<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report MARCH 18, 1996
(Date of earliest event reported)
MERCHANTS BANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-14484 36-3182868
(Commission File Number) (I.R.S. Employer Identification Number)
34 SOUTH BROADWAY, AURORA, ILLINOIS 60507
(Address of principal executive offices) (Zip Code)
(708) 896-9000
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
As previously reported in a Form 8-K filed with the Securities and Exchange
Commission by Merchants Bancorp, Inc. (the "Registrant") on January 16, 1996,
the Registrant acquired all of the issued and outstanding stock of Valley Banc
Services Corp. ("Valley"), an Illinois corporation, on January 3, 1996. This
Form 8-K is being filed to provide the financial information and exhibits
required by Item 7 of the previously filed Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The required financial information concerning Valley is attached
hereto as Exhibit 99.1.
(b) PRO FORMA FINANCIAL INFORMATION.
The required PRO FORMA financial information with respect to the
Registrant is attached hereto as Exhibit 99.2.
(c) EXHIBITS.
27 Financial Data Schedule
99.1 Financial information of Valley.
99.2 Pro forma financial information of the Registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERCHANTS BANCORP, INC.
Dated: March 14, 1996 By: /S/ CALVIN R. MYERS
-------------------
Calvin R. Myers
President
2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page No.
----------- --------
<S> <C> <C>
27 Financial Data Schedule
99.1 Financial information of Valley Banc Services
Corp.
99.2 Pro forma financial information of Merchants
Bancorp, Inc.
</TABLE>
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 28,166
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 187,169
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 304,327
<ALLOWANCE> 5,176
<TOTAL-ASSETS> 539,761
<DEPOSITS> 453,771
<SHORT-TERM> 22,726
<LIABILITIES-OTHER> 6,170
<LONG-TERM> 3,000
0
0
<COMMON> 2,607
<OTHER-SE> 51,487
<TOTAL-LIABILITIES-AND-EQUITY> 539,761
<INTEREST-LOAN> 28,046
<INTEREST-INVEST> 10,936
<INTEREST-OTHER> 893
<INTEREST-TOTAL> 39,875
<INTEREST-DEPOSIT> 16,500
<INTEREST-EXPENSE> 18,423
<INTEREST-INCOME-NET> 21,452
<LOAN-LOSSES> 1,783
<SECURITIES-GAINS> 133
<EXPENSE-OTHER> 17,889
<INCOME-PRETAX> 8,698
<INCOME-PRE-EXTRAORDINARY> 8,698
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,196
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.41
<YIELD-ACTUAL> .047
<LOANS-NON> 1,135
<LOANS-PAST> 0
<LOANS-TROUBLED> 949
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,140
<CHARGE-OFFS> 2,513
<RECOVERIES> 766
<ALLOWANCE-CLOSE> 5,176
<ALLOWANCE-DOMESTIC> 5,176
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
VALLEY BANC SERVICES CORP.
AND SUBSIDARIES
ST. CHARLES, ILLINOIS
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDARIES
St. Charles, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
CONTENTS
REPORT OF INDEPENDENT AUDITORS .............................................. 1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS ............................................ 2
CONSOLIDATED STATEMENTS OF INCOME ...................................... 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ........................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS .................................. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................. 6
<PAGE>
[LOGO]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Valley Banc Services Corporation
St. Charles, Illinois
We have audited the accompanying consolidated balance sheets of Valley Banc
Services Corp. and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Valley Banc Services
Corp. and Subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for income taxes to conform with the
provisions of Statement of Financial Accounting Standards No. 109. As discussed
in Note 2 to the consolidated financial statements, in 1994 the Company changed
its method of accounting for securities to conform with the provisions of
Statement of Financial Accounting Standards No. 115.
/s/ Crowe, Chizek, and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 26, 1996
1.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,258,278 $ 7,352,410
Federal funds sold 4,447,000 2,892,000
--------------- ---------------
Cash and cash equivalents 13,705,278 10,244,410
Securities available-for-sale 39,130,816 4,605,274
Securities held-to-maturity (fair value of
$24,702,524 in 1994) - 25,706,226
Loans, net of deferred fees and unearned discount 109,612,346 95,490,288
Allowance for loan losses (1,323,513) (1,001,748)
--------------- ---------------
Net loans 108,288,833 94,488,540
Other real estate owned 127,434 566,404
Premises and equipment, net 3,695,994 3,894,097
Core deposit and other intangibles 253,750 311,250
Accrued interest receivable 1,861,147 1,502,787
Other assets 464,083 460,537
--------------- ---------------
$ 167,527,335 $ 141,779,525
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 23,648,776 $ 20,273,333
Interest-bearing demand 26,620,833 26,537,658
Savings 16,831,450 18,383,450
Deposits, $100,000 and over 24,729,713 17,153,892
Other time deposits 59,968,455 45,341,230
--------------- ---------------
Total deposits 151,799,227 127,689,563
Notes payable 3,550,000 3,700,000
Federal funds purchased 1,133,000 500,000
Accrued interest payable and other liabilities
1,299,632 845,100
--------------- ---------------
157,781,859 132,734,663
Commitments and contingent liabilities
Shareholders' equity
Common stock - ($1 par value, 1,000,000 shares
authorized; 525,668 shares issued) 525,668 525,668
Surplus 7,145,537 7,145,537
Retained earnings 1,878,318 1,489,143
Treasury stock (9,460 shares, at par) (9,460) (9,460)
Unrealized gain (loss) on securities available-for-sale,
net of taxes of $105,745 and $(54,620) in 1995 and
in 1994, respectively 205,413 (106,026)
--------------- ---------------
9,745,476 9,044,862
--------------- ---------------
$ 167,527,335 $ 141,779,525
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans (including fee income) $ 9,684,322 $ 7,879,628 $ 6,727,964
Securities
Taxable 2,076,960 1,677,528 1,775,064
Tax exempt 34,865 36,331 17,205
Federal funds sold 331,174 70,016 75,665
Interest-bearing deposits in other financial
institutions - 1,550 2,550
------------ ------------ ------------
12,127,321 9,665,053 8,598,448
Interest expense
Deposits 5,843,764 3,965,752 3,727,811
Notes payable 276,051 278,511 268,679
Other borrowings 20,573 46,007 5,640
------------ ------------ ------------
6,140,388 4,290,270 4,002,130
------------ ------------ ------------
NET INTEREST INCOME 5,986,933 5,374,783 4,596,318
Provision for loan losses 673,000 307,000 186,650
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,313,933 5,067,783 4,409,668
Other income
Service charges and fees 614,908 518,938 456,428
Security losses (65,500) (60,000) -
Other income 142,782 145,018 129,494
------------ ------------ ------------
692,190 603,956 585,922
Other expense
Salaries and employee benefits 2,360,168 2,177,781 1,949,713
Occupancy and equipment expense 826,380 715,746 629,889
Data processing fees 362,087 308,975 238,332
FDIC assessment 146,393 260,184 222,224
Loss on disposal of other real estate owned 157,119 - -
Amortization of core deposit and other intangibles 57,500 87,840 145,730
Other expenses 1,370,996 1,177,931 1,075,545
------------ ------------ ------------
5,280,643 4,728,457 4,261,433
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 725,480 943,282 734,157
Income tax provision 336,305 323,659 284,337
------------ ------------ ------------
NET INCOME $ 389,175 $ 619,623 $ 449,820
------------ ------------ ------------
------------ ------------ ------------
Earnings per share $ .75 $ 1.20 $ .87
--------- --------- ---------
--------- --------- ---------
Weighted average number of shares outstanding 516,208 516,208 516,208
--------- --------- ---------
--------- --------- ---------
Book value per share as of December 31, based on
516,208 shares outstanding $ 18.88 $ 17.52 $ 16.53
--------- --------- ---------
--------- --------- ---------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Gains (Losses) Total
on Securities Share-
Common Retained Treasury Available- holders'
Stock Surplus Earnings Stock for-Sale Equity
----- ------- -------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1993 $ 525,668 $ 7,145,537 $ 419,700 $ (9,460) $ - $ 8,081,445
Net income - - 449,820 - - 449,820
--------- ----------- ----------- -------- --------- -----------
Balance at
December 31, 1993 525,668 7,145,537 869,520 (9,460) - 8,531,265
Cumulative effect
of adopting State-
ment of Financial
Accounting Stan-
dards No. 115, net
of tax of $20,427 - - - - 39,651 39,651
Net change in
unrealized gains
(losses) on securities
available-for-sale,
net of taxes of
$75,047 - - - - (145,677) (145,677)
Net income - - 619,623 - - 619,623
--------- ----------- ----------- -------- --------- -----------
Balance at
December 31, 1994 525,668 7,145,537 1,489,143 (9,460) (106,026) 9,044,862
Net change in
unrealized gains
(losses) on securities
available-for-sale,
net of taxes of
$74,646 - - - - 144,901 144,901
Net unrealized gain
on securities transferred
from held- to-maturity to
available-for-sale, net of
taxes of $85,720 - - - - 166,538 166,538
Net income - - 389,175 - - 389,175
--------- ----------- ----------- -------- --------- -----------
Balance at
December 31, 1995 $ 525,668 $ 7,145,537 $ 1,878,318 $ (9,460) $ 205,413 $ 9,745,476
--------- ----------- ----------- -------- --------- -----------
--------- ----------- ----------- -------- --------- -----------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 389,175 $ 619,623 $ 449,820
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 405,762 365,343 301,050
Amortization of premiums and discounts
on securities, net 124,987 259,017 224,894
Losses on securities 65,500 60,000 -
Provision for loan losses 73,000 307,000 186,650
Loss on disposal of other real estate owned 157,119 - -
Amortization of core deposit and other
intangibles 57,500 87,840 145,730
Increase in interest receivable (358,360) (177,872) (83,103)
Increase in deferred income taxes (67,999) (76,140) (54,941)
Increase (decrease) in deferred loan fees (12,583) 34,969 39,197
Increase in accrued interest payable and
other liabilities 339,489 145,727 111,243
(Increase) decrease in other assets, net 19,130 (218,474) 43,679
----------- ----------- -----------
Net cash provided by operating activities 1,792,720 1,407,033 1,364,219
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls and
paydowns of securities available-for-sale 1,311,672 1,626,719 -
Purchases of securities available-for-sale (5,350,279) (1,241,992) -
Proceeds from maturities, calls and
paydowns of securities held-to-maturity 6,761,977 5,705,282 8,813,685
Purchases of securities held-to-maturity (11,261,368) (4,814,408) (12,260,959)
Net increase in loans (14,487,198) (14,321,743) (12,294,724)
Proceeds from sales of other real estate owned 308,339 208,216 124,822
Premises and equipment expenditures, net (207,659) (730,829) (1,409,519)
----------- ----------- -----------
Net cash used in investing activities (22,924,516) (13,568,755) (17,026,695)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 24,109,664 12,347,854 16,895,594
Payments of notes payable (150,000) (300,000) (269,571)
Increase in federal funds purchased 633,000 50,000 450,000
----------- ----------- -----------
Net cash provided by financing activities 24,592,664 12,097,854 17,076,023
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 3,460,868 (63,868) 1,413,547
Cash and cash equivalents at beginning of year 10,244,410 10,308,278 8,894,731
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $13,705,278 $10,244,410 $10,308,278
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $5,892,473 4,253,753 $4,035,927
Income taxes 376,000 509,378 332,640
Supplemental disclosure of noncash investing activities
Transfer of loans to other real estate owned $26,488 $102,410 $573,032
Transfer of securities held-to-maturity to securities
available-for-sale, at fair value 30,270,136 5,205,545 -
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the accounts of Valley Banc Services Corp. (the "Company"), and its
wholly-owned subsidiaries, Hinckley State Bank, which was acquired on June 24,
1984; State Bank of Osco, which was acquired on June 12, 1987; Fox Valley Bank,
which was acquired on May 20, 1988; and Anchor Bank, which was acquired on
March 2, 1990. These acquisitions were accounted for using the purchase method
of accounting and, accordingly, assets acquired and liabilities assumed were
valued at their estimated fair market values at the dates of acquisition. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Approximately $250,000 of the purchase price of Fox Valley Bank and $325,000 of
the purchase price of Anchor Bank have been allocated to core deposit value and
other intangibles. These intangibles are being amortized over a ten-year
period. At December 31, 1995, $253,750 in intangible assets remains to be
amortized.
The Company and the Banks operate in Hinckley, Osco, St. Charles and Grayslake,
Illinois, as a bank holding company and commercial banks, respectively. The
Company's only significant activity is ownership of the Banks. The Banks'
primary services include accepting deposits and making commercial, consumer, and
mortgage loans.
USE OF ESTIMATES IN THE 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, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Future results could differ
from these estimates.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, non-interest bearing amounts due from banks,
federal funds sold, money market mutual funds, short term interest-bearing
deposits in other financial institutions and securities purchased under
agreements to resell in less than 90 days. Generally, federal funds are sold
for one-day periods. The Company reports net cash flows for customer loan
transactions, deposit transactions and deposits made with other financial
institutions.
SECURITIES: Securities are classified as held-to-maturity when the Company's
management has the positive intent and the Company has the ability to hold those
securities to maturity. Accordingly, they are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Securities are classified
as available-for-sale when management may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
on alternative investments and for other reasons. They are carried at fair
value. Unrealized gains and losses on securities available-for-sale are charged
or credited to a valuation allowance and included as a separate component of
shareholders' equity, net of income taxes. Premium amortization is deducted
from and discount accretion is added to interest income from securities using
the interest method. Realized gains and losses on disposition of securities
available-for-sale are based on the net proceeds and the adjusted carrying
amount of the securities sold, using the specific identification method.
- --------------------------------------------------------------------------------
(Continued)
6.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS AND LOAN INCOME: Loans are stated net of the allowance for loan losses,
unearned discount, and deferred loan fees. Interest on most loans is accrued
over the term of the loan based on the amount of principal outstanding. Where
serious doubt exists as to the collectibility of a loan, the accrual of interest
is discontinued.
Loan fees, net of direct loan origination costs, are deferred and amortized over
the estimated life of the loan as a yield adjustment. These fees are amortized
using the interest method.
ALLOWANCE FOR LOAN LOSSES: An allowance for loan losses is established and
maintained because some loans may not be repaid in full. Increases to the
allowance are recorded by a provision for loan losses charged to expense. A
loan is charged off by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover possible losses that are currently anticipated
based on past loss experience, general economic conditions, information about
specific borrower situations including their financial position and collateral
values, and other factors and estimates which are subject to change over time.
While management may periodically allocate portions of the allowance for
specific problem loan situations, the entire allowance is available for any loan
charge-offs that occur.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses.
Statements of Financial Accounting Standards (SFAS) No. 114 and No. 118 became
effective January 1, 1995 and require recognition of loan impairment. Loans are
considered impaired if full principal or interest payments are not anticipated.
Each impaired loan is carried at the present value of expected cash flows
discounted at the loan's effective interest rate or at the fair value of the
collateral if the loan is collateral dependent. A portion of the allowance for
loan losses is allocated to an impaired loan if the present value of cash flows
or collateral value indicate the need for an allowance allocation. The effect
of adopting these standards is included in the 1995 provision for loan losses
and was not material.
Smaller balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, and automobile, home equity and second mortgage loans. Commercial
loans and mortgage loans secured by other properties are evaluated individually
for impairment.
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans are moved to nonaccrual status when 90 days or more past due. All
commercial and non-residential mortgage nonaccrual loans, and loans restructured
after January 1, 1995, are defined as impaired loans. Impaired loans, or
portions thereof, are charged off when deemed uncollectible.
The nature of disclosures for impaired loans is considered generally comparable
to prior nonaccrual and renegotiated loans and non-performing and past due asset
disclosures. Increases or decreases in the carrying value of impaired loans are
reported as reductions or increases in the provision for loan losses.
OTHER REAL ESTATE OWNED: Other real estate owned is comprised of properties
acquired through, or in lieu of, loan foreclosure and are recorded at the lower
of cost (fair value at the time of foreclosure) or fair value less estimated
selling costs. Costs related to improving the properties are capitalized,
whereas costs related to holding the property are expensed.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is included in operating expenses and is
computed primarily on the straight-line method over the estimated useful lives
of the assets. The cost of maintenance and repairs is charged to expense as
incurred, and significant improvements are capitalized. At the time of sale or
disposition of an asset, the applicable cost and accumulated depreciation are
removed from the books.
INCOME TAXES: The Company and its bank subsidiaries file a consolidated federal
income tax return. Under the intercompany tax-sharing agreement, the banks pay
to the Company the amount of federal income taxes for which they would have been
liable, computed as though the banks had filed separate returns.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (FAS No. 109), "Accounting for Income Taxes". The adoption of
FAS 109 changed the Company's method of accounting for income taxes from the
deferred method (APB 11) to an asset and liability approach. Previously, the
Company deferred the past tax effects of timing differences between financial
reporting and taxable income. The asset and liability approach requires the
recognition of deferred tax-liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities, using enacted tax rates. The effect of
adopting FAS 109 was not material to the Company's consolidated net income and
is included in the 1993 income tax provision.
The Company records income tax expense based on the amount of taxes due on its
tax return plus deferred taxes computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE: Earnings per share amounts are computed based on the
weighted average number of shares outstanding, net of treasury shares.
BOOK VALUE PER SHARE: Book value per share amounts are computed based on the
total shareholders' equity at the end of the period divided by the number of
shares issued, less treasury stock, at the end of the year.
NOTE 2 - SECURITIES
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 115 requires corporations
to classify debt and equity securities as either held-to-maturity, trading or
available-for-sale. The cumulative effect on retained earnings at January 1,
1994, of adopting SFAS No. 115, net of income taxes, was $39,651. This
adjustment represents primarily the effect of adjusting securities available-
for-sale to fair value.
In November 1995, the Financial Accounting Standards Board issued "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities", which allowed corporations to transfer its
securities between the categories of held-to-maturity and available-for-sale
prior to December 31, 1995. Accordingly, the Banks reclassified all of their
held-to-maturity bonds into the available-for-sale category prior to December
31, 1995. The amortized cost and unrealized gain of the securities which were
transferred were $30,017,878 and $252,258, respectively.
The amortized cost, gross unrealized gains and losses, and fair values of
securities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
---------------------------1 9 9 5 ----------------------
-------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 7,150,462 $ 57,635 $ (23,024) $ 7,185,073
U.S. government agencies 29,042,742 357,971 (83,383) 29,317,330
States and political
subdivisions 1,688,921 14,167 (13,700) 1,689,388
Mortgage-backed and
related securities 860,533 13,106 (11,614) 862,025
Other 77,000 - - 77,000
----------- ---------- ----------- ------------
$ 38,819,658 $ 442,879 $ (131,721) $ 39,130,816
----------- ---------- ----------- ------------
----------- ---------- ----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
(continued)
9.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
----------------------1 9 9 4----------------------
-------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ---------------------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 1,270,042 $ - $ (37,620) $ 1,232,422
U.S. government agencies 2,242,415 - (83,722) 2,158,693
States and political
subdivisions 506,424 - (13,924) 492,500
Mortgage-backed and
related securities 670,039 1,523 (26,903) 644,659
Other 77,000 - - 77,000
------------ -------- ------------ ------------
$ 4,765,920 $ 1,523 $ (162,169) $ 4,605,274
------------ -------- ------------ ------------
------------ -------- ------------ ------------
Securities Held-to-Maturity
- ---------------------------
U.S. Treasury $ 8,206,742 $ 1,660 $ (325,740) $ 7,882,662
U.S. government agencies 15,782,551 8,751 (654,627) 15,136,675
States and political
subdivisions 1,144,225 8,460 (27,077) 1,125,908
Mortgage-backed and
related securities 572,408 20,919 (36,048) 557,279
------------ -------- ------------ ------------
$ 25,706,226 $ 39,790 $(1,043,492) $ 24,702,524
------------ -------- ------------ ------------
------------ -------- ------------ ------------
</TABLE>
The mortgage-backed and related securities are investments in pools of loans
which are secured primarily by first mortgages on residential real estate.
There were no significant concentrations of investments (greater than 10% of
shareholders' equity) in any individual security issue except for U.S. Treasury
securities and obligations of U.S. government agencies and corporations.
At December 31, 1995 and 1994, securities with an amortized cost of
approximately $10,575,000 and $8,563,000, respectively, were pledged to
collateralize public deposits and for other purposes as required or permitted by
law.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE>
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of securities at December 31, 1995 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Securities Available-for-Sale Cost Value
----------------------------- ---- -----
<S> <C> <C>
Due in one year or less $ 10,144,232 $ 10,149,768
Due after one year through five years 25,003,880 25,275,767
Due after five years through ten years 2,386,340 2,409,729
Due after ten years 347,673 356,527
------------ ------------
37,882,125 38,191,791
Mortgage-backed and related securities 860,533 862,025
Other securities 77,000 77,000
------------- -------------
$ 38,819,658 $ 39,130,816
------------- -------------
------------- -------------
</TABLE>
There were no sales of debt securities in 1995, 1994 and 1993. Losses on
securities of $65,500, $60,000 and $0 for the years ended December 31, 1995,
1994 and 1993, respectively, resulted from a markdown of an equity security, a
provision made to adjust a valuation allowance for an FHA Title 1 pool included
in mortgage-backed and related securities, and a provision made to adjust a
valuation allowance for a municipal bond.
NOTE 3 - LOANS
The Company makes loans to, and obtains deposits from, customers primarily in
Kane, DeKalb, Lake and Henry counties in Illinois, and the surrounding
communities. Most loans are secured by specific items of collateral, including
commercial and residential real estate and other business and consumer assets.
Loans consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Commercial and agricultural $ 51,782,354 $ 46,564,061
Real estate mortgage 47,326,474 40,507,873
Consumer 11,076,379 9,005,653
----------- -----------
Total loans 110,185,207 96,077,587
Less:
Unearned income (292,113) (293,968)
Deferred loan fees (280,748) (293,331)
------------- -------------
$ 109,612,346 $ 95,490,288
------------- --------------
------------- --------------
</TABLE>
11.
<PAGE>
NOTE 3 - LOANS (Continued)
Loans in non-accrual status amounted to approximately $19,000 and $67,000 at
December 31, 1995 and 1994, respectively.
A summary of loans made by the Company in the ordinary course of business to or
for the benefit of directors, executive officers, or principal holders of common
stock of the Company is as follows for the year ended December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of year $ 4,827,000
New loans 303,000
Repayments and retirements (2,257,000)
------------
Balance at end of year $ 2,873,000
-------------
-------------
</TABLE>
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans, standby letters of
credit, and unused lines of credit. The Company's exposure to credit loss in
the event of nonperformance by the other parties to these financial instruments
is represented by the contractual amount of the instruments. The Company uses
the same credit policy to make or fund such commitments as it uses for new loans
recorded in the financial statements. At December 31, the approximate contract
amounts of these financial instruments are summarized as follows:
<TABLE>
<CAPTION>
Contract Amount
---------------
1995 1994
---- ----
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Unused lines of credit $ 18,035,000 $ 14,108,000
Unfunded loan commitments 2,895,000 1,311,000
Standby letters of credit 1,776,000 1,438,000
</TABLE>
Since many commitments to make loans expire without being used, the amounts
above do not necessarily represent future cash commitments. Collateral obtained
upon exercise of the commitment is determined using management's credit
evaluation of the borrower, and may include commercial and residential real
estate and other business and consumer assets.
Included in the commitments above at December 31, 1995 are fixed rate
commitments of $820,000 with rates ranging from 8.50% to 10.50%
12.
<PAGE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,001,748 $ 868,717 $ 740,627
Provision charged to operations 673,000 307,000 186,650
Recoveries on loans previously
charged off 26,406 31,634 28,923
Loans charged off (377,641) (205,603) (87,483)
----------- ----------- ---------
Balance at end of year $ 1,323,513 $ 1,001,748 $ 868,717
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
Information regarding impaired loans is as follows for the
year ended December 31, 1995:
<S> <C>
Average investment in impaired loans $ 670,626
Interest income recognized on impaired loans
including interest income recognized on cash basis 66,948
Interest income recognized on impaired loans on cash basis --
Information regarding impaired loans at December 31, 1995:
Balance of impaired loans $ 305,714
Less portion for which no allowance for loan losses is
allocated (41,714)
------------
Portion, of impaired loan balance for which an allowance
for credit losses is allocated $ 264,000
------------
------------
Portion of allowance for loan losses allocated to the
impaired loan balance $ 51,250
------------
------------
</TABLE>
13.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
The premises and equipment at December 31, 1995, 1994 and 1993, consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 716,561 $ 716,561
Buildings and improvements 2,843,356 2,782,723
Furniture and equipment 1,933,497 1,786,480
----------- -----------
Total cost 5,493,414 5,285,764
Accumulated depreciation (1,797,420) (1,391,667)
----------- -----------
$ 3,695,994 $ 3,894,097
----------- -----------
----------- -----------
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993,
totaled approximately $406,000, $365,000 and $301,000, respectively.
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current $404,304 $399,799 $334,278
Deferred (67,999) (76,140) (54,841)
-------- -------- --------
$336,305 $323,659 $284,337
-------- -------- --------
-------- -------- --------
</TABLE>
The following are the components of the deferred tax assets and liabilities at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Gross deferred tax assets
Allowance for loan losses $308,149 $217,126
Deferred loan fees 95,454 99,631
Unrealized losses on securities available-for-sale - 54,620
Other 11,217 16,004
-------- --------
414,820 387,381
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Gross deferred tax liabilities
Depreciation $ (49,105) $(67,318)
Unrealized gains on securities available-for-sale (105,745) --
Other (46,354) (14,080)
(201,204) (81,398)
--------- --------
Net deferred tax asset 213,616 305,983
Valuation allowance for deferred tax assets -- --
--------- --------
Net deferred tax asset $ 213,616 $305,983
--------- --------
--------- --------
</TABLE>
The Company has not recorded a valuation allowance based on the amount of
recoverable taxes paid in prior years and based on estimates of future taxable
income.
The difference between the financial statement tax provision and amounts
computed by applying the federal income tax rate of 34% to income before income
taxes is reconciled as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at the
statutory rate $246,663 $320,716 $249,613
Increase (decrease) in tax
resulting from
Tax exempt interest (13,117) (15,992) (12,065)
Goodwill amortization 19,550 14,142 44,080
Nondeductible legal expenses 56,771 -- --
Other 26,438 4,793 2,759
-------- -------- --------
$336,305 $323,659 $284,337
-------- -------- --------
-------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 356,711 $ 353,713 $ 295,393
Money market accounts 436,279 348,473 317,044
Savings 581,151 599,513 524,944
Time, $100,000 and over 1,013,203 569,555 613,015
Other time 3,456,420 2,094,498 1,977,405
---------- ---------- ----------
$5,843,764 $3,965,752 $3,727,811
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 8 - NOTES PAYABLE
At December 31, 1995 and 1994, the Company was indebted under the following
notes:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Term loan to Cole Taylor Bank originally dated
July 1, 1991, renewed on December 28, 1994;
interest rate is the 3-month LIBOR (London
Interbank Offering Rate) plus 150 basis points,
adjusting quarterly at the end of each calendar
quarter; interest is payable quarterly beginning
March 30, 1995; principal reductions of $100,000
due on January 20, 1995 and $400,000 due
voluntarily prior to maturity; remaining principal
of $3,200,000 due in full on January 31, 1998. $3,550,000 $3,700,000
Secured line of credit to Cole Taylor Bank in the
amount of $100,000 originally dated July 1, 1991,
renewed on December 28, 1994; interest rate is the
3-month LIBOR plus 150 basis points, adjusting
quarterly at the end of each calendar quarter;
interest is payable quarterly when line is drawn
upon. -- --
---------- ----------
$3,550,000 $3,700,000
---------- ----------
---------- ----------
</TABLE>
The note and line of credit with Cole Taylor Bank are secured by all shares of
Hinckley State Bank, State Bank of Osco, Fox Valley Bank and Anchor Bank stock
owned by the Company, as well as funds on deposit with Cole Taylor Bank. This
debt was subsequently paid off as part of the acquisition discussed in Note 15.
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has established a profit-sharing plan for qualified employees to
which it contributes a percentage of qualified employees' salaries. This
discretionary contribution is determined annually based on projected earnings
and is approved by the Board of Directors.
Qualified employees may contribute up to 10% of their compensation. The expense
recognized for the plan for 1995, 1994 and 1993 was approximately $127,000,
$130,000 and $125,000, respectively.
NOTE 10 - DIVIDEND RESTRICTIONS
Bank holding companies are required to comply with the Federal Reserve Board's
risk-based capital guidelines. The minimum ratio of total capital to risk-
weighted assets (including certain off-balance-sheet activities, such as standby
letters of credit) is 8%. At least half of the total capital is required to be
Tier I Capital. Under these guidelines, Tier I Capital consists of common and
qualifying preferred stockholders' equity and minority interests in equity
accounts of consolidated subsidiaries, less goodwill. The calculation of Tier I
Capital is exclusive of unrealized gains and losses, net of tax, on securities
available-for-sale. Tier II Capital consists of, in addition to Tier I Capital,
mandatory convertible debt, preferred stock not qualifying as Tier I Capital,
subordinated and other qualifying term debts and the allowance for loan losses.
Risk-based capital ratios are calculated with reference to risk-weighted assets
which include both on and off-balance-sheet exposures. In addition to the risk-
based capital requirements, the Federal Reserve Board has adopted a minimum
leverage ratio (Tier I Capital to total assets) of 3%, provided that all but the
strongest companies are expected to maintain a ratio of 1% to 2% above the
stated minimum. The Company, at December 31, 1995, met all regulatory capital
requirements.
Dividend payments to the parent company are limited under the terms of the note
agreement with Cole Taylor Bank, which provides that the subsidiary banks must
maintain primary equity capital above specified minimum levels. In addition,
banking regulations limit the amount of dividends which may be paid from the
banks without prior approval of the bank's regulatory agency. Based on these
restrictions, the banks' retained earnings available for the payment of
dividends without prior approval(s) were approximately $705,000 at December 31,
1995.
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS
Effective January 19, 1996, State Bank of Osco adopted a Corrective Action
Resolution (CAR) under the direction of the Federal Deposit Insurance
Corporation (FDIC). The CAR required the Bank to adopt a Plan of Action for
each loan classified by the FDIC in their October 10, 1995 examination. These
Plans of Action summarize how the balance of the classified loans will be
reduced and provide regular status reports on each loan. The CAR also requires
the Bank to address concerns the FDIC cited with regard to: loan file
documentation; staffing requirements; profit enhancement; liquidity and interest
rate risk. The Bank is also required to submit quarterly progress reports to
the FDIC concerning compliance with the CAR.
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
Fox Valley Bank leases approximately 5,200 square feet of office space and a
drive-up for the main office facility in St. Charles, Illinois; approximately
1,900 square feet of office space and a drive-up facility for a branch facility
also in St. Charles, Illinois; and approximately 1,200 square feet of office
space for a branch facility in Geneva, Illinois. The term of the main office
lease is 10 years with two consecutive five-year renewal options and rentals are
subject to annual increases not to exceed 5%. The term of the St. Charles
branch lease is also 10 years with one five-year renewal option, and rentals are
subject to annual increases not to exceed 7.5%. The term of the Geneva branch
lease is five years. Minimum lease payments required by the agreements,
exclusive of future annual increases which are tied to an inflationary pricing
factor, are as follows:
1996 $ 113,400
1997 113,400
1998 108,300
1999 43,200
2000 34,200
Thereafter 54,150
------------
$ 466,650
------------
------------
The Company is also liable under a lease for the prior main office facility in
St. Charles, Illinois. This lease expires on April 30, 2000 with annual rent
commitments ranging from approximately $22,000 in 1995 to $29,000 in 1999.
These minimum lease payments are not included in the above table as the Company
has subleased the office at substantially the same terms as the original lease.
The Company is currently in negotiations with the sublessee to assign this lease
obligation. The Company expects to incur a loss of $14,000 upon termination of
this lease.
The Company maintained reserves in accordance with Federal Reserve requirements
of approximately $487,000 at December 31, 1995.
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value. There is no ready market for a significant portion of the Company's
financial instruments. Considerable judgment is required to develop the
estimates of fair value, and, therefore, the estimates provided below are not
necessarily indicative of the amount that could be realized in a current market
exchange. Changes in assumptions could significantly affect these estimated
fair values.
SHORT-TERM FINANCIAL INSTRUMENTS: These instruments are valued at their
carrying amounts included in the balance sheets, which are reasonable estimates
of fair value due to the relatively short period to maturity of these
instruments. This approach applies to cash and cash equivalents, accrued
receivables and certain other liabilities.
SECURITIES: Fair value for these instruments equals quoted market prices or
dealer quotes.
LOANS: The fair value of loans is estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. The fair value of
nonaccrual loans is also estimated on a present value basis, using higher
discount rates appropriate to the higher risk involved.
DEPOSITS: The fair value of demand deposits, savings accounts, and money market
deposits is the amount payable on demand at the reporting date. The fair value
of certificates of deposit is estimated by discounting future cash flows using
the current rates for deposits of similar remaining maturities. The intangible
value of long-term relationships with depositors is not taken into account in
estimating the fair values disclosed.
FEDERAL FUNDS PURCHASED: Federal funds purchased are for a term of one day, and
the carrying amount is a reasonable estimate of fair value.
NOTES PAYABLE: The Cole Taylor Bank note payable was a floating rate instrument
and the carrying amount was a reasonable estimate of fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The fee that would
be charged to enter similar commitments today is the fair value. All
commitments to extend credit and standby letters of credit are issued on a
short-term or floating rate basis. The fair value of these instruments is not
material.
- --------------------------------------------------------------------------------
(Continued)
19.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Value Fair Value
----- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 13,705,278 $ 13,705,278
Securities available-for-sale 39,130,816 39,130,816
Loans 109,612,346 109,851,895
Allowance for loan losses (1,323,513) (1,323,513)
Accrued interest receivable 1,861,147 1,861,147
Financial liabilities:
Deposits 151,799,227 151,922,738
Notes payable 3,550,000 3,550,000
Federal funds purchased 1,133,000 1,133,000
Accrued interest payable 610,723 610,723
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY STATEMENTS
Presented below are the condensed balance sheets as of December 31, 1995 and
1994, and the related statements of income and cash flows for each of the three
years in the period ended December 31, 1995 for Valley Banc Services Corp.
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,782 $ 86,990
Investment in bank subsidiaries 13,245,196 12,454,854
Core deposit and other intangibles 75,000 100,000
Other assets 94,040 157,576
----------- -----------
$13,416,018 $12,799,420
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 3,550,000 $ 3,700,000
Other liabilities 120,542 54,558
----------- -----------
3,670,542 3,754,558
Shareholders' equity
Common stock, ($1 par value; 1,000,000
shares authorized; 525,668 shares
issued at December 31, 1995 and 1994) 525,668 525,668
Surplus 7,145,537 7,145,537
Retained earnings 1,878,318 1,489,143
Treasury stock (9,460 shares, at par,
at December 31, 1995 and 1994) (9,460) (9,460)
Unrealized gain (loss) on securities
available-for-sale, net of taxes of
$105,745 and $(54,620) in 1995 and
1994, respectively 205,413 (106,026)
----------- -----------
9,745,476 9,044,862
----------- -----------
$13,416,018 $12,799,420
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY STATEMENTS (Continued)
STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income
Dividends from bank subsidiaries $ 425,000 $575,000 $580,000
Other income 29,180 31,258 56,385
--------- -------- --------
454,180 606,258 636,385
Expenses
Interest expense 276,051 278,511 268,679
Other expense 303,938 240,074 409,958
--------- -------- --------
579,989 518,585 678,637
--------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED EARNINGS OF
BANK SUBSIDIARIES (125,809) 87,673 (42,252)
Income tax benefit 99,083 163,981 163,709
--------- -------- --------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDIARIES (26,726) 251,654 121,457
Equity in undistributed earnings of bank
subsidiaries 415,901 367,969 328,363
--------- -------- --------
NET INCOME $ 389,175 $619,623 $449,820
--------- -------- --------
--------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE>
VALLEY BANC SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY STATEMENTS (Continued)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 389,175 $ 619,623 $ 449,820
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 35,017 22,418 115,283
Earnings of subsidiary banks; net of
dividends received (415,901) (367,969) (328,363)
Security losses -- 25,000 --
(Increase) decrease in other assets 53,517 (37,592) 13,783
Increase (decrease) in other liabilities 65,984 40,790 (3,709)
--------- --------- ---------
Net cash provided by operating activities 127,792 302,270 246,814
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution to State Bank of Osco (63,000) -- --
Proceeds from sales of premises and equipment -- 8,420 --
--------- --------- ---------
Net cash provided by (used in) investing activities (63,000) 8,420 --
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable (150,000) (300,000) (269,571)
--------- --------- ---------
Net cash used in financing activities (150,000) (300,000) (269,571)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (85,208) 10,690 (22,757)
Cash and cash equivalents at beginning of year 86,990 76,300 99,057
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,782 $ 86,990 $ 76,300
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 276,051 $ 278,511 $ 268,772
Income taxes 376,000 509,378 332,640
</TABLE>
NOTE 15 - ACQUISITION
Pursuant to an Agreement and Plan of Merger dated June 30, 1995 and effective
January 3, 1996, the stock of the Company was sold to Merchants Bancorp, Inc.
for $20,500,000 in cash.
- --------------------------------------------------------------------------------
23.
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Merchants Bancorp, Inc. ("Company") acquired 100% of the outstanding common
stock of Valley Banc Services Corp. ("Valley"), on January 3, 1996, for cash in
the amount of $20.5 million. The Company borrowed $14 million to finance the
transaction, which was accounted for using the purchase method. In addition, the
Company made a capital contribution of approximately $3.5 to Valley, which was
used to repay a note payable.
The accompanying pro forma financial information presents the balances sheets of
the Company and Valley as of December 31, 1995, the purchase accounting
adjustments, and the resulting pro forma balance sheet. Statements of income of
the Company and Valley are presented for the year ended December 31, 1995, with
December 31, 1995, purchase accounting adjustments amortized for one year (as if
they had occurred on January 1, 1995).
The Company's management is currently soliciting offers, from independent
parties, to sell certain assets and liabilities of two Valley Banc Services
Corp. Subsidiaries. The following purchase accounting adjustments reflect the
Company's current estimate of the selling price.
<PAGE>
MERCHANTS BANCORP, INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Valley Banc
Merchants Services Adjustments
Bancorp, Inc. Corp. Debit(Credit) Pro Forma
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 28,166 $ 9,258 $ 24,050 G $ 34,946
(20,500) H
(3,550) I
(2,478) L
Securities available for sale 187,169 39,131 (311) A 200,266
311 D
(10,050) G
(15,984) L
Federal funds sold 0 4,447 (3,540) L 907
Loans held for sale 4,340 0 4,340
Loans 304,327 109,612 240 D 378,184
(35,995) L
Allowance for loan losses (5,176) (1,323) 526 L (5,973)
---------- ---------- --------- ---------
299,151 108,289 (35,229) 372,211
Premises and equipment, net 9,504 3,696 (2,159) L 11,041
Other real estate owned 566 127 693
Investment in Valley Banc Services Corp. 0 0 20,650 H 0
3,550 I
(24,200) M
Goodwill 0 254 (254) C 8,046
9,343 D
(1,297) L
Core deposit intangible 0 0 3,363 D 2,527
(836) L
Net assets of acquired subsidiaries, held for sale 0 0 7,438 L 7,438
Accrued interest and other assets 10,865 2,325 (150) H 12,095
(945) L
---------- ---------- --------- ---------
$ 539,761 $ 167,527 $(52,778) $654,510
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
Valley Banc
Merchants Services Adjustments
Bancorp, Inc. Corp. Debit(Credit Pro Forma
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits $453,771 $151,799 $ (187)D $551,634
54,123 L
Federal funds purchased and securities
sold under repurchase agreements 22,726 1,133 23,859
Notes payable 3,000 3,550 (14,000)G 17,000
3,550 F
Accrued interest and other liabilities 6,170 1,299 106 A 7,923
(1,707)D
1,147 L
--------- --------- -------- ---------
485,667 157,781 43,032 600,416
--------- --------- -------- ---------
STOCKHOLDERS' EQUITY
Common stock 2,607 526 526 M 2,607
Surplus 18,344 7,146 (1,869)B 18,344
254 C
(11,363)D
(3,550)F
23,674 M
Retained earnings 31,877 1,878 1,878 B 31,877
Unrealized gain on securities available for sale 1,450 205 205 A 1,450
Treasury stock, at cost (184) (9) (9)B (184)
--------- --------- -------- ---------
Total stockholders' equity 54,094 9,746 9,746 54,094
--------- --------- -------- ---------
$539,761 $167,527 $52,778 $654,510
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
<PAGE>
MERCHANTS BANCORP, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
Valley Banc
Merchants Services Adjustments
Bancorp, Inc. Corp. Debit(Credit) Pro Forma
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 28,046 $ 9,684 $ 20E $ 37,710
Interest on loans held for sale 161 0 161
Interest on securities:
Taxable 8,122 2,077 47E 10,152
Tax-exempt 2,814 35 2,849
Interest on federal funds sold 732 331 1,063
---------- --------- -------- ---------
39,875 12,127 67 51,935
---------- --------- -------- ---------
INTEREST EXPENSE
Interest on deposits 16,500 5,843 (22)E 22,321
Interest on federal funds purchased and
securities sold under repurchase agreements 1,769 21 1,790
Interest on notes payable 154 276 286J 716
--------- --------- -------- ---------
18,423 6,140 264 24,827
--------- --------- -------- ---------
Net interest income 21,452 5,987 331 27,108
Provision for loan losses 1,783 673 2,456
--------- --------- -------- ---------
Net interest income after provision for loan losses 19,669 5,314 331 24,652
--------- --------- -------- ---------
NONINTEREST INCOME
Trust income 1,925 0 1,925
Mortgage banking income 1,267 0 1,267
Service charges and fees 2,713 615 3,328
Securities gains (losses), net 133 (66) 67
Other income 880 143 1,023
--------- --------- -------- ---------
6,918 692 0 7,610
--------- --------- -------- ---------
NONINTEREST EXPENSES
Salaries and employee benefits 9,893 2,360 12,253
Occupancy expenses, net 1,030 529 1,559
Furniture and equipment expenses 1,238 297 1,535
FDIC deposit assessment 475 146 621
Goodwill amortization 0 0 383E 383
Core deposit intangible amortization 0 0 303E 303
Other expenses 5,253 1,949 7,202
--------- --------- -------- ---------
17,889 5,281 686 23,856
--------- --------- -------- ---------
Income before income taxes 8,698 725 1,017 8,406
Provision for income taxes 2,502 336 (135)E 2,592
(111)K
--------- --------- -------- ---------
Net income $ 6,196 $ 389 $ 771 $ 5,814
--------- --------- -------- ---------
--------- --------- -------- ---------
Earnings per share $2.41 $2.26
Weighted average shares outstanding 2,570,453 2,570,453
</TABLE>
<PAGE>
MERCHANTS BANCORP, INC.
ADJUSTING ENTRIES
DECEMBER 31, 1995
(IN THOUSANDS, UNAUDITED
<TABLE>
<CAPTION>
Entry Statement Item Debit Credit
- ----- -------------- ------ ------
<S> <C> <C> <C>
ENTRIES AT VALLEY BANC SERVICES CORP.
A Unrealized gain on securities available for sale $ 205
Accrued interest and other liabilities 106
Securities available for sale $ 311
The impact of Financial Accounting Standard
No. 115, net of deferred income taxes, was
reversed prior to implementation of
purchase accounting adjustments.
B Retained earnings 1,878
Surplus 1,869
Treasury stock 9
To combine retained earnings and treasury stock into surplus.
C Surplus 254
Goodwill 254
Intangible assets of Valley Banc Services Corp.
and subsidiaries were eliminated prior to
implementation of purchase accounting adjustments.
D Securities available for sale 311
Loans 240
Goodwill 9,343
Core deposit intangible 3,363
Deposits 187
Accrued interest and other liabilities (deferred taxes) 1,707
Surplus 11,363
To adjust assets and liabilities to fair value.
E Interest and fees on loans 20
Loans 20
Interest on securities 47
Securities available for sale 47
Interest on deposits 22
Deposits 22
Goodwill amortization 383
Goodwill 383
Core deposit intangible amortization 303
Core deposit intangible 303
Provision for income taxes 135
Accrued interest and other liabilities 135
To reflect first-year amortization of
purchase accounting adjustments of
acquired subsidiaries not held for
sale, net of taxes.*
</TABLE>
<PAGE>
ADJUSTING ENTRIES OF VALLEY BANC SERVICES CORP. - CONTINUED
<TABLE>
<CAPTION>
<S> <C> <C>
F Note payable 3,550
Surplus 3,550
To record repayment of note payable from capital contribution.
ENTRIES AT MERCHANTS BANCORP, INC., CONSOLIDATED
G Cash and due from banks 24,050
Notes payable 14,000
Securities available for sale 10,050
To reflect sources of funds for the purchase.
H Investment in Valley Banc Services Corp. 20,650
Cash and due from banks 20,500
Other assets (Organizational expenses incurred) 150
To record the purchase of 100% of the common stock of
Valley Banc Services Corp.
I Investment in Valley Banc Services Corp. 3,550
Cash and due from banks 3,550
Additional capital contribution to repay note payable.
J Interest on notes payable 286
Accrued interest and other liabilities 286
To reflect accrual of interest on new notes
payable net of note payable repaid. Interest
payable attributed to net assets held for sale is excluded.*
K Accrued interest and other liabilities 111
Provision for income taxes 111
To reflect income tax effect of interest accrual.*
L Cash and due from banks 2,478
Securities available for sale 15,984
Federal funds sold 3,540
Loans 35,995
Allowance for loan losses 526
Premises and equipment, net 2,159
Goodwill 1,297
Core deposit intangible 836
Accrued interest and other assets 945
Deposits 54,123
Accrued interest and other liabilities 1,147
Net assets of acquired subsidiaries, held for sale 7,438
To classify net assets of State Bank of Osco
and Anchor Bank as held for sale.
<PAGE>
ELIMINATING ENTRY
M Common stock 526
Surplus 23,674
Investment in subsidiary 24,200
To eliminate investment in subsidiary for pro forma
consolidation.
</TABLE>
* Balance sheet offsets to the income statement adjustments are not reflected
in the accompanying pro forma balances sheet.
FIVE YEAR AMORTIZATION SCHEDULE
OF NET PURCHASE ACCOUNTING ADJUSTMENTS
Year Amortization
---- ------------
1996 731
1997 720
1998 709
1999 698
2000 687
