZATION OF AGREEMENT. The execution, delivery and
performance of this Agreement, and the transactions contemplated hereby,
have been duly authorized by the Boards of Directors of Seller and its sole
stockholder, which comprises all necessary corporate action on the part of
Seller and OKFC, and this Agreement is the valid and binding obligation of
Seller and OKFC. OKFC is the sole stockholder of Seller.
6.28 EFFECTIVE AGREEMENT. Subject to the receipt of any and all
necessary regulatory approvals, the execution, delivery and performance of
this Agreement by Seller and OKFC and the consummation of the transactions
contemplated hereby, will not create a conflict, result in a breach,
constitute a violation or default, result in the acceleration of payment or
other obligations, or create a lien, charge or encumbrance, under any of
the provisions of the charter or by-laws of Seller or OKFC, under any
judgment, decree or order, under any law, rule, or regulation of any
government or agency thereof, or under any contract, agreement or
instrument to which Seller or OKFC is subject, where such conflict, breach,
violation, default, acceleration or lien, singly or in combination, would
have a material adverse effect on Seller's or OKFC's ability to perform its
obligations hereunder. This Agreement is legally binding on and enforceable
against both OKFC and Seller in accordance with its terms.
6.29 CUSTOMER LISTS. Except as shown in the Disclosure Schedule, none
of the Bank, Seller, OKFC or any other Affiliate (as defined in Subsection
16.8.2 below) has used for any purposes other than those of the Bank or has
sold or otherwise transferred to or made available to banks, savings and
loans/thrifts, credit card issuing companies, trust companies or mortgage
companies or holding companies for any of the foregoing (collectively,
"Financial Services Organizations") all or a portion of the Bank's customer
database.
6.30 BUSINESS AT THE REAL ESTATE. Except for the tenant described in
the Disclosure Schedule, since May 1, 1994, the Bank is the only entity
which has done business at or from the Real Estate.
6.31 SALE OF AUTO LOAN PORTFOLIO. Prior to the Closing Date, OKFC,
Seller or an Affiliate shall have purchased the Bank's indirect auto loan
portfolio (including delinquent loans and repossessed collateral) for cash
at book value, less unearned discount.
6.32 DUE DILIGENCE. Neither Seller nor OKFC has during either's
investigation prior to the date of this Agreement discovered any facts or
circumstances which have caused it to conclude that a material breach of
the representations and warranties in Section 5 has occurred.
6.33 MISCELLANEOUS. Excluding daily discrepancies in miscellaneous
balancing accounts which are not extraordinary, to the best of the
knowledge of Seller and OKFC, except as specifically described in the
Disclosure Schedule, there has been no theft, embezzlement, or conversion
of funds of the Bank or any application of funds of the Bank for any
purpose other than a lawful banking purpose. The books and records of the
Bank have been and are maintained in accordance with generally accepted
accounting principles applied on a consistent basis.
6.34 DISCLOSURE. No representation, warranty, covenant or other
statement of Seller, OKFC or the Bank made in this Agreement, or contained
in any certificate, schedule or other document referred to herein or
furnished to Buyer or made available for inspection by it (or to be so
furnished or made available for inspection) in connection with this
Agreement contains or shall contain any untrue statement of a material fact
or omits or shall omit to state any material fact necessary in order to
make the statements contained therein, in light of the circumstances in
which they are made, not misleading.
7. DESTRUCTION OR IMPAIRMENT OF PROPERTIES; WARRANTIES.
7.1 DESTRUCTION OR IMPAIRMENT OF PROPERTIES. If on or prior to the
Closing Date any of the tangible properties or assets of the Bank shall be
destroyed, damaged, or lost, or their use or capacity impaired,
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from whatever cause and regardless of fault or negligence, in a replacement
value of $50,000 or more, and if the loss is not fully insured over a
deductible of $5,000, then: (a) Seller shall promptly give written notice
thereof to Buyer; and (b) Buyer, without any liability to Seller, OKFC or
the Bank hereunder, may in its discretion choose not to conclude the
transactions provided for in this Agreement and may terminate this
Agreement by giving written notice to Seller on or before the date 30 days
after Buyer receives written notice of such occurrence from Seller.
7.2 WARRANTIES. Anything contained in this Agreement to the contrary
notwithstanding, irrespective of any inspection, examination or inquiry
which Buyer may make or perform, the representations, warranties,
agreements, and covenants of Seller and OKFC contained in this Agreement
shall remain in full force and effect as provided in Subsection 16.3.
8. CONDUCT OF THE PARTIES PRIOR TO AND AFTER CLOSING.
8.1 COVENANTS OF BUYER. Buyer hereby covenants with Seller and OKFC
that Buyer will do the following or cause the following to occur:
8.1.1 REGULATORY APPLICATION. Buyer shall: (i) as soon as is
practicable, file an application on Form Y-3 with the Board of Governors
of the Federal Reserve Bank of Chicago or the Federal Reserve System
(the "Federal Reserve") seeking the Federal Reserve's approval of the
transactions contemplated by this Agreement; (ii) provide OKFC with a
copy of such application in advance of filing; (iii) use reasonable
efforts to respond as promptly as practicable to all inquiries received
from the Federal Reserve for additional information; (iv) request
confidential treatment for information which OKFC requests in writing be
so treated (although such confidential treatment may be rejected by the
Federal Reserve so that such information will be publicly available);
and (v) keep OKFC informed of the status of the application.
8.1.2 CONFIDENTIALITY. If the transactions contemplated hereby are
not consummated, Buyer will treat as confidential and will not use or
disclose to third parties any information concerning Seller, OKFC or the
Bank obtained by Buyer hereunder (and will promptly return copies
thereof or destroy them and certify to their destruction), except that
this restriction shall not apply to any such information which is or
comes into the public domain (other than through the negligence of
Buyer), was in the possession of Buyer prior to the negotiations with
Seller and OKFC relating to this Agreement, comes into the public domain
as part of the normal process of the transaction, or at any time comes
into the possession of Buyer from third parties who have the right to
disclose such information otherwise than in connection with this
Agreement or as may be required to be disclosed by law or otherwise to
consummate the transactions provided for herein. This Subsection 8.1.2
shall survive termination of this Agreement.
8.2 COVENANTS OF SELLER AND OKFC. Seller and OKFC hereby covenant with
Buyer that Seller and OKFC will do the following or cause the following to
occur:
8.2.1 ACCESS AND INFORMATION IN GENERAL. Seller and the Bank have
made available to Buyer and its agents, and they have inspected and
examined, certain of the Bank's books, records and regulatory
information. Seller shall afford to Buyer and its representatives full
access during normal business hours to the offices, assets, premises,
properties and books and records (including those relating to loans,
deposits and investments), personnel and financial, legal and accounting
agents of the Bank from the date hereof through the Closing Date in
order that Buyer may have full opportunity to make such further
investigation as it desires of the affairs of the Bank and to provide
for an orderly transition in the operation and ownership thereof. In
addition, Seller shall provide Buyer with such access and information as
is necessary for Buyer to have prepared such audited and other
statements as are required by the Securities and Exchange Commission
("SEC") in order to make timely filings with the SEC, including without
limitation a Report on Form 8-K.
8.2.2 REGULATORY RECORDS. From the date hereof through and
including the Closing Date, OKFC and Seller shall consent to or cause
the Bank to consent to Buyer's examination and/or inquiry concerning the
Bank of the state and federal regulatory authorities having jurisdiction
over
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the Bank as Buyer deems necessary, and, to the extent permitted by such
regulatory authorities, OKFC and Seller shall consent to or cause the
Bank to consent to Buyer's being provided with or otherwise given access
to, all reports concerning the Bank prepared by any employee of a
regulatory authority. Seller and OKFC shall, and shall cause the Bank
to, use their best efforts to assist Buyer in securing any necessary
permission of regulatory authorities referred to in this Subsection
8.2.2.
8.2.3 TITLE COMMITMENT; SURVEY. (a) No later than thirty (30) days
after the date of delivery of this Agreement, Seller shall obtain, at
Seller's expense, and deliver to Buyer, the following:
(i) An owner's policy title commitment (the "Title Commitment")
with respect to the real estate owned by the Bank and used for its
building and parking lots (the "Real Estate"). The Title Commitment
shall: be from Chicago Title Insurance Company or other title
insurance company authorized to do business in Illinois and
satisfactory to Buyer; have an effective date as close as feasible to
the date of delivery of such Title Commitment; commit the issuer to
issue to the Bank on the Closing Date an American Land Title
Association (ALTA) Form B title insurance policy having an effective
date as of the Closing Date in the amount allocated to the Real
Estate pursuant to, and with the endorsements listed on, Exhibit E
(the "Title Policy"); and show title vested in the Bank and free of
all liens or encumbrances except Permitted Exceptions, as defined in
Subsection 16.8 hereof.
(ii) A survey (the "Survey") with respect to the Real Estate,
dated on or after the date of the Title Commitment. The Survey shall
be an ALTA/ACSM 1988 Class A Survey, including Table 3 requirements 1
through 12, showing no survey defects other than Permitted
Exceptions.
(b) If the Title Commitment or the Survey discloses title
exceptions other than Permitted Exceptions, Seller shall have ten (10)
days from the date of delivery thereof to have such exceptions cleared
and removed from the Title Commitment, or to have the title insurer
commit to insure against loss or damage that may be occasioned by such
exceptions by an endorsement in form and substance satisfactory to
Buyer, in Buyer's sole discretion. If the exceptions are not removed or
endorsement over the exceptions is not obtained, Buyer may terminate
this Agreement upon notice to Seller within fifteen (15) days after the
expiration of the 10-day cure period, or may elect to take title
notwithstanding the exceptions.
8.2.4 INSURANCE. Seller shall, and shall cause the Bank to,
cooperate with Buyer in supplying Buyer with such necessary information
and executed documents as Buyer shall require in making application for
insurance policies relating to the Bank.
8.2.5 SUPPLEMENTS TO DISCLOSURE SCHEDULE. From time to time prior
to the Closing Date, Seller and OKFC shall promptly supplement or amend
the Disclosure Schedule with respect to any matter hereafter arising
which, if existing or occurring at or prior to the date of this
Agreement, would have been required to be set forth or described in the
Disclosure Schedule or which is necessary to correct any information in
the Disclosure Schedule or in any representation and warranty of Seller
and OKFC which has been rendered inaccurate thereby. For purposes of
determining the accuracy of the representations and warranties of Seller
and OKFC contained in this Agreement in order to determine the
fulfillment of the condition set forth in Subsection 12.1, the
Disclosure Schedule delivered by Seller shall be deemed to include only
that information contained therein on the date of this Agreement.
8.2.6 INFORMATION FOR REGULATORY APPLICATION(S). Seller and OKFC
shall expeditiously provide Buyer with all information concerning
Seller, OKFC and the Bank necessary for Buyer to complete its regulatory
application required for consummation of the transaction provided for
herein, and Seller and OKFC jointly and severally represent and warrant
to Buyer that all such information shall be true and complete in all
material respects. Such representation and warranty shall be true on the
date hereof, on the Pre-Closing Date and on the Closing Date as if
remade on such dates and shall survive the Closing as provided in
Subsection 16.3.
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8.2.7 SOLICITATION OF EMPLOYEES. Except with the written consent of
Buyer, for two (2) years following the Closing Date, neither Seller nor
any Affiliate will hire any current officers of the Bank or solicit
employees of the Bank as prospective officers or employees of Seller or
any Affiliate while any such employee is in the employ of the Bank,
Buyer or any subsidiary of Buyer; provided, that such prohibition shall
not extend to general advertising by Seller or any Affiliate in
publications of general circulation.
8.2.8 CONFIDENTIALITY. If the transactions contemplated hereby are
not consummated, Seller and OKFC will treat as confidential and will not
use or disclose to third parties any information concerning Buyer
obtained by Seller and/or OKFC hereunder (and will promptly return
copies thereof or destroy them and certify to their destruction), except
that this restriction shall not apply to any such information which is
or comes into the public domain (other than through the negligence of
Seller or OKFC), was in the possession of Seller and/or OKFC prior to
the negotiations with Buyer relating to this Agreement, comes into the
public domain as part of the normal process of the transaction, or at
any time comes into the possession of Seller and/or OKFC from third
parties who have the right to disclose such information otherwise than
in connection with this Agreement or as may be required to be disclosed
by law or otherwise to consummate the transactions provided for herein.
This Subsection 8.2.8 shall survive termination of this Agreement.
8.2.9 TAX INFORMATION. At least ten (10) days prior to the Closing
Date, Seller and OKFC shall provide Buyer with copies of: (i) all
details supporting the Bank's deferred tax inventory items as of
December 31, 1994; and (ii) such of the Bank's prior year separate
company tax returns as Buyer shall have requested. The parties
acknowledge that, to the extent permitted by Illinois law: all Illinois
net loss deductions available to the Bank will be claimed on OKFC's 1994
and/or 1995 Unitary Illinois income tax return and, notwithstanding any
tax allocation policy, the tax benefit related to such losses will be
retained by Seller or its successor. As a result, no amount has been or
will be recorded on the Bank's financial statements to reflect such
Illinois net loss deductions. Notwithstanding the foregoing, to the
extent that any or all such losses and/or benefits are not utilized by
Seller and/or OKFC or are disallowed, Seller shall promptly give notice
to Buyer, specifying the amount of such losses and/or benefits
disallowed and/or not utilized. The Bank and its successors may utilize
the losses and/or benefits which were disallowed or were not utilized by
Seller and/or OKFC.
8.2.10 TAX RESERVES. Seller believes that the Bank's reserves for
current and deferred taxes as of December 31, 1994, May 31, 1995 and
August 31, 1995 are adequate based on Seller's knowledge of the Bank's
current and deferred tax requirements as of those dates. However, Seller
has not calculated or reconciled the details comprising the deferred tax
requirements for fixed assets and discount accretion to the estimated
amounts indicated in the schedule titled "Edgemark-Lockport Federal
Deferred Inventory at 06-30-95" which is included in the Disclosure
Schedule. Therefore, Seller cannot be certain that such deferred tax
requirements are accurate. The aggregate deferred tax liability for
fixed assets and discount accretion as of December 31, 1994 is estimated
to be $101,450 (pre-tax requirement of $289,858 multiplied by 35%).
Prior to Closing, Seller and Buyer together shall calculate such
requirements and deferred taxes at an assumed tax rate of 35%. If the
calculated amount of deferred taxes for fixed assets and discount
accretion as of December 31, 1994, exceeds $101,450, Seller shall remit
the difference to the Bank prior to the Closing Date.
8.3 COVENANTS OF BOTH PARTIES. Seller and OKFC hereby covenant with
Buyer, and Buyer hereby covenants with Seller and OKFC, as follows:
8.3.1 COOPERATION. Each party shall cooperate, use their best
efforts, and work with one another, to: (a) take or cause to be taken
all actions necessary, proper or advisable to consummate the
Acquisition; (b) promote the orderly transfer to Buyer of the Bank Stock
and the business of the Bank; (c) obtain the regulatory approvals
referred to in this Agreement at the earliest possible date; (d) provide
the information necessary to calculate the Bank's 1995 federal and state
income tax liabilities through the Closing Date; and (e) no later than
120 days after the Closing (or 90 days
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after Buyer has provided OKFC with reasonably requested tax information,
if later), settle with one another the Bank's actual current federal and
state tax liabilities for open tax years subsequent to 1993 through the
Closing Date.
8.3.2 NOTICES. Promptly upon the occurrence of, or promptly upon
becoming aware of the impending or threatened occurrence of, any event
which would cause or constitute a breach of any of the representations,
warranties and covenants of Buyer on one hand or Seller and/or OKFC on
the other or which would prevent Buyer on one hand or Seller and/or OKFC
on the other from carrying out any of the agreements contained in this
Agreement, Buyer or Seller and OKFC, as appropriate, shall give written
notice thereof to the other party and use its best efforts to prevent or
promptly remedy the same. Notwithstanding the foregoing, if a party
determines that it is too costly to cure a particular breach, then, in
lieu of remedying the same, it shall promptly give notice of such fact
to the other party and shall allow the other party to terminate the
Agreement without liability to the terminating party at any time at or
prior to the Closing. In such case, the terminating party's remedies for
any such breach shall include all legal and equitable remedies.
8.3.3 RESPONSIBILITY FOR BENEFITS.
(a) Seller and OKFC shall be solely responsible and liable for
all benefits accruing and claims arising from occurrences or
omissions on or prior to the Closing Date under any welfare, fringe,
qualified or nonqualified deferred compensation or other benefit
plan, program or arrangement (collectively, the "Benefits Plans")
maintained by OKFC, Seller or an Affiliate ("OKFC's Plans") for any
employee of the Bank, any dependent of such employee or any other
related eligible individual (collectively, the "Participants").
Seller and OKFC shall also be responsible for any and all costs,
fees, and expenses, including any taxes, excise taxes, and penalties
relating to OKFC's Plans, as they are maintained on or prior to the
Closing Date for the Participants. Seller and OKFC shall not have any
duty or responsibility to continue any of OKFC's Plans for any of the
Participants after the Closing Date except to the extent of rights
and benefits which accrued on or prior to the Closing Date.
(b) Buyer shall be solely responsible and liable for all
benefits accruing and claims arising from occurrences or omissions
after the Closing Date under any Benefits Plans established or
maintained by Buyer or Buyer's affiliates ("Buyer's Plans") and for
any and all costs, fees and expenses, including any taxes, excise
taxes, and penalties, arising after the Closing Date relating to
Buyer's Plans, as they are maintained after the Closing Date for the
Participants. Immediately following the Closing, Buyer shall offer
employees of the Bank who are to be employed by the Bank after the
Closing Date basic medical benefit coverage without prior conditions
exclusions, effective at the later of their acceptance and the day
following the Closing Date.
(c) Seller and OKFC shall be solely responsible for all rights
and responsibilities arising under the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA rights") on or prior to the
Closing Date under any of OKFC's Plans, and Buyer shall be solely
responsible for any COBRA rights and responsibilities arising under
any of Buyer's Plans after the Closing Date.
(d) Anything contained in this Subsection 8.3.3 to the contrary
notwithstanding, in case of any conflict between this Subsection
8.3.3 and Subsection 6.24 and the indemnifications relating to
Subsection 6.24, such Subsection 6.24 and such related
indemnifications shall govern.
8.3.4 EMPLOYEES. Pursuant to Subsection 4.2.9, Seller, OKFC and the
Bank are to deliver the executed resignations of such officers and
directors of the Bank as Buyer shall have requested at least 30 days
prior to the Closing Date. For those individuals for whom Buyer has so
requested resignations, Seller and OKFC shall, at their expense, provide
Seller's and OKFC's customary severance packages, which packages shall
include full releases by such individuals of the Bank, Buyer and Buyer's
affiliates.
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8.3.5 FURTHER ASSURANCES. Seller, OKFC and Buyer shall on the
Pre-Closing Date, the Closing Date and from time to time thereafter,
upon the request of the other, do, execute, acknowledge and deliver, or
cause to be done, executed, acknowledged and delivered, all such further
acts, assignments, transfers, powers of attorney, assurances and
instruments as may be reasonably required for the better assigning,
transferring, granting, conveying, assuring and confirming to Buyer
ownership of the shares of Bank Stock to be acquired by Buyer pursuant
to this Agreement and to Seller the cash to be paid pursuant to this
Agreement. The agreements of Seller, OKFC and Buyer in this Section 8
shall survive the Closing.
9. INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless Seller
and OKFC, their respective successors and assigns against and in respect of: (a)
any and all liabilities, losses, damages or deficiencies arising out of or
resulting from any and all: (i) breaches of warranty, covenant, agreement or
undertaking on the part of Buyer in this Agreement, while such warranties,
covenants, agreements or undertakings remain in effect pursuant to Subsection
16.3; (ii) failures by Buyer to perform or otherwise fulfill any undertaking or
other agreement or obligation to be performed or fulfilled by it under this
Agreement; and (iii) acts or other events at or with respect to the Bank which
occurred after the Closing Date and which are not covered under the insurance of
OKFC, Seller or the Bank; and (b) any and all actions, suits, proceedings,
claims, demands, assessments, judgments, costs and expenses, including
reasonable attorneys' fees, incident to any of the foregoing or such
indemnifications. The foregoing indemnifications shall survive the Closing
hereunder.
10. INDEMNIFICATION BY SELLER AND OKFC.
10.1 Seller and OKFC jointly and severally shall indemnify and hold
harmless Buyer, its successors and assigns against and in respect of: (a)
any and all liabilities, losses, damages or deficiencies arising out of or
resulting from any and all: (i) breaches of warranty, covenant, agreement
or undertaking on the part of Seller and/or OKFC in this Agreement, while
such warranties, covenants, agreements or undertakings remain in effect
pursuant to Subsection 16.3; (ii) failures by Seller and/or OKFC to perform
or otherwise fulfill any undertaking or other agreement or obligation to be
performed or fulfilled by either or both of them under this Agreement; and
(iii) acts or other events at or with respect to the Bank which occurred on
or prior to the Closing Date and which are not covered under the insurance
of Buyer; and (b) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including reasonable attorneys'
fees, incident to any of the foregoing or such indemnifications. The
foregoing indemnifications shall survive the Closing hereunder.
10.2 Seller and OKFC have made Buyer aware of: (i) the litigation
entitled "Jill May v. Old Kent Bank and Trust Company, a Michigan banking
corporation and Defendant A: Whether singular or plural, all other entities
engaging in the same or similar practices of the named defendants herein,"
believed to be designated Civil Action No. 95-2697-CK, in the Circuit Court
for the County of Kent, Michigan, dated February 24, 1995 (the "May
Litigation"), which may include the Bank; and (ii) the dispute and possible
or pending litigation regarding the disposition of certain real estate held
in the Bank's land trust, believed to be designated No. 72-11760, for which
the beneficiaries appear to be Schultz, Welsh and Dollmeyer, and the land
trust itself, described in the Disclosure Schedule (the "Land Trust
Matter"). Regardless of whether such indemnifications are otherwise covered
pursuant to 10.1 above, Seller and OKFC jointly and severally shall
indemnify and hold harmless Buyer, the Bank, and their respective
successors and assigns against and in respect of: (a) any and all
liabilities, losses, damages or deficiencies arising out of or resulting
from the May Litigation and any and all litigation arising with respect
thereto; (b) any and all liabilities, losses, damages or deficiencies
arising out of or resulting from the Land Trust Matter and any and all
litigation arising with respect thereto; and (c) any and all actions,
suits, proceedings, claims, demands, assessments, judgments, costs and
expenses, including reasonable attorneys' fees, incident to any of the
foregoing or such indemnifications. The foregoing indemnifications shall
survive the Closing hereunder.
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11. CONDITIONS TO OBLIGATIONS OF PARTIES. The several obligations of
Seller, OKFC and Buyer hereunder are subject to the satisfaction of the
following conditions prior to or at the Closing:
11.1 No action, proceeding or order by or before any court or other
governmental body or regulatory authority shall have been instituted or
issued, and not dismissed or reversed with prejudice, to restrain, prohibit
or invalidate the transactions contemplated herein.
11.2 All consents, approvals and permits necessary for the acquisition
by Buyer of all of the shares of Bank Stock to be acquired hereunder,
including, without limitation, approval of the transactions provided for in
this Agreement by the Federal Reserve shall have been obtained and shall
contain only those conditions which are reasonably satisfactory to Buyer,
and all regulatory or statutorily mandated waiting periods during which the
transactions contemplated hereby may not take place shall have expired.
12. CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of Buyer under this
Agreement are subject to satisfaction of all of the following conditions prior
to or at the Closing, any of which may be waived by Buyer:
12.1 The representations and warranties of Seller and OKFC set forth
or referred to in this Agreement shall have been true and correct in all
material respects on the date of this Agreement, on the Pre-Closing Date
and on the Closing Date with the same effect as though all of such
representations and warranties had been remade on and as of the Pre-Closing
Date and the Closing Date.
12.2 Seller and OKFC shall have performed and kept in all material
respects all the covenants, agreements and commitments to be performed and
kept by either of them hereunder on or prior to the Pre-Closing Date and/or
the Closing Date and shall have tendered or delivered all items required to
be delivered pursuant to this Agreement.
12.3 There shall not have been any material adverse change or
disruption in the financial condition or operations of the Bank from the
Interim Date. For this purpose, the sale of the Bank's indirect auto loan
portfolio for cash at book value, less unearned discount, pursuant to
Subsection 6.31 shall not be deemed a material adverse change.
12.4 No action, proceeding or order by or before any court or other
governmental body or regulatory authority shall have been instituted,
pending, threatened or recommended which might materially adversely affect
the right of Buyer to operate and control the business of the Bank on and
after the Closing Date; no cease and desist order, notice of warning or
order for hearing or similar proceeding or order with respect to the Bank
shall have been instituted, threatened or recommended by the Comptroller of
the Currency, the Federal Deposit Insurance Corporation or the Illinois
Commissioner of Banks and Trust Companies; and no condition to the approval
of the transactions provided for in this Agreement shall have been imposed
by any of such regulators or by the Federal Reserve.
12.5 There shall not have been filed any lawsuit which could have a
material adverse effect on the Bank, unless such lawsuit shall have been
dismissed with prejudice.
13. CONDITIONS TO OBLIGATIONS OF SELLER AND OKFC. The obligations of Seller
and OKFC under this Agreement are subject to satisfaction of all of the
following conditions prior to or at the Closing, any of which may be waived by
Seller or OKFC:
13.1 The representations and warranties of Buyer set forth or referred
to in this Agreement shall have been true and correct in all material
respects on the date of this Agreement, on the Pre-Closing Date and on the
Closing Date with the same effect as though all of such representations and
warranties had been remade on and as of the Pre-Closing Date and the
Closing Date.
13.2 Buyer shall have performed and kept in all material respects all
the covenants, agreements and commitments to be performed and kept by it
hereunder on or prior to the Pre-Closing Date and/or the Closing Date and
shall have tendered or delivered the items required to be delivered by it
pursuant to this Agreement.
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14. TERMINATION.
14.1 TERMINATION BY MUTUAL AGREEMENT. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned by mutual consent
of each of Seller and OKFC on one hand and Buyer on the other hand.
14.2 TERMINATION BY BUYER OR SELLER. This Agreement may be terminated
and the transactions contemplated hereby abandoned by Seller and OKFC on
one hand or Buyer on the other hand:
14.2.1 At any time on or prior to the Closing Date if the other
has, in any material respect, breached any covenant, undertaking,
representation or warranty contained herein, and such breach has not
been cured by such breaching party by the earlier of 30 days after the
date on which notice pursuant to Subsection 14.4 is given to the
breaching party or the Closing Date;
14.2.2 In the event any of the conditions precedent to the
obligations of such party specified in Sections 11, 12 or 13, as
applicable, of this Agreement has not been met as of the date required
by this Agreement and, if not so met, has not been waived by such party;
14.2.3 At any time, if any regulatory approval required for
consummation of the Acquisition is denied by the applicable regulatory
authority, and the time period for appeals and requests for
reconsideration has expired; or
14.2.4 In the event the acquisition contemplated by this Agreement
has not been consummated by 5:00 p.m. Chicago time on June 30, 1996.
14.3 TERMINATION BY BUYER. This Agreement may be terminated and the
transactions contemplated hereby abandoned by Buyer in the circumstances
described in Sections 7 and 8 hereof.
14.4 NOTICE OF TERMINATION. To exercise the rights to terminate as
provided in this Section, the exercising party must advise the other party
in writing, which notice shall be effective immediately upon its being
delivered as referenced in Section 15 hereof.
15. NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally,
delivered by reputable overnight courier with delivery confirmed, or if mailed
by certified or registered mail, return receipt requested, postage pre-paid:
15.1 If to Buyer, to: with a copy to:
Richard T. Wojcik Law Offices of
Chairman and CEO Joel S. Corwin
Heritage Financial Services 150 South Wacker Drive
12015 South Western Ave. Suite 500
Blue Island, Illinois 60406 Chicago, Illinois 60606
15.2 If to Seller or OKFC, to: with a copy to:
James H. Walters Warner, Norcross & Judd
Senior Vice President Attention: Shane B. Hansen
Old Kent Financial Corporation 900 Old Kent Building
One Vandenberg Center 111 Lyon Street, N.W.
Grand Rapids, MI 49503 Grand Rapids, MI 49503
15.3 Any party hereto may change the address at which such party is to
receive notice hereunder by written notice to the other parties.
16. MISCELLANEOUS.
16.1 EXPENSES. Except as and to the extent specifically allocated
otherwise herein, each of the parties hereto shall bear its own expenses,
whether or not the transactions contemplated hereby are consummated.
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16.2 CERTIFICATES. All statements contained in any certificate
delivered by or on behalf of Seller, OKFC or Buyer pursuant to this
Agreement or in connection with the transactions contemplated hereby shall
be deemed to be representations and warranties of the party delivering the
certificate hereunder. Each such certificate shall be executed on behalf of
the party delivering the certificate by duly authorized officers of such
party.
16.3 SURVIVAL OF COVENANTS, REPRESENTATIONS AND WARRANTIES. The
respective covenants, representations and warranties of Seller and OKFC
contained or referred to in Subsections 6.4 and 6.8, and, as they relate to
the foregoing, the indemnifications contained in Subsection 10.1, as well
as the indemnifications contained in Subsection 10.2, of this Agreement
shall survive the Closing without limit in time. The remaining respective
covenants, representations and warranties (and the related
indemnifications) of Seller, OKFC and Buyer contained or referred to in
this Agreement shall survive the Closing for two (2) years.
16.4 WAIVERS. No failure of any party to exercise any power given such
party under this Agreement or to insist upon the strict compliance by any
other party to obligations hereunder, and no custom or practice of the
parties in variance with the terms hereof, shall constitute a waiver of any
party's right to demand exact compliance with the terms hereof.
16.5 ASSIGNMENT; ENFORCEABILITY.
16.5.1 This Agreement may not be assigned by any party hereto other
than by mutual agreement of the parties; provided, that prior to the
Closing, Seller may be merged into OKFC, upon which occurrence all
obligations of Seller under this Agreement shall automatically become
obligations of OKFC, in addition to OKFC's other obligations under this
Agreement which shall also continue in effect.
16.5.2 All obligations of Seller and/or OKFC to Buyer hereunder
shall be enforceable by Buyer against Seller and OKFC, jointly and
severally. All obligations of Buyer to Seller or OKFC hereunder shall be
enforceable by Seller or OKFC against Buyer.
16.6 PARTIES IN INTEREST; ASSIGNMENT; AMENDMENT. This Agreement is
binding upon and is for the benefit of the parties hereto and their
respective successors and permitted assigns, and no person who is not a
party hereto (or a successor or permitted assignee of such party) shall
have any rights or benefits under this Agreement, either as a third party
beneficiary or otherwise. This Agreement cannot be amended or modified,
except by a written agreement executed by the parties hereto or their
respective successors and permitted assigns.
16.7 CAPTIONS. The captions used in this Agreement are for convenience
only and are not intended to limit or define the scope or intent of any
Section or Subsection.
16.8 TERMINOLOGY. The specific terms of art that are defined in
various provisions of this Agreement shall apply throughout this Agreement
(including without limitation each Exhibit hereto), unless expressly
indicated otherwise. In addition, the following terms and phrases shall
have the meanings set forth for purposes of this Agreement (including such
Exhibits):
16.8.1 the term "person" shall mean any individual, corporation,
partnership, association, trust, or other entity, whether business,
personal, or otherwise;
16.8.2 the term "Affiliate" shall mean any person (including,
without limitation, natural persons, corporations, partnerships and
other entities) directly or indirectly controlling, controlled by or
under common control with Seller, including, without limitation, OKFC,
the Bank and the officers and directors of any of such entities; and
16.8.3 the term "Permitted Exceptions" shall mean any or all of the
following: (i) those special exceptions (general exceptions being
waived), restrictions, easements, rights of way and encumbrances
referred to in the Title Commitment to be delivered pursuant to this
Agreement which individually and in the aggregate do not materially
detract from the value of, or materially interfere
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<PAGE> 23
with the present or intended use of, the Real Estate and are reasonably
acceptable to Buyer; and (ii) statutory liens for current taxes or
assessments not yet due, or if due not yet delinquent, or the validity
of which is being contested in good faith by appropriate proceedings;
and (iii) such other liens, imperfections in title, charges, easements,
restrictions and encumbrances which are reasonably acceptable to Buyer.
16.9 PRESS RELEASES. Seller and OKFC on one hand and Buyer on the
other shall consult with one another concerning the form and substance of
any press release regarding any matters relating to this Agreement. None of
the parties hereto shall be prohibited from making any press release which
its legal counsel deems necessary in order to fulfill such party's
disclosure obligations imposed by law, provided that such party provides
reasonable advance notice of such publication to the other parties hereto.
16.10 ENTIRE AGREEMENT. This Agreement, including the Exhibits hereto,
all of which are a part hereof, and the Disclosure Schedule which has been
separately identified, contain the entire agreement among the parties with
respect to the transactions contemplated herein and supersede all previous
negotiations, commitments and writings.
16.11 GOVERNING LAW; INVALIDITY. This Agreement shall be construed and
enforced, and all questions concerning compliance by any person with its
terms shall be determined, under Federal law and the laws of the State of
Illinois. If any provision herein contained is held to be invalid by any
court of competent jurisdiction as applied to any fact or circumstance, its
invalidity shall not affect any other provisions or the same provisions as
applied to any other fact or circumstance.
16.12 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
HERITAGE FINANCIAL SERVICES, INC.,
an Illinois corporation
By: /s/ Richard T. Wojcik
------------------------------
Richard T. Wojcik
Chairman and CEO
OLD KENT -- ILLINOIS, INC.
a Delaware corporation
By: /s/ B.P. Sherwood III
------------------------------
B.P. Sherwood III
President
OLD KENT FINANCIAL CORPORATION,
a Michigan corporation
By: /s/ B.P. Sherwood III
------------------------------
B.P. Sherwood III
Vice Chairman
23
<PAGE> 24
EXHIBITS TO STOCK PURCHASE AGREEMENT*
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SECTION
- - ----------- ------------------------------------------------------------------------- -------
<S> <C> <C>
Exhibit A Opinion of Warner Norcross & Judd LLP 4.2.4
Exhibit B Covenants Not to Compete 4.2.7
Exhibit C Opinion of Joel S. Corwin 4.3.4
Exhibit D Real Estate Owned by the Bank 6.8
Exhibit E Title Policy Matters 8.2.3
</TABLE>
- - -------------------------
* Pursuant to Regulation S-K Item 601(b)(2), the exhibits listed on this page
have been omitted from the filing of the Stock Purchase Agreement with the
Securities and Exchange Commission ("Commission"). The Registrant agrees to
furnish supplementally a copy of any omitted exhibit to the Commission on
request.
24
<PAGE> 1
EXHIBIT 9(B)
EXTENSION OF VOTING TRUST AGREEMENT
The Registrant was informed in February 1996 that the Voting Trust
Agreement dated as of December 31, 1985 among Carl C. Greer and others, as
amended by Amendment dated as of September 10, 1986, was, pursuant to its terms,
extended for an additional ten (10) years, until December 31, 2005.
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Presented below is the calculation of the Registrant's primary and fully
diluted earnings per share required by Item 601(b)(11) of Regulation S-K is
presented below (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
PRIMARY
Net income..................................................... $13,294 $12,417 $11,025
======= ======= =======
Average common shares outstanding.............................. 7,937 7,901 7,834
Common stock equivalents -- net effect of the assumed exercise
of stock options -- based on the treasury stock method using
average market price........................................ 372 384 390
------- ------- -------
Average primary shares outstanding.......................... 8,309 8,285 8,224
======= ======= =======
Primary earnings per share.................................. $1.60 $1.50 $1.34
======= ======= =======
FULLY DILUTED
Net income..................................................... $13,294 $12,417 $11,025
======= ======= =======
Average common shares outstanding.............................. 7,937 7,901 7,834
Common stock equivalents -- net effect of the assumed exercise
of stock options -- based on the treasury stock method using
average market price or year-end market price, whichever was
higher...................................................... 393 387 418
------- ------- -------
Average fully diluted shares outstanding.................... 8,330 8,288 8,252
======= ======= =======
Fully diluted earnings per share............................ $1.60 $1.50 $1.34
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
The following are wholly owned subsidiaries of the Registrant:
1. Heritage Bank
2. First National Bank of Lockport*
3. Heritage Trust Company
- - ------
* Except for directors' qualifying shares.
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF ARTHUR ANDERSEN LLP
We consent to the incorporation by reference in the Registration Statement
No. 33-59924 of Heritage Financial Services, Inc. on Form S-8 of our report
dated January 18, 1996, appearing in this Annual Report on Form 10-K of Heritage
Financial Services, Inc. for the year ended December 31, 1995.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 6, 1996
<PAGE> 1
EXHIBIT 23(B)
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in the Registration Statement
No. 33-59924 of Heritage Financial Services, Inc. on Form S-8 of our report
dated January 19, 1995, appearing in this Annual Report on Form 10-K of Heritage
Financial Services, Inc. for the year ended December 31, 1995.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 6, 1996
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Richard T. Wojcik, Frederick J. Sampias
and Ronald P. Groebe, or any of them, the undersigned's true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
to act for the undersigned and in the undersigned's name, place and stead, in
any and all capabilities, to sign the Annual Report on Form 10-K of HERITAGE
FINANCIAL SERVICES, INC. for the fiscal year ended December 31, 1995 and any and
all amendments thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated February 13, 1996
<TABLE>
<S> <C>
/s/ LAEL W. MATHIS
- - -------------------------------------------- --------------------------------------------
John J. Gallagher Lael W. Mathis
/s/ JACK PAYAN /s/ ARTHUR E. SIELOFF
- - -------------------------------------------- --------------------------------------------
Jack Payan Arthur E. Sieloff
/s/ JOHN L. STERLING
- - -------------------------------------------- --------------------------------------------
John L. Sterling Chester Stranczek
/s/ ARTHUR G. TICHENOR /s/ DOMINICK J. VELO
- - -------------------------------------------- --------------------------------------------
Arthur G. Tichenor Dominick J. Velo
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 44268
<INT-BEARING-DEPOSITS> 201
<FED-FUNDS-SOLD> 5410
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 318159
<INVESTMENTS-CARRYING> 97456
<INVESTMENTS-MARKET> 99306
<LOANS> 569494
<ALLOWANCE> 8477
<TOTAL-ASSETS> 1066368
<DEPOSITS> 915292
<SHORT-TERM> 47002
<LIABILITIES-OTHER> 7291
<LONG-TERM> 0
0
0
<COMMON> 4962
<OTHER-SE> 91821
<TOTAL-LIABILITIES-AND-EQUITY> 1066368
<INTEREST-LOAN> 48156
<INTEREST-INVEST> 23326
<INTEREST-OTHER> 2378
<INTEREST-TOTAL> 73860
<INTEREST-DEPOSIT> 31516
<INTEREST-EXPENSE> 33364
<INTEREST-INCOME-NET> 40496
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 223
<EXPENSE-OTHER> 27670
<INCOME-PRETAX> 19597
<INCOME-PRE-EXTRAORDINARY> 19597
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13294
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.58
<LOANS-NON> 3919
<LOANS-PAST> 938
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3270
<ALLOWANCE-OPEN> 8720
<CHARGE-OFFS> 865
<RECOVERIES> 422
<ALLOWANCE-CLOSE> 8477
<ALLOWANCE-DOMESTIC> 8477
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
