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Registration No. 33-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
_____________________________
CNB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 6022 35-1568731
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Identification
incorporation or Classification Number)
organization) Code Number)
20 N.W. Third Street
Evansville, Indiana 47739
(812) 464-3400
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
_____________________________
DAVID L. KNAPP
Executive Vice President
CNB Bancshares, Inc.
20 N.W. Third Street
Evansville, Indiana 47739
(812) 464-3400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
_____________________________
Copies to:
Thomas C. Erb, Esq. Claudia V. Swhier
Lewis, Rice & Fingersh, L.C. Barnes & Thornburg
500 N. Broadway 1313 Merchants Bank Bldg.
St. Louis, Missouri 63102 11 South Meridian Street
(314) 444-7600 Indianapolis, Indiana 46204
(317) 638-1313
_____________________________
Approximate date of commencement of proposed sale of the securities to the
public:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
_____________________________
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE(2) REGISTRATION FEE
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Common stock, $1.00 stated value 2,431,056 $27.36 $66,515,876.38 $22,936.51
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(1) Based upon the assumed maximum number of shares of common stock of the
Registrant issuable to holders of common stock of UF Bancorp, Inc., a
Delaware corporation ("UFB"), in the proposed merger of UFB into Citizens
Bancshares, Inc., a wholly owned subsidiary of the Registrant.
(2) Solely for purposes of calculating the registration fee with Rule 457(f)(1)
as of June 14, 1995, being within 5 days of the filing of this Registration
Statement.
_____________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CNB BANCSHARES, INC.
CROSS REFERENCE SHEET TO PROSPECTUS
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FORM S-4 HEADING PROSPECTUS LOCATION
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1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus........................ Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Inside Front and Outside Back Cover
Pages of Prospectus; Table of Contents
3. Risk Factors, Ratio of Earnings
to Fixed Charges and Other
Information....................... Summary Information
4. Terms of the Transaction........... Summary Information; Merger;
Description of CNB Capital Stock;
Comparison of Shareholder Rights
5. Pro Forma Financial Information.... Pro Forma Financial Data
6. Material Contacts with the Company
Being Acquired.................... Summary Information; Merger
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters......... *
8. Interests of Named Experts and
Counsel........................... Merger; Legal Opinion; Experts
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................... *
10. Information with Respect to S-3
Registrants....................... Incorporation of Certain Documents
by Reference; Merger
11. Incorporation of Certain
Information by Reference.......... Incorporation of Certain Documents
by Reference
12. Information with Respect to S-2 or
S-3 Registrants................... *
13. Incorporation of Certain
Information by Reference.......... *
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*Indicates item not applicable
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FORM S-4 HEADING PROSPECTUS LOCATION
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14. Information with Respect to
Registrants Other than S-3
or S-2 Registrants................ *
15. Information with Respect to S-3
Companies......................... *
16. Information with Respect to S-2 or
S-3 Companies..................... Incorporation of Certain Documents by
Reference; Comparative Stock Prices;
Merger
17. Information with Respect to
Companies Other than S-3 or
S-2 Companies..................... *
18. Information if Proxies, Consents or
Authorizations are to be Solicited Incorporation of Certain Documents By
Reference; Summary Information;
Special Meeting; Merger; Shareholder
Proposals
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited or in an Exchange Offer. *
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*Indicates item not applicable
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CNB BANCSHARES, INC.
PROSPECTUS
______________________
UF BANCORP, INC.
PROXY STATEMENT
This Prospectus/Proxy Statement (this "Prospectus/Proxy Statement") is being
furnished to shareholders of UF Bancorp, Inc., a Delaware corporation ("UFB"),
in connection with the solicitation of proxies by the Board of Directors of UFB
for use at a Special Meeting of shareholders of UFB (the "Special Meeting") to
be held at ____ __.m., local time, on _______________, 1995, at the main office
of UFB located at 510 Main Street, Evansville, Indiana, and any adjournments or
postponements thereof.
At the Special Meeting, shareholders of UFB will consider and vote upon the
proposed acquisition of UFB by CNB Bancshares, Inc., an Indiana corporation
("CNB"), by means of the merger (the "Merger") of UFB with and into Citizens
Bancshares, Inc., an Indiana corporation and wholly owned subsidiary of CNB
("CBI"), pursuant to the Agreement and Plan of Merger dated December 12, 1994,
as amended June 9, 1995, among UFB, CBI and CNB (the "Merger Agreement"). Upon
consummation of the Merger, each issued and outstanding share of common stock of
UFB, par value $0.01 per share (the "UFB Common"), will be converted into the
right to receive 1.366 shares of common stock of CNB, stated value $1.00 per
share (the "CNB Common"), subject to possible upward or downward adjustment
based upon the average of the per share closing prices of a share of CNB Common
during the twenty day period preceding the fifth calendar day preceding the
consummation of the Merger, as set forth in the Merger Agreement and described
in this Prospectus/Proxy Statement. See "MERGER -- Conversion Ratio."
This Prospectus/Proxy Statement also constitutes a prospectus of CNB with
respect to up to 2,431,056 shares of CNB Common issuable in the Merger to the
holders of UFB Common.
The outstanding shares of CNB Common are, and the shares of CNB Common to be
issued in the Merger will be, included for quotation on the Nasdaq Stock
Market's National Market ("Nasdaq"). The last reported sale price of CNB Common
on Nasdaq on __________________, 1995, was $________.
This Prospectus/Proxy Statement and the accompanying form of proxy are first
being mailed to shareholders of UFB on or about _______________, 1995.
THE SHARES OF CNB COMMON HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/
PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
___________________________________
THE SHARES OF CNB COMMON OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR
SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND OR ANY OTHER GOVERNMENTAL AGENCY.
___________________________________
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS ____________, 1995
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TABLE OF CONTENTS
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AVAILABLE INFORMATION.............................. 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.... 1
SUMMARY INFORMATION............................... 3
Introduction................................... 3
Parties........................................ 3
Special Meeting................................ 4
Merger......................................... 5
Management and Operations After Merger......... 12
Comparison of Shareholder Rights............... 12
COMPARATIVE STOCK PRICES.......................... 13
SELECTED COMPARATIVE PER SHARE DATA............... 14
SELECTED FINANCIAL DATA........................... 15
PRO FORMA COMBINED SELECTED FINANCIAL DATA........ 17
SPECIAL MEETING................................... 18
Date, Time and Place........................... 18
Matters to be Considered at Special Meeting.... 18
Record Date.................................... 18
Vote Required.................................. 18
Voting and Revocation of Proxies............... 19
Solicitation of Proxies........................ 19
PARTIES........................................... 19
CNB............................................ 19
General................................... 19
Recent Acquisitions....................... 20
Pending Acquisitions..................... 20
UFB........................................... 21
MERGER........................................... 22
Background of and Reasons for Merger.......... 22
UFB...................................... 22
CNB...................................... 24
Opinion of Financial Advisor.................. 24
General.................................. 24
Summary of Financial Analyses............ 26
Conversion Ratio.............................. 29
Fractional Shares............................. 29
Share Adjustments............................. 30
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Closing Date; Effective Time.................... 30
Form of Merger; Related Transactions............ 31
Regulatory Approvals............................ 31
Conditions to Consummation of Merger............ 31
Termination or Abandonment...................... 33
Termination Fee................................. 35
Exchange of Stock Certificates.................. 35
Representations and Warranties.................. 36
Certain Other Agreements........................ 36
Conduct of Business Pending Merger......... 37
Dividends.................................. 38
Environmental Inspections.................. 38
Other UFB Agreements....................... 39
Additional UFB Reserves, Accruals and
Charges.................................. 39
CNB Agreements............................. 40
Effect on Employee Benefit and Stock Plans...... 41
Employee Benefits.......................... 41
Stock Options.............................. 41
Expenses and Fees............................... 41
No Solicitation................................. 42
Interests of Certain Persons in Merger.......... 42
Indemnification and Insurance.............. 42
Employee Benefits.......................... 43
Stock Option Plans......................... 43
Consulting Agreement....................... 43
Supplemental Executive Retirement Plan..... 43
Directors Deferred Compensation Plan....... 43
Employment and Termination Agreements...... 44
Recognition and Retention Plan and Trust... 45
Board Composition.......................... 45
Interests of CNB's Management and Board.... 45
Waiver and Amendment............................ 46
Absence of Dissenters' Rights................... 46
Federal Income Tax Consequences................. 46
Accounting Treatment............................ 47
Management and Operations After Merger.......... 48
Resale of CNB Common............................ 48
PRO FORMA FINANCIAL DATA........................... 49
DESCRIPTION OF CNB'S CAPITAL STOCK................. 57
General......................................... 57
CNB Common...................................... 57
COMPARISON OF SHAREHOLDER RIGHTS................... 58
Shareholder Vote Required for Certain
Transactions.................................. 59
Business Combinations...................... 59
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Removal of Directors....................... 61
Amendments to Articles or Certificate
of Incorporation......................... 62
Voting Rights.............................. 63
Special Meeting of Shareholders; Shareholder
Action by Written Consent..................... 63
Dissenters' Rights.............................. 64
Takeover Statutes............................... 64
Indemnification................................. 66
Limitation of Liability of Directors............ 67
Consideration of Non-Shareholder Interests...... 68
LEGAL OPINION...................................... 69
EXPERTS............................................ 69
Independent Auditors for CNB.................... 69
Independent Auditors for UFB.................... 69
Presence at Special Meeting..................... 69
SHAREHOLDER PROPOSALS.............................. 69
EXHIBITS
Agreement and Plan of Merger, as amended........ A-1
Fairness Opinion of Kemper Securities, Inc...... B-1
UF Bancorp, Inc. Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1994....... C-1
UF Bancorp, Inc. Quarterly Report on Form 10-Q/A
for the quarter ended March 31, 1995.......... D-1
</TABLE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IN CONNECTION
WITH THE OFFERING DESCRIBED HEREIN AND ANY SUCH INFORMATION OR REPRESENTATION,
IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CNB OR
UFB. THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OR AN
OFFERING OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR IN ANY JURISDICTION TO ANY PERSON TO WHOM IT WOULD BE UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS
PROSPECTUS/PROXY STATEMENT AT ANY TIME DOES NOT IMPLY THAT ANY INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
CNB and UFB are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "S.E.C."). The reports, proxy
statements and other information filed by CNB and UFB can be inspected and
copied at the public reference facilities of the S.E.C., Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the S.E.C.
located at 7 World Trade Center, New York, New York 10048, and Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661,
and copies of such materials can be obtained from the public reference section
of the S.E.C. at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, reports, proxy statements and other information concerning
CNB and UFB may be inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
CNB has filed with the S.E.C. a Registration Statement on Form S-4 (together
with any amendments thereto, the "Registration Statement") under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the CNB Common
to be issued pursuant to the Merger described herein. This Prospectus/Proxy
Statement does not contain all the information set forth in the Registration
Statement and the exhibits thereto. Such additional information may be obtained
from the S.E.C.'s principal office in Washington, D.C. Statements contained in
this Prospectus/Proxy Statement or in any document incorporated in this
Prospectus/Proxy Statement by reference as to the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance where reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement is qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the S.E.C. by CNB (File No. 0-11510) and
UFB (File No. 0-19523) pursuant to the Exchange Act are incorporated by
reference in this Prospectus/Proxy Statement:
1. CNB's Annual Report on Form 10-K for the year ended December 31, 1994;
2. CNB's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995;
3. The description of the common stock of CNB contained in CNB's
Registration Statement on Form S-2 under the Securities Act (S.E.C. File
No. 33-36017);
4. CNB's Current Reports on Form 8-K, dated February 15, 1995, May 23, 1995
and June 15, 1995;
<PAGE>
5. UFB's Annual Report on Form 10-K for the fiscal year ended June 30, 1994,
as amended by its Annual Report on Form 10-K/A for the fiscal year ended
June 30, 1994;
6. UFB's Quarterly Reports on Form 10-Q for the quarters ended September
30, 1994, December 31, 1994 and March 31, 1995, as amended by its
Quarterly Reports on Form 10-Q/A for the quarters ended September 30,
1994, December 31, 1994 and March 31, 1995;
7. UFB's Current Reports on Form 8-K dated December 13, 1994, and December
29, 1994;
8. The following information contained in the specified pages of UFB's
Annual Report on Form 10-K/A for the fiscal year ended June 30, 1994,
attached as Exhibit C to this Prospectus/Proxy Statement, is
specifically incorporated herein by reference: (i) Audited consolidated
financial statements of UFB, the notes thereto and the report of
independent auditors on pages 53 through 79; (ii) Common stock data on
page 38 (under the caption "Market For Registrant's Common Equity and
Related Stockholder Matters"); (iii) Selected consolidated financial
data on page 39 (under the caption "Selected Consolidated Financial
Information"); (iv) Supplementary financial information on page 52
(under the caption "Quarterly Results of Operation"); and (v)
Management's Discussion and Analysis of Financial Condition and Results
of Operations on pages 40 through 51; and
9. The following information contained in specified pages of UFB's
Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1995,
attached as Exhibit D to this Prospectus/Proxy Statement, is
specifically incorporated herein by reference: (i) Financial Statements
(Item 1 of Form 10-Q/A at pages 1 through 7); and (ii) Management's
Discussion and Analysis of Financial Condition and Results of Operations
(Item 2 of Form 10-Q/A at pages 8 through 19). Information contained
under Part II of Form 10-Q/A is excluded from this Prospectus/Proxy
Statement.
All documents and reports filed by CNB pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus/Proxy Statement
and prior to the date of the Special Meeting shall be deemed to be incorporated
by reference in this Prospectus/Proxy Statement and to be a part hereof from the
dates of filing of such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus/Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus/Proxy Statement.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS RELATING TO CNB
AND UFB BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
THESE DOCUMENTS (EXCLUDING UNINCORPORATED EXHIBITS) ARE AVAILABLE, WITHOUT
CHARGE UPON WRITTEN OR ORAL REQUEST, TO ANY PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM THIS PROSPECTUS/PROXY STATEMENT IS DELIVERED, IN THE CASE OF CNB,
TO DAVID L. KNAPP, EXECUTIVE VICE PRESIDENT, CNB BANCSHARES, INC., 20 N.W. THIRD
STREET, EVANSVILLE, INDIANA 47739 (TELEPHONE NUMBER (812) 464-3400), OR, IN THE
CASE OF UFB, TO ENNIS R. GRIFFITH, SENIOR VICE PRESIDENT, UF BANCORP, INC., 501
MAIN STREET, EVANSVILLE, INDIANA 47708 (TELEPHONE NUMBER (812) 425-7111). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
____________, 1995.
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SUMMARY INFORMATION
The following is a brief summary of certain information contained elsewhere in
this Prospectus/Proxy Statement. The following summary is not intended to be
complete and is qualified in all respects by the information appearing elsewhere
herein or incorporated by reference into this Prospectus/Proxy Statement, the
Exhibits hereto and the documents referred to herein. All information contained
in this Prospectus/Proxy Statement relating to CNB and its subsidiaries has been
supplied by CNB and all information relating to UFB and its subsidiaries has
been supplied by UFB. Shareholders are urged to read this Prospectus/Proxy
Statement and the Exhibits hereto in their entirety.
INTRODUCTION
This Prospectus/Proxy Statement relates to the Merger Agreement among UFB, CBI
and CNB which provides for, among other things, CNB's acquisition of UFB by
means of the Merger of UFB with and into CBI, a wholly owned subsidiary of CNB.
As a result of the Merger, CNB will acquire all of the issued and outstanding
shares of UFB Common, and UFB will cease to exist as a separate entity.
The summary set forth in this Prospectus/Proxy Statement of certain provisions
of the Merger Agreement is qualified in its entirety by reference to the full
text of the Merger Agreement, which is incorporated by reference herein and
attached as Exhibit A to this Prospectus/Proxy Statement.
PARTIES
CNB is a multi-bank holding company headquartered in Evansville, Indiana. At
March 31, 1995, CNB had consolidated assets of $2.9 billion, deposits of $2.2
billion, loans of $1.9 billion and shareholders' equity of $242 million.
Through the 81 full-service banking offices and 25 consumer finance offices of
its financial and non-banking subsidiaries, CNB provides commercial, retail and
correspondent banking, mortgage servicing, trust, data processing, cash
management and related financial services and property and casualty insurance to
customers in southern, west central and central Indiana, western Kentucky,
southern Illinois and the suburban Louisville, Kentucky area.
CBI is a bank holding company and wholly owned subsidiary of CNB. CBI owns
all of the capital stock of CNB's largest and lead bank, The Citizens National
Bank of Evansville ("Citizens Bank"). CBI engages in no other business.
On February 1, 1995, CNB acquired King City Federal Savings Bank ("King
City"), a federal savings bank headquartered in Mt. Vernon, Illinois. At
December 31, 1994, King City had total assets of $172.1 million, deposits of
$161.0 million and shareholders' equity of $8.2 million.
On February 10, 1995, CNB acquired Harrisburg Bancshares, Inc. ("HBI"), an
Illinois corporation and bank holding company for The Harrisburg National Bank
located in Harrisburg, Illinois. At December 31, 1994, HBI had total assets of
$110.4 million, deposits of $95.3 million and shareholders' equity of $5.7
million.
On October 18, 1994, CNB entered into an Agreement and Plan of Reorganization
to acquire The Bank of Orleans ("Orleans"), an Indiana state bank located in
Orleans, Indiana. At March 31, 1995, Orleans had total assets of $57.8 million,
deposits of $51.8 million and shareholders' equity of $5.7 million. There can
be no assurance that the acquisition will be consummated. On April 7, 1995,
Citizens Bank of Western
3
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Indiana, a wholly-owned subsidiary of CNB headquartered in Terre Haute, Indiana,
entered into a Purchase and Assumption Agreement to acquire certain assets and
assume certain liabilities of four branch offices of Household Bank, f.s.b.,
located in west-central Indiana. The total amount of deposits to be assumed is
approximately $80 million. There can be no assurance that the purchase and
assumption transaction will be consummated.
For additional information regarding CNB, see "PARTIES -- CNB."
The principal executive offices of CNB and CBI are at 20 N.W. Third Street,
Evansville, Indiana 47739 (telephone number (812) 464-3400).
UFB was organized in July 1991 for the purpose of acquiring all of the
outstanding shares of Union Federal Savings Bank, a federal savings bank
("Thrift"), in its conversion from mutual to stock form. At March 31, 1995, UFB
had consolidated assets of $553.0 million, deposits of $359.2 million, net loans
of $200.5 million and shareholders' equity of $38.7 million.
The principal business of Thrift consists of attracting retail deposits from
the general public and investing those funds primarily in loans secured by first
mortgages on owner-occupied, one-to-four family residences and in mortgage-
backed securities. Thrift also originates consumer and, to a much lesser
extent, commercial business loans and commercial real estate (including multi-
family residential) loans. Through its network of sixteen offices, Thrift
currently serves eight counties in southern Indiana, western Kentucky and the
Mt. Carmel area in southern Illinois.
The principal executive office of UFB is at 501 Main Street, Evansville,
Indiana 47708 (telephone number (812) 425-7111).
For additional information regarding UFB, see "PARTIES -- UFB."
SPECIAL MEETING
Date, Time and Place of Special Meeting
The Special Meeting will be held at the main offices of UFB located at 501
Main Street, Evansville, Indiana on ___________, 1995, at ______ __.m., local
time.
Matters to be Considered at Special Meeting
At the Special Meeting, holders of UFB Common will consider and vote upon
approving the Merger Agreement providing for the Merger of UFB with and into
CBI. In addition, shareholders of UFB may be asked to vote on a proposal to
adjourn or postpone the Special Meeting, which adjournment or postponement could
be used for the purpose, among others, of allowing time for the solicitation of
additional votes to approve the Merger Agreement.
Record Date
The record date for the Special Meeting is ____________, 1995.
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Vote Required
Approval and adoption of the Merger and the Merger Agreement will require the
affirmative vote of a majority of the outstanding shares of UFB Common entitled
to vote thereon. Holders of UFB Common will be entitled to one vote per share.
Revocation of Proxies
Any proxy given pursuant to this solicitation may be revoked by the grantor at
any time prior to the voting thereof on the Merger Agreement by filing with the
Secretary of UFB a written revocation or a duly executed proxy bearing a later
date. A holder of UFB Common may withdraw his or her proxy at the Special
Meeting at any time before it is exercised by electing to vote in person;
however, attendance at the Special Meeting will not in and of itself constitute
a revocation of the proxy.
Security Ownership of UFB Management
As of the record date, executive officers and directors of UFB and their
affiliates have the power to vote a total of 152,846 shares (9.51%) of UFB
Common, all of which are expected by management of UFB to be voted in favor of
the Merger Agreement.
MERGER
The following summary is qualified in its entirety by reference to the full
text of the Merger Agreement, which is attached as Exhibit A hereto and
incorporated by reference herein.
Conversion Ratio
At the time the Merger is consummated (the "Effective Time"), UFB will merge
into CBI and as a result thereof each share of UFB Common will be converted into
the right to receive 1.366 shares of CNB Common (the "Conversion Ratio");
provided, however, that if (a) the CNB Average Price (as defined below) is less
than $26.66, then the Conversion Ratio will be increased so as to equal the
product of (i) 1.366, and (ii) the quotient of $26.66 divided by the CNB Average
Price; or (b) the CNB Average Price is more than $36.06, then the Conversion
Ratio will be decreased so as to equal the product of (i) 1.366, and (ii) the
quotient of $36.06 divided by the CNB Average Price. As used herein, the term
"CNB Average Price" means the average of the per share closing prices of a share
of CNB Common as reported on Nasdaq during the twenty business day period
preceding the fifth calendar day preceding the date on which the Merger is
consummated (the "Closing Date").
No fractional shares of CNB Common will be issued and, in lieu thereof,
holders of shares of UFB Common who would otherwise be entitled to a fractional
share interest (after taking into account all shares of UFB Common to be
received in the Merger by such holder) will be paid an amount in cash equal to
the product of such fractional share interest and the closing price of a share
of CNB Common on Nasdaq on the fifth business day immediately preceding the date
on which the Effective Time occurs.
The shares of CNB Common to be issued in the Merger, together with any cash
payments in lieu of fractional shares, are hereinafter referred to as the
"Merger Consideration."
As the Conversion Ratio will be determined based upon the CNB Average Price
(which is not determinable until the end of the fifth trading day immediately
preceding the Closing Date), it is not
5
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possible, as of the date of this Prospectus/Proxy Statement, to determine the
definitive Conversion Ratio. For purposes of illustration, however, if the
Effective Time and the Closing Date both would have occurred on ___________,
1995, the CNB Average Price would have been $__________ and shareholders of UFB
would have received 1.366 shares of CNB Common for each share of UFB Common held
(plus cash in lieu of fractional shares). The foregoing information is provided
solely for purposes of illustration. In the event that the actual CNB Average
Price should be less than $26.66, the actual Conversion Ratio would be more than
1.366 shares of CNB Common for each share of UFB Common, and if the actual CNB
Average Price should be more than $36.06, the Conversion Ratio would be less
than 1.366 shares of CNB Common for each share of UFB Common.
Value of Merger
As of ____________, 1995, based on a Conversion Ratio of 1.366 (i.e., assuming
no upward or downward adjustment; see "MERGER; Conversion Ratio") and the
closing sale price of CNB Common as reported on Nasdaq on such date, the Merger
had a per share value of $______ to holders of UFB Common, and the approximate
total value of the Merger Consideration to UFB shareholders was $______ million.
The market value of the Merger Consideration as stated above may materially
increase or decrease depending on the closing sale price of CNB Common as
reported on Nasdaq on the date on which the Effective Time occurs. No assurance
can be given as to the market price of CNB Common on the date on which the
Effective Time occurs.
Reasons for Merger
UFB
The Board of Directors of UFB believes that the Merger is in the best
interests of UFB and its shareholders and has approved and declared advisable
the Merger. The Board of Directors' recommendation is based on a number of
factors discussed in this Prospectus/Proxy Statement. See "MERGER --Background
of and Reasons for Merger -- UFB."
CNB
The Board of Directors of CNB believes that the Merger will enable Citizens
Bank to deliver financial services to a larger share of the Evansville, Indiana
and surrounding area markets. It is also expected to create operating synergies
that will permit financial services to be delivered more efficiently. See
"MERGER -- Background of and Reasons for Merger -- CNB."
Recommendation of Board of Directors of UFB
THE BOARD OF DIRECTORS OF UFB BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF THE SHAREHOLDERS OF UFB AND, ACCORDINGLY, RECOMMENDS THAT HOLDERS
OF UFB COMMON VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND "FOR" THE PROPOSAL
REGARDING ADJOURNMENT OR POSTPONEMENT.
Certain members of the management and Board of Directors of UFB have interests
in the Merger that are in addition to the interests of shareholders of UFB
generally. See "MERGER -- Interests of Certain Persons in Merger."
6
<PAGE>
Opinion of Financial Advisor
UFB has received an opinion of Kemper Securities, Inc. ("Kemper Securities")
that the Conversion Ratio in the Merger is fair, from a financial point of view,
to the holders of UFB Common. For additional information regarding the opinion
of Kemper Securities and the fees paid by UFB to Kemper Securities, see
"MERGER -- Opinion of Financial Advisor" and the opinion of Kemper Securities
attached hereto as Exhibit B and incorporated by reference herein.
Form of Merger; Related Transactions
The Merger Agreement provides that UFB will merge with and into CBI, which is
a wholly owned subsidiary of CNB, and CBI will be the surviving corporation.
Upon consummation of the Merger, CBI will continue to be a wholly owned
subsidiary of CNB and UFB will cease to exist as a separate entity. Concurrent
with the consummation of the Merger, Thrift will be merged (the "Evansville Bank
Merger") with and into Citizens Bank and Thrift will cease to exist as a
separate entity. Immediately prior to the consummation of the Merger and the
Evansville Bank Merger, the following branch purchase and assumption
transactions will be effected between Thrift and other subsidiaries of CNB: (i)
Citizens Bank of Jasper, an Indiana state bank, will purchase and assume the
assets and liabilities of Thrift's one branch office located in Jasper, Indiana
(the "Jasper P&A"); (ii) Citizens Bank of Kentucky, a Kentucky state bank, will
purchase and assume the assets and liabilities of Thrift's two branch offices
located in Henderson, Kentucky (the "Kentucky P&A"); and (iii) Citizens Bank of
Illinois, National Association, a national banking association, will purchase
and assume the assets and liabilities of Thrift's one branch office located in
Mt. Carmel, Illinois (the "Illinois P&A"). The Evansville Bank Merger, the
Jasper P&A, the Kentucky P&A and the Illinois P&A are referred to herein
collectively as the "Related Transactions." The Merger is conditioned upon the
consummation of the Related Transactions.
Conditions to Merger; Regulatory Approvals
The Merger is subject to various conditions including, among other things, (i)
approval of the Merger Agreement by the requisite majority vote of the
shareholders of UFB (see "SPECIAL MEETING -- Vote Required"); (ii) receipt of
regulatory approvals from the Office of the Comptroller of the Currency (the
"O.C.C."), the Federal Deposit Insurance Corporation (the "F.D.I.C."), the
Office of Thrift Supervision (the "O.T.S.") and the Kentucky Department of
Financial Institutions (the "K.D.F.I.") (see "MERGER --Regulatory Approvals");
(iii) receipt of an opinion on certain tax aspects of the Merger (see "MERGER --
Federal Income Tax Consequences"); (iv) receipt of an accounting opinion to the
effect that the Merger qualifies for "pooling of interests" accounting treatment
(see "MERGER -- Accounting Treatment"); (v) the occurrence of no material
adverse changes in the businesses of CNB or UFB; (vi) the Closing Book Value of
UFB (determined as provided in the Merger Agreement and described elsewhere
herein; see "MERGER --Conditions to Consummation of Merger") being not less than
$48,691,000 (which was the amount of the consolidated shareholders' equity
account of UFB as of October 31, 1994); and (vii) the reaffirmation of the
opinion of Kemper Securities to the effect that the Merger is fair to the
shareholders of UFB from a financial point of view (see "MERGER -- Opinion of
Financial Advisor"). See "MERGER -- Conditions to Consummation of Merger."
The Merger may not be consummated until the 15th day after the date of the
O.C.C. and F.D.I.C. approvals. Applications for prior approval of the
Evansville Bank Merger were approved by the O.C.C. and the O.T.S. on June 13,
1995 and April 5, 1995, respectively; applications for prior approval of the
Jasper P&A were approved by the F.D.I.C. and the O.T.S. on May 19, 1995 and
April 5, 1995, respectively; applications for prior approval of the Kentucky P&A
were approved by the F.D.I.C., the O.T.S. and the K.D.F.I. on __________, 1995,
April 5, 1995 and May 15, 1995, respectively; and
7
<PAGE>
applications for prior approval of the Illinois P&A were approved by the O.C.C.
and the O.T.S. on June 13, 1995 and April 5, 1995, respectively. The Merger
does not require the separate approval of any regulatory agency.
Conduct of Business Pending Merger; Dividends
Pursuant to the Merger Agreement, UFB has agreed that it will, and that it
will cause its subsidiaries to, continue to carry on its respective business and
the discharge or incurrence of its respective obligations and liabilities only
in the usual, regular and ordinary course of business as conducted prior to the
execution of the Merger Agreement. See "MERGER -- Certain Other Agreements --
Conduct of Business Pending Merger."
The Merger Agreement provides that UFB may declare and pay its regular
quarterly dividend on the UFB Common not to exceed $0.15 per share at
approximately the same time during each quarter which it has historically
declared and paid such quarterly dividend. In this regard, CNB and UFB have
agreed to cooperate with each other to coordinate the record and payment dates
of their respective dividends for the quarter in which the Effective Time occurs
such that UFB shareholders would receive the aforesaid quarterly dividend from
UFB or a regular quarterly dividend from CNB, but not from both with respect to
any such quarter. See "MERGER -- Certain Other Agreements -- Dividends."
Termination of Merger Agreement
The Merger Agreement may be terminated at any time prior to the Effective Time
(i) if the Merger is not consummated on or prior to December 12, 1995; (ii) by
mutual agreement of CNB and UFB; (iii) by CNB or UFB in the event of a material
breach by the other of any of its representations and warranties or agreements
under the Merger Agreement not cured within 30 days after notice of such breach
is given by the non-breaching party (see "MERGER -- Representations and
Warranties"); (iv) by either party in the event all the conditions to its
obligations are not satisfied or waived (and not cured within any applicable
cure period) (see "MERGER -- Conditions to Consummation of Merger"); (v) by CNB
if environmental inspection reports on UFB's real properties that must be
obtained pursuant to the Merger Agreement disclose any contamination or presence
of hazardous wastes the estimated clean-up or other remedial cost of which
exceeds $250,000 or cannot be reasonably estimated to be such amount or less
(see "MERGER -- Certain Other Agreements -- Environmental Inspections"); (vi) by
CNB in the event that UFB or any of its subsidiaries becomes a party or subject
to any new or amended written agreement, memorandum of understanding, cease and
desist order, imposition of civil money penalties or other regulatory
enforcement action or proceeding with any federal or state agency charged with
the supervision or regulation of banks or thrifts or bank or thrift holding
companies after the date of the Merger Agreement which is materially adverse to
UFB and its subsidiaries; and (vii) by CNB in the event the Mortgage Operations
Losses (as defined below; see "MERGER -- Termination or Abandonment") exceed
$1,335,167.23. See "MERGER --Termination or Abandonment."
Termination Fee
The Merger Agreement provides that upon the occurrence of one or more
Triggering Events (as defined below), UFB will pay to CNB the sum of $2 million.
The term "Triggering Event" means any of the following events (a) upon
termination of the Merger Agreement by CNB upon a breach thereof by UFB
(including, without limitation, upon the entering into of an agreement between
UFB and any third party which is inconsistent with the transactions contemplated
by the Merger Agreement), provided that within two years of the date of such
termination, an event described
8
<PAGE>
in clause (c) or (d) below occurs; (b) the failure of UFB's shareholders to
approve the Merger and the Merger Agreement at the Special Meeting, provided
that within one year of the date of the Special Meeting, an event described in
clause (c) or (d) below occurs; (c) any person or group of persons (other than
CNB) acquires, or has the right to acquire, 50% or more of the UFB Common,
exclusive of shares of UFB Common sold directly or indirectly to such person or
group of persons by CNB; or (d) upon the entry by UFB into an agreement or other
understanding with a person or group of persons (other than CNB and/or its
affiliates) for such person or group of persons to acquire, merge or consolidate
with UFB or to purchase all or substantially all of UFB's assets. As used
above, the term "person" and "group of persons" has the meanings conferred
thereon by Section 13(d) of the Exchange Act. See "MERGER -- Termination Fee."
Accounting Treatment
The Merger is expected to qualify as a "pooling of interests" for accounting
and financial reporting purposes. The receipt of an opinion from Geo. S. Olive
& Co., L.L.C., the independent accountants of CNB, confirming that the Merger
will qualify for "pooling of interests" accounting, is a condition to CNB's
obligation to consummate the Merger. See "MERGER -- Conditions to Consummation
of Merger." If such condition is not met, the Merger would not be consummated
unless the condition were waived by CNB and the approval of UFB's shareholders
entitled to vote on the Merger were resolicited if such change in accounting
treatment were deemed material to the financial condition and results of
operations of CNB on a pro forma basis. See "MERGER -- Accounting Treatment."
Closing Date; Effective Time of Merger
The Merger Agreement provides that the closing of the Merger (the "Closing")
will take place, at CNB's election, on (i) the last business day of; or (ii) the
first business day of the month following; or (iii) the last business day of the
earliest month which is the second month of a calendar quarter following, in
each case, the month during which all necessary regulatory approvals required by
law for the Merger and the Related Transactions have been obtained and all
waiting periods required by law have expired (see "MERGER -- Regulatory
Approvals") or such other time thereafter as UFB and CNB may agree.
The Merger Agreement provides that the Effective Time of the Merger will be
the later of (a) the date of filing with the Secretary of State of the State of
Indiana of Articles of Merger; and (b) the date of filing with the Secretary of
State of the State of Delaware of a Certificate of Merger. Assuming that the
Merger is approved by the requisite vote of the shareholders of UFB and that the
other conditions to the Merger are satisfied or waived (where permissible), it
is presently anticipated that the Effective Time of the Merger will be in the
third quarter of 1995, but no assurance can be given that such timetable will be
met or that the conditions to the Merger will be satisfied or waived (where
permissible).
With the exception of those shareholders of UFB who may be deemed to be an
"affiliate" of UFB for purposes of Rule 145 under the Securities Act, the Merger
Agreement does not prohibit shareholders of UFB from selling their shares prior
to the Effective Time. The Merger Agreement provides, however, that each
affiliate of UFB must enter into an agreement with CNB providing, among other
things, that such affiliate will not make any sale or other disposition of any
shares of UFB Common during the 30 day period commencing on the 30th day prior
to the Effective Time. Persons who may be deemed to be affiliates of UFB
generally include individuals who (or entities which) control, are controlled by
or are under common control with UFB and will include directors and certain
officers of UFB and may include principal shareholders of UFB. See "MERGER --
Resale of CNB Common."
9
<PAGE>
Interests of Certain Persons in Merger
Certain members of UFB's management and Board of Directors have material
interests in the Merger that are in addition to the interests of shareholders of
UFB generally. These material interests relate to provisions in the Merger
Agreement providing that (i) each employee (including an officer) of UFB who
continues as an employee following the Effective Time will be entitled to
participate in certain employee benefit and stock plans that may be in effect
for employees of all of CNB's subsidiaries, from time to time, on the same basis
as similarly situated employees of other CNB subsidiaries (see "MERGER -- Effect
on Employee Benefit and Stock Plans -- Employee Benefits"); (ii) CNB will assume
the outstanding options to acquire shares of UFB Common (see "MERGER -- Effect
on Employee Benefit and Stock Plans -- Stock Options"); (iii) CNB will provide
officers and directors of UFB and its subsidiaries, after the Merger, with the
same directors' and officers' liability insurance coverage that it provides to
directors and officers of its other banking subsidiaries generally and CNB will
use its best efforts to obtain an endorsement to its directors' and officers'
liability insurance policy to cover acts or omissions of such officers and
directors prior to the effective time (and if CNB cannot obtain such endorsement
without payment of any special premium or other charge or expense, UFB may
purchase such coverage provided the premium therefore does not exceed $25,000),
and CNB will cause CBI or its successor, for six years after the Effective Time,
to indemnify the officers and directors of UFB and its subsidiaries against any
liability arising out of actions occurring prior to the Effective Time, to the
extent that such indemnification is then permitted under the Delaware General
Corporation Law (the "Delaware Law") and by UFB's Articles of Incorporation as
in effect on the date of the Merger Agreement (see "MERGER -- Interests of
Persons in Merger --Indemnification and Insurance"); (iv) upon the retirement of
Mr. Donald A. Rausch, Chairman of the Board, President and Chief Executive
Officer of UFB and Thrift, CNB will enter into a consulting agreement with him,
renewable annually, on mutually agreeable terms providing for annual consulting
fees of $40,000 (see "MERGER -- Interests of Persons in Merger -- Consulting
Agreement"); (v) CBI will, at the Effective Time, assume all obligations, duties
and liabilities of UFB under the Supplemental Executive Retirement Plan
established by UFB for the benefit of Mr. Rausch (see "MERGER -- Interests of
Persons in Merger --Supplemental Executive Retirement Plan"); (vi) Citizens Bank
will, at the Effective Time, assume all obligations, duties and liabilities of
Thrift under the Directors Deferred Compensation Master Agreement and related
Joinder Agreements for each of the Directors of Thrift (provided that deferrals
of director fees under such plan will cease as of or after the Effective Time
and any director fees held in accounts under such plan will continue to be held
under the plan and accrue interest as provided therein) (see "MERGER --Interests
of Persons in Merger -- Directors Deferred Compensation Plan"); (vii) Citizens
Bank will assume and CBI will guarantee such assumption, at the Effective Time,
all duties, liabilities and obligations of Thrift which may exist at any time
under the Employment Agreements between Thrift and each of Messrs. Donald A.
Rausch, Chairman of the Board, President and Chief Executive Officer of UFB and
Thrift, Ennis R. Griffith, Senior Vice President, Chief Financial Officer and
Secretary/Treasurer of UFB and Thrift, Terry G. Johnston, Senior Vice President
and Lending Operations Officer of UFB and Thrift, and Paul E. Wargel, Senior
Vice President - Residential Lending Manager of Thrift, and under the Special
Termination Agreements between Thrift and each of Messrs. Steven E. Fowler, Vice
President/Financial Services of Thrift, and J. Ray Justice, Vice
President/Administration of Thrift (see "MERGER -- Interests of Persons in
Merger -- Employment and Termination Agreements"); (viii) CNB and Citizens Bank
will, at the Effective Time, assume Thrift's Recognition and Retention Plan and
Trust, which holds 22,242 shares of UFB Common for the benefit of certain
executive officers of UFB (see "MERGER -- Interests of Persons in Merger --
Recognition and Retention Plan and Trust"); and (ix) each director of UFB
immediately prior to the Effective Time who is under the age of 70 will be
elected to the Board of Directors of Citizens Bank or the board of another
subsidiary bank of CNB, if more appropriate and agreed to by CNB and such
director (see "MERGER -- Interests of Persons in Merger -- Board Composition").
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<PAGE>
No member of CNB's management or Board of Directors has an interest in the
Merger, other than as a shareholder of CNB generally, except that Mr. William E.
Vieth, Executive Vice President of CNB, owns 500 shares of UFB Common and Mr.
Robert L. Koch, II, a director of CNB, beneficially owns 5,700 shares of UFB
Common.
None of the directors or executive officers of UFB would own, on a pro forma
basis giving effect to the Merger, more than 1% of the issued and outstanding
shares of CNB Common.
Federal Income Tax Consequences
The Merger is intended to be a tax-free reorganization so that no gain or loss
will be recognized by CNB or UFB, and no gain or loss will be recognized by UFB
shareholders, except in respect of cash received for fractional shares. The
following is a summary of a tax opinion issued by Lewis, Rice & Fingersh, L.C.,
counsel to CNB, and included as an exhibit to the Registration Statement.
If the Merger is consummated in accordance with the terms set forth in the
Merger Agreement, the Related Transactions are consummated as provided in the
Merger Agreement and described in this Prospectus/Proxy Statement (see "MERGER--
Form of Merger; Related Transactions") and in accordance with certain
representations made by the parties, and assuming no adverse change in
applicable law, (i) the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"); (ii) no gain or loss will be recognized by the holders of shares of UFB
Common upon receipt of Merger Consideration (except for cash received in lieu of
fractional shares); (iii) the basis of CNB Common received by the shareholders
of UFB will be the same as the basis of UFB Common exchanged therefor; (iv) the
holding period of the shares of CNB Common received by the shareholders of UFB
will include the holding period of the shares of UFB Common exchanged therefor,
provided such shares were held as capital assets as of the Effective Time; and
(v) if a cash payment is received by a shareholder of UFB in lieu of a
fractional share interest in CNB Common, the cash payment will be treated as
received by the shareholder as a distribution in full payment in exchange for
the fractional share redeemed. See "MERGER -- Federal Income Tax Consequences."
The opinion is subject to certain assumptions and based on certain
representations of each of UFB, Thrift, CNB, CBI and Citizens Bank. Further,
the opinion will be based on current law, which could be amended, revoked, or
modified with or without retroactive effect, in a manner which would change such
opinion. The opinion will neither be binding upon the Internal Revenue Service
(the "I.R.S."), nor will the I.R.S. be precluded from taking a contrary
position. Because no authority has been found that directly addresses the
federal income tax consequences of a transaction substantially similar to the
Merger and Related Transactions, the opinion will not be entirely free from
doubt. If litigated by the I.R.S., there can be no assurance that a court would
necessarily agree with the opinion.
Pursuant to the Merger Agreement, CNB and CBI have agreed that they will not
take any actions following the Effective Time which would cause the Merger to
lose its status as a reorganization under 368(a)(2)(D) of the Code and,
specifically, that CBI or its subsidiaries will continue at least one historic
business line of Thrift, or use at least a significant portion of Thrift's
historic business assets in a business, in each case within the meaning of
Treas. Reg. (S)1.368-1(d).
THE FOREGOING IS A GENERAL SUMMARY OF ALL OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO SHAREHOLDERS OF UFB WITHOUT
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<PAGE>
REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SHAREHOLDER'S TAX
SITUATION AND STATUS. EACH SHAREHOLDER OF UFB SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR HER,
INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN LAWS
AND THE POSSIBLE EFFECT OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
Absence of Dissenters' Rights
Under the Delaware Law, the shareholders of UFB are not entitled to dissent
from the Merger and demand payment of the fair or appraised value of their
shares of UFB Common as a result of the Merger because such shares, as well as
the shares of CNB Common to be received by the holders of UFB Common in the
Merger, are quoted on Nasdaq. See "MERGER -- Absence of Dissenters' Rights."
MANAGEMENT AND OPERATIONS AFTER MERGER
Upon consummation of the Merger and the Evansville Bank Merger, UFB and Thrift
will merge with and into CBI and Citizens Bank, respectively, and UFB and Thrift
will cease to exist as separate entities. Immediately prior to the Evansville
Bank Merger, certain of Thrift's branches located outside of the Evansville,
Indiana area will be transferred, via branch purchase and assumption
transactions, to other subsidiaries of CNB located in those other areas. See
"MERGER -- Form of Merger; Related Transactions." The Board of Directors of
Citizens Bank, after the Effective Time, will consist of the persons serving on
such Board immediately prior to the Effective Time and each of the directors of
UFB who is under age 70. See "MERGER -- Interest of Certain Persons in Merger
- -- Board Composition." It is not expected that the management or Board of
Directors of CNB will be affected as a result of the Merger. See "MERGER --
Management and Operations After Merger."
COMPARISON OF SHAREHOLDER RIGHTS
The rights of the holders of UFB Common and CNB Common differ in certain
respects. The rights of the shareholders of UFB who receive shares of CNB
Common in the Merger will be governed by the corporate law of Indiana (the
"Indiana Law"), the state in which CNB is incorporated, and by CNB's Articles of
Incorporation and Bylaws, as amended, and other corporate documents. The rights
of holders of UFB Common are presently governed by the Delaware Law. The
governing law and documents of CNB differ from those which apply to UFB in
several respects, including procedures for approving certain business
combinations, amending Articles of Incorporation and removing directors, the
ability of shareholders to call special shareholders' meetings, take action by
written consent and dissent from corporate action and receive fair value for
their shares and rights of shareholders pursuant to certain takeover statutes.
See "COMPARISON OF SHAREHOLDER RIGHTS."
Certain provisions of CNB's Articles of Incorporation and Bylaws, as amended,
reduce CNB's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by its Board of Directors. The
Board of Directors of CNB believes that it is in the best interests of CNB and
its shareholders to encourage potential acquirors to negotiate directly with
CNB's Board of Directors and that these provisions will encourage such
negotiations and discourage nonnegotiated takeover attempts. It is also the
view of CNB's Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflective of the
true value of CNB and which is in the best interests of all shareholders. These
provisions may, however, also have the effect of
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<PAGE>
discouraging a future takeover attempt which would not be approved by CNB's
Board of Directors, but pursuant to which shareholders may receive a premium for
their shares over the then current market prices. As a result, shareholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of CNB's Board of Directors
and management more difficult.
COMPARATIVE STOCK PRICES
Shares of CNB Common and UFB Common are listed on Nasdaq under the symbols
CNBE and UFBI, respectively. The following table sets forth, for the periods
indicated, the high and low closing bid prices of CNB Common and UFB Common as
reported on Nasdaq. The bid prices for such shares reflect interdealer prices,
without retail markup, markdown or commission and do not necessarily represent
actual transactions. The prices for CNB Common have been adjusted for a one for
ten stock dividend paid by CNB on December 9, 1994 (the "Stock Dividend") and
rounded up to the nearest one-eighth.
<TABLE>
<CAPTION>
CNB Common UFB Common
-------------------------- --------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C>
1993 First Quarter........... $26 1/8 $23 7/8 $22 5/8 $17 7/8
Second Quarter.......... 28 24 7/8 22 3/4 19 1/4
Third Quarter........... 29 1/2 26 7/8 27 3/4 22 3/4
Fourth Quarter.......... 28 3/4 27 28 1/2 22 1/2
1994 First Quarter........... $30 1/4 $28 1/8 $26 1/4 23
Second Quarter.......... 30 1/2 28 5/8 29 1/4 22 1/2
Third Quarter........... 31 1/8 30 1/2 28 26
Fourth Quarter.......... 31 1/4 28 1/4 38 25 3/4
1995 First Quarter........... $32 $29 1/4 $36 1/2 $34
Second Quarter
(through June __, 1995). 30 1/4 29 1/2 --- ---
</TABLE>
- --------------
On November 3, 1994, the day before UFB announced that it was engaged in
merger negotiations with an unnamed institution, the closing sale price of UFB
Common was $31.75. On December 12, 1994, the last trading day before the
announcement of the execution of the Merger Agreement, the closing sale prices
of CNB Common and UFB Common, as reported on Nasdaq, were $31.75 per share and
$36.50 per share, respectively, and the equivalent per share price for UFB
Common, which is calculated by multiplying the specified closing sale price of
CNB Common by the Conversion Ratio of 1.366 shares of CNB Common for each share
of UFB Common (assuming no upward or downward adjustment of the Conversion
Ratio; see "MERGER -- Conversion Ratio"), was $43.37.
On June ___, 1995, the closing sale prices of CNB Common and UFB
Common, as reported on Nasdaq, were $___ per share and $___ per share,
respectively, and the equivalent per share price for UFB Common (assuming no
upward or downward adjustment of the Conversion Ratio; see "MERGER --Conversion
Ratio"), was $___ per share, and there were approximately ___ and approximately
___ holders of record of CNB Common and UFB Common, respectively.
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<PAGE>
SELECTED COMPARATIVE PER SHARE DATA
(unaudited)
The following summary presents comparative historical, pro forma and pro
forma equivalent unaudited per share data for CNB and UFB. The pro forma
amounts assume that the Merger had been effective during the periods presented
and had been accounted for under the pooling of interests method of accounting.
For a description of the pooling of interests method of accounting with respect
to the Merger, see "Merger -- Accounting Treatment."
The amounts designated "Historical" represent, for CNB, the historical
financial results of CNB and also give effect to two separate transactions which
were completed after December 31, 1994, and before the date of this
Prospectus/Proxy Statement and which were accounted for under the pooling of
interests method (the "Recent Acquisitions") (see "PARTIES -- CNB -- Recent
Acquisitions"). The amounts designated "Pro Forma Combined Per CNB Share"
represent the pro forma results of the Merger and also give effect to the Recent
Acquisitions and one additional separate transaction, the acquisition of
Orleans, which is presently pending and which is expected to be accounted for
under the pooling of interests method (see "PARTIES -- CNB -- Pending
Acquisitions"). The amounts designated "Equivalent Pro Forma Per UFB Share" are
computed by multiplying the Pro-Forma Combined Per CNB Share amounts by the
Conversion Ratio of 1.366 shares of CNB Common for each share of UFB Common
(assuming no upward or downward adjustment of the Conversion Ratio; see "MERGER
- -- Conversion Ratio").
The data presented should be read in conjunction with the more detailed
information and financial statements included herein or incorporated by
reference in this Prospectus/Proxy Statement and with the unaudited pro forma
financial statements included elsewhere in this Prospectus/Proxy Statement. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "PRO FORMA FINANCIAL
DATA."
<TABLE>
<CAPTION>
Three Months Ended March 31/(2)/ Year Ended December 31,/(2)/
-------------------------------- -----------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE:/(1)/
Historical:
CNB
Primary......................... $ 0.47 $ 0.44 $ 1.82 $ 1.82 $ 1.52
Fully diluted................... 0.47 0.42 1.78 1.76 1.48
UFB................................. 0.52 0.61 (2.00) 3.01 2.68
Pro Forma Combined Per CNB Share:
Primary......................... 0.46 0.44 1.35 1.87 1.60
Fully diluted................... 0.46 0.43 1.33 1.82 1.56
Equivalent Pro-Forma Per UFB Share:
Primary......................... 0.63 0.60 1.84 2.55 2.19
Fully diluted................... 0.63 0.59 1.82 2.49 2.13
DIVIDENDS PER COMMON SHARE:/(3)/
Historical:
CNB................................. $ 0.20 $ 0.19 $ 0.79 $ 0.73 $ 0.71
UFB................................. 0.15 0.125 0.53 0.455 0.31
Pro-Forma Combined Per CNB Share....... 0.20 0.19 0.79 0.73 0.71
Equivalent Pro-Forma Per UFB Share..... 0.27 0.26 1.08 1.00 0.97
BOOK VALUE PER COMMON SHARE:
Historical:
CNB................................. $16.16 $15.61 $15.81 $15.55 $13.90
UFB................................. 24.08 29.23 22.82 28.44 26.29
Pro Forma Combined Per CNB Share....... 16.32 16.42 15.95 16.28 14.74
Equivalent Pro-Forma Per UFB Share..... 22.29 22.43 21.79 22.24 20.13
</TABLE>
- --------------
/(1)/ Excludes the cumulative effect of the adoption of SFAS 109, Accounting for
Income Taxes, which was adopted by CNB on January 1, 1993.
/(2)/ The pro forma financial information of UFB, the fiscal year-end of which
is June 30, has been restated to conform with CNB's fiscal year-end of
December 31 by adding the results of UFB for the six-month period ended
December 31 to the most recent fiscal year-end information and deducting
the results of UFB for the six-month period ended December 31 of the
preceding fiscal year.
/(3)/ CNB's pro forma and UFB's pro forma equivalent dividends per share
represent historical dividends per share declared by CNB multiplied by the
Conversion Ratio of 1.366 (assuming no upward or downward adjustment).
14
<PAGE>
SELECTED FINANCIAL DATA
The following tables present selected unaudited consolidated historical
financial data for CNB and UFB and pro forma combined amounts reflecting the
Merger. The pro forma amounts assume that the Merger had been effective during
the periods presented. The data presented is derived from the consolidated
financial statements of CNB and UFB and should be read in conjunction with the
more detailed information and financial statements included herein or
incorporated by reference in this Prospectus/Proxy Statement and with the
unaudited pro forma financial statements included elsewhere in this
Prospectus/Proxy Statement. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "PRO FORMA FINANCIAL DATA."
CNB/(1)/
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------ -------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands, except per share data)
Income Statement Data:
- ----------------------
Interest Income......................... $ 55,953 $ 44,086 $ 195,467 $ 177,206 $ 187,882 $ 212,831 $ 205,025
Interest Expense........................ 26,361 19,699 87,255 80,764 95,950 125,797 129,329
Net Interest Income..................... 29,592 24,387 108,212 96,442 91,932 87,034 75,696
Provision for Loan Losses............... 1,504 1,302 6,319 3,605 8,960 15,040 8,081
Noninterest Income...................... 8,893 10,262 37,352 33,910 28,313 26,106 21,927
Noninterest Expense..................... 25,938 23,983 97,707 87,867 81,359 78,963 64,598
Net Income/(2)/......................... 6,985 6,311 26,833 25,966 21,376 13,780 18,414
Per Common Share Data:
- ----------------------
Net Income/(2)/ $ 0.47 $ 0.44 $ 1.82 $ 1.82 $ 1.52 $ 0.98 $ 1.33
Primary.............................. 0.47 0.42 1.78 1.76 1.48 0.98 1.33
Fully diluted........................ 0.20 0.19 0.79 0.73 0.71 0.68 0.65
Dividends Declared...................... 16.16 15.61 15.81 15.55 13.90 13.05 12.70
Book Value..............................
Balance Sheet Data at Period End:
- ---------------------------------
Loans................................... $1,909,409 $1,681,639 $1,917,982 $1,661,561 $1,401,981 $1,514,317 $1,570,512
Total Earning Assets.................... 2,713,176 2,466,416 2,711,892 2,456,235 2,243,750 2,220,880 2,234,614
Total Deposits.......................... 2,252,341 2,195,719 2,242,643 2,209,078 2,064,367 2,031,312 2,070,083
Total Shareholders' Equity.............. 242,074 226,304 237,260 224,303 195,318 183,974 179,389
Total Assets............................ 2,904,397 2,658,975 2,919,087 2,654,188 2,450,578 2,427,200 2,451,766
Total Long-Term Debt.................... 60,824 47,057 58,077 50,111 60,477 75,730 61,910
Financial Ratios:
- -----------------
Return on Average Assets/(3)/........... 0.96% 0.95% 0.96% 1.02% 0.88% 0.57% 0.84%
Return on Average Common Equity/(3)/.... 11.56 11.36 11.52 12.47 11.20 7.48 10.86
Net Interest Margin/(3)(4)/............. 4.53 4.17 4.30 4.23 4.25 4.13 4.03
Core Capital (Tier 1) Leverage
Ratio/(5)/........................... 7.73 7.84 7.51 7.56 7.31 6.74 6.48
Core Capital (Tier 1) Risk-Based
Capital Ratio/(6)/................... 11.84 12.06 11.63 11.86 11.47 10.60 9.06
Net Charge-Offs to Average Loans/(3)/... 0.44 0.21 0.21 0.23 0.50 0.77 0.61
Allowance for Losses to Loans........... 1.36 1.37 1.39 1.36 1.55 1.33 1.08
Nonperforming Loans to Loans/(7)/....... 0.81 1.00 0.78 0.95 1.00 1.27 1.19
Allowance for Losses to
Nonperforming Loans/(7)/............. 168.51 137.70 177.85 143.69 154.33 104.06 90.43
Nonperforming Assets to Total
Assets/(8)/.......................... 0.61 0.79 0.61 0.80 0.86 1.03 1.13
- ---------------------------
</TABLE>
/(1)/ The historical information set forth in the table gives effect to the
Recent Acquisitions which were completed after December 31, 1994, and
before the date of this Prospectus/Proxy Statement (which were accounted
for under the pooling of interests method). See "PARTIES -- CNB -- Recent
Acquisitions."
/(2)/ Net income excludes the cumulative effect of the change in accounting for
income taxes.
/(3)/ Annualized in the case of interim financial information.
/(4)/ Computed by dividing net interest income by average interest earning
assets and stated on a fully taxable equivalent basis.
/(5)/ Computed by dividing period-end tangible equity (core capital) by period-
end tangible assets.
/(6)/ Based on final 1992 standards.
/(7)/ Nonperforming loans include nonaccrual and restructured loans and loans
past due 90 days or more.
/(8)/ Nonperforming assets include nonperforming assets and other real estate
owned.
15
<PAGE>
UFB
<TABLE>
<CAPTION>
Nine Months Ended March 31, Year Ended June 30,
------------------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------------- -------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands, except per share data)
Income Statement Data:
- --------------------------------------------
Interest Income............................ $ 27,439 $ 24,600 $ 31,852 $ 35,791 $ 39,600 $ 40,307 $ 39,238
Interest Expense........................... 17,034 14,269 18,520 20,727 26,419 29,836 30,404
Net Interest Income........................ 10,405 10,331 13,332 15,064 13,181 10,471 8,834
Provision for Loan Losses.................. 1,065 247 914 285 231 391 319
Noninterest Income......................... 2,036 6,362 8,131 8,433 8,724 3,893 3,879
Noninterest Expense........................ 12,547 10,317 14,798 15,168 13,744 10,442 9,909
Net Income/(1)/............................ (3,358) 3,844 3,679 4,950 4,745 2,258 1,726
Per Common Share Data:
- --------------------------------------------
Net Income/(1)/............................ $ (1.96) $ 2.23 $ 2.14 $ 2.74 n/a/(8)/ n/a/(8)/ n/a/(8)/
Dividends Declared......................... 0.425 0.36 0.49 0.43 0.10 -- --
Book Value................................. 24.08 29.23 29.11 26.54 23.76 n/a/(8)/ n/a/(8)/
Balance Sheet Data at Period End:
- --------------------------------------------
Loans...................................... $202,447 $175,597 $169,452 $179,896 $194,446 $211,141 $221,453
Total Earning Assets....................... 552,080 436,781 470,849 455,041 441,222 432,081 408,110
Total Deposits............................. 359,150 390,307 382,916 381,712 390,751 400,576 377,033
Total Shareholders' Equity................. 38,719 46,580 46,385 44,519 41,803 22,890 20,632
Total Assets............................... 553,041 469,261 503,883 489,526 470,677 460,766 430,848
Total Long-Term Debt....................... -- -- -- -- -- -- --
Financial Ratios:
- --------------------------------------------
Return on Average Assets/(2)/.............. (0.83%) 1.02% 0.74% 1.02% 1.00% 0.51% 0.41%
Return on Average Common Equity/(2)/....... (10.88) 11.30 8.04 11.43 13.62 10.32 8.78
Net Interest Margin/(2)(3)/................ 2.69 2.90 2.86 3.27 2.95 2.52 2.21
Tier 1 Leverage (core capital) Ratio/(4)/.. 7.78 9.93 9.21 9.09 8.88 4.90 4.76
Tier 1 Risk-Based Capital Ratio/(5)/....... 20.39 24.03 24.08 22.39 20.86 11.40 10.81
Net Charge-Offs to Average
Loans/(2)/............................... 0.47 0.09 0.10 0.07 0.10 0.08 0.06
Allowance for Losses to Loans.............. 0.96 0.52 0.91 0.44 0.33 0.29 0.18
Nonperforming Loans to Loans/(6)/.......... 0.11 0.08 0.10 0.24 0.25 0.95 0.98
Allowance for Loan Losses to
Nonperforming Loans/(6)/................. 863.11 618.12 913.69 187.79 131.17 30.92 18.28
Nonperforming Assets to Total
Assets/(7)/.............................. 0.19 0.27 0.33 0.43 0.42 0.58 0.66
- ---------------------------
</TABLE>
/(1)/ Net income excludes the cumulative effect of change in accounting for
income taxes.
/(2)/ Annualized in the case of interim financial data.
/(3)/ Computed by dividing net interest income by average interest-earning
assets and stated on a fully taxable equivalent basis.
/(4)/ Computed by dividing period-end tangible equity (core capital) by period-
end tangible assets.
/(5)/ Based on final 1992 standards.
/(6)/ Nonperforming loans include nonaccrual and restructured loans and loans
past due 90 days or more.
/(7)/ Nonperforming assets include nonperforming loans and other real estate
owned.
/(8)/ Not applicable. UFB was organized on October 31, 1991.
16
<PAGE>
PRO FORMA COMBINED SELECTED FINANCIAL DATA/(1)/
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------ -------------------------------------
1995 1994 1994 1993 1992
<S> <C> <C> <C> <C> <C>
(dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Interest Income...................................... $ 66,652 $ 52,570 $ 231,926 $ 215,435 $ 229,930
Interest Expense..................................... 33,196 24,497 108,378 102,339 121,208
Net Interest Income.................................. 33,456 28,073 123,548 113,096 108,722
Provision for Loan Losses............................ 1,554 1,385 8,384 3,934 9,200
Non-interest Income.................................. 10,043 12,074 41,685 43,213 36,564
Non-interest Expense................................. 29,338 27,654 116,690 103,905 97,584
Net Income/(2)/...................................... 8,059 7,531 23,492 31,840 26,954
Per Common Share Data:
- ---------------------
Net Income/(2)/ $ 0.46 $ 0.44 $ 1.35 $ 1.87 $ 1.60
Primary.......................................... 0.46 0.43 1.33 1.82 1.56
Fully diluted.................................... 0.20 0.19 0.79 0.73 0.71
Dividends Declared................................... 16.32 16.42 15.95 16.28 14.74
Book Value...........................................
Balance Sheet Data at Period End:
- ---------------------------------
Loans................................................ $2,140,810 $1,884,604 $2,140,380 $1,867,869 $1,616,644
Total Earning Assets................................. 3,291,020 2,957,747 3,280,681 2,984,161 2,742,669
Total Deposits....................................... 2,663,292 2,636,517 2,649,910 2,643,300 2,494,378
Total Shareholders' Equity........................... 285,583 278,899 279,509 275,479 244,667
Total Assets......................................... 3,514,770 3,184,918 3,528,498 3,219,196 2,981,956
Total Long-Term Debt................................. 60,824 47,057 58,077 50,111 60,477
Financial Ratios:
- ----------------
Return on Average Assets/(3)/........................ 0.91% 0.95% 0.70% 1.02% 0.91%
Return on Average Common Equity/(3)/................. 11.24 10.99 8.30 12.33 11.36
Net Interest Margin/(3)(4)/.......................... 4.21 3.97 4.07 4.04 4.09
Core Capital (Tier 1) Leverage Ratio/(5)/............ 7.74 8.13 7.61 7.82 7.66
Core Capital (Tier 1) Risk-Based Capital Ratio/(6)/.. 12.72 13.38 12.54 13.06 12.71
Net Charge-Offs to Average Loans/(3)/................ 0.39 0.20 0.23 0.21 0.44
Allowance for Losses to Loans........................ 1.33 1.29 1.36 1.28 1.41
Nonperforming Loans to Loans/(7)/.................... 0.74 0.90 0.71 0.87 0.90
Allowance for Loan Losses to
Nonperforming Loans/(7)/......................... 180.68 144.03 191.88 147.41 156.87
Nonperforming Assets to Total Assets/(8)/............ 0.53 0.70 0.54 0.72 0.77
</TABLE>
___________________________
/(1)/ The pro forma information set forth in this table gives effect to the
Recent Acquisitions which were completed after December 31, 1994, and
before the date of this Prospectus/Proxy Statement and which were
accounted for under the pooling of interests method (see "PARTIES--CNB--
Recent Acquisitions") and to one additional separate transaction, the
acquisition of Orleans, that is presently pending and which is expected to
be accounted for under the pooling of interest method (see "PARTIES--CNB--
Pending Acquisitions"). The information for UFB, the fiscal year-end of
which is June 30, has been restated to conform with CNB's fiscal year-end
of December 31 by adding the results of UFB for the six-month period ended
December 31 to the most recent fiscal year-end information and deducting
the results of UFB for the six-month period ended December 31 of the
preceding fiscal year.
/(2)/ Net income excludes the cumulative effect of the change in accounting for
income taxes.
/(3)/ Annualized in the case of interim financial information.
/(4)/ Computed by dividing net interest income by average interest-earning
assets and stated on a fully taxable equivalent basis.
/(5)/ Computed by dividing period-end core capital (tangible equity) by period-
end tangible assets.
/(6)/ Based on final 1992 standards.
/(7)/ Nonperforming loans include nonaccrual and restructured loans and loans
past due 90 days or more.
/(8)/ Nonperforming assets include nonperforming loans and other real estate
owned.
17
<PAGE>
SPECIAL MEETING
DATE, TIME AND PLACE
This Prospectus/Proxy Statement is being furnished to shareholders of UFB
in connection with the solicitation of proxies by the Board of Directors of UFB
for use at the Special Meeting to be held at the main office of UFB located at
501 Main Street, Evansville, Indiana on ___________, 1995, at ______ __.m.,
local time, and at any adjournment or postponement thereof.
MATTERS TO BE CONSIDERED AT SPECIAL MEETING
At the Special Meeting, the shareholders of UFB will consider and vote upon
the Merger Agreement providing for the Merger of UFB with and into CBI. In
addition, shareholders of UFB may be asked to vote upon a proposal to adjourn or
postpone the Special Meeting, which adjournment or postponement could be used
for the purpose, among others, of allowing time for the solicitation of
additional votes to approve the Merger Agreement.
This Prospectus/Proxy Statement, the attached Notice of Special Meeting and
the Proxy Card are first being sent to shareholders of UFB on or about
___________, 1995.
RECORD DATE
The Board of Directors of UFB has fixed the close of business on
___________, 1995, as the record date for the determination of shareholders of
UFB Common to receive notice of and to vote at the Special Meeting. On the
record date there were ______ shares of UFB Common outstanding. Only holders of
shares of UFB Common of record on the record date are entitled to vote at the
Special Meeting. No shares of UFB Common can be voted at the Special Meeting
unless the record holder is present in person or represented by proxy at the
Special Meeting.
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of UFB Common
entitled to vote thereon is required to approve the Merger and the Merger
Agreement. Each holder of UFB Common is entitled to one vote per share of UFB
Common. As of the record date, the directors and executive officers of UFB and
their affiliates have the power to vote a total of 152,846 shares of UFB Common,
or 9.1% of the shares outstanding, which are expected to be voted in favor of
the Merger and the Merger Agreement.
Proxies marked as abstentions and shares held in street name which have
been designated by brokers on proxy cards as not voted will not be counted as
votes cast and, as a result, will have the same effect as a vote against the
Merger and the Merger Agreement. Proxies marked as abstentions or as broker
non-votes, however, will be treated as shares present for purposes of
determining whether a quorum is present.
18
<PAGE>
VOTING AND REVOCATION OF PROXIES
Proxies for use at the Special Meeting accompany this Prospectus/Proxy
Statement. A shareholder may use his or her proxy if he or she is unable to
attend the Special Meeting in person or wishes to have his or her shares voted
by proxy even if he or she does attend the Special Meeting. Shares of UFB
Common represented by a proxy properly signed and returned to UFB at, or prior
to, the Special Meeting, unless subsequently revoked, will be voted at the
Special Meeting in accordance with instructions thereon. If a proxy is properly
signed and returned and the manner of voting is not indicated on the proxy, any
shares of UFB Common represented by such proxy will be voted FOR the Merger and
the Merger Agreement and FOR the proposal regarding adjournment or postponement.
Any proxy given pursuant to this solicitation may be revoked by the grantor at
any time prior to the voting thereof on the Merger and the Merger Agreement, by
filing with the Secretary of UFB a written revocation or a duly executed proxy
bearing a later date. A holder of UFB Common may withdraw his or her proxy at
the Special Meeting at any time before it is exercised by electing to vote in
person; however, attendance at the Special Meeting will not in and of itself
constitute a revocation of the proxy.
SOLICITATION OF PROXIES
In addition to solicitation of proxies from shareholders of UFB Common by
use of the mail, proxies also may be solicited by personal interview, telephone
and wire by directors, officers and employees of UFB, who will not be
specifically compensated for such services and it is expected that banks,
brokerage houses and others will be requested to forward the soliciting material
to their principals and obtain authorization for the execution of proxies. All
costs of soliciting proxies, assembling and mailing this Prospectus/Proxy
Statement and all papers which now accompany or hereafter may supplement the
same will be borne by UFB. UFB reserves the right to engage an outside party to
solicit proxies and to pay special compensation for that purpose.
CNB and UFB have agreed to share in the expense of preparation of this
Prospectus/Proxy Statement and CNB will bear the entire cost of printing this
Prospectus/Proxy Statement and all S.E.C. and other regulatory filing fees
incurred in connection therewith.
PARTIES
CNB
GENERAL
CNB was organized in January 1984, as a one-bank holding company for The
Citizens National Bank of Evansville. CNB is a multi-bank holding company
headquartered in Evansville, Indiana, where Citizens Bank, which remains the
largest and lead bank of CNB's financial subsidiaries, conducts its principal
operations. As of March 31, 1995, CNB had consolidated assets of $2.9 billion,
deposits of $2.2 billion, loans of $1.9 billion and shareholders' equity of $242
million.
The business of CNB consists primarily of the ownership, supervision and
control of its subsidiaries. CNB provides its subsidiaries with advice, counsel
and specialized services in various fields of financial and banking policy and
operations. Through the 81 full-service banking offices and 25 consumer finance
offices of its financial and non-banking subsidiaries, CNB provides commercial,
retail
19
<PAGE>
and correspondent banking, mortgage servicing, trust, data processing, cash
management and related financial services to customers in southern, west central
and central Indiana, western Kentucky, southern Illinois and the suburban
Louisville, Kentucky area. CNB's non-banking subsidiaries include Citizens
Information Systems, Inc., which provides data processing and information
services to banks and businesses in Indiana, Kentucky and Illinois; Citizens
Life Assurance Company, which underwrites credit life and disability insurance
for CNB's financial subsidiaries and Citizens Realty and Insurance Inc., which
sells property and casualty insurance as an independent agent.
While CNB continues to standardize its corporate policies and procedures
and centralize administrative functions to provide more efficient and cost-
effective operations support for its financial subsidiaries, its management
philosophy is to afford its financial subsidiaries adequate flexibility to
respond to varying local market conditions and local customers and community
needs. This philosophy allows the management of CNB's financial subsidiaries to
better meet the banking needs of their customers by taking advantage of the
additional resources, services and efficiencies available to them as members of
CNB's multi-bank organization, but in the manner best suited for their local
conditions.
CNB's growth since its formation has resulted principally from
acquisitions. Management anticipates that CNB will continue to pursue expansion
through future acquisitions. It is anticipated that potential candidates for
acquisition in the near term would be located in southern and central Indiana,
western Kentucky and southern Illinois. In addition, CNB may engage in new
activities as law and regulations permit.
CBI is a bank holding company and wholly owned subsidiary of CNB. CBI owns
all of the capital stock of Citizens Bank. CBI engages in no other business.
RECENT ACQUISITIONS
King City Federal Savings Bank
On February 1, 1995, CNB acquired, for shares of CNB Common, all of the
issued and outstanding shares of King City, a federally chartered savings bank
headquartered in Mt. Vernon, Illinois. As of December 31, 1994, King City had
assets of $172.1 million, deposits of $161.0 million and shareholders' equity of
$8.2 million.
Harrisburg Bancshares, Inc.
On February 10, 1995, CNB acquired, for shares of CNB Common, all of the
issued and outstanding shares of HBI and its subsidiary bank, The Harrisburg
National Bank. As of December 31, 1994, HBI had assets of $110.4 million,
deposits of $95.3 million and shareholders' equity of $5.7 million.
PENDING ACQUISITIONS
The Bank of Orleans
On October 18, 1994, CNB entered into an Agreement and Plan of
Reorganization with Orleans to acquire, for shares of CNB Common, all of the
issued and outstanding shares of Orleans, an Indiana state bank headquartered in
Orleans, Indiana. The shares of CNB Common to be issued in connection
20
<PAGE>
with the acquisition of Orleans would constitute approximately 1.8% of the
outstanding shares of CNB Common, assuming consummation of the Merger. As of
March 31, 1995, Orleans had assets of $57.8 million, deposits of $51.8 million
and shareholder's equity of $5.7 million. The acquisition, which is subject to,
among other things, approval of Orleans' shareholders, is expected to be
completed in the third quarter of 1995. There can be no assurance at this stage
of the process that the transaction will be consummated. The Merger is not
conditioned upon consummation of the Orleans acquisition.
Household Bank, f.s.b. Branches
On April 7, 1995, Citizens Bank of Western Indiana, a wholly owned
subsidiary of CNB headquartered in Terre Haute, Indiana, entered into a Purchase
and Assumption Agreement to acquire certain assets and assume certain
liabilities of four branch offices of Household Bank, f.s.b., located in west-
central Indiana. The total amount of deposits to be assumed is approximately
$80 million. There can be no assurance that all necessary regulatory approvals
will be obtained or that all conditions to the Purchase and Assumption Agreement
will be satisfied such that the purchase and assumption transaction will be
consummated. The Merger is not conditioned upon consummation of the purchase
and assumption transaction.
Additional information concerning CNB is included in the CNB documents
incorporated by reference herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
UFB
UFB was organized in July 1991 for the purpose of acquiring all of the
outstanding shares of Union Federal Savings Bank, a federal savings bank, in its
conversion from mutual to stock form. The assets of UFB consist primarily of
the stock of Thrift and investment securities purchased with the net proceeds of
the conversion retained at the holding company level. The activities of UFB are
funded by such investment securities and the income thereon and dividends from
Thrift. At March 31, 1995, UFB had consolidated assets of $553.0 million,
deposits of $359.2 million, net loans of $200.5 million and shareholders' equity
of $38.7 million.
The principal business of Thrift consists of attracting retail deposits
from the general public and investing those funds primarily in loans secured by
first mortgages on owner-occupied, one-to-four family residences and in
mortgage-backed securities. Thrift also operates consumer and, to a much lesser
extent, commercial business loans and commercial real estate (including multi-
family residential) loans. Through its network of sixteen offices, Thrift
currently serves eight counties in southern Indiana, western Kentucky and the
Mt. Carmel area in southern Illinois. This market area includes the communities
of Columbus, Evansville, Ft. Branch, Jasper, Mt. Vernon, Newburgh, Princeton and
Shelbyville in Indiana, Henderson in Kentucky, and Mt. Carmel in Illinois.
UFB's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1994
is attached hereto as Exhibit C and UFB's Quarterly Report on Form 10-Q/A for
the quarter ended March 31, 1995 is attached hereto as Exhibit D. Additional
information concerning UFB is included in the UFB documents attached hereto
and/or incorporated by reference herein. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
21
<PAGE>
MERGER
The following summary is qualified in its entirety by reference to the
full text of the Merger Agreement, which is attached as Exhibit A hereto and
incorporated by reference herein.
BACKGROUND OF AND REASONS FOR MERGER
UFB
In recent years, there has been, and there continues to be,
substantial consolidation in the United States banking and financial services
industry. This trend is necessarily of concern to smaller institutions, like
UFB, because larger entities that emerge from consolidations may acquire
substantial competitive advantages, including greater diversity in their loan
portfolios, cost savings through the integration of overlapping operations and
support functions, improved access to capital and funding and the ability to
spread costs of new products, services and research and development over a wider
customer base. UFB has been dedicated to the goal of providing superior banking
services primarily in southern Indiana, Mt. Carmel, Illinois, and Henderson,
Kentucky and, in analyzing strategic alternatives, has always sought to ensure
that the alternatives being considered can reasonably be expected to result in
improved services as well as enhanced shareholder value.
In January 1994, UFB engaged Kemper Securities to contact a number of
institutions on behalf of UFB who might be interested in a business combination
with UFB. Twenty-four bank holding companies and two thrift holding companies
were contacted. The institutions contacted included companies which UFB and
Kemper Securities believed would have a strategic interest in UFB and the
financial ability to acquire UFB, but which were not based in Evansville,
Indiana. Eleven of those institutions executed confidentiality agreements,
after which they were provided selected confidential information about UFB. As
a result of these contacts, only one of the institutions submitted a written
proposal, and the Board of Directors of UFB, in consultation with Kemper
Securities, concluded that the price offered was insufficient.
In September 1994, UFB's directors and management decided, with Kemper
Securities' assistance, to contact two prospective purchasers based in
Evansville, Indiana, and, because of expressions of interest, another
institution based outside of Evansville, Indiana. During September and October
1994, contacts were made with, and information was provided to, these three
prospective purchasers, one of which was CNB. During the last week of October
1994, after performing a limited investigation of UFB, all three of the
contacted companies provided UFB with written expressions of interest concerning
an acquisition of UFB. These preliminary expressions of interest contemplated
prices ranging between $40.15 and $43.14 for each fully diluted UFB share (i.e.,
after considering the dilutive effect of UFB's outstanding stock options). Two
of the three proposals contemplated stock consideration and the third
contemplated cash. At a Board of Directors meeting held on November 3, 1994,
UFB, with the assistance of Kemper Securities and legal counsel, analyzed each
proposal and determined that the proposal submitted by CNB was the best
opportunity for UFB and its shareholders. As a result, the directors authorized
Kemper Securities and its legal counsel to proceed with negotiations on behalf
of UFB for a definitive agreement with CNB. On November 4, 1994, UFB publicly
announced that it was negotiating with an unnamed financial institution for a
merger with that institution.
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While such negotiations with CNB towards a definitive agreement were
taking place, one of the other parties revised its proposal upward, but CNB's
proposal, in the opinion of UFB and Kemper Securities, continued to be superior.
During the next five weeks, UFB and CNB conducted negotiations of the Merger
Agreement and CNB completed additional due diligence investigations of UFB. On
December 12, 1994, the Merger Agreement was approved by both parties. Prior to
such approval, the directors of UFB received the oral opinion, followed up in
writing, of Kemper Securities that the Conversion Ratio in the Merger was fair,
from a financial point of view, to UFB's shareholders.
In reaching the determination that the Merger is fair to, and in the
best interests of, UFB and its shareholders, the UFB Board of Directors
consulted with UFB management, as well as its financial and legal advisors, and
considered a number of factors, including, without limitation, the following:
(a) UFB's business, operations, earnings, prospects and financial
condition;
(b) the business, operations, earnings, prospects and financial
condition of CNB, the enhanced opportunities for operating
efficiencies (particularly in terms of integration of operations and
support functions) that could result from the Merger, and the enhanced
opportunities for growth that the Merger would make possible;
(c) the opinion of Kemper Securities as of December 12, 1994, that
the Conversion Ratio in the Merger was fair to UFB shareholders from a
financial point of view;
(d) the competitive proposal process conducted by UFB with the
assistance of Kemper Securities, and the expressions of interest made
by other financial institutions;
(e) the value implicit in the Conversion Ratio in relation to the
then-current market value, book value and earnings of UFB, and the
dividend rate that UFB shareholders who become CNB shareholders are
expected to enjoy as a result of the Merger, and the fact that UFB
would be unlikely to match or exceed such value in the foreseeable
future by remaining independent;
(f) comparisons to median transaction multiples of other pending
and contemplated thrift acquisitions in terms of price to book value
and earnings;
(g) the terms of the Merger Agreement;
(h) the market prices at which shares of CNB Common have been
trading in recent periods;
(i) alternatives to the Merger and the competitive environment that
UFB was likely to encounter as an independent company;
(j) the fact that the pro forma capital position of the combined
companies would be well in excess of all applicable regulatory capital
requirements;
(k) the expectation that the Merger will be a tax-free transaction
to UFB and will generally be a tax-free transaction to its
shareholders who receive solely CNB Common (except cash in lieu of
fractional shares) (see "MERGER -- Federal Income Tax Consequences");
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(l) the current and prospective economic environment and
competitive constraints facing financial institutions, including UFB;
and
(m) the fact that the consideration to be received in the Merger by
UFB shareholders reflects a significant premium for UFB Common over
the market prices at which such stock had traded in the weeks prior to
the public announcement relating to the Merger made by UFB on November
4, 1994.
The UFB Board of Directors did not assign any specific or relative weight
to the foregoing factors in its consideration.
IN VIEW OF ALL THE CONSIDERATIONS DESCRIBED ABOVE, THE BOARD OF DIRECTORS
OF UFB UNANIMOUSLY RECOMMENDS THAT UFB SHAREHOLDERS VOTE FOR THE APPROVAL OF THE
MERGER AGREEMENT AND THE MERGER.
Certain members of the management and Board of Directors of UFB have
interests in the Merger that are in addition to the interests of shareholders of
UFB generally. See "MERGER -- Interests of Certain Persons in Merger."
CNB
As part of its ongoing operations, CNB continually is presented with and
seeks out acquisition opportunities to enhance its banking franchise. The
acquisition strategy of CNB, which is disciplined and targeted, is to increase
its presence in central and southern Indiana, western Kentucky and southern
Illinois, and to also explore new geographic markets, while maintaining strong
core earnings and a strong capital position. The Board of Directors of CNB
believes the acquisition of UFB will enhance CNB's presence in these market
areas and will be a natural and desirable addition to CNB's banking franchise in
these areas. Moreover, because both institutions are headquartered in
Evansville, Indiana, it is also expected to create operational efficiencies and
economies of scale by eliminating many of the duplicative administrative and
operational costs and expenses associated with maintaining two separate
financial institutions.
OPINION OF FINANCIAL ADVISOR
GENERAL
Kemper Securities has delivered its written opinion to UFB's Board of
Directors that, as of the date of this Prospectus/Proxy Statement, the
Conversion Ratio in the Merger is fair, from a financial point of view, to the
holders of UFB Common. See "MERGER -- Conversion Ratio." Kemper Securities'
written opinion essentially confirms its oral opinion provided to UFB's Board of
Directors on December 12, 1994, prior to the execution of the Merger Agreement,
and its written opinion dated as of the date of the Merger Agreement.
THE FULL TEXT OF THE OPINION OF KEMPER SECURITIES DATED AS OF THE DATE OF
THIS PROSPECTUS/PROXY STATEMENT, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED, AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS EXHIBIT B TO
THIS PROSPECTUS/PROXY STATEMENT. UFB'S SHAREHOLDERS ARE URGED TO READ KEMPER
SECURITIES' OPINION IN ITS ENTIRETY. KEMPER SECURITIES' OPINION IS DIRECTED TO
THE BOARD OF DIRECTORS OF UFB ONLY AND IS DIRECTED ONLY TO THE CONVERSION
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RATIO IN THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER
OF UFB AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE
SUMMARY OF KEMPER SECURITIES' OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF SUCH OPINION.
In connection with its opinion, Kemper Securities, among other things: (i)
reviewed the Merger Agreement; (ii) reviewed drafts of this Prospectus/Proxy
Statement; (iii) reviewed UFB's financial statements and certain internal
management reports and certain publicly available financial and other data with
respect to UFB and CNB including financial statements for recent years and
interim periods to date and certain other relevant financial and operating data
relating to CNB made available to it from published sources; (iv) discussed
UFB's history, operations, service areas, asset/liability structure and quality,
financial condition and performance, and prospects, among other factors, with
members of UFB's management; (v) compared UFB and CNB from a financial point of
view with certain other companies in the financial services industry which it
deemed relevant; (vi) reviewed the reported price and trading activity for UFB
Common and CNB Common; (vii) reviewed the financial terms of certain recent
business combinations in the thrift industry specifically; (viii) reviewed
certain pro forma data for CNB giving effect to the Merger and other of CNB's
pending acquisitions; (ix) discussed the Merger and the Merger Agreement with
UFB's counsel; (x) reviewed the results of its efforts as UFB's financial
advisor to solicit, evaluate, and negotiate acquisition proposals; and (xi)
performed such other studies and analyses as it considered appropriate. Kemper
Securities also took into account general economic, market, and financial
conditions as well as its experience in other transactions, its knowledge of the
thrift and commercial banking industries, and its experience in securities
valuation.
Kemper Securities relied without independent verification upon the accuracy
and completeness of the foregoing financial and other information reviewed by it
for purposes of its opinion. Kemper Securities also assumed that there has been
no material change in UFB's or CNB's assets, financial condition, results of
operations, business, or prospects since the date of the last financial
statements made available to it for UFB and CNB, respectively. In addition,
Kemper Securities did not make an independent evaluation, appraisal, or physical
inspection of the assets or individual properties of UFB or CNB, nor was Kemper
Securities furnished with such appraisals. Further, Kemper Securities' opinion
is based on economic, monetary, and market conditions existing as of the date of
this Prospectus/Proxy Statement. No limitations were imposed by UFB upon Kemper
Securities on the scope of its investigation nor were any specific instructions
given to Kemper Securities in connection with its fairness opinion.
Kemper Securities was retained by UFB on the basis of the firm's
reputation, experience, and familiarity with the thrift and commercial banking
industries and with merger and acquisition transactions. As part of its
investment banking services, Kemper Securities is regularly engaged in the
valuation of businesses and their securities in connection with merger and
acquisition transactions, public offerings, private placements,
recapitalizations, and other purposes.
Pursuant to its agreement with Kemper Securities, UFB has thus far paid
Kemper Securities $556,203 for its services which amount shall be credited
against a completion fee that is currently estimated to be $458,650 (assuming
for purposes of this estimate a closing sale price of CNB Common of $29.75 per
share). Additionally, UFB will pay Kemper Securities for its reasonable out-of-
pocket expenses, upon request.
For the purposes of its opinion, Kemper Securities believes it is
independent of UFB and CNB. Other than its services to UFB in connection with
the Merger and related fairness opinion, Kemper Securities has provided no other
professional services to either UFB or CNB.
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SUMMARY OF FINANCIAL ANALYSES
The following is a summary of the principal matters considered and
financial analyses utilized by Kemper Securities in connection with providing
its written opinion dated December 12, 1994 to UFB's Board of Directors but does
not purport to be a complete description of the analyses performed by Kemper
Securities. Kemper Securities reviewed the following matters and financial
analyses with UFB's Board of Directors on December 12, 1994.
Sale Process. Kemper Securities reviewed its activities as UFB's financial
advisor to solicit, evaluate, and negotiate acquisition proposals. See "MERGER
- -- Background of and Reasons for Merger -- UFB" for a summary of these
activities and the results thereof.
Status of the Securities Markets. Kemper Securities examined selected
indicators of debt and equity markets since December 1991. Specifically, month-
end observations of federal funds, thirty-year Treasury, and Federal National
Mortgage Association thirty-year eight percent-coupon mortgage-backed securities
yields were reviewed. The analysis indicated that these yields had trended
generally downward until the end of 1993 but had increased during 1994.
Additionally, monthly observations of stock price indices comprised of actively
traded commercial banks and bank holding companies located in the Midwest
("Midwest Banks"), thrifts and thrift holding companies located in the Midwest
("Midwest Thrifts"), and thrifts and thrift holding companies nationally ("All
Thrifts") were compared to each other and to the Standard & Poors 500 Index (the
"S&P500"). This analysis indicated that over the period the stocks of Midwest
Thrifts had increased in price to a greater extent than did those of All
Thrifts, that stocks of Midwest Thrifts had increased in price to a greater
extent than did those of Midwest Banks, and that the stocks of all of the
foregoing financial institutions had increased in price to a greater extent than
those comprising the S&P500. Another analysis indicated that over the period an
index of stocks comprised of thrifts with between $250 million and $500 million
in assets and a second index of stocks comprised of thrifts with assets between
$500 million and $1 billion had increased in price to a greater extent than an
index of stocks comprised of banks with assets between $1 billion and $5
billion. Finally, monthly stock prices and trading volume of UFB and CNB were
analyzed. This analysis indicated that over the period since December 1991
UFB's stock had increased in price to a greater extent than did CNB stock and
the stocks of Midwest Thrifts, and that CNB stock had increased in price to a
greater extent than did the stocks of Midwest Banks.
Thrift Acquisition Price Trends. Kemper Securities reviewed the pricing
relationships associated with thrift merger and acquisition transactions both
nationally and regionally (i.e., in the Midwest) for the seven calendar quarters
ended September 30, 1994. The analysis indicated that the median price-earnings
multiple of thrift acquisitions nationally had increased to 14.5x from 13.4x for
the quarter ended March 31, 1994. Prior to this the median price-earnings
multiples of thrift acquisitions had decreased to 13.4x for the quarter ended
March 31, 1994 from 15.8x for the quarter ended September 30, 1993. Another
analysis indicated that the median price-earnings multiple of thrift
acquisitions in the Midwest had increased to 16.1x for the quarter ended
September 30, 1994 from 11.6x for the quarter ended December 31, 1993. A third
analysis indicated that the average price-book value ratio of thrift
acquisitions nationally had increased to 160% for the quarter ended September
30, 1994 from 149% for the quarter ended December 31, 1993. A fourth analysis
indicated that the average price-book value ratio of thrift acquisitions in the
Midwest were 167%, 160%, and 169% for the quarters ending September 30, 1994,
June 30, 1994 and March 31, 1994, respectively, which where higher than the 155%
price-book value ratio for the quarter ended December 31, 1993.
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Analysis of Comparable Transactions. Kemper Securities reviewed the
financial terms of certain thrift merger and acquisition transactions which
involved the purchase of thrifts and thrift holding companies located in the
Midwest with total assets between $250 million and $750 million that were
pending at December 6, 1994 or had been completed within approximately two years
prior thereto. Pending and completed transactions were analyzed using
information available both at the announcement date and at the earlier of
December 6, 1994 or the completion date.
Kemper Securities calculated, reviewed, and compared selected financial
data and ratios for the approximately twenty thrifts and thrift holding
companies involved in pending and completed merger and acquisition transactions
(the "Comparative Group") using information as of the most recently available
date. The approximately forty variables summarized in the analysis pertained to
size, profitability, growth, capital adequacy, credit risk, asset quality, and
interest rate sensitivity. Such analysis indicated that, with respect to the
median value of the Comparative Group: (i) UFB's total assets and total equity
were $537.3 million and $45.9 million, respectively, corresponding to $382.4
million and $33.9 million for the Comparative Group; (ii) UFB's net interest
spread, return on average assets, and "core" return on average assets (i.e.,
excluding net gains on sales of assets and other non-recurring items) were
2.62%, 0.87%, and 0.82%, respectively, corresponding to 3.30%, 1.15%, and 1.02%
for the Comparative Group; (iii) UFB's annual asset, loan, and deposit growth
rates were 6.09%, negative 16.19%, and negative 2.85%, corresponding to negative
0.09%, 1.28%, and negative 0.01% for the Comparative Group; (iv) UFB's ratio of
equity to total assets was 8.54%, corresponding to 7.59% for the Comparative
Group; (v) UFB's ratio of "higher risk" loans (consisting of construction, land,
multi-family and commercial real estate, and commercial business loans, based on
federal regulatory classifications) to gross loans was 19.76%, corresponding to
17.81% for the Comparative Group; (vi) UFB's ratio of non-performing assets to
total assets was 0.22%, corresponding to 0.74% for the Comparative Group; and
(vii) UFB's one-year interest rate sensitivity gap as a percent of assets was
20.53%, corresponding to 0.61% for the Comparative Group.
With respect to the median of Comparative Group merger and acquisition
transactions based on information available at the earlier of December 6, 1994
or the completion date, the analysis indicated that: (i) the price-earnings
multiple for UFB in the Merger was 15.7x, corresponding to 12.5x and 12.0x,
respectively, for pending and completed transactions; (ii) the price-"core"
earnings multiple for UFB in the Merger was 16.7x, corresponding to 13.8x and
13.0x, respectively, for pending and completed transactions; (iii) the price-
book value ratio for UFB in the Merger was 150.0%, corresponding to 148.8% and
157.1%, respectively, for pending and completed transactions; and (iv) the
price-tangible book value ratio for UFB in the Merger was 150.0%, corresponding
to 149.5% and 158.6%, respectively, for pending and completed transactions.
In addition, Kemper Securities calculated the multiple of the "adjusted
offer value" to "normalized core earnings" and ratio of "adjusted offer value"
to "normalized tangible book value" for each Comparative Group merger and
acquisition transaction. Kemper Securities assumed "normalized tangible book
value" to be the acquired company's actual tangible equity less an assumed
dividend that would result in tangible equity equal to 7.0% of tangible assets,
"adjusted offer value" to be the actual offer value minus the difference between
the acquired company's actual tangible equity and "normalized tangible book
value," and "normalized core earnings" to be "core" earnings less assumed
earnings on the difference between the acquired company's actual tangible equity
and "normalized tangible book value." With respect to the median of Comparative
Group transactions based on information available at the earlier of December 6,
1994 or the completion date, the analysis indicated that: (i) the adjusted offer
value to normalized core earnings multiple for UFB in the Merger was 18.3x,
corresponding to 16.0x
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and 13.9x, respectively, for pending and completed transactions and (ii) the
adjusted offer value to normalized tangible book value ratio for UFB in the
Merger was 162.0%, corresponding to 168.3% and 173.5%, respectively, for pending
and completed transactions.
Stock Consideration. Kemper Securities compared selected market valuation,
balance sheet, income statement, and asset quality data of CNB to the
corresponding publicly available data of thirteen Midwest bank holding companies
with total assets between $1 billion and $5 billion that are not located in
major Metropolitan areas: AMCORE Financial, Inc; FirstBank of Illinois Co.; 1st
Source Corporation; First Financial Corporation (Indiana); Fort Wayne National
Corporation; Old National Bancorp; Chemical Financial Corporation; Citizens
Banking Corporation; First Michigan Bank Corporation; First Bancorporation of
Ohio; Mid Am, Inc.; Park National Corporation; and Associated Banc-Corp.
(collectively, the "CNB Comparable Group"). Using the latest information
available at December 6, 1994 the analysis indicated that, with respect to
median value and ranking within this group of thirteen companies: (i) CNB's
total assets were $2.5 billion corresponding to $1.9 billion, or the sixth
largest in the CNB Comparable Group; (ii) CNB's return on average assets, return
on average equity, and net interest margin were 1.04%, 12.14%, and 4.36%,
respectively, corresponding to 1.19%, 13.61%, and 4.75%, or eleventh, tenth, and
eleventh highest in the CNB Comparable Group; (iii) CNB's average equity to
assets ratio and average tangible equity to assets ratio were 8.42% and 7.77%,
respectively, corresponding to 8.81% and 8.39%, or twelfth and eleventh highest
in the CNB Comparable Group; and (iv) CNB's ratios of average loans to assets
and non-performing assets to total assets were 63.30% and 0.72%, respectively,
corresponding to 62.32% and 0.52%, or sixth and fifth highest in the CNB
Comparable Group. The analysis also indicated that CNB's price-earnings
multiple and price-book value ratios were 16.8x and 194.3%, respectively,
corresponding to medians of 10.7x and 154.9%, or second and third highest in the
CNB Comparable Group. Kemper Securities noted that CNB's largest direct
competitor, Old National Bancorp, had a price-earnings multiple of 17.0x and a
price-book value ratio of 219.7%. Based on median estimates of 1994 and 1995
earnings per share obtained from Institutional Broker Estimate System, CNB's
price-earnings multiples were 16.8x and 16.7x, respectively, corresponding to
medians of 10.7x and 9.8x, or the second and highest in the CNB Comparable
Group. Kemper Securities noted that both CNB and Old National Bancorp appeared
to have premiums reflected in their stocks due to, in part, their market area
and large market shares therein as well as their relative attractiveness as
acquisition candidates themselves.
Kemper Securities also presented an historical analysis of CNB's stock
price in relation to CNB's historical earnings and book value as well as to a
stock price index consisting of the CNB Comparable Group. The first analysis of
CNB's historical stock price indicated that for each month-end since October
1993, CNB's multiple of stock price to latest twelve-month earnings exceeded
15.5x and, with one exception, CNB's ratio of stock price to book value exceeded
180%. The second analysis of CNB's historical total stock return indicated that
for the period from December 1991 to December 1994, the total stock return of
the CNB Comparable Group was greater than that of CNB.
Pro Forma Analysis. Kemper Securities calculated historical and estimated
1994 earnings per share and book value per share for CNB giving effect to the
Merger. The pro forma analysis assumed the Conversion Ratio, a CNB stock price
of $31 1/2 per share, and no Merger-related savings or expenses. With respect
to the historical nine months ended September 30, 1994 and the estimated
calendar year 1994, the pro forma analysis indicated that the Merger would be
dilutive to CNB earnings per share by approximately 1.7% and 1.8%, respectively,
and would be accretive to CNB book value per share by approximately 5.3% and
3.7%, respectively.
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General. The foregoing is a summary of the principal financial analyses
performed by Kemper Securities but does not purport to be a complete description
of the analyses performed by Kemper Securities. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the analyses or of the
summary set forth above, without considering the analysis as a whole, could
create an incomplete view of the processes underlying Kemper Securities'
opinion. In arriving at its fairness determination, Kemper Securities
considered the results of all of such analyses. No specific Comparative Group
institution is identical to UFB, and no selected Comparative Group merger and
acquisition transaction is identical to the Merger. Accordingly, Kemper
Securities indicated to UFB's Board of Directors that analyses of the results
described above are not mathematical, but rather involve complex considerations
and judgments concerning differences in operating and financial characteristics.
The above analyses do not purport to be appraisals nor do they necessarily
reflect the prices at which UFB or its securities actually may be sold.
CONVERSION RATIO
The Merger Agreement provides that each share of UFB Common will be
converted, in the Merger, into the right to receive the number of shares of CNB
Common equal to the Conversion Ratio (together with any cash payment in lieu of
fractional shares, as described below). The Conversion Ratio is equal to 1.366
shares of CNB Common for each share of UFB Common, provided, however, that if
(a) the CNB Average Price (as defined below) is less than $26.66, then the
Conversion Ratio will be increased so as to equal the product of (i) 1.366, and
(ii) the quotient of $26.66 divided by the CNB Average Price; or (b) the CNB
Average Price is more than $36.06, then the Conversion Ratio will be decreased
so as to equal the product of (i) 1.366, and (ii) the quotient of $36.06 divided
by the CNB Average Price. As used herein, the term "CNB Average Price" means
the average of the per share closing prices of a share of CNB Common as reported
on Nasdaq during the twenty business day period preceding the fifth calendar day
preceding the Closing Date.
The shares of CNB Common to be issued in the Merger, together with any cash
payment in lieu of fractional shares, as provided below (see "MERGER --
Fractional Shares"), are referred to herein as the "Merger Consideration."
As the Conversion Ratio will be determined based upon the CNB Average Price
(which is not determinable until the end of the fifth trading day immediately
preceding the Closing Date), it is not possible, as of the date of this
Prospectus/Proxy Statement, to determine the definitive Conversion Ratio. For
purposes of illustration, however, if the Effective Time and the Closing Date
both would have occurred on ___________, 1995, the CNB Average Price would have
been $__________ and shareholders of UFB would have received 1.366 shares of CNB
Common for each share of UFB Common held (plus cash in lieu of fractional
shares). The foregoing information is provided solely for purposes of
illustration. In the event that the actual CNB Average Price should be less
than $26.66, the actual Conversion Ratio would be more than 1.366 shares of CNB
Common for each share of UFB Common, and if the actual CNB Average Price should
be more than $36.06, the Conversion Ratio would be less than 1.366 shares of CNB
Common for each share of UFB Common.
FRACTIONAL SHARES
No fractional shares of CNB Common will be issued and, in lieu thereof,
holders of shares of UFB Common who would otherwise be entitled to a fractional
share interest (after taking into account
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all shares of UFB Common held by such holder) will be paid an amount in cash
equal to the product of such fractional share interest and the closing price of
a share of CNB Common on Nasdaq on the fifth business day immediately preceding
the date on which the Effective Time occurs.
SHARE ADJUSTMENTS
If, between the date of the Merger Agreement and the Effective Time, a
share of CNB Common is changed into a different number of shares of CNB Common
or a different class of shares (a "Share Adjustment") by reason of
reclassification, recapitalization, splitup, exchange of shares or readjustment,
or if a stock dividend thereon is declared with a record date within such
period, then the Conversion Ratio will be appropriately and proportionately
adjusted so that each shareholder of UFB will be entitled to receive such number
of shares of CNB Common as such shareholder would have received pursuant to such
Share Adjustment had the record date therefor been immediately following the
Effective Time of the Merger; provided, however, that the one for ten stock
dividend paid by CNB on December 9, 1994, was taken into account by the parties
in determining the Conversion Ratio and, therefore, such stock dividend is not
deemed a Share Adjustment and the Conversion Ratio has not been, and will not
be, adjusted as a result thereof.
CLOSING DATE; EFFECTIVE TIME
The Merger Agreement provides that the Closing of the Merger will take
place, at CNB's election, on (i) the last business day of; or (ii) the first
business day of the month following; or (iii) the last business day of the
earliest month which is the second month of a calendar quarter following, in
each case, the month during which all necessary regulatory approvals required by
law for the Merger and the Related Transactions have been obtained and all
waiting periods required by law have expired (see "MERGER -- Regulatory
Approvals") or such other time thereafter as UFB and CNB may agree.
The Merger Agreement provides that the Effective Time of the Merger will be
the later of (a) the date of filing with the Secretary of State of the State of
Indiana of Articles of Merger; and (b) the date of filing with the Secretary of
State of the State of Delaware of a Certificate of Merger. Assuming that the
Merger is approved by the requisite vote of the shareholders of UFB and that the
other conditions to the Merger are satisfied or waived (where permissible), it
is presently anticipated that the Effective Time of the Merger will be in the
third quarter of 1995, but no assurance can be given that such timetable will be
met or that the conditions to the Merger will be satisfied or waived (where
permissible).
With the exception of those shareholders of UFB who may be deemed to be an
"affiliate" of UFB for purposes of Rule 145 under the Securities Act, the Merger
Agreement does not prohibit shareholders of UFB from selling their shares prior
to the Effective Time. The Merger Agreement provides, however, that each
affiliate of UFB must enter into an agreement with CNB providing, among other
things, that such affiliate will not make any sale or other disposition of any
shares of UFB Common during the 30 day period commencing on the 30th day prior
to the Effective Time. Persons who may be deemed to be affiliates of UFB
generally include individuals who (or entities which) control, are controlled by
or are under common control with UFB and will include directors and certain
officers of UFB and may include principal shareholders of UFB. See "MERGER --
Resale of CNB Common."
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FORM OF MERGER; RELATED TRANSACTIONS
The Merger Agreement provides that UFB will merge with and into CBI, which
is a wholly owned subsidiary of CNB, and CBI will be the surviving corporation.
Upon consummation of the Merger, CBI will continue to be a wholly owned
subsidiary of CNB and UFB will cease to exist as a separate entity. Concurrent
with the consummation of the Merger, Thrift will be merged with and into
Citizens Bank (the "Evansville Bank Merger") and Thrift will cease to exist as a
separate entity. Immediately prior to the consummation of the Merger and the
Evansville Bank Merger, the following branch purchase and assumption
transactions will be effected between Thrift and other subsidiaries of CNB: (i)
Citizens Bank of Jasper, an Indiana state bank, will purchase and assume the
assets and liabilities of Thrift's one branch office located in Jasper, Indiana;
(ii) Citizens Bank of Kentucky, a Kentucky state bank, will purchase and assume
the assets and liabilities of Thrift's two branch offices located in Henderson,
Kentucky; and (iii) Citizens Bank of Illinois, National Association, a national
banking association, will purchase and assume the assets and liabilities of
Thrift's one branch office located in Mt. Carmel, Illinois. The Merger is
conditioned upon the consummation of the Related Transactions.
REGULATORY APPROVALS
The Merger does not require the separate approval of any regulatory agency.
The Related Transactions require the prior approval of the following regulatory
agencies. The Evansville Bank Merger requires the prior approval of the O.C.C.
and the O.T.S. Applications for prior approval of the Evansville Bank Merger
were approved by the O.C.C. and the O.T.S. on June 13, 1995 and April 5, 1995,
respectively. The Jasper P&A requires the prior approval of the F.D.I.C. and
the O.T.S. Applications for prior approval of the Jasper P&A were approved by
the F.D.I.C. and the O.T.S. on May 19, 1995 and April 5, respectively. The
Kentucky P&A requires the prior approval of the F.D.I.C., the O.T.S. and the
K.D.F.I. Applications for prior approval of the Kentucky P&A were approved by
the F.D.I.C., the O.T.S., and the K.D.F.I. on __________, 1995, April 5, 1995,
and May 15, 1995, respectively. The Illinois P&A requires the prior approval of
the O.C.C. and the O.T.S. Applications for prior approval of the Illinois P&A
were approved by the O.C.C. and the O.T.S. on June 13, 1995 and April 5, 1995,
respectively.
The Merger may not be consummated until the 15th day following the dates of
the O.C.C. and the F.D.I.C. approvals, during which time the United States
Department of Justice may challenge the Merger on antitrust grounds. The
commencement of an antitrust action would stay the effectiveness of the O.C.C.'s
and F.D.I.C.'s approval unless a court specifically orders otherwise.
CONDITIONS TO CONSUMMATION OF MERGER
The Merger is subject to various conditions. Specifically, the obligations
of each party to effect the Merger are subject to the fulfillment or waiver by
each of the parties, at or prior to the Closing Date, of the following
conditions (i) the representations and warranties of the other party set forth
in the Merger Agreement will be true and correct in all material respects on the
date thereof and as of the Closing Date (see "MERGER -- Representations and
Warranties"); (ii) the other party will have performed and complied in all
material respects with all of its obligations and agreements required to be
performed prior to the Closing Date (see "MERGER -- Certain Other Agreements");
(iii) no order or injunction will have been issued by any court of competent
jurisdiction, no other legal restraint or prohibition preventing the
consummation of the Merger will be in effect or pending and there will be no
action taken or any statute,
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rule, regulation or order enacted which makes consummation of the Merger
illegal; (iv) all necessary regulatory approvals and consents and other
approvals (including the requisite approval of the Merger and the Merger
Agreement by the shareholders of UFB) required to consummate the Merger and the
Related Transactions will have been obtained and all waiting periods in respect
thereof will have expired (see "MERGER -- Regulatory Approvals" and "SPECIAL
MEETING -- Vote Required"); (v) each party will have received all required
documents from the other party; (vi) the Registration Statement relating to the
CNB Common to be issued pursuant to the Merger will have become effective, all
required state securities approvals or exemptions will have been obtained and no
stop order suspending the effectiveness of the Registration Statement will have
been issued and no proceedings for that purpose will have been initiated or
threatened by the S.E.C. or any state securities agency; and (vii) each party
will have received an opinion of counsel for CNB, Lewis, Rice & Fingersh, L.C.,
or a ruling of the Internal Revenue Service, that if the Merger is consummated
in accordance with the terms set forth in the Merger Agreement, (a) the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code, (b) no gain or loss will be recognized by the holders of shares of UFB
Common upon receipt of Merger Consideration (except for cash received in lieu of
fractional shares), (c) the basis of CNB Common received by the shareholders of
UFB will be the same as the basis of UFB Common exchanged therefor, and (d) the
holding period of the shares of CNB Common received by the shareholders of UFB
will include the holding period of the shares of UFB Common exchanged therefor,
provided such shares were held as capital assets as of the Effective Time (see
"MERGER -- Federal Income Tax Consequences").
The obligation of CNB to effect the Merger is further subject to the
fulfillment, or waiver by CNB, at or prior to the Closing, of the following
conditions (i) CNB will have received an opinion letter from its independent
public accountants, Geo. S. Olive & Co., L.L.C., to the effect that the Merger
qualifies for "pooling of interests" accounting treatment under Accounting
Principles Board Opinion No. 16 if closed and consummated in accordance with the
Merger Agreement (see "MERGER --Accounting Treatment"); (ii) CNB will have
received certain environmental inspection reports required to be obtained on
certain of UFB's real properties and CNB will not have elected to exercise its
termination rights in connection therewith (which such rights are described
herein; see "MERGER --Termination or Abandonment" and "-- Certain Other
Agreements -- Environmental Inspections"); and (iii) the Closing Book Value (as
defined below) of UFB will not have been less than $48,691,000 (which is equal
to the consolidated shareholders' equity accounts of UFB as of October 31,
1994). As used herein, the term "Closing Book Value" means the amount of the
consolidated shareholders' equity accounts of UFB, as of the end of the month
immediately preceding the Closing Date, determined in accordance with generally
accepted accounting principles consistently applied with the year ended June 30,
1994, less (i) the amount of any increase in the consolidated shareholders'
equity accounts of UFB resulting from or attributable to the sale of securities
held on and sold after the date of the Merger Agreement or any transactions or
accounting adjustments not in the ordinary course of business effected or
completed after the date of the Merger Agreement, plus (ii) any reduction of
consolidated shareholders' equity theretofore recorded solely as a result of
accruals, reserves or charges taken by UFB at the written request of CNB
pursuant to the Merger Agreement (see "MERGER -- Certain Other Agreements --
Additional UFB Reserves, Accruals and Charges"), plus (iii) any reduction of
consolidated shareholders' equity theretofore recorded solely as a result of Net
Unrealized Gain/Loss on Securities Available for Sale pursuant to FAS 115. As
the Closing Book Value will be determined as of the end of the month immediately
preceding the Closing Date, it is not possible, as of the date of this
Prospectus/Proxy Statement, to determine whether the foregoing condition has
been satisfied. Assuming, for purposes of illustration only, that the Closing
Date would have occurred in June 1995, the Closing Book Value would have been
$50,612,000 and the foregoing condition would have been satisfied.
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The obligation of UFB to effect the Merger is further subject to the
reaffirmation on or before the date of the mailing of this Prospectus/Proxy
Statement by UFB's investment banker, Kemper Securities, of its fairness
opinion, originally rendered and delivered to UFB at the meeting of the Board of
Directors of UFB at which the Merger Agreement was approved by such Board of
Directors, to the effect that the Merger is fair to the UFB shareholders from a
financial point of view. The fairness opinion of Kemper Securities is attached
hereto as Exhibit B and the foregoing condition has been satisfied. See "MERGER
- -- Opinion of Financial Advisor."
TERMINATION OR ABANDONMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time (i) if the Merger is not consummated on or prior to December 12, 1995; (ii)
by mutual agreement of CNB and UFB; (iii) by CNB or UFB in the event of a
material breach by the other of any of its representations and warranties or
agreements under the Merger Agreement not cured within 30 days after notice of
such breach is given by the non-breaching party (see "MERGER -- Representations
and Warranties"); (iv) by either party in the event all the conditions to its
obligations are not satisfied or waived (and not cured within any applicable
cure period) (see "MERGER -- Conditions to Consummation of Merger"); (v) by CNB
if environmental inspection reports on UFB's real properties that must be
obtained pursuant to the Merger Agreement disclose any contamination or presence
of hazardous wastes the estimated clean-up or other remedial cost of which
exceeds $250,000 or cannot be reasonably estimated to be such amount or less
(see "MERGER -- Certain Other Agreements -- Environmental Inspections"); (vi) by
CNB in the event that UFB or any of its subsidiaries becomes a party or subject
to any new or amended written agreement, memorandum of understanding, cease and
desist order, imposition of civil money penalties or other regulatory
enforcement action or proceeding with any federal or state agency charged with
the supervision or regulation of banks or thrifts or bank or thrift holding
companies after the date of the Merger Agreement which is materially adverse to
UFB and its subsidiaries; and (vii) by CNB if, after the date of the Merger
Agreement, there is made or there otherwise arises or is incurred one or more
Mortgage Operations Losses (as defined below) the reasonable estimated loss
amount of which exceed, in the aggregate, $1,335,167.23.
As used above, the term "Mortgage Operations Losses" means any claim,
demand or notice asserted or threatened at any time against UFB or any of its
subsidiaries or any loss or charge realized or which should be realized by UFB
or any of its subsidiaries which arises from, is connected with or pertains to
(a) the business or operations of Union Security Mortgage, Inc. ("USM")
(including, without limitation, matters related to the origination and/or sale
of loans by USM); (b) the sale of USM by UFB to the Acquiror (as defined below);
(c) any guarantee by UFB or Thrift of any obligation or liability of USM; (d)
loan charges, provisions or losses of Union Financial Corp. ("UFC"); or (e) any
guarantee by UFB or Thrift of any obligation or liability of UFC, for which, in
any such case listed in (a) through (e) above, there is no Meritorious Defense
(as defined below). The term "Meritorious Defense" means any defense to a
claim, demand or cause of action which UFB and its counsel, Barnes & Thornburg,
reasonably believe and independent counsel retained by CNB for such purpose and
reasonably acceptable to UFB determines, based upon such counsel's independent
investigation of facts, is substantially more likely than not to prevail in
defeating such claim, demand or cause of action. The Merger Agreement
provides that, at the request of CNB, UFB will contact any of USM, the Acquiror
or any investor in or purchaser or holder of loans originated and/or sold by USM
or UFC to inquire of such person's knowledge of the existence of any Mortgage
Operations Loss (or the existence of facts or circumstances that reasonably
could be expected to lead to a Mortgage Operations Loss), UFB will permit a
representative of CNB to participate in all such contacts and communications,
and UFB will provide to
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CNB promptly upon receipt after the date of the Merger Agreement by UFB or any
of its subsidiaries a copy of any correspondence or other written communication
and a summary of any oral communications pertaining to any Mortgage Operations
Losses or any facts or circumstances that reasonably could be expected to lead
to a Mortgage Operations Loss.
USM is a mortgage banking company based in Santa Ana, California, and was a
wholly-owned subsidiary of Thrift until May 31, 1993, the date on which complete
ownership of USM was sold to an unrelated third party (the "Acquiror"). During
Thrift's ownership of USM, USM originated, sold and serviced conventional
single-family residential loans, through its main office and a satellite office
located in Woodland Hills, California. Subsequent to the sale of the loans that
it originated, USM remained potentially liable for losses incurred by
purchasers, including unpaid principal and interest, under certain
representations and warranties made to the purchasers at the time of the sale.
Under certain circumstances (for example, when the debtor made fraudulent
misrepresentations to USM in the origination process), USM may become liable for
a purchaser's losses on a defaulted loan, regardless of whether the loan is
recourse or nonrecourse, if there has been a breach of the representations and
warranties made to the purchaser by USM.
With the sale of USM on May 31, 1993, Thrift retained liability for
breaches of these representations and warranties for all loans sold by USM prior
to May 31, 1993, and thus assumed the potential liability for any breach of the
representations and warranties. Moreover, in certain cases Thrift had
separately guaranteed USM's obligations pursuant to guarantees signed by Thrift
prior to sale of USM to the Acquiror.
Both before and after the sale of USM to the Acquiror, Thrift has received
from various purchasers, both directly or indirectly through USM and the
Acquiror, demands to repurchase from the purchaser and/or to indemnify the
purchaser for losses incurred in connection with loans involving a breach of the
representations and warranties made at the time of sale to the purchaser.
In January, 1993, Thrift formed a new mortgage banking subsidiary based in
Virginia named Union Financial Corp. Like USM, UFC originates, sells and
services conventional single-family residential loans, and remains potentially
liable for losses incurred by purchasers, including unpaid principal and
interest, under certain representations and warranties made to the purchasers at
the time of the loan sales. On May 31, 1995, UFC entered into certain
agreements to sell substantially all of its assets to a financial institution
headquartered in New Jersey. UFC will discontinue its mortgage banking business
upon consummation of the sale. The sale is subject to certain conditions,
including receipt of appropriate licenses and consents, and there can be no
assurance at this stage of the process that the transaction will be consummated.
The Merger is not conditioned upon the consummation of the sale. Like with the
sale of USM, UFC and Thrift will retain liability for breaches of certain
representations and warranties for all loans made by UFC prior to the sale.
As described above, CNB may terminate the Merger Agreement if, after the
date of the Merger Agreement, there is made or otherwise arises or is incurred
one or more Mortgage Operations Losses the reasonable estimated loss amount of
which exceeds, in the aggregate, $1,335,167.23. UFB estimates that the
aggregate amount of Mortgage Operations Losses as of the date of this
Prospectus/Proxy Statement is $750,136. Additional information regarding the
Mortgage Operation Losses is included on pages 15 and 16 of UFB's Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 1995, a copy of which is
attached as Exhibit D to this Prospectus/Proxy Statement.
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TERMINATION FEE
The Merger Agreement provides that upon the occurrence of one or more
Triggering Events (as defined below), UFB will pay to CNB the sum of $2 million.
The term "Triggering Event" means any of the following events (a) upon
termination of the Merger Agreement by CNB upon a breach thereof by UFB
(including, without limitation, upon the entering into of an agreement between
UFB and any third party which is inconsistent with the transactions contemplated
by the Merger Agreement), provided that within two years of the date of such
termination, an event described in clause (c) or (d) below occurs; (b) the
failure of UFB's shareholders to approve the Merger and the Merger Agreement at
the Special Meeting, provided that within one year of the date of the Special
Meeting, an event described in clause (c) or (d) below occurs; (c) any person or
group of persons (other than CNB) acquires, or has the right to acquire, 50% or
more of the UFB Common, exclusive of shares of UFB Common sold directly or
indirectly to such person or group of persons by CNB; or (d) upon the entry by
UFB into an agreement or other understanding with a person or group of persons
(other than CNB and/or its affiliates) for such person or group of persons to
acquire, merge or consolidate with UFB or to purchase all or substantially all
of UFB's assets. As used above, the term "person" and "group of persons" has
the meanings conferred thereon by Section 13(d) of the Exchange Act.
EXCHANGE OF STOCK CERTIFICATES
The conversion of UFB Common into CNB Common will occur by operation of law
at the Effective Time. After the Effective Time, certificates theretofore
evidencing shares of UFB Common which may be exchanged for shares of CNB Common
will be deemed, for all corporate purposes other than the payment of dividends
and other distributions on such shares, to evidence ownership of and entitlement
to receive such shares of CNB Common.
At or prior to the Effective Time, CNB will deposit, or cause to be
deposited, with Citizens Bank, the exchange agent in the Merger (the "Exchange
Agent"), the Merger Consideration for the benefit of the UFB shareholders. As
soon as reasonably practicable after the Effective Time, the Exchange Agent will
send a transmittal letter and instructions to each record holder of certificates
for UFB Common whose shares were converted into the right to receive the Merger
Consideration, advising such holder of the number of shares of CNB Common such
holder is entitled to receive pursuant to the Merger, of the amount of cash such
holder is due in lieu of a fractional share of CNB Common, and of the procedures
for surrendering such certificates in exchange for a certificate for the number
of whole shares of CNB Common, and a check for the cash amount (if any) such
holder is entitled to receive in lieu of a fractional share. The letter of
transmittal will also specify that delivery will be effected, and risk of loss
and title to the certificates for UFB Common will pass, only upon proper
delivery of the certificates for UFB Common to the Exchange Agent and will be in
such form and have such other provisions as CNB may reasonably specify.
SHAREHOLDERS OF UFB ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR
EXCHANGE UNTIL SUCH LETTER OF TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED. The
shares of CNB Common into which UFB Common will be converted in the Merger will
be deemed to have been issued at the Effective Time. Unless and until the
certificates for UFB Common are surrendered, together with a letter of
transmittal duly executed and any other required documents, dividends on the
shares of CNB Common issuable with respect to such UFB Common which would
otherwise be payable will not be paid to the holders of such certificates and,
in such case, upon surrender of the certificates for UFB Common, together with a
letter of transmittal duly executed and any other required documents,
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there will be paid any dividends on such shares of CNB Common which became
payable between the Effective Time and the time of such surrender. No interest
on any such dividends will accrue or be paid.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of UFB
and CNB. These include, among other things, representations and warranties by
UFB, except as otherwise disclosed to CNB, as to (i) organization and good
standing; (ii) capitalization; (iii) the due authorization and execution of the
Merger Agreement; (iv) the identity and ownership of any subsidiaries; (v) the
accuracy of its financial statements and its filings with the S.E.C. and the
accuracy of Thrift's filings with the O.T.S.; (vi) the absence of material
adverse changes in the financial condition, results of operations or business of
UFB and its subsidiaries; (vii) the absence of certain orders, agreements,
imposition of civil money penalties or memoranda of understanding between UFB or
any of its subsidiaries or any of their officers and directors and any federal
or state agency charged with the supervision or regulation of banks or thrifts;
(viii) the filing of tax returns and payment of taxes; (ix) the absence of
pending or threatened litigation (except as specified) or other such actions;
(x) agreements with employees, including employment agreements; (xi) certain
reports required to be filed with various regulatory agencies; (xii) loan
portfolio; (xiii) investment portfolio; (xiv) employee matters and matters
relating to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"); (xv) good title to properties, the absence of liens (except as
specified) and insurance matters; (xvi) environmental matters; (xvii) compliance
with applicable laws and regulations; (xviii) the absence of brokerage
commissions or similar finder's fees in connection with the Merger (except for
the fees payable to Kemper Securities); (xix) the absence of undisclosed
liabilities; (xx) properties, material contracts and other agreements; (xxi)
certain interim events; (xxii) non-banking activities; and (xxiii) the accuracy
of information supplied by it in connection with the Registration Statement,
this Prospectus/Proxy Statement and any other documents to be filed with the
S.E.C., Nasdaq or any banking or other regulatory authority in connection with
the transactions contemplated by the Merger Agreement.
CNB's representations and warranties include, among other things, those as
to (i) organization; (ii) capitalization; (iii) the due authorization and
execution of the Merger Agreement and the absence of the need (except as
specified) for governmental or third party consents to the Merger; (iv)
subsidiaries of CNB; (v) the accuracy of CNB's financial statements and filings
with the S.E.C.; (vi) the absence of material adverse changes in the financial
condition, results of operations or business of CNB and its subsidiaries; (vii)
the absence of material pending or threatened litigation or other such actions;
(viii) certain reports required to be filed with various regulatory agencies;
(ix) compliance with applicable laws and regulations; (x) the accuracy of
information supplied by it in connection with the Registration Statement, this
Prospectus/Proxy Statement and any other documents to be filed with the S.E.C.,
Nasdaq or any banking or other regulatory authority in connection with the
transactions contemplated by the Merger Agreement; (xi) the absence of certain
orders, agreements, imposition of civil money penalties or memoranda of
understanding between CNB or any of its subsidiaries or any of their officers
and directors and any federal or state agency charged with the supervision or
regulation of banks or bank holding companies; and (xii) the absence of
undisclosed liabilities.
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CERTAIN OTHER AGREEMENTS
CONDUCT OF BUSINESS PENDING MERGER
Pursuant to the Merger Agreement, UFB has agreed, among other things, that
it will, and that it will cause its subsidiaries to, continue to carry on, after
the date of the Merger Agreement, its respective business and the discharge or
incurrence of its respective obligations and liabilities only in the usual,
regular and ordinary course as previously conducted, and that UFB and its
subsidiaries will not, without the prior written consent of CNB (which will not
be unreasonably withheld) (i) issue additional UFB Common (except pursuant to
the exercise of UFB Stock Options (as defined below; see "MERGER -- Stock
Options")) or other capital stock, options, warrants or other rights to
subscribe for or purchase UFB Common or any other capital stock or any other
securities convertible into or exchangeable for any capital stock of UFB or its
subsidiaries; (ii) directly or indirectly redeem, purchase or otherwise acquire
UFB Common or any other capital stock of UFB or its subsidiaries; (iii) effect a
reclassification, recapitalization, splitup, exchange of shares, readjustment or
other similar change in any capital stock or otherwise reorganize or
recapitalize; (iv) change its certificates or articles of incorporation or
association, as the case may be, or bylaws; (v) grant any increase (other than
ordinary and normal increases consistent with past practices) in the
compensation payable or to become payable to officers or salaried employees,
grant any stock options or, except as required by law or pursuant to the Merger
Agreement, adopt or change any bonus, insurance, pension, or other employee
plan, payment or arrangement made to, for or with any such officers or
employees, except that, if the Merger is not consummated before October 1, 1995,
the Board of Directors of Thrift, in its sole discretion, may thereafter extend
for one year any one or more of the Employment Agreements with each of Donald A.
Rausch, Ennis R. Griffith, Terry G. Johnston and Paul E. Wargel and the Special
Termination Agreements with Steven E. Fowler and J. Ray Justice (see "MERGER --
Interests of Certain Persons in Merger -- Employment and Termination
Agreements"); (vi) borrow or agree to borrow any amount of funds other than
Federal Home Loan Bank borrowings and other borrowings in the ordinary course of
business (except for the purpose of funding investment securities) or directly
or indirectly guarantee or agree to guarantee any obligations of others; (vii)
make or commit to make any new loan or letter of credit or any new or additional
discretionary advance under any existing line of credit, in excess of $350,000,
or that would increase the aggregate credit outstanding to any one borrower to
more than $350,000; (viii) purchase or otherwise acquire any investment security
for its own account having an average remaining life maturity greater than five
years or any asset-backed securities other than those issued or guaranteed by
the Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation; (ix) increase or
decrease the rate of interest paid by Thrift on any deposit product, including
without limitation, certificates of deposit, except in accordance with past
practices; provided, however, that, notwithstanding the foregoing, in no event
will UFB permit Thrift to pay a rate of interest on any deposit product which is
more than the greater of (a) one-quarter of one percent (0.0025) above the
average of the rates paid on comparable deposit products by the five highest
deposit interest paying banks or other thrifts located in the market in which
such deposit product is offered by Thrift (or, if fewer than five banks and
other thrifts are located in such market, the average of the rates paid by all
banks and other thrifts located in such market), or (b) the rate paid by a
subsidiary of CNB, if any, in the market in which such deposit product is
offered by Thrift and Thrift will determine and document its compliance with the
foregoing provisions each Tuesday or whenever Thrift otherwise changes the rates
paid on its deposit products; (x) enter into any agreement, contract or
commitment having a term in excess of three months and involving an aggregate
expenditure or commitment of more than $25,000 other than letters of credit,
loan agreements, and other lending, credit and deposit agreements and documents
made in the ordinary course of business; (xi) mortgage,
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pledge, lien, charge or otherwise encumber any of its assets or properties
except in the ordinary course of business; (xii) cancel, accelerate or waive any
material indebtedness, claims or rights owing to UFB or its subsidiaries except
in the ordinary course of business; (xiii) sell or otherwise dispose of any real
property or any material amount of personal property other than OREO or other
property acquired in foreclosure or otherwise in the ordinary collection of
indebtedness to UFB and its subsidiaries and other than loans held-for-sale sold
in the ordinary course of Thrift's business; (xiv) foreclose or otherwise take
title to or possess any real property, other than single family, non-
agricultural residential property of one acre or less, without first obtaining a
phase one environmental report which indicates that the property is free of
hazardous, toxic or polluting waste materials; (xv) commit any act or fail to do
any act which will result in a breach of any agreement, contract or commitment,
or violate any law, statute, rule, governmental regulation or order, which will
materially and adversely affect the business, financial condition or results of
operations of UFB and its subsidiaries; (xvi) purchase any real or personal
property or make any capital expenditure in excess of $50,000; or (xvii) engage
in any transaction or take any action that would render untrue in any material
respect any of the representations and warranties made by UFB in the Merger
Agreement, if such representations or warranties were given as of the date of
such transaction or action.
DIVIDENDS
The Merger Agreement provides that UFB may declare and pay its regular
quarterly dividend on the UFB Common not to exceed $0.15 per share at
approximately the same time during each quarter which it has historically
declared and paid such quarterly dividend. In this regard, CNB and UFB have
agreed to cooperate with each other to coordinate the record and payment dates
of their respective dividends for the quarter in which the Effective Time occurs
such that UFB shareholders would receive the aforesaid quarterly dividend from
UFB or a regular quarterly dividend from CNB, but not from both with respect to
any such quarter.
ENVIRONMENTAL INSPECTIONS
UFB has agreed to provide CNB, not later than 45 days after the date of the
Merger Agreement, a report of a phase one environmental investigation on certain
real property owned, leased or operated by UFB (which does not include leased
space in retail and similar establishments for automatic teller machines or bank
branch facilities where the space leased comprises less than 15% of the total
space leased to all tenants of such property) and, if required by the phase one
investigation in CNB's reasonable opinion, a report of a phase two investigation
on properties requiring such additional study. UFB is presently obtaining, at
CNB's request, phase two investigations on six of UFB's real properties which
CNB determined, based upon the results of the phase one investigations, required
additional study. Environmental investigations routinely are conducted by CNB
in connection with transactions involving the acquisition of real property,
whether pursuant to the acquisition of a bank or other business or in its
ongoing business operations. These investigations are intended to identify and
quantify potential environmental risks of ownership, such as contamination,
which could lead to liability for clean-up costs under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, and
other applicable laws. A "phase one" investigation is an initial environmental
inquiry intended to identify areas of concern which might require more in-depth
assessment. The scope of a phase one investigation varies depending on the
environmental consultant utilized and the property assessed, but will typically
include (i) visual inspection of the property; (ii) review of governmental
records to ascertain the presence of such things as "Superfund" sites,
underground storage tanks or landfills, etc. on or near the site; (iii) review
of all relevant site records such as air or water discharge
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permits and hazardous waste manifests; and (iv) research regarding previous
owners and uses of the property as well as those of surrounding properties. In
bank or other business acquisition transactions, CNB's policy is to obtain phase
one environmental investigations of real property to ensure that environmental
problems do not exist which could result in unacceptably high or unquantifiable
risk to CNB and its shareholders.
OTHER UFB AGREEMENTS
UFB has agreed to (i) give CNB prompt written notice of any occurrence, or
impending or threatened occurrence, of any event or condition which would cause
or constitute a breach of any of UFB's representations or agreements in the
Merger Agreement or of the occurrence of any matter or event known to and
directly involving UFB, which would not include any changes in conditions that
affect the banking industry generally, that is materially adverse to the
business, operations, properties, assets or condition (financial or otherwise)
of UFB and its subsidiaries taken as a whole; (ii) use its best efforts to
obtain all necessary consents in any material leases, licenses, contracts,
instruments and rights which require the consent of another person for their
transfer or assumption pursuant to the Merger; (iii) use its best efforts to
perform and fulfill all conditions and obligations to be performed or fulfilled
under the Merger Agreement, to effect the Merger and to facilitate and
effectuate the transition and integration of the business and operations of UFB
and its subsidiaries with the business and operations of CNB and its
subsidiaries; (iv) permit CNB reasonable access to UFB's properties and to
disclose and make available all books, documents, papers and records relating to
assets, stock ownership, properties, operations, obligations and liabilities in
which CNB may have a reasonable and legitimate interest in furtherance of the
transactions contemplated by the Merger Agreement; (v) cause the Special Meeting
to be duly called and held; (vi) submit to CNB, not later than fifteen days
after the end of each month, a report detailing all expenditures resulting from
the extraordinary, non-recurring costs associated with the transactions
contemplated by the Merger Agreement which have been incurred or otherwise
accrued by UFB during the preceding month; (viii) if CNB or CBI determines that
it is necessary or advisable in order to resolve or minimize objections that may
be asserted with respect to the Merger by any federal or state governmental
agency or body (collectively, the "Governmental Entities") or otherwise, that
CNB or CBI not acquire (directly or indirectly) from UFB certain assets or
deposits of Thrift, then Thrift will take appropriate steps to divest such
assets or deposit liabilities (provided that the obligation of Thrift to
consummate any such divestitures will be subject to the condition that the
Merger be simultaneously consummated); and (ix) if requested by CNB, take all
actions necessary to facilitate and effectuate the transition and integration of
Thrift's loan and deposit products with those of Citizens Bank of Jasper (with
respect to Thrift's office located in Jasper, Indiana), Citizens Bank of
Illinois, National Association (with respect to Thrift's office located in Mt.
Carmel, Illinois), Citizens Bank of Kentucky (with respect to Thrift's offices
located in Henderson, Kentucky) and Citizens Bank (with respect to all other
offices of Thrift), effective as of the anticipated Closing Date.
ADDITIONAL UFB RESERVES, ACCRUALS AND CHARGES
The Merger Agreement acknowledges that while UFB has established all
reserves and taken all provisions for possible loan losses required by generally
accepted accounting principles and applicable laws, rules and regulations, CNB
may have adopted different loan, accrual and reserve policies (including
different loan classifications and levels of reserves for possible loan losses).
The Merger Agreement, accordingly, provides that CNB and UFB will consult and
cooperate with each other prior to the Effective Time to (i) conform the loan,
accrual and reserve policies of UFB and its subsidiaries to those of CNB; (ii)
determine appropriate and reasonable accruals, reserves, and charges for UFB to
establish and take
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in respect of excess equipment, write-off or write-down of various assets,
severance costs, litigation matters, additional provision for warranty expense,
recapture of untaxed bad debt reserve and other appropriate charges and
accounting adjustments taking into account the parties' business plans following
the Merger; and (iii) determine the amount and the timing for recognizing for
financial accounting purposes the expenses of the Merger and the restructuring
charges related to or to be incurred in connection with the Merger. UFB has
agreed, on or before or as of December 31, 1994, to establish and take all such
reserves, accruals, and charges and recognize, for financial accounting
purposes, such expenses and charges, as requested by CNB.
Pursuant to this provision of the Merger Agreement, UFB provided an
additional $1.5 million for the allowance for loan losses, provided $3.6 million
for mortgage banking fraud losses, wrote down other assets by $100,000, accrued
and paid merger related professional fees of $700,000, and provided $2,775,000
for tax bad debt deductions for which no provision for federal income taxes had
been made. UFB also sold, pursuant to the Merger Agreement, its entire portfolio
of agency multi-step callable bonds and one mortgage backed security for a
combined loss of $1,301,000. The above adjustments, net of applicable income
taxes, reduced shareholders' equity by $7,096,000 at December 31, 1994. UFB
subsequently determined to reflect a portion of the foregoing adjustments in its
consolidated financial statements for the year ended June 30, 1994 and the
quarter ended September 30, 1994. See UFB's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1994, and UFB's Quarterly Report on Form 10-Q/A for
the quarter ended March 31, 1995, copies of which are attached as Exhibit C and
Exhibit D, respectively, to this Prospectus/Proxy Statement.
CNB AGREEMENTS
Pursuant to the Merger Agreement, CNB has agreed, among other things, to
(i) file all regulatory applications required in order to consummate the Merger
and the Related Transactions, keep UFB reasonably informed as to the status of
such applications and not intentionally take any action that would prevent or
delay the receipt of any regulatory approval; (ii) file the Registration
Statement with the S.E.C. and use its best efforts to cause the Registration
Statement to become effective; (iii) timely file all documents required to
obtain all necessary blue sky permits and approvals; (iv) prepare and file any
application required to list on Nasdaq the shares of CNB Common to be issued in
the Merger and any other filings required under the Exchange Act relating to the
Merger and the transactions contemplated in the Merger Agreement; (v) promptly
notify UFB in writing if it has knowledge of any event or condition which would
cause or constitute a breach of any of its representations or agreements
contained in the Merger Agreement; (vi) use its best efforts to perform and
fulfill all conditions and obligations to be performed or fulfilled under the
Merger Agreement and to effect the Merger in accordance with the terms and
conditions of the Merger Agreement; (vii) permit UFB reasonable access to CNB's
properties and to disclose and make available all books, documents, papers and
records relating to assets, stock ownership, properties, operations, obligations
and liabilities in which UFB may have a reasonable and legitimate interest in
furtherance of the transactions contemplated by the Merger Agreement; (viii) not
to intentionally take any action that would prevent the Merger and the other
transactions contemplated by the Merger Agreement from qualifying for pooling of
interests accounting treatment (see "MERGER --Accounting Treatment"); (ix)
authorize the issuance of the required number of shares of CNB Common to be
issued pursuant to the Merger Agreement, cause such shares to be approved for
inclusion on Nasdaq (subject to official notice of issuance) and take all other
necessary corporate action to consummate the Merger; and (x) use its reasonable
best efforts to take such actions to resolve any objections which may be
asserted with respect to the Merger by any Governmental Entities, including,
without limitation, objections under any antitrust or banking laws as may be
reasonably required by any such Governmental Entities and prudent in light of
the anticipated benefits to CNB of the transaction contemplated by the Merger
Agreement. In addition, the Merger Agreement states that CNB will provide
certain employee
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benefit plans and programs to the employees of UFB who continue their employment
after the Effective Time. See "MERGER -- Effect on Employee Benefit and Stock
Plans."
EFFECT ON EMPLOYEE BENEFIT AND STOCK PLANS
EMPLOYEE BENEFITS
The Merger Agreement provides that each employee of UFB or its subsidiaries
who continues as an employee following the Effective Time will be entitled, as a
new employee of a subsidiary of CNB, to participate in certain employee benefit
and stock plans of CNB or its subsidiaries on substantially the same terms and
conditions offered to similarly situated employees of CNB or its subsidiaries if
such employee is eligible for participation therein and otherwise is not
participating in a similar plan maintained by UFB after the Effective Time.
Such participation is subject to the right of CNB to amend or terminate any such
plans or programs in its discretion (provided any such amendment applies to CNB
employees generally). CNB will, for purposes of vesting and any age or period
of service requirements for commencement of participation with respect to any
employee benefit plans in which former employees of UFB or its subsidiaries may
participate, credit each such employee with his or her term of service with UFB
and its subsidiaries. The Merger Agreement also provides that the UFB Employee
Stock Ownership Plan and related Trust Agreement (the "ESOP") will be terminated
on or after the Effective Time and all participants with an account balance
under the ESOP will become fully vested in such accounts as of such termination.
Participants' benefits under the ESOP will be distributed, in connection with
the ESOP termination, in a single lump sum or by direct rollover to the Citizens
Incentive Savings Plan or an individual retirement account.
STOCK OPTIONS
The Merger Agreement provides that, at the Effective Time, each outstanding
option to purchase shares of UFB Common (a "UFB Stock Option") issued pursuant
to the UFB Stock Option and Incentive Plan whether or not exercisable or vested,
will be assumed by CNB. Each UFB Stock Option will be deemed to constitute an
option to acquire, on the same terms and conditions as were applicable under
such UFB Stock Option, the same number of full shares of CNB Common as the
holder of such UFB Stock Option would have been entitled to receive pursuant to
the Merger had such holder exercised such option in full immediately prior to
the Effective Time, at a price per share equal to the quotient of (i) the
aggregate exercise price for UFB Common otherwise purchasable pursuant to such
UFB Stock Option divided by (ii) the number of full shares of CNB Common deemed
purchasable pursuant to such UFB Stock Option. CNB will not issue fractional
shares of CNB Common.
EXPENSES AND FEES
Except as provided under "MERGER -- Termination Fee," and described below,
in the event the Merger Agreement is terminated or the Merger is abandoned, all
costs and expenses incurred in connection with the Merger Agreement will be paid
by the party incurring such costs and expenses, and no party shall have any
liability to the other party for costs, expenses, damages or otherwise, except
that in the event the Merger Agreement is terminated on account of a willful
breach of any of the representations or warranties therein or any breach of the
agreements set forth therein, the non-breaching party is entitled to seek
damages against the breaching party. Notwithstanding the foregoing, CNB will be
required to reimburse UFB for (a) all of its out-of-pocket expenses incurred in
obtaining the phase one environmental investigations required under the Merger
Agreement; and (b) 50% of its out-of-pocket
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expenses incurred in obtaining any phase two environmental investigation
pursuant to Merger Agreement which does not recommend or suggest as being
appropriate the taking of any remedial or corrective actions (see "MERGER --
Certain Other Agreements -- Environmental Investigations"), if the Merger is not
consummated for any reason other than (i) due to termination of the Merger
Agreement by CNB on account of a breach by UFB or if UFB or its subsidiaries
become subject to certain regulatory enforcement actions; (ii) the failure of
UFB's shareholders to approve the Merger Agreement and the Merger; or (iii) the
inability of CNB to obtain an opinion that the Merger will qualify for pooling
of interests accounting treatment due to the actions of UFB, its affiliates or
shareholders.
NO SOLICITATION
The Merger Agreement provides that, unless and until the Merger Agreement
has been terminated, UFB will not solicit or encourage or, subject to the
fiduciary duties of its directors as advised by counsel and UFB's investment
banker, hold discussions or negotiations with, or provide information to, any
person in connection with any proposal from any person relating to the
acquisition of all or a substantial portion of the business, assets or stock of
UFB and its subsidiaries. UFB is required to promptly advise (within 24 hours)
CNB of its receipt of any such proposal or inquiry, the substance of such
proposal or inquiry, and the identity of such person.
INTERESTS OF CERTAIN PERSONS IN MERGER
Certain directors and executive officers of UFB have certain interests in
the Merger in addition to their interests as shareholders of UFB generally. The
Board of Directors of UFB was aware of these interests and considered them,
among other matters, in approving the Merger Agreement and the transactions
contemplated thereby. None of the directors or executive officers of UFB would
own, on a pro forma basis giving effect to the Merger, more than 1% of the
issued and outstanding shares of CNB Common.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that CNB will provide the directors and
officers of UFB and its subsidiaries, after the Merger, with the same directors'
and officers' liability insurance coverage that CNB provides to directors and
officers of its other banking subsidiaries generally and that CNB will use its
best efforts (which will not be deemed to require, however, the payment of any
special premium or other charge or expense) to obtain an endorsement to its
directors' and officers' liability insurance policy to cover acts and omissions
of the directors and officers of UFB and its subsidiaries occurring or failing
to occur prior to the Closing Date; provided, however, that if CNB is unable to
obtain such endorsement, then UFB may purchase tail coverage under its existing
directors' and officers' liability insurance on such terms and provisions as UFB
deems appropriate, provided the premiums therefor do not exceed $25,000.
The Merger Agreement also provides that for a period of six years after the
Effective Time CNB will cause CBI, as the surviving corporation in the Merger,
to indemnify the present and former directors, officers, employees and agents of
UFB and its subsidiaries against any liability arising out of actions occurring
prior to the Effective Time (including, without limitation, the transactions
contemplated by the Merger Agreement), to the extent that such indemnification
is then permitted under the Delaware Law and by UFB's Articles of Incorporation
as in effect on the date of the Merger Agreement, including provisions relating
to advances of expenses incurred in the defense of any action or suit.
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Pursuant to the Merger Agreement, CNB has agreed to cause any successor or
assignee of CBI, after the Effective Time, to assume the obligations of CBI
described in the two preceding paragraphs or, if CBI should liquidate, dissolve
or otherwise wind up its business after the Effective Time, CNB has agreed to
assume such obligations.
EMPLOYEE BENEFITS
The Merger Agreement contains certain provisions regarding employee
benefits which are described under "MERGER -- Effect on Employee Benefit and
Stock Plans -- Employee Benefits."
STOCK OPTION PLANS
The Merger Agreement contains certain provisions regarding the assumption
by CNB of outstanding options to acquire shares of UFB Common which are
described under "MERGER -- Effect on Employee Benefits -- Stock Options."
CONSULTING AGREEMENT
The Merger Agreement provides that, upon the retirement of Mr. Donald A.
Rausch, the Chairman of the Board, President and Chief Executive Officer of UFB
and Thrift, in February 1996, CNB will enter into a consulting agreement with
Mr. Rausch, renewable annually, on mutually agreeable terms providing for annual
consulting fees of $40,000.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Merger Agreement provides that, as a result of the Merger, at the
Effective Time, CBI will assume all obligations, duties and liabilities of UFB
under the Supplemental Executive Retirement Plan (the "SERP") established by UFB
for the benefit of Mr. Rausch on March 19, 1991, as amended effective January 1,
1994. The SERP is an unfunded, non-qualified agreement which provides for
retirement income to Mr. Rausch consistent with the amount that would be
provided under UFB's retirement plan, but for the maximum benefit restrictions
under ERISA. Under the SERP, when Mr. Rausch attains the age of 65, he will be
entitled to $18,000 per year for five years. If Mr. Rausch dies before age 70,
his beneficiaries will receive $18,000 per year for thirteen years or until he
would have attained age 78. If Mr. Rausch should die after attaining age 65,
but prior to age 78, an additional $250,000 will be payable to his estate
(subject to reduction for any $18,000 per year payments made as discussed
above). Similar payments will be made if Mr. Rausch becomes disabled prior to
age 70. When Mr. Rausch attains the age of 70, he will receive $18,000 per year
for eight years. If Mr. Rausch dies after age 78, an additional $250,000 will
be payable to his estate. To fund the foregoing payments, Thrift obtained an
insurance policy on Mr. Rausch's life during fiscal 1992. Coverage terminates
at age 100 with a declining death benefit.
DIRECTORS DEFERRED COMPENSATION PLAN
The Merger Agreement provides that the deferral of UFB directors' fees
under the Directors Deferred Compensation Master Agreement dated August 1, 1993,
and related Joinder Agreements, will cease as of or after the Effective Time.
Any director fees held in accounts under such plan will continue to be held
under the plan and accrue interest as provided therein. Citizens Bank, as a
result of the Merger, will assume all obligations, duties and liabilities of
Thrift under such plan.
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EMPLOYMENT AND TERMINATION AGREEMENTS
The Merger Agreement provides that, as a result of the Merger, at the
Effective Time, Citizens Bank will assume, and CBI will guarantee such
assumption, all duties, liabilities and obligations of Thrift which may exist at
any time under the Employment Agreements between Thrift and each of Messrs.
Donald A. Rausch, Chairman of the Board, President and Chief Executive Officer
of UFB and Thrift, Ennis R. Griffith, Senior Vice President, Chief Financial
Officer and Secretary/Treasurer of UFB and Thrift, Terry G. Johnston, Senior
Vice President and Lending Operations Officer of UFB and Thrift, and Paul E.
Wargel, Senior Vice President - Residential Lending Manager of Thrift, and under
the Special Termination Agreements between Thrift and each of Messrs. Steven E.
Fowler, Vice President/Financial Services of Thrift, and J. Ray Justice, Vice
President/Administration of Thrift.
Employment Agreements
The Employment Agreement between Thrift and each of Messrs. Rausch and
Griffith is for a three year term which expires October 30, 1997 and the
Employment Agreement between Thrift and each of Messrs. Johnston and Wargel is
for a two year term which expires October 30, 1996. The Board of Directors of
Thrift has the discretion to review the Employment Agreements annually and
extend the terms for an additional year. The Merger Agreement provides that, if
the Merger is not consummated before October 1, 1995, the Board of Directors of
Thrift, in its sole discretion, may thereafter extend for one year any one or
more of the Employment Agreements (see "MERGER -- Certain Other Agreements --
Conduct of Business Pending Merger").
In addition to base salary (which is $183,000 for Mr. Rausch, $93,000 for
Mr. Griffith, $78,700 for Mr. Johnston and $58,100 for Mr. Wargel), each
Employment Agreement provides for discretionary bonuses, disability pay, and
participation in stock benefit plans and other fringe benefits applicable to
executive personnel. Each Employment Agreement also provides that, if the
officer's employment is involuntarily terminated (for any reason other than
"cause" (as defined in the Employment Agreement) or for other specific reasons
specified in the Employment Agreement) in connection with or within twelve
months after a change of control which occurs any time during the term of the
Employment Agreement, the officer would be entitled to receive a payment in an
amount equal to a certain percentage of his "base amount" of compensation
(generally the average annual compensation for the five previous years of his
employment). The percentage for Messrs. Rausch and Griffith is 299% and the
percentage for Messrs. Johnston and Wargel is 200%. The Merger would constitute
a "change in control" under the Employment Agreements.
Termination Agreements
The Termination Agreement between Thrift and each of Messrs. Justice and
Fowler is for a one year term which expires October 30, 1995. The Board of
Directors of Thrift has the discretion to review the Termination Agreements
annually and extend the terms for an additional year. The Merger Agreement
provides that, if the Merger is not consummated before October 1, 1995, the
Board of Directors of Thrift, in its sole discretion, may thereafter extend for
one year any one or more of the Termination Agreements (see "MERGER -- Certain
Other Agreements -- Conduct of Business Pending Merger").
Each Termination Agreement provides that, if the officer's employment is
involuntarily terminated (for any reason other than "cause" (as defined in the
Termination Agreement)) after a change of control
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which occurs any time during the term of the Termination Agreement, the officer
would be entitled to (i) a payment in an amount equal to 100% of his "base
amount" of compensation (generally the average annual compensation for the five
previous years of his employment); (ii) the continuation of life, health and
disability coverage for a period equal to the earlier of the employee's
obtaining similar coverage by another employer or twelve months from the date of
the officer's termination; and (iii) have a period of twelve months from the
effective date of his termination or such longer period as may be determined by
UFB's Stock Option Committee or pursuant to the UFB Stock Option and Incentive
Plan within which to exercise options granted to him (subject to restrictions
for incentive stock options under 422(A) of the Code).
RECOGNITION AND RETENTION PLAN AND TRUST
The Merger Agreement provides that Thrift's Recognition and Retention Plan
and Trust (the "RRP") will be assumed by Citizens Bank and CNB at the Effective
Time and shares of CNB Common, determined by applying the Conversion Ratio to
the UFB Common held in the RRP at the Effective Time, will be substituted for
shares of UFB Common held in the RRP at the Effective Time, subject to the same
transfer restrictions and other terms and conditions to which such awards were
subject at the Effective Time.
At the time Thrift was converted to stock form, it made a contribution in
the amount of $600,050 to purchase 55,560 shares of UFB Common which were
awarded to certain officers of Thrift. The shares of UFB Common granted under
the RRP vest at a rate of 20% per year, commencing on the date of the award. As
of the date of this Prospectus/Proxy Statement, 22,242 shares of UFB Common are
unvested and held under the RRP for the benefit of certain officers, including
Mr. Rausch (8,892 shares), Mr. Griffith (4,296 shares), Mr. Johnston (1,484
shares), Mr. Wargel (1,484 shares), Mr. Fowler (816 shares) and Mr. Justice (816
shares).
BOARD COMPOSITION
The Merger Agreement provides that CNB will cause each of the directors of
UFB who are under age 70 to be elected to the Board of Directors of Citizens
Bank or the board of another subsidiary bank of CNB, if more appropriate and
agreed to by CNB and such director. It is expected that each of the present
directors of UFB who will be under age 70 as of the Effective Time (which
includes each of the present directors except Messrs. Robert R.C. Miller, John
R. Stallings and W. Earl Williams) will be elected to the Board of Directors of
Citizens Bank. See "MERGER -- Management and Operations After Merger."
INTERESTS OF CNB'S MANAGEMENT AND BOARD
No member of CNB's management or Board of Directors has an interest in the
Merger, other than as a shareholder of CNB generally, except that Mr. William E.
Vieth, Executive Vice President of CNB, owns 500 shares of UFB Common and Mr.
Robert L. Koch, II, a director of CNB, beneficially owns 5,700 shares of UFB
Common. Except for 200 shares purchased by Mr. Koch in February 1993, the
foregoing shares of UFB Common were purchased after the public announcement of
the pending Merger.
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WAIVER AND AMENDMENT
Prior to or at the Effective Time, any provision of the Merger Agreement,
including, without limitation, the conditions to consummation of the Merger, may
be (i) waived, to the extent permitted under law, in writing by the party which
is entitled to the benefits thereof; or (ii) amended at any time by written
agreement of the parties, whether before or after approval of the Merger
Agreement by the shareholders of UFB; provided, however, that after any such
approval no such amendment or modification may reduce the amount or change the
form of the Merger Consideration unless approval of UFB shareholders entitled to
vote on the Merger Agreement were resolicited. It is anticipated that a
condition to the obligations of UFB and CNB to consummate the Merger will be
waived only in those circumstances where the Board of Directors of UFB or CNB,
as the case may be, deems such waiver to be in the best interests of such
company and its shareholders.
ABSENCE OF DISSENTERS' RIGHTS
Under the Delaware Law, the shareholders of UFB are not entitled to dissent
from the Merger and demand payment of the fair or appraised value of their
shares of UFB Common as a result of the Merger because such shares, as well as
the shares of CNB Common to be received by the holders of UFB Common in the
Merger, are quoted on Nasdaq.
FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to qualify as a reorganization under Section 368(a)
of the Code. Except for cash received in lieu of a fractional share interest in
CNB Common, holders of shares of UFB Common will recognize no gain or loss on
the receipt of CNB Common in the Merger, their aggregate basis in the shares of
CNB Common received in the Merger will be the same as their aggregate basis in
their shares of UFB Common converted in the Merger and, provided the shares
surrendered are held as a capital asset, the holding period of the shares of CNB
Common received by them will include the holding period of their shares of UFB
Common converted in the Merger. Cash received in lieu of fractional share
interests will be treated as a distribution in full payment of such fractional
share interests, resulting in capital gain or loss or ordinary income, as the
case may be, depending upon each shareholder's particular situation. The
following is a summary of a tax opinion issued by Lewis, Rice & Fingersh, L.C.,
counsel for CNB, and included as an exhibit to the Registration Statement.
If the Merger is consummated in accordance with the terms of the Merger
Agreement, the Related Transactions are consummated as provided in the Merger
Agreement and described in this Prospectus/Proxy Statement (see "MERGER--Form of
Merger; Related Transactions") and in accordance with certain representations
made by the parties, and assuming no adverse change in applicable law, (i) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code; (ii) no gain or loss will be recognized by the holders of shares of
UFB Common upon receipt of Merger Consideration (except for cash received in
lieu of fractional shares); (iii) the basis of shares of CNB Common received by
the shareholders of UFB will be the same as the basis of shares of UFB Common
exchanged therefor; (iv) the holding period of the shares of CNB Common received
by the shareholders of UFB will include the holding period of the shares of UFB
Common exchanged therefor, provided such shares were held as capital assets as
of the Effective Time; and (v) if a cash payment is received by a shareholder of
UFB in lieu of a fractional share interest of CNB Common, the cash payment will
be treated as received by the shareholder as a distribution
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in full payment in exchange for the fractional share redeemed.
The opinion is subject to certain assumptions and based on certain
representations of each of UFB, Thrift, CNB, CBI and Citizens Bank. Further,
the opinion will be based on current law, which could be amended, revoked, or
modified with or without retroactive effect, in a manner which would change such
opinion. The opinion will neither be binding upon the I.R.S., nor will the
I.R.S. be precluded from taking a contrary position. Because no authority has
been found that directly addresses the federal income tax consequences of a
transaction substantially similar to the Merger and Related Transactions, the
opinion will not be entirely free from doubt. If litigated by the I.R.S., there
can be no assurance that a court would necessarily agree with the opinion.
Pursuant to the Merger Agreement, CNB and CBI have agreed that they will
not take any actions following the Effective Time which would cause the Merger
to lose its status as a reorganization under 368(a)(2)(D) of the Code and,
specifically, that CBI or its subsidiaries will continue at least one historic
business line of Thrift, or use at least a significant portion of Thrift's
historic business assets in a business, in each case within the meaning of
Treas. Reg. (S)1.368-1(d).
THE FOREGOING IS A GENERAL SUMMARY OF ALL OF THE MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER TO SHAREHOLDERS OF UFB WITHOUT REGARD TO THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SHAREHOLDER'S TAX SITUATION AND
STATUS. EACH SHAREHOLDER OF UFB SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR HER, INCLUDING
THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN LAWS AND THE
POSSIBLE EFFECT OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
It is anticipated that the Merger will qualify as a "pooling of interests"
for accounting and financial reporting purposes. Under this method of
accounting, the assets and liabilities of CNB and UFB will be carried forward
after the Effective Time into the consolidated financial statements of CNB at
their recorded amounts, the consolidated income of CNB will include income of
CNB and UFB for the entire fiscal year in which the Merger occurs, and the
separately reported income of CNB and UFB for prior periods will be combined and
restated as consolidated income of CNB.
The Merger Agreement provides that a condition to CNB's obligation to
consummate the Merger is its receipt of an opinion from Geo. S. Olive & Co.
L.L.C., the independent public accountants for CNB, to the effect that the
Merger will qualify for "pooling of interests" accounting treatment under
Accounting Principles Board Opinion No. 16 if consummated in accordance with the
Merger Agreement. In the event such condition is not met, the Merger would not
be consummated unless the condition was waived by CNB and the approval of UFB'
shareholders entitled to vote on the Merger was resolicited if such change in
accounting treatment were deemed material to the financial condition and results
of operations of CNB on a pro forma basis. See "MERGER -- Conditions to
Consummation of Merger."
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MANAGEMENT AND OPERATIONS AFTER MERGER
Upon consummation of the Merger and the Evansville Bank Merger, UFB and
Thrift will merge with and into CBI and Citizens Bank, respectively, and UFB and
Thrift will cease to exist as separate entities. Immediately prior to the
Evansville Bank Merger, certain of Thrift's branches located out of the
Evansville, Indiana area will be transferred, via branch purchase and assumption
transactions, to other subsidiaries of CNB located in those other areas. See
"MERGER -- Form of Merger; Related Transactions." The Board of Directors of
Citizens Bank, after the Effective Time, will consist of the persons serving on
such Board immediately prior to the Effective Time and each director of UFB who
is under age 70. See "MERGER -- Interest of Certain Persons in Merger -- Board
Composition." It is not expected that the management or Board of Directors of
CNB will be affected as a result of the Merger.
RESALE OF CNB COMMON
The shares of CNB Common issued pursuant to the Merger will be freely
transferable under the Securities Act except for shares issued to any person who
may be deemed to be an "affiliate" of UFB or CNB for purposes of Rule 145 under
the Securities Act. The Merger Agreement provides that each such affiliate will
enter into an agreement with CNB providing that such affiliate will not transfer
any shares of CNB Common received in the Merger except in compliance with the
Securities Act and will make no disposition of any shares of UFB Common or CNB
Common (or any interest therein) during the period commencing 30 days prior to
the Effective Time through the date on which financial results covering at least
30 days of combined operations of CNB and UFB after the Merger have been
published. This Prospectus/Proxy Statement does not cover resales of shares of
CNB Common received by any person who may be deemed to be an affiliate of UFB.
Persons who may be deemed to be affiliates of UFB generally include individuals
who (or entities which) control, are controlled by or are under common control
with UFB and will include directors and certain officers of UFB and may include
principal shareholders of UFB.
48
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed balance sheet as
of March 31, 1995, and the pro forma combined condensed statements of income for
the three month periods ended March 31, 1995 and 1994 and each of the years in
the three-year period ended December 31, 1994, give effect to the Merger based
on the historical consolidated financial statements of CNB and its subsidiaries
and the historical consolidated financial statements of UFB and its subsidiaries
under the assumptions and adjustments set forth in the accompanying notes to the
pro forma financial statements.
The pro forma financial statements have been prepared by the
managements of CNB and UFB based upon their respective financial statements.
These pro forma statements, which include results of operations as if the Merger
had been consummated at the beginning of each period presented, may not be
indicative of the results that actually would have occurred if the Merger had
been in effect on the dates indicated or which may be obtained in the future.
The pro forma financial statements should be read in conjunction with the
historical consolidated financial statements and notes thereto of CNB and UFB
incorporated by reference herein.
The following pro forma combined condensed balance sheet and condensed
statements of income include:
(a) CNB's historical consolidated financial information, which includes
the two Recent Acquisitions. Each of the Recent Acquisitions was
accounted for as a pooling of interests and, accordingly, historical
financial data for each of the Recent Acquisitions is included for all
periods presented. The Recent Acquisitions are King City, which was
acquired on February 1, 1995, and HBI, which was acquired on February
10, 1995. See "PARTIES -- CNB -- Recent Acquisitions."
(b) UFB's historical financial information, which has been designated
herein as "UFB." The information for UFB, the fiscal year-end of
which is June 30, has been restated to conform with CNB's fiscal year-
end of December 31 by adding the results of UFB for the six month
period ended December 31 to the most recent fiscal year-end
information and deducting the results of UFB for the six month period
ended December 31 of the preceding fiscal year.
(c) The combined statements of CNB and UFB, which have been designated
herein as "CNB/UFB Pro Forma Combined".
(d) Orleans' historical consolidated financial information, which has been
designated herein as "Orleans." CNB has entered into a definitive
agreement, dated October 18, 1994, as amended May 5, 1995, to acquire,
for shares of CNB Common, all of the issued and outstanding common
stock of Orleans. The proposed transaction would be accounted for as
a pooling of interests; accordingly, historical financial data for
Orleans is included for all periods presented. There can be no
assurance at this stage of the process that the transaction will be
completed. See "PARTIES -- CNB -- Pending Acquisitions."
(e) The combined statements of CNB, UFB and Orleans which have been
designated herein as "Pro Forma Combined."
49
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
March 31, 1995
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Pro Forma CNB/UFB Pro Forma Pro Forma
CNB UFB Adjustments Pro Forma Orleans Adjustments Combined
---------- -------- ----------- ----------- ------- ----------- ----------
Increase Increase
(Decrease) (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 92,415 $ 10,542 $ 102,957 $ 1,297 $ 104,254
Interest bearing deposits
in banks 3,717 1,014 4,731 -- 4,731
Federal funds sold 11,700 5,200 16,900 1,300 18,200
Real estate loans held for
sale 2,397 8,913 11,310 -- 11,310
Investments available for sale 271,392 304,506 575,898 6,741 582,639
Investment securities 514,561 -- 514,561 18,769 553,330
Loans 1,909,409 202,447 2,111,856 28,954 2,140,810
Allowance for loan losses (26,035) (1,942) (27,977) (588) (28,565)
-------------------------------------------------------------------------------------------------
Net loans 1,883,374 200,505 2,083,879 28,366 2,112,245
Premises and equipment 59,413 8,748 (500) [2] 67,661 277 67,938
Other real estate owned 2,150 828 2,978 -- 2,978
Goodwill 19,058 -- 19,058 -- 19,058
Other assets 44,220 12,785 57,005 1,082 58,087
-------------------------------------------------------------------------------------------------
Total Assets $2,904,397 $553,041 $ (500) $3,456,938 $57,832 $ $3,514,770
=================================================================================================
Liabilities:
Deposits 2,252,341 359,150 2,611,491 51,801 2,663,292
Repurchase agreements 299,366 -- 299,366 -- 299,366
Federal Funds purchased 18,220 -- 18,220 -- 18,220
Short-term borrowings 4,065 146,926 150,991 -- 150,991
Long-term debt 60,824 -- 60,824 -- 60,824
Other liabilities 27,507 8,246 445 [2] 36,198 296 36,494
-------------------------------------------------------------------------------------------------
Total Liabilities 2,662,323 514,322 445 3,177,090 52,097 3,229,187
-------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock 14,980 19 2,177 [1][2] 17,176 500 (182) [3] 17,494
Capital surplus 203,010 17,810 (4,650) [1][2] 216,170 1,200 182 [3] 217,552
Retained earnings 23,973 30,815 (3,780) [1][2] 51,008 4,164 55,172
Treasury stock (5,308) 5,308 [1] -- --
ESOP loan guarantee (133) (133) (133)
Unearned compensation (150) (150) (150)
Net unrealized security gains
(losses) 111 (4,334) (4,223) (129) (4,352)
-------------------------------------------------------------------------------------------------
Total Shareholders' Equity 242,074 38,719 (945) 279,848 5,735 285,583
-------------------------------------------------------------------------------------------------
Total Liabilities and Equity $2,904,397 $553,041 $ (500) $3,456,938 $57,832 $ $3,514,770
================================================================================================
</TABLE>
50
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET (Unaudited)
The following pro forma adjustments are necessary to record the Merger and
pending merger.
[1] To reflect exchange of shares of UFB Common for shares of CNB Common,
retaining the historical cost basis of assets, liabilities and equity
through the treatment as a pooling of interest. A total of 2,196,109 shares
of CNB Common will be issued at the exchange ratio of 1.366 shares of CNB
Common for each of the 1,607,693 issued and outstanding shares of UFB common
stock (assuming no upward or downward adjustment of the Conversion Ratio,
see "MERGER--Conversion Ratio"), resulting in a transfer from Capital
Surplus to Common Stock of $2,180,000 to reflect the increase in the
aggregate par value of the issued and outstanding shares of CNB Common over
the aggregate par value of the currently outstanding shares of UFB common
stock.
<TABLE>
<CAPTION>
<S> <C>
Common stock 2,180
Capital surplus (2,180)
To reflect the cancellation of UFB Treasury Stock.
Capital stock (3)
Capital surplus (2,470)
Retained earnings (2,835)
Treasury stock 5,308
</TABLE>
[2] Upon consummation of the Merger, CNB will recognize certain expenses related
to the Merger. These expenses will be nonrecurring charges for restructuring
and termination costs related to closing of certain duplicate facilities and
severance pay related to certain employment contractsand separated employees
in connection with the Merger. Duplicate premises and data processing
equipment are expected to be written down by approximately $500,000.
Severance benefits to honor existing employment contracts and benefits for
other employees are estimated to be $950,000. The net after-tax adjustment
of these items is $945,000. The Pro Forma Combined Statement of Income does
not reflect these nonrecurring Merger related expenses.
<TABLE>
<CAPTION>
<S> <C>
Premises and equipment (500)
Other liabilities 445
Retained earnings (945)
</TABLE>
[3] To reflect exchange of shares of Orleans common stock for shares of CNB
Common, retaining the historical cost basis of assets, liabilities and
equity through the treatment as a pooling of interest. A total of 318,500
shares of CNB Common will be issued at the exchange ratio of 6.37 shares of
CNB Common for each of the 50,000 issued and outstanding shares of Orleans
common stock (assuming no downward adjustment of the conversion ratio),
resulting in a transfer from Common Stock to Capital Surplus of $181,500 to
reflect the decrease in the aggregate par value of the issued and
outstanding shares of CNB Common relative to the aggregate par value of the
currently outstanding shares of Orleans common stock.
<TABLE>
<CAPTION>
<S> <C>
Common stock (182)
Capital surplus 182
</TABLE>
51
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 1995
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Pro Forma CNB/UFB Pro Forma Pro Forma
CNB UFB Adjustments Pro Forma Orleans Adjustments Combined
-------- -------- ------------ ---------- -------- ------------ ----------
Increase Increase
(Decrease) (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $55,953 $9,634 $65,587 $1,065 $66,652
Interest expense 26,361 6,313 32,674 522 33,196
------- ------ ------ ------- ----- ------ -------
Net interest income 29,592 3,321 -- 32,913 543 -- 33,456
Provision for loan losses 1,504 50 1,554 1,554
------- ------ ------ ------- ----- ------ -------
Net interest income after
provision for losses 28,088 3,271 -- 31,359 543 -- 31,902
Non-interest income 8,893 1,122 10,015 28 10,043
Non-interest expense 25,938 3,062 29,000 338 29,338
------- ------ ------ ------- ----- ------ -------
Income before income taxes 11,043 1,331 -- 12,374 233 -- 12,607
Income taxes 4,058 437 4,495 53 -- 4,548
------- ------ ------ ------- ----- ------ -------
Net income $ 6,985 $ 894 $ -- $ 7,879 $ 180 $ -- $ 8,059
======= ====== ====== ======= ====== ====== =======
Net income per common share
Primary $ 0.47 $ 0.46
Fully diluted $ 0.47 $ 0.46
Average Shares Outstanding 15,002 17,676
Fully Diluted Shares Outstanding 15,492 18,166
</TABLE>
52
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 1994
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Pro Forma CNB/UFB Pro Forma Pro Forma
CNB UFB Adjustments Pro Forma Orleans Adjustments Combined
-------- -------- ------------ ---------- -------- ------------ ----------
Increase Increase
(Decrease) (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $44,086 $7,569 $51,655 $ 915 $52,570
Interest expense 19,699 4,395 24,094 403 24,497
------- ------ ------ ------- ------ ------ -------
Net interest income 24,387 3,174 -- 27,561 512 -- 28,073
Provision for loan losses 1,302 83 1,385 1,385
------- ------ ------ ------- ------ ------ -------
Net interest income after
provision for losses 23,085 3,091 -- 26,176 512 -- 26,688
Non-interest income 10,262 1,782 12,044 30 12,074
Non-interest expense 23,983 3,361 27,344 310 27,654
------- ------ ------ ------- ------ ------ -------
Income before income taxes 9,364 1,512 -- 10,876 232 -- 11,108
Income taxes 3,053 487 3,540 37 -- 3,577
------- ------ ------ ------- ------ ------ -------
Net income $ 6,311 $1,025 $ -- $ 7,336 $ 195 $ -- $ 7,531
======= ====== ====== ======= ====== ====== =======
Net income per common share
Primary $ 0.44 $ 0.44
Fully diluted $ 0.42 $ 0.43
Average Shares Outstanding 14,445 17,068
Fully Diluted Shares Outstanding 15,080 17,703
</TABLE>
53
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1994
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Pro Forma CNB/UFB Pro Forma Pro Forma
CNB UFB Adjustments Pro Forma Orleans Adjustments Combined
-------- -------- ------------ ---------- -------- ------------ ----------
Increase Increase
(Decrease) (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $195,467 $32,626 $228,093 $3,833 $231,926
Interest expense 87,255 19,367 106,622 1,756 108,378
-------- ------- ------ -------- ------ ------ --------
Net interest income 108,212 13,259 -- 121,471 2,077 -- 123,548
Provision for loan losses 6,319 1,765 8,084 300 8,384
-------- ------- ------ -------- ------ ------ --------
Net interest income after
provision for losses 101,893 11,494 -- 113,387 1,777 -- 115,164
Non-interest income 37,352 4,465 41,817 (132) 41,685
Non-interest expense 97,707 17,327 115,034 1,656 116,690
-------- ------- ------ -------- ------ ------ --------
Income before income taxes 41,538 (1,368) -- 40,170 (11) -- 40,159
Income taxes 14,705 2,024 16,729 (62) -- 16,667
-------- ------- ------ -------- ------ ------ --------
Net income $ 26,833 $(3,392) $ -- $ 23,441 $ 51 $ -- $ 23,492
======== ======= ====== ======== ====== ====== ========
Net income per common share
Primary $ 1.82 $ 1.35
Fully diluted $ 1.78 $ 1.33
Average Shares Outstanding 14,717 17,352
Fully Diluted Shares Outstanding 15,291 17,926
</TABLE>
54
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1993
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Pro Forma CNB/UFB Pro Forma Pro Forma
CNB UFB Adjustments Pro Forma Orleans Adjustments Combined
-------- -------- ------------ ---------- -------- ------------ ----------
Increase Increase
(Decrease) (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $177,206 $34,475 $211,681 $3,754 $215,435
Interest expense 80,764 19,823 100,587 1,752 102,339
-------- ------- ------ -------- ------ ------ --------
Net interest income 96,442 14,652 -- 111,094 2,002 -- 113,096
Provision for loan losses 3,605 329 3,934 -- 3,934
-------- ------- ------ -------- ------ ------ --------
Net interest income after
provision for losses 92,837 14,323 -- 107,160 2,002 -- 109,162
Non-interest income 33,910 9,261 43,171 42 43,213
Non-interest expense 87,867 14,735 102,602 1,303 103,905
-------- ------- ------ -------- ------ ------ --------
Income before income taxes 38,880 8,849 -- 47,729 741 -- 48,470
Income taxes 12,914 3,536 16,450 180 -- 16,630
-------- ------- ------ -------- ------ ------ --------
Net income/(1)/ $ 25,966 $ 5,313 $ -- $ 31,279 $ 561 $ -- $ 31,840
======== ======= ====== ======== ====== ====== ========
Net income per common share
Primary $ 1.82 $ 1.87
Fully diluted $ 1.76 $ 1.82
Average Shares Outstanding 14,270 16,999
Fully Diluted Shares Outstanding 15,084 17,787
</TABLE>
- --------------------
/(1)/ Net income excludes the cumulative effect of change in accounting for
income taxes.
55
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1992
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Pro Forma CNB/UFB Pro Forma Pro Forma
CNB UFB Adjustments Pro Forma Orleans Adjustments Combined
-------- -------- ------------ ---------- -------- ------------ ----------
Increase Increase
(Decrease) (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $187,882 $37,874 $225,756 $4,174 $229,930
Interest expense 95,950 23,111 119,061 2,147 121,208
-------- ------- ------ -------- ------ ------ --------
Net interest income 91,932 14,763 -- 106,695 2,027 -- 108,722
Provision for loan losses 8,960 240 9,200 -- 9,200
-------- ------- ------ -------- ------ ------ --------
Net interest income after
provision for losses 82,972 14,523 -- 97,495 2,027 -- 99,522
Non-interest income 28,313 8,135 36,448 116 36,564
Non-interest expense 81,359 15,004 96,363 1,221 97,584
-------- ------- ------ -------- ------ ------ --------
Income before income taxes 29,926 7,654 -- 37,580 922 -- 38,502
Income taxes 8,550 2,771 11,321 227 -- 11,548
-------- ------- ------ -------- ------ ------ --------
Net income $ 21,376 $ 4,883 $ -- $ 26,259 $ 695 $ -- $ 26,954
======== ======= ====== ======== ====== ====== ========
Net income per common share
Primary $ 1.52 $ 1.60
Fully diluted $ 1.48 $ 1.56
Average Shares Outstanding 14,077 16,881
Fully Diluted Shares Outstanding 14,931 17,745
</TABLE>
56
<PAGE>
DESCRIPTION OF CNB'S CAPITAL STOCK
GENERAL
CNB's Articles of Incorporation presently authorize the issuance of fifty
million shares of common stock, $1.00 stated value per share, and two million
shares of preferred stock, without par value. As of May 30, 1995, 14,818,767
shares of CNB Common were issued and outstanding and no shares of CNB's
preferred stock were issued and outstanding. The Board of Directors of CNB is
authorized to cause the preferred stock to be issued from time to time, in
series, by resolution adopted prior to the issue of shares of a particular
series, and to fix and determine in the resolution the designation, relative
rights, preferences and limitations of the shares of each series, including
voting, dividend and liquidation rights and all other matters with respect to
such shares as are permitted to be fixed and determined by the Board of
Directors under the Indiana Law.
CNB COMMON
The following is a brief description of the terms of CNB Common.
Dividend Rights
Holders of CNB Common are entitled to receive dividends when, as and if
declared by CNB's Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights which may attach to preferred stock
which may be issued by CNB in the future. The ability of the subsidiary banks of
CNB to pay cash dividends, which are expected to be CNB's principal source of
income, is restricted by applicable banking laws. Such dividends have previously
been CNB's principal source of income.
Voting Rights
Holders of shares of CNB Common are entitled to one vote per share in the
election of directors and in all other matters to be voted upon by the
shareholders generally. Shareholders of CNB do not have cumulative voting rights
in the election of directors. Therefore, a majority of the shares of CNB Common
can elect the entire Board of Directors.
Classification of Board of Directors
The Board of Directors of CNB is divided into three classes, and the
directors are elected by classes to three-year terms. Approximately one-third of
the directors of CNB are elected at each annual meeting of the shareholders. The
primary goal of CNB's staggered Board is to encourage well-financed bidders who
are interested in acquiring CNB to negotiate directly with CNB's Board of
Directors. Although it promotes stability and continuity of the Board of
Directors, classification of the Board of Directors (combined with the fact that
shares of CNB Common do not have cumulative voting rights in the election of
directors) may have the effect of decreasing the number of directors that could
otherwise be elected by anyone who obtains a controlling interest in CNB Common
and thereby could impede a change in control of CNB or discourage certain offers
(possibly including some offers which shareholders may feel would be in their
best interest). Because of the additional time required to change control of the
Board of Directors, a staggered Board of Directors also tends to perpetuate
present management.
57
<PAGE>
Liquidation Rights
In the event of liquidation, dissolution or winding up of CNB, whether
voluntary or involuntary, the holders of CNB Common would be entitled to share
ratably in any of its assets or funds that are available for distribution to its
shareholders after the satisfaction of its liabilities (or after adequate
provision is made therefor) and after preferences on any outstanding preferred
stock.
Preemptive Rights
Holders of shares of CNB Common do not have the preemptive right to
subscribe on a pro-rata basis for any presently or subsequently authorized
shares of CNB Common.
Assessment and Redemption
The shares of CNB Common presently outstanding are, and the shares of CNB
Common issued by CNB pursuant to the Merger will be, when issued and delivered
pursuant to the Merger Agreement and as described herein, duly authorized,
validly issued, fully paid and non-assessable. There are no redemption or
sinking fund provisions applicable to the shares of CNB Common.
Transfer Agent
Citizens Bank is the transfer agent for shares of CNB Common.
Dividend Restrictions under Loan Agreement
Pursuant to the terms of a Term Loan Agreement (the "Loan Agreement"), CNB
may not, until October 31, 1997, in any fiscal year, purchase or redeem any
shares of CNB Common in an amount that exceeds 7.5% of its tangible net worth in
the immediately preceding fiscal year. The Loan Agreement also provides that CNB
may not, until October 31, 1997, pay or declare any dividend (other than stock
dividends payable in shares of CNB Common) on CNB Common or make any other
distribution in respect of CNB Common, except that, provided that no "Event of
Default" or "Unmatured Event of Default" (as such terms are defined in the Loan
Agreement) exists or would exist as a result thereof, CNB may declare or pay
cash dividends to the holders of CNB Common not to exceed for all fiscal years
of CNB on a cumulative basis beginning with the 1991 fiscal year (x) $5 million
in the aggregate for all years beginning with the 1991 fiscal year, plus (y) the
net proceeds received by CNB from the sale after December 31, 1990 of shares of
CNB Common or convertible debt securities subsequently converted into CNB
Common, plus (z) 50% of CNB's net income on a cumulative basis beginning with
the 1991 fiscal year. As of March 31, 1995, $1.165 million was available for
payment of dividends, purchases of CNB Common and payments or distributions in
respect of CNB Common under the Loan Agreement.
COMPARISON OF SHAREHOLDER RIGHTS
The rights of holders of shares of CNB Common are governed by the Indiana
Law and by the Articles of Incorporation and Bylaws, as amended, and other
corporate documents of CNB. The rights of holders of shares of UFB Common are
governed by the Delaware Law and by the Certificate of Incorporation, Bylaws and
other corporate documents of UFB. The rights of holders of shares of UFB Common
differ in certain respects from the rights which they would have as holders of
shares of CNB
58
<PAGE>
Common. A summary of the material differences between the respective rights of
the holders of shares of CNB Common and UFB Common is set forth below.
SHAREHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
BUSINESS COMBINATIONS
CNB
The Articles of Incorporation of CNB include a so-called "fair price"
provision. This provision generally provides that mergers, other business
combinations and similar transactions and the sale, lease, mortgage or other
disposition of more than 10% of total assets involving CNB or any of
subsidiaries of CNB and any person or entity beneficially owning directly or
indirectly more than 10% of the outstanding voting stock of CNB, or affiliates
or associates of such an entity (a "CNB 10% shareholder"), may not be
consummated without the approval of the holders of at least 80% of the voting
stock of CNB, unless either (i) the transaction is approved by a majority of the
members of the Board of Directors of CNB who are not affiliated with the CNB 10%
shareholder; or (ii) the transaction meets certain minimum ("fair price") price
requirements (in either of which cases, the shareholder and director approval
requirements of the "fair price" provision would no longer apply and only the
normal shareholder and director approval requirements of the Indiana Law would
govern the transaction). The primary purpose of CNB's "fair price" provision is
to provide additional safeguards for the remaining shareholders in the event
that an individual or entity becomes a majority shareholder of CNB. If CNB
comes under the control of a single person or entity, substantial inequities
could befall the minority shareholders. A bid for control of a target company
is often followed, in time, by a complete business combination that eliminates
minority interests in the target company on terms often unfavorable to the
minority -- a so-called "two-tier" structured takeover. Minority shareholders
in these circumstances may be forced out by the controlling shareholder in a
business combination transaction at a time and for a price (cash or other types
of consideration, often including debt instruments) not to their liking. The
price per share in such transactions often is lower than the price per share
previously paid by the controlling shareholder for its controlling block of
stock in the first tier of the takeover. The minority shareholders, in such
event, may have no alternative unless they choose to follow the statutory
procedures for appraisal rights as a dissenting shareholder or to bring legal
action against the controlling shareholder for breach of fiduciary duty, either
of which procedures may be costly and time consuming. CNB's greater than
majority shareholder vote requirements make it more difficult for a single
shareholder to obtain ultimate "control" over CNB in the sense of being able
unilaterally to effect a completed business combination on the controlling
shareholder's own terms. A disadvantage of these greater than majority
shareholder vote requirements, however, is that outside parties contemplating an
attempt to acquire control over CNB by acquiring less than all of the
outstanding stock of CNB may be discouraged from making such an attempt, because
ultimate "control" will require obtaining a higher percentage of the outstanding
shares of CNB Common than if normal shareholder vote requirements were in
effect. As a result, premium offers for CNB Common from outside parties
interested in acquiring control may be somewhat less likely from such parties
than premium offers for other similar companies without such greater than
majority voting requirements. In addition, because outside parties may be
somewhat less likely to attempt to acquire control over CNB due to the greater
than majority shareholder vote requirements, the management of CNB may be
somewhat less vulnerable to removal in the future than would be the case if such
provisions were not in effect.
59
<PAGE>
UFB
The Certificate of Incorporation of UFB provides for a greater than majority
shareholder approval requirement for certain business combinations with
interested shareholders that is similar in effect to the fair price provision
found in CNB's Articles of Incorporation. Under UFB's Certificate of
Incorporation, certain business combinations with an interested shareholder
require the affirmative vote of the holders of at least 80% of the voting power
of the outstanding shares of stock of UFB entitled to vote in the election of
directors. Generally, an interested shareholder is any person, other than UFB
or any subsidiary of UFB, that is the beneficial owner, directly or indirectly,
of more than 10% of the voting power of the outstanding voting stock of UFB.
The business combination provisions relating to interested shareholders also
apply to affiliates of interested shareholders. Business combinations subject
to the 80% shareholder approval requirement include (i) any merger or
consolidation of UFB or any subsidiary of UFB with an interested shareholder or
affiliate thereof; (ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of assets of UFB or any UFB subsidiary to an interested
shareholder having an aggregate fair market value equaling or exceeding 25% or
more of the combined assets of UFB and its subsidiaries; (iii) the issuance or
transfer by UFB or any subsidiary of UFB to an interested shareholder or
affiliate thereof of any securities of UFB or any subsidiary of UFB having an
aggregate fair market value equalling or exceeding 25% of the combined fair
market value of the outstanding common stock of UFB and its subsidiaries; (iv)
the adoption of any plan for the liquidation or dissolution of UFB proposed by
or on behalf of an interested shareholder or affiliate thereof; and (v) any
reclassification of securities or recapitalization of UFB, or any merger or
consolidation of UFB with any of its subsidiaries or any other transaction that
has the effect of increasing the proportionate share of the outstanding shares
of any class of equity or convertible securities of UFB or any subsidiary of UFB
directly or indirectly owned by an interested shareholder or affiliate thereof.
A business combination with an interested shareholder may avoid the 80%
shareholder approval requirement, needing only an affirmative vote of a majority
of the voting power of the outstanding shares of stock of UFB entitled to vote
in the election of directors, if (i) the business combination does not involve
cash or other consideration being received by the shareholders of UFB solely in
their capacity as shareholders of UFB and the business combination has been
approved by a majority of the disinterested directors of UFB; or (ii) the
business combination has been approved by a majority of the disinterested
directors of UFB, or each of the following conditions are met (a) the fair
market value of the consideration received per share by the holders of UFB
Common equals or exceeds the higher of certain fair price determinations, (b)
there has been no reduction of dividends or failure to pay dividends after the
time the interested shareholder became an interested shareholder, except as
approved by a majority of disinterested directors, (c) the interested
shareholder and its affiliates have not become the beneficial owners of any
additional shares of voting stock of UFB after the interested shareholder became
an interested shareholder, (d) the interested shareholder has not received the
benefit, directly or indirectly, of any loans, advances, guarantees, pledges or
other financial assistance, and (e) a proxy or information statement describing
the proposed business combination and complying with the requirements of the
Exchange Act has been mailed to shareholders of UFB at least 30 days prior to
the consummation of such business combination. The above provisions have the
same effect as CNB's fair price provision, that is, providing additional
safeguards for the remaining shareholders in the event that an individual or
entity becomes a majority shareholder of UFB. UFB's greater than majority
provisions may also, similar to CNB's fair price provision, have the effects of
discouraging certain premium offers that may be beneficial to the shareholders
of UFB and making the directors and management somewhat less vulnerable to
removal.
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REMOVAL OF DIRECTORS
CNB
The Articles of Incorporation of CNB provide that at a meeting called
expressly for that purpose, a director or the entire Board of Directors of CNB
may be removed without cause only upon the affirmative vote of the holders of
not less than 80% of the shares entitled to vote generally in an election of
directors. At a meeting called expressly for that purpose, a director may be
removed by the shareholders of CNB for cause by the affirmative vote of the
holders of a majority of the shares entitled to vote generally in the election
of directors. CNB's Articles of Incorporation provide that, except as may be
otherwise provided by law, cause for removal of a director will be found to
exist only if the director whose removal is proposed (i) has been convicted of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; or (ii) has been adjudged by a court of competent
jurisdiction to be liable for negligence or misconduct in the performance of his
or her duty to CNB in a manner of substantial importance to CNB, and such
adjudication is no longer subject to direct appeal. CNB's 80% shareholder vote
requirement for removal of directors without cause precludes a majority
shareholder from circumventing the classified Board by decreasing the size of
the Board until its nominees have a numerical majority or by removing directors
not up for election, filling the resulting vacancy with its nominees, and
thereby gaining control of the Board. The removal provisions makes it more
difficult for shareholders of CNB to change the composition of the Board of
Directors even if the shareholders believe that such a change would be
beneficial to CNB and to the shareholders of CNB.
UFB
The Certificate of Incorporation of UFB provides that any director or the
entire Board of Directors of UFB may be removed from office at any time, but
only for cause and only by the affirmative vote of the holders of at least 80%
of the voting power of all of the outstanding shares of capital stock of UFB
entitled to vote generally in the election of directors. Any director of UFB
who becomes disqualified to hold office may be removed from office by the
affirmative vote of the holders of at least a majority of the voting power of
all of the outstanding shares of capital stock of UFB entitled to vote generally
in the election of directors. Director disqualification occurs when (i) a
director owns less than 100 shares of UFB Common; (ii) is convicted of a felony;
(iii) becomes ineligible for any reason to serve on the board of directors of a
federally chartered thrift institution; or (iv) is adjudicated or otherwise
legally declared an incapacitated person by reason of mental weakness. Like
CNB's restrictions on director removal, UFB's 80% shareholder vote requirement
for removal of directors precludes a majority shareholder from circumventing
UFB's classified Board of Directors by decreasing the size of the Board until
its nominees have a numerical majority or by removing directors not up for
election, filling the resulting vacancy with it nominees, and thereby gaining
control of the Board. Unlike CNB's restrictions on director removal, however,
shareholders of UFB may not remove directors without cause, making it even more
difficult for a majority shareholder to control UFB's Board of Directors. The
restriction on director removal found in UFB's Certificate of Incorporation also
makes it more difficult for shareholders of UFB to change the composition of the
Board of Directors of UFB even where the shareholders believe in good faith that
such a change would be beneficial to UFB and to the shareholders of UFB.
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AMENDMENTS TO ARTICLES OR CERTIFICATE OF INCORPORATION
CNB
The Indiana Law provides that, unless a greater vote is required under a
specific provision of the Indiana Law or by a corporation's articles of
incorporation or its board of directors, a corporation may amend its articles of
incorporation upon receiving more votes of holders in favor of the amendment
than votes cast against the amendment, unless the amendment creates dissenters'
rights in which case a favorable vote of the holders of a majority of the
outstanding shares is required. Under the Indiana Law, a corporation's board of
directors may condition its submission of a proposed amendment to the
shareholders of the corporation on any basis, including the requirement of the
affirmative vote of a greater percentage of the voting shares of the corporation
than otherwise required under the Indiana Law.
The Articles of Incorporation of CNB provide that, notwithstanding any other
provision of the Articles of Incorporation or any provision of law or any
preferred stock designation, the provisions of Article VII (relating to the
classification, number, terms, removal of directors and newly created
directorships and vacancies), Article IX (relating to special meetings of
shareholders) and Article X (relating to the "fair price" provisions discussed
above), may be altered, amended or repealed only with the affirmative vote of
the holders of 80% of CNB Common then entitled to vote in an election of
directors.
UFB
The Delaware Law provides that the certificate of incorporation of a
Delaware corporation may be amended only if first approved by the corporation's
board of directors and thereafter by a majority of the outstanding stock
entitled to vote thereon. The Delaware Law also provides that if a greater than
majority shareholder vote is required to effect an action under a certain
article of a Delaware corporation's certificate of incorporation, then amending
such an article likewise requires such a greater than majority shareholder vote.
The Certificate of Incorporation of UFB provides that the Certificate of
Incorporation may be amended only if the Board of Directors of UFB propose the
amendment and thereafter the Board approves the proposed amendment by the
affirmative vote of at least two-thirds of the directors then in office at a
duly constituted meeting of the Board of Directors called expressly for such
purpose. After Board approval, the proposed amendment must be approved by the
shareholders of UFB by a majority of the total votes eligible to be cast at a
duly constituted meeting of the shareholders called expressly for such purposes.
The Certificate of Incorporation of UFB further provides that the affirmative
vote of at least 80% of the voting power of all of the outstanding shares of the
capital stock of UFB entitled to vote generally in the election of directors
shall be required to amend or repeal the provisions of (i) Section C of Article
FOURTH (relating to voting restrictions imposed on shareholders owning in excess
of 10% of the outstanding shares of UFB Common); (ii) Sections C or D or Article
FIFTH (relating to shareholder special meetings and shareholder action by
written consent); (iii) Article SIXTH (relating to the number, classification,
qualification, disqualification, director nominations, filling of vacancies and
removal of directors of UFB); (iv) Article SEVENTH (relating to amending the
Bylaws); (v) Article EIGHTH (relating to approval of business combinations with
an interested shareholder or its affiliates); (vi) Article TENTH (relating to
indemnification); and (vii) Articles TWELFTH (relating to amending the
Certificate of Incorporation).
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VOTING RIGHTS
CNB
Holders of shares of CNB Common are entitled to one vote per share in the
election of directors and in all other matters to be voted upon by the
shareholders generally. Directors of CNB are elected by a plurality of the
shareholder votes cast and shareholders of CNB are not entitled to cumulative
voting in the election of directors. A plurality of the shares of CNB Common
can, therefore, elect the entire Board of Directors. All other matters voted on
by shareholders are determined by a majority of the shareholder votes cast,
except those matters specifically requiring a greater than majority vote by law
or CNB's Articles of Incorporation.
UFB
In accordance with the Delaware Law and as provided in the Bylaws of UFB,
each outstanding share of UFB Common is entitled to one vote on each matter
voted on at a shareholders' meeting. A shareholder of UFB may vote in person or
by proxy. Directors of UFB are elected by a plurality of the shareholder votes
cast and shareholders of UFB are not entitled to cumulative voting in the
election of directors. A plurality of the shares of UFB Common can, therefore,
elect the entire Board of Directors. All other matters voted on by shareholders
are determined by a majority of the shareholder votes cast, except those matters
specifically requiring a greater than majority vote by law or UFB's Certificate
of Incorporation. Notwithstanding the foregoing, Article Fourth, Section C of
UFB's Certificate of Incorporation provides that no person who beneficially owns
more than 10% of UFB's outstanding shares may vote shares in excess of that
limit. See "-- Takeover Statutes -- UFB."
SPECIAL MEETING OF SHAREHOLDERS; SHAREHOLDER ACTION BY WRITTEN CONSENT
CNB
The Articles of Incorporation of CNB require that shareholders must hold at
least 80% of the outstanding voting shares of CNB in order to call a special
meeting of shareholders. This provision is intended to discourage attempts by
the holders of less than 80% of the outstanding voting stock of CNB from
disrupting the business of the corporation between annual shareholders' meetings
by calling special meetings. Possible disadvantages of this provision is that it
makes it more difficult for a shareholder or shareholder group to take action
where such action is opposed by a majority of the Board of Directors and
management of CNB and it may delay the removal of directors, even if cause
exists for such removal. The Indiana Law provides that any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if a consent, in writing, setting forth the action taken is signed by
the holders of all of the shares entitled to vote on the subject matter.
UFB
In accordance with the Delaware Law, UFB's Certificate of Incorporation
provides that special meetings of shareholders of UFB may be called only by the
Board of Directors of UFB pursuant to a resolution adopted by a majority of the
total number of directors which UFB would have if there were no vacancies on the
Board of Directors. The Certificate of Incorporation of UFB also provides that
any action required or permitted to be taken by the shareholders of UFB must be
effected at a duly called annual or special shareholders' meeting and may not be
effected by any consent in writing by such
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shareholders. Delaware law, in the absence of this provision, permits action by
written consent of shareholders signed by the holders of the number of shares
that would be required to effect the action at a meeting. UFB's restriction
against shareholders' ability to call a special shareholders' meeting and
against shareholder action by written consent is more restrictive than CNB's 80%
shareholder vote required to call a special meeting and shareholders' act by
written consent of all of CNB's shareholders. UFB's more restrictive provisions
preclude attempts by shareholders to disrupt the business of UFB between annual
shareholders' meetings, but make it impossible for a shareholder or shareholder
group to take action where such action is opposed by a majority of the Board of
Directors and management of UFB. UFB's more restrictive provisions also
preclude the removal of directors, even if cause exists or a director becomes
disqualified, until the next annual shareholders' meeting, where such removal is
opposed by a majority of the Board of Directors.
DISSENTERS' RIGHTS
CNB
Under the Indiana Law, a shareholder of a corporation is entitled (subject
to certain exceptions) to receive payment for the fair value of his or her
shares if, among other things, such shareholder dissents from a plan of share
exchange, sale or exchange of all or substantially all of the property of the
corporation, or a merger or control share acquisition to which such corporation
is a party. Such rights are not available to holders of shares traded on a
securities exchange or Nasdaq. Because CNB is not merging directly with UFB and
CNB shares are traded on Nasdaq, CNB's shareholders are not entitled to assert
such rights in connection with the Merger.
UFB
The Delaware Law provides, that, unless the certificate of incorporation of
a Delaware corporation provides otherwise, no dissenters' appraisal rights are
available to holders of shares that are listed on a national securities exchange
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or are held of
record by more than 2,000 shareholders. As UFB Common is a national market
system security traded on Nasdaq and UFB's Certificate of Incorporation does not
provide for dissenters' appraisal rights, holders of UFB Common have no
dissenters' appraisal rights in any merger, consolidation or disposition of
assets. Shareholders of UFB may not, therefore, assert dissenters' appraisal
rights in connection with the Merger. See "MERGER -- Absence of Dissenters'
Rights."
TAKEOVER STATUTES
CNB
In general, the Indiana Law prohibits any business combination, such as a
merger or consolidation between an Indiana corporation with shares of its stock
registered under the federal securities laws or which makes an election under
the Indiana Law, and an "interested shareholder" (which is defined as any owner
of 10% or more of the corporation's stock) for five years after the date on
which such shareholder became an interested shareholder, unless the stock
acquisition which caused the person to become an interested shareholder was
approved in advance by the corporation's board of directors. This so-called
"five-year freeze" provision of the Indiana Law is effective even if all parties
should subsequently decide that they wish to engage in the business combination.
The Indiana Law also contains a "control share
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acquisition" provision which effectively denies voting rights to shares of an
"issuing public corporation" acquired in control share acquisitions unless the
grant of such voting right is approved by a majority vote of disinterested
shareholders. An issuing public corporation is a corporation that (i) has 100 or
more shareholders; (ii) has its principal place of business, its principal
office or substantial assets within Indiana and (iii) either (a) more than 10%
of its shareholders are Indiana residents, (b) more than 10% of its shares are
owned by Indiana residents, or (c) 10,000 shareholders resident in Indiana. CNB
is an "issuing public corporation." A control share acquisition is one by which
a purchasing shareholder acquires more than one-fifth, one-third, or one-half of
the voting power of the stock of an Indiana corporation whose stock is
registered under the federal securities laws. In addition, if any person
proposing to make or who has made "control share acquisitions" does not file an
"acquiring person statement" with the issuing corporation or if the control
shares are not accorded full voting rights by other shareholders, and if the
articles of incorporation or bylaws of the corporation whose shares are acquired
authorize such redemption (CNB's Bylaws do), the acquired shares are subject to
redemption by the corporation. Finally, if a control share acquisition should be
made of a majority or more of the corporation's voting stock, and those shares
are granted full voting rights, shareholders are granted dissenters' rights.
UFB
The Delaware Law has a "freeze provision," similar to Indiana's five-year
freeze, that generally prohibits any business combination, such as a merger or
consolidation, between a Delaware corporation and an interested shareholder
(which is generally defined as any owner of 15% or more of the outstanding
voting stock of a corporation) for three years after the date on which such
shareholder becomes an interested shareholder. The Delaware statute provides
that if any of the following conditions are met Delaware's three-year freeze
provision will not apply: (i) prior to such date the board of directors of the
corporation approved either the business combination or the transaction by which
the interested shareholder became an interested shareholder; (ii) upon
consummation of the transaction which resulted in the shareholder becoming an
interested shareholder, the interested shareholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding shares held by persons who are directors and also officers
and by certain employee stock ownership plans); or (iii) on or subsequent to
such date the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of the shareholders
by the affirmative vote of at least 66% of the outstanding voting stock of the
corporation which is not owned by the interested shareholder. The Delaware Law
does not contain a control share acquisition statute similar to the one in
Indiana. Under the terms, however, of UFB's Certificate of Incorporation, a
record owner of UFB Common who beneficially owns, directly or indirectly, in
excess of 10% of the outstanding shares of UFB Common is not entitled to vote
the shares held in excess of 10% of the outstanding shares of UFB Common. The
number of shares which may be voted by any record owner owning shares in excess
of the 10% stock ownership limit is equal to the total number of votes which a
single record owner of all of UFB Common owned by such person would be entitled
to cast, multiplied by a fraction, the numerator of which is the number of
shares beneficially owned by such person and owned of record by such record
owner and the denominator of which is the total number of shares of UFB Common
beneficially owned by such person owning shares in excess of the 10% stock
ownership limit.
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INDEMNIFICATION
CNB
Pursuant to the Indiana Law and the Articles of Incorporation and Bylaws of
CNB, CNB is obligated to indemnify certain officers and directors in connection
with liabilities arising from legal proceedings resulting from such person's
service to CNB in certain circumstances. CNB may also voluntarily undertake to
indemnify certain persons acting on CNB's behalf in certain circumstances.
Chapter 37 of the Indiana Law provides for mandatory indemnification of
directors and officers of Indiana corporations and permissive indemnification of
directors, officers, employees and agents of Indiana corporations who are made
parties to proceedings as a result of their relationship with such corporation.
Chapter 37 also applies to individuals who are serving at such corporation's
request as directors, officers, employees and agents of such corporation's
subsidiaries. Chapter 37 requires Indiana corporations, unless limited by their
articles of incorporation, to indemnify any director or officer against
reasonable expenses incurred in connection with any proceeding to which such
person was a party if the individual is wholly successful on the merits. Chapter
37 authorizes Indiana corporations to indemnify any director, officer, employee
or agent against liability incurred in such a proceeding generally if the
individual's conduct was in good faith and the individual reasonably believed,
in the case of conduct in the individual's official capacity, that his or her
conduct was in the corporation's best interests and in all other cases that his
or her conduct was not opposed to the best interests of such corporation.
Chapter 37 further authorizes any court of competent jurisdiction, unless the
articles of incorporation provide otherwise, to order indemnification generally
if the court determines a director or officer of an Indiana corporation is
entitled to mandatory indemnification or is otherwise fairly and reasonably
entitled to indemnification in view of all the relevant circumstances. Chapter
37 also authorizes Indiana corporations to advance reasonable expenses in
advance of final disposition of a proceeding generally if the individual affirms
in writing a good faith belief that he satisfies the standard of conduct for
permissive indemnification, the individual undertakes in a signed writing to
repay the advance if it is determined he does not satisfy the standard of
conduct for permissive indemnification and the corporation determines that the
facts then known do not preclude indemnification. Finally, Chapter 37 authorizes
further indemnification to the extent that the corporation may provide in its
articles of incorporation, bylaws, a resolution of the board of directors or the
shareholders or any other authorization, whenever adopted, after notice, by a
majority vote of all the voting shares then issued and outstanding. Except with
respect to the advancement of expenses, CNB's Bylaws generally provide for the
indemnification of CNB's directors, officers, employees and agents to the extent
permitted by Chapter 37.
UFB
The Delaware Law grants Delaware corporations broad indemnification powers,
including the authority to provide forms of indemnification in addition to the
types of indemnification set forth by the Delaware statute. The Certificate of
Incorporation of UFB provides mandatory indemnification for each person who was
or is made a party or threatened to be made a party to or is otherwise involved
in any proceeding by reason of the fact that he or she is or was a director or
officer of UFB or is or was serving or has agreed to serve at the request of UFB
as a director, officer, employee or agent of another corporation. Such mandatory
indemnification covers the alleged action whether or not such person was acting
in their official capacity. Such indemnification covers all expense, liability
and loss including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement reasonably incurred by the indemnitee
in connection with the proceeding. UFB's Certificate of
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Incorporation provides indemnification to an indemnitee who initiates a
proceeding only if the proceeding was authorized by the Board of Directors of
UFB or was initiated to enforce indemnification rights. The Certificate of
Incorporation of UFB provides for payment of indemnification expenses in advance
of a proceeding's final disposition provided the indemnitee first delivers to
UFB an undertaking by or on behalf of such indemnitee to repay all amounts so
advanced if it shall ultimately be determined that the indemnitee is not
entitled to be indemnified for such expense. In addition to mandatory
indemnification, UFB may in accordance with its Certificate of Incorporation, to
the extent authorized by a majority vote of the disinterested directors of UFB,
grant rights to indemnification and to the advancement of indemnification
expenses to any employee or agent of UFB or any person who is or was serving or
has agreed to serve at the request of UFB as an employee or agent of another
corporation, to the fullest extent that UFB is authorized to indemnify and
advance expenses to the directors and officers of UFB. UFB's Certificate of
Incorporation also authorizes UFB to maintain insurance to protect UFB and any
director, officer, employee or agent of UFB or another corporation against any
expense, liability or loss, whether or not UFB would have the power to indemnify
such person against such expense, liability or loss under the Delaware Law.
LIMITATION OF LIABILITY OF DIRECTORS
CNB
The Indiana Law provides that no director of an Indiana corporation will be
subject to liability for any action taken as a director, or any failure to take
any action as a director, unless the director has both breached or failed to
perform the duties of the director's office in compliance with the Indiana Law
and the breach or failure to perform constitutes willful misconduct or
recklessness. This provision eliminates the potential liability of a
corporation's directors for failure, except through willful misconduct or
recklessness, to satisfy their duty of care, which requires each director to
carry out his or her duties in good faith, with the care an ordinarily prudent
person in a like position would exercise under similar circumstances, and in a
manner the director reasonably believes to be in the best interests of the
corporation. This provision may thus reduce the likelihood of derivative
litigation against directors and discourage or deter shareholders or management
from bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have been beneficial to
the corporation and its shareholders. Shareholders therefore will not have a
cause of action based upon negligent business decisions, including those
relating to attempts to acquire control of the corporation. This provision does
not, however, preclude all equitable remedies for breach of the duty of care,
although such remedies might not be available as a practical matter.
UFB
The Certificate of Incorporation of UFB provides that a director of UFB
shall not be personally liable to UFB or the shareholders of UFB for monetary
damages for breach of fiduciary duty as a director, except for liability
resulting from (i) any breach of the director's duty of loyalty to UFB or the
shareholders of UFB; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) unlawful payment of
dividends or unlawful stock purchases or redemptions; or (iv) any transaction
from which the director derived an improper personal benefit. Shareholders of
UFB do not, therefore, have a cause of action based upon negligent business
decisions, including those relating to attempts to acquire control of the UFB.
UFB's Certificate of Incorporation does not, however, preclude all equitable
remedies for breach of the duty of care, although such remedies might not be
available as a practical matter. Similar to CNB's limitation of director
liability, UFB's
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limitation of director liability may reduce the likelihood of derivative
litigation against directors and discourage or deter shareholders or management
from bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have been beneficial to
UFB and the shareholders of UFB.
CONSIDERATION OF NON-SHAREHOLDER INTERESTS
CNB
The Indiana Law specifically authorizes directors, in considering the best
interests of a corporation, to consider the short-term and long-term interests
of the corporation as well as the effects of any action on shareholders,
employees, suppliers and customers of the corporation and communities in which
offices or other facilities of the corporation are located, and any other
factors the directors consider pertinent. Under the Indiana Law, directors are
not required to approve a proposed corporate action if the directors determine
in good faith after considering and weighing as they deem appropriate the effect
of such action on the corporation's constituents that such approval is not in
the best interest of the corporation. In addition, the Indiana Law states that
directors are not required to redeem any rights under or render inapplicable a
shareholder rights plan or to take or decline to take any other action solely
because of the effect such action might have on a proposed acquisition of
control of a corporation or the amounts to be paid to shareholders under such an
acquisition. The Indiana Law explicitly provides that the different or higher
degree of scrutiny imposed in Delaware and certain other jurisdictions upon
director actions taken in response to potential changes in control will not
apply. Any determination made with respect to the foregoing by a majority of the
disinterested directors will conclusively be presumed to be valid unless it can
be demonstrated that such determination was not made in good faith.
UFB
The Delaware Law does not address a Delaware director's ability to consider
nonshareholder interests when discharging his or her duties. Delaware case law,
however, provides that in discharging his or her responsibilities, a director of
Delaware corporation must limit consideration of nonshareholder interests, and
that a board of directors of a Delaware corporation may consider nonshareholder
interests only if those interests are rationally related to benefits accruing to
the shareholders of the Delaware corporation. Revlon, Inc. v. MacAndrews &
Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). Delaware case law further
provides that when a board of directors of a Delaware corporation decides to
sell a Delaware corporation, concern for nonshareholder interests is
inappropriate. Id.
The Certificate of Incorporation of UFB grants the Board of Directors of
UFB broader discretion than that authorized by Delaware case law. Specifically,
UFB's Certificate of Incorporation provides that the Board of Directors of UFB
may, when evaluating any tender or exchange offer, any offer to merge or
consolidate UFB with another corporation or any offer to purchase all or
substantially all of the assets of UFB, give due consideration to all relevant
factors including, without limitation, social and economic effect of acceptance
of such offers on present and future customers and employees of UFB and
subsidiaries of UFB, the communities in which UFB and its subsidiaries operate
or are located and the ability of UFB and its subsidiaries to fulfill their
respective corporate or banking objectives.
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LEGAL OPINION
The legality of the securities offered hereby will be passed upon by Lewis,
Rice & Fingersh, L.C.
EXPERTS
INDEPENDENT AUDITORS FOR CNB
The consolidated financial statements of CNB for the year ended December
31, 1994, incorporated by reference in CNB's Annual Report (Form 10-K) and as
restated for the February, 1995 acquisitions of King City and HBI and
incorporated by reference in CNB's Current Report on Form 8-K dated May 23,
1995, have been audited by Geo. S. Olive & Co. L.L.C., independent auditors, as
set forth in their reports included therein and incorporated herein by
reference. The financial statements referred to above are incorporated herein by
reference in reliance upon such reports and upon the authority of such firm as
experts in auditing and accounting.
INDEPENDENT AUDITORS FOR UFB
The consolidated financial statements of UFB incorporated by reference in
UFB's Annual Report (Form 10-K) for the fiscal year ended June 30, 1994, as
amended by UFB's Annual Report on Form 10-K/A for the fiscal year ended June 30,
1994, have been audited by Geo. S. Olive & Co. L.L.C., independent auditors, as
set forth in their report included therein and incorporated by reference in
reliance upon such report and upon the authority of such firm as experts in
auditing and accounting.
PRESENCE AT SPECIAL MEETING
Representatives of Geo. S. Olive & Co. L.L.C. are expected to be present at
the Special Meeting with the opportunity to make a statement if they desire to
do so and to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Shareholder proposals for the annual meeting of CNB's shareholders to be
held in April, 1996 must be received by CNB no later than November 24, 1995, and
must meet the requirements established by the S.E.C. for shareholder proposals.
Upon receipt of any such proposal CNB will determine whether or not to include
such proposal in the Proxy Statement and proxies in accordance with the S.E.C.'s
regulations governing the solicitation of proxies.
_________________________
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EXHIBIT A
================================================================================
AGREEMENT AND PLAN OF MERGER
by and among
UF BANCORP, INC.
a Delaware corporation
and
CNB BANCSHARES, INC.
an Indiana corporation
and
CITIZENS BANCSHARES, INC.
an Indiana corporation
Dated December 12, 1994
================================================================================
A
<PAGE>
TABLE OF CONTENTS
_________________
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
ARTICLE ONE - TERMS OF THE MERGER AND CLOSING............................. A-1
Section 1.01. The Merger.......................................... A-1
Section 1.02. Merging Corporation................................. A-1
Section 1.03. Surviving Corporation............................... A-1
Section 1.04. Effect of the Merger................................ A-1
Section 1.05. Conversion of Shares................................ A-1
Section 1.06. The Closing......................................... A-2
Section 1.07. Exchange Procedures; Surrender of Certificates...... A-2
Section 1.08. Closing Date........................................ A-3
Section 1.09. Actions At Closing.................................. A-4
ARTICLE TWO - REPRESENTATIONS OF UFB...................................... A-5
Section 2.01. Organization and Capital Stock...................... A-5
Section 2.02. Authorization; No Defaults.......................... A-5
Section 2.03. Subsidiaries........................................ A-6
Section 2.04. Financial Information............................... A-6
Section 2.05. Absence of Changes.................................. A-7
Section 2.06. Regulatory Enforcement Matters...................... A-7
Section 2.07. Tax Matters......................................... A-7
Section 2.08. Litigation.......................................... A-7
Section 2.09. Employment Agreements............................... A-8
Section 2.10. Reports............................................. A-8
Section 2.11. Loan Portfolio...................................... A-8
Section 2.12. Investment Portfolio................................ A-8
Section 2.13. Employee Matters and ERISA.......................... A-9
Section 2.14. Title to Properties; Insurance...................... A-10
Section 2.15. Environmental Matters............................... A-11
Section 2.16. Compliance with Law................................. A-11
Section 2.17. Brokerage........................................... A-11
Section 2.18. No Undisclosed Liabilities.......................... A-11
Section 2.19. Properties, Contracts and Other Agreements.......... A-12
Section 2.20. Interim Events...................................... A-12
Section 2.21. Non-Banking Activities.............................. A-13
Section 2.22. Statements True and Correct......................... A-13
ARTICLE THREE - REPRESENTATIONS OF CNB AND CBI............................ A-13
Section 3.01. Organization and Capital Stock...................... A-13
Section 3.02. Authorization....................................... A-14
Section 3.03. Subsidiaries........................................ A-14
</TABLE>
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<TABLE>
<C> <S> <C>
Section 3.04. Financial Information............................... A-14
Section 3.05. Absence of Changes.................................. A-15
Section 3.06. Litigation.......................................... A-15
Section 3.07. Reports............................................. A-15
Section 3.08. Compliance With Law................................. A-15
Section 3.09. Statements True and Correct......................... A-15
Section 3.10. Regulatory Enforcement Matters...................... A-15
Section 3.11. Undisclosed Liabilities............................. A-16
ARTICLE FOUR - AGREEMENTS OF UFB.......................................... A-16
Section 4.01. Business in Ordinary Course......................... A-16
Section 4.02. Breaches............................................ A-19
Section 4.03. Submission to Shareholders.......................... A-19
Section 4.04. Consents to Contracts and Leases.................... A-19
Section 4.05. Conforming Accounting and Reserve Policies;
Restructuring Expenses.............................. A-19
Section 4.06. Consummation of Agreement........................... A-20
Section 4.07. Environmental Reports............................... A-20
Section 4.08. Restriction on Resales.............................. A-21
Section 4.09. Access to Information............................... A-21
Section 4.10. Subsidiary Bank Merger, Branch Transfer and Branch
Closing Transactions................................ A-21
Section 4.11. Expense Report...................................... A-22
ARTICLE FIVE - AGREEMENTS OF CNB AND CBI.................................. A-22
Section 5.01. Regulatory Approvals and Registration Statement..... A-22
Section 5.02. Breaches............................................ A-23
Section 5.03. Consummation of Agreement........................... A-23
Section 5.04. Stock Options....................................... A-23
Section 5.05. Directors and Officers' Liability Insurance
and Indemnification................................. A-24
Section 5.06. Employee Benefits................................... A-24
Section 5.07. Access to Information............................... A-25
Section 5.08. Authorization of CNB Common......................... A-26
Section 5.09. Tax-Free Reorganization............................. A-26
Section 5.10. Restricted Shares................................... A-26
Section 5.11. Accounting and Regulatory Matters................... A-26
Section 5.12. Compliance with Antitrust and Other Laws............ A-26
ARTICLE SIX - CONDITIONS PRECEDENT TO THE MERGER.......................... A-27
Section 6.01. Conditions to CNB's and CBI's Obligations........... A-27
Section 6.02. Conditions to UFB's Obligations..................... A-28
</TABLE>
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<TABLE>
<C> <S> <C>
ARTICLE SEVEN - TERMINATION OR ABANDONMENT................................ A-29
Section 7.01. Mutual Agreement.................................... A-29
Section 7.02. Breach of Agreements................................ A-29
Section 7.03. Environmental Reports............................... A-30
Section 7.04. Failure of Conditions............................... A-30
Section 7.05. Regulatory Approval Denial.......................... A-30
Section 7.06. Shareholder Approval Denial......................... A-30
Section 7.07. Regulatory Enforcement Matters...................... A-30
Section 7.08. Fall-Apart Date..................................... A-30
Section 7.09. Termination Fee..................................... A-30
Section 7.10. Mortgage Operations Losses.......................... A-31
ARTICLE EIGHT - GENERAL................................................... A-32
Section 8.01. Confidential Information............................ A-32
Section 8.02. Publicity........................................... A-32
Section 8.03. Return of Documents................................. A-32
Section 8.04. Notices............................................. A-32
Section 8.05. Liabilities......................................... A-33
Section 8.06. Nonsurvival of Representations, Warranties
and Agreements...................................... A-33
Section 8.07. Entire Agreement.................................... A-33
Section 8.08. Headings and Captions............................... A-34
Section 8.09. Waiver, Amendment or Modification................... A-34
Section 8.10. Rules of Construction............................... A-34
Section 8.11. Counterparts........................................ A-34
Section 8.12. Successors and Assigns.............................. A-34
Section 8.13. Severability........................................ A-34
Section 8.14. Governing Law; Assignment........................... A-34
Section 8.15. Certain Expense Reimbursement....................... A-34
</TABLE>
EXHIBIT 1.09(a) - UFB's Legal Opinion Matters
EXHIBIT 1.09(b) - CNB's Legal Opinion Matters
EXHIBIT 4.08 - Form of Affiliate's Letter
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AGREEMENT AND PLAN OF MERGER
----------------------------
This is an AGREEMENT AND PLAN OF MERGER (this "Agreement") made December 12,
1994, by and among UF BANCORP, INC., a Delaware corporation ("UFB"), CNB
BANCSHARES, INC., an Indiana corporation ("CNB"), and CITIZENS BANCSHARES, INC.,
an Indiana corporation and wholly-owned subsidiary of CNB ("CBI").
In consideration of the premises and the mutual terms and provisions set
forth in this Agreement, the parties agree as follows.
ARTICLE ONE
-----------
TERMS OF THE MERGER AND CLOSING
-------------------------------
SECTION 1.01. THE MERGER. Pursuant to the terms and provisions of this
Agreement and the Indiana Business Corporation Law (the "Indiana Corporate Law")
and The Delaware General Corporation Law (the "Delaware Corporate Law"), UFB
shall merge with and into CBI (the "Merger").
SECTION 1.02. MERGING CORPORATION. UFB shall be the merging corporation
under the Merger and its corporate identity and existence, separate and apart
from CBI, shall cease on consummation of the Merger.
SECTION 1.03. SURVIVING CORPORATION. CBI shall be the surviving
corporation in the Merger. No changes in the articles of incorporation and
bylaws of CBI shall be effected by the Merger.
SECTION 1.04. EFFECT OF THE MERGER. The Merger shall have all of the
effects provided by this Agreement, the Indiana Corporate Law and the Delaware
Corporate Law.
SECTION 1.05. CONVERSION OF SHARES.
(a) At the Effective Time (as defined in Section 1.08 hereof), each share of
common stock, par value $0.01, of UFB (the "UFB Common") issued and outstanding
immediately prior to the Effective Time shall be converted into the right to
receive 1.366 shares (the "Conversion Ratio") of common stock, stated value
$1.00 per share, of CNB (the "CNB Common"); provided, however, that if the CNB
Average Price (as defined below in this Section 1.05(a)) is less than $26.66,
then the Conversion Ratio shall equal the product of (i) 1.366 and (ii) the
quotient of $26.66 divided by the CNB Average Price; provided, further, however,
that if the CNB Average Price is more than $36.06, then the Conversion Ratio
shall equal the product of (i) 1.366 and (ii) the quotient of $36.06 divided by
the CNB Average Price. The "CNB Average Price" shall equal the average of the
per share closing prices of a share of CNB Common as reported on the Nasdaq
Stock Market's National Market ("Nasdaq") during the twenty (20) business day
period preceding the fifth (5th) calendar day preceding the Closing Date (as
defined in Section 1.08 hereof). No fractional shares of CNB Common shall be
issued and, in lieu thereof, holders of shares of UFB Common who would otherwise
be entitled to a fractional share interest (after taking into account all shares
of UFB Common held by such holder) shall be paid an amount in cash equal to the
product of such fractional share interest and the closing price of a share of
CNB Common
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on Nasdaq on the fifth (5th) business day immediately preceding the date on
which the Effective Time occurs.
(b) At the Effective Time, all of the shares of UFB Common, by virtue of
the Merger and without any action on the part of the holders thereof, shall no
longer be outstanding and shall be canceled and retired and shall cease to
exist, and each holder of any certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of UFB Common (the
"Certificates") shall thereafter cease to have any rights with respect to such
shares, except the right of such holders to receive, without interest, the
number of whole shares of CNB Common and any cash in lieu of a fractional share
interest in CNB Common into which such holders' shares of UFB Common shall have
been converted pursuant to the Conversion Ratio (the "Merger Consideration")
upon the surrender of such Certificate or Certificates in accordance with
Section 1.07 hereof.
(c) At the Effective Time, each share of UFB Common, if any, held in the
treasury of UFB or by any direct or indirect subsidiary of UFB (other than
shares held in trust accounts for the benefit of others or in other fiduciary,
nominee or similar capacities) immediately prior to the Effective Time shall be
canceled.
(d) At the Effective Time, each share of common stock, par value $1.00 per
share, of CBI outstanding immediately prior to the Effective Time shall remain
outstanding unaffected by the Merger.
(e) If between the date hereof and the Effective Time a share of CNB Common
shall be changed into a different number of shares of CNB Common or a different
class of shares (a "Share Adjustment") by reason of reclassification,
recapitalization, splitup, exchange of shares or readjustment, or if a stock
dividend thereon shall be declared with a record date within such period, then
the number of shares of CNB Common or a different class of shares into which a
share of UFB Common shall be converted pursuant to subsection (a) above shall be
appropriately and proportionately adjusted so that each shareholder of UFB shall
be entitled to receive such number of shares of CNB Common as such shareholder
would have received pursuant to such Share Adjustment had the record date
therefor been immediately following the Effective Time of the Merger; provided,
however, that because the parties took into account in determining the
Conversion Ratio the one-for-ten stock dividend on CNB Common declared by CNB
October 18, 1994, and payable on December 9, 1994, to holders of record on
November 15, 1994, such stock dividend shall not be deemed a Share Adjustment
for purposes of this subsection (e) and the Conversion Ratio shall not be
adjusted as a result thereof.
SECTION 1.06. THE CLOSING. The closing of the Merger (the "Closing") shall
take place at the main offices of CNB at 10:00 A.M. Central Time on the Closing
Date (as defined in Section 1.08).
SECTION 1.07. EXCHANGE PROCEDURES; SURRENDER OF CERTIFICATES.
(a) The Citizens National Bank of Evansville, Evansville, Indiana, shall act
as Exchange Agent in the Merger (the "Exchange Agent"). At or prior to the
Effective Time, CNB shall deposit, or shall cause to be deposited, with the
Exchange Agent the Merger Consideration for the benefit of the holders of
Certificates for exchange in accordance with this Section 1.07.
(b) As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each record holder of any Certificate or Certificates whose
shares were converted into the right to
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receive the Merger Consideration, a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange Agent
and shall be in such form and have such other provisions as CNB may reasonably
specify) (each such letter, the "Merger Letter of Transmittal") and instructions
for use in effecting the surrender of the Certificates in exchange for the
Merger Consideration. Upon surrender to the Exchange Agent of a Certificate,
together with a Merger Letter of Transmittal duly executed and any other
required documents, the holder of such Certificate shall be entitled to receive
in exchange therefor solely the Merger Consideration. No interest on the Merger
Consideration issuable upon the surrender of the Certificates shall be paid or
accrued for the benefit of holders of Certificates. If the Merger Consideration
is to be issued to a person other than a person in whose name a surrendered
Certificate is registered, it shall be a condition of issuance that the
surrendered Certificate shall be properly endorsed or otherwise in proper form
for transfer and that the person requesting such issuance shall pay to the
Exchange Agent any required transfer taxes or other taxes or establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
(c) No dividends that are otherwise payable on shares of CNB Common
constituting the Merger Consideration shall be paid to persons entitled to
receive such shares of CNB Common until such persons surrender their
Certificates. Upon such surrender, there shall be paid to the person in whose
name the shares of CNB Common shall be issued any dividends which shall have
become payable with respect to such shares of CNB Common (without interest and
less the amount of taxes, if any, which may have been imposed thereon as to
which CNB has withholding obligations), between the Effective Time and the time
of such surrender.
(d) At any time following six (6) months after the Effective Time, CNB shall
be entitled to terminate the Exchange Agent relationship, and thereafter holders
of Certificates shall be entitled to look only to CNB (subject to abandoned
property, escheat or other similar laws) with respect to the Merger
Consideration issuable upon surrender of their Certificates.
(e) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if reasonably required by CNB
or the Exchange Agent, the posting by such person of a bond in such amount as
CNB or the Exchange Agent may reasonably direct as indemnity against any claim
that may be made against CNB and/or the Exchange Agent with respect to such
Certificate, CNB or Exchange Agent will issue, in exchange for such lost, stolen
or destroyed Certificate, the Merger Consideration deliverable in respect
thereof pursuant to this Agreement.
SECTION 1.08. CLOSING DATE. At CNB's election, the Closing shall take
place on (i) the last business day of, or (ii) the first business day of the
month following, or (iii) the last business day of the earliest month which is
the second month of a calendar quarter following, in each case, the month during
which each of the conditions in Sections 6.01(d) and 6.02(d) hereof is satisfied
or waived by the appropriate party or on such other date after such satisfaction
or waiver as UFB and CNB may agree (the "Closing Date"). The Merger shall be
effective upon the later of (a) the date of filing with the Secretary of State
of the State of Indiana of Articles of Merger and (b) the date of filing with
the Secretary of State of the State of Delaware of a Certificate of Merger (the
"Effective Time"), which CNB and UFB shall use their best efforts to cause to
occur on the Closing Date.
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SECTION 1.09. ACTIONS AT CLOSING.
(a) At the Closing, UFB shall deliver to CNB and CBI:
(i) a certified copy of the Certificate of Incorporation and Bylaws
of UFB and each of its subsidiaries;
(ii) a Certificate signed by an appropriate officer of UFB stating
that (A) each of the representations and warranties contained in Article Two
is true and correct in all material respects at the time of the Closing with
the same force and effect as if such representations and warranties had been
made at Closing, and (B) all of the conditions set forth in Section 6.01(b)
hereof have been satisfied or waived as provided therein;
(iii) a certified copy of the resolutions of UFB's Board of
Directors and shareholders, as required for valid approval of the execution
of this Agreement, the Subsidiary Reorganization Agreements (as defined in
Section 4.10 hereof) and the consummation of the Merger and the other
transactions contemplated hereby and by the Subsidiary Reorganization
Agreements;
(iv) Certificate of the Secretary of State of the State of
Delaware, dated a recent date, stating that UFB is in good standing; and
(v) Articles of Merger and Certificate of Merger executed by UFB,
reflecting the terms and provisions of this Agreement and in proper form for
filing with the Secretaries of State of the States of Indiana and Delaware
in order to cause the Merger to become effective pursuant to the Indiana
Corporate Law and the Delaware Corporate Law; and
(vi) a legal opinion from counsel for UFB, in form reasonably
acceptable to CNB counsel, opining with respect to the matters listed on
Exhibit 1.09(a) hereto.
(b) At the Closing, CNB shall deliver to UFB:
(i) a Certificate signed by an appropriate officer of CNB and CBI
stating that (A) each of the representations and warranties contained in
Article Three is true and correct in all material respects at the time of
the Closing with the same force and effect as if such representations and
warranties had been made at Closing and (B) all of the conditions set forth
in Section 6.02(b) and 6.02(d) hereof (but excluding the approval of UFB's
shareholders) have been satisfied;
(ii) a certified copy of the resolutions of CNB's Board of
Directors authorizing the execution of this Agreement and the consummation
of the transactions contemplated hereby;
(iii) a certified copy of the resolutions of CBI's Board of
Directors and shareholder, as required for valid approval of the execution
of this Agreement and the consummation of the Merger and the transactions
contemplated hereby; and
(iv) a legal opinion from counsel for CNB, in form reasonable
acceptable to UFB's counsel, opining with respect to the matters listed on
Exhibit 1.09(b) hereto.
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<PAGE>
ARTICLE TWO
-----------
REPRESENTATIONS OF UFB
----------------------
UFB hereby makes the following representations and warranties:
SECTION 2.01. ORGANIZATION AND CAPITAL STOCK.
(a) UFB is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power to
own all of its property and assets, to incur all of its liabilities and to carry
on its business as now being conducted. UFB is a savings and loan holding
company registered with the Office of Thrift Supervision under the Home Owners'
Loan Act of 1933, as amended.
(b) The authorized capital stock of UFB consists of (i) 4,000,000 shares of
UFB Common, of which, as of the date hereof, 1,607,693 shares are issued and
outstanding, and (ii) 1,000,000 shares of preferred stock, par value $0.01 per
share, of which no shares are issued and outstanding. All of the issued and
outstanding shares of UFB Common are duly and validly issued and outstanding and
are fully paid and non-assessable. None of the outstanding shares of UFB Common
has been issued in violation of any preemptive rights of the current or past
shareholders of UFB. As of the date hereof, UFB had outstanding employee and
director stock options representing the right to acquire not more than 171,996
shares of UFB Common pursuant to the UFB Stock Option Plan (as defined in
Section 5.04 hereof). Section 2.01(b) of that certain confidential writing
delivered by UFB to CNB and executed by UFB, CNB and CBI concurrently with the
delivery and execution of this Agreement (the "Disclosure Schedule"), lists the
name and number of options held by each holder of UFB Stock Options (as defined
in Section 5.04 hereof).
(c) Except as set forth in subsection 2.01(b) above, there are no shares of
UFB Common or other capital stock or other equity securities of UFB outstanding
and no outstanding options, warrants, rights to subscribe for, calls, or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of UFB Common or other capital
stock of UFB or contracts, commitments, understandings or arrangements by which
UFB is or may be obligated to issue additional shares of its capital stock or
options, warrants or rights to purchase or acquire any additional shares of its
capital stock.
(d) Except as disclosed in Section 2.01(d) of the Disclosure Schedule, each
Certificate representing shares of UFB Common issued by UFB in replacement of
any Certificate theretofore issued by it which was claimed by the record holder
thereof to have been lost, stolen or destroyed was issued by UFB only upon
receipt of an affidavit of lost stock certificate and indemnity agreement of
such shareholder indemnifying UFB against any claim that may be made against it
on account of the alleged loss, theft or destruction of any such Certificate or
the issuance of such replacement Certificate.
SECTION 2.02. AUTHORIZATION; NO DEFAULTS. UFB's Board of Directors has, by
all appropriate action, approved this Agreement and the Merger and authorized
the execution hereof on its behalf by its duly authorized officers and the
performance by UFB of its obligations hereunder. Nothing in the certificate of
incorporation or bylaws of UFB, as amended, or any other agreement, instrument,
decree, proceeding, law or regulation (except as specifically referred to in or
contemplated by this Agreement)
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<PAGE>
by or to which it or any of its subsidiaries are bound or subject which is
material to UFB and its subsidiaries taken as a whole or to the Merger would
prohibit or inhibit UFB from consummating this Agreement and the Merger on the
terms and conditions herein contained. This Agreement has been duly and validly
executed and delivered by UFB and constitutes a legal, valid and binding
obligation of UFB, enforceable against UFB in accordance with its terms, except
as such enforcement may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or similar laws affecting the
enforceability of creditors' rights generally and by judicial discretion in
applying principles of equity. UFB and its subsidiaries are neither in default
under nor in violation of any provision of their articles of incorporation or
charter, bylaws, or any promissory note, indenture or any evidence of
indebtedness or security therefor, lease, contract, purchase or other commitment
or any other agreement, except for defaults and violations which will not have a
material adverse effect on the operations, business or financial condition of
UFB and its subsidiaries taken as a whole.
SECTION 2.03. SUBSIDIARIES. Each of UFB's direct and indirect subsidiaries
(collectively, the "subsidiaries") the name and jurisdiction of incorporation of
which is disclosed in Section 2.03 of the Disclosure Schedule, is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has the corporate power to own its
respective properties and assets, to incur its respective liabilities and to
carry on its respective business as now being conducted. The number of issued
and outstanding shares of capital stock of each such subsidiary is set forth in
Section 2.03 of the Disclosure Schedule, all of which shares (except as may be
otherwise there noted) are owned by UFB or UFB's subsidiaries, as the case may
be, free and clear of all liens, encumbrances, rights of first refusal, options
or other restrictions of any nature whatsoever. There are no options, warrants
or rights outstanding to acquire any capital stock of any of UFB's subsidiaries
and no person or entity has any other right to purchase or acquire any unissued
shares of stock of any of UFB's subsidiaries, nor does any such subsidiary have
any obligation of any nature with respect to its unissued shares of stock.
Except as may be disclosed in Section 2.03 of the Disclosure Schedule, neither
UFB nor any of UFB's subsidiaries is a party to any partnership or joint venture
or owns an equity interest in any other business or enterprise.
SECTION 2.04. FINANCIAL INFORMATION. The consolidated balance sheets of
UFB and its subsidiaries as of June 30, 1993 and 1994 and related consolidated
income statements and statements of changes in shareholders' equity and of cash
flows for the three (3) years ended June 30, 1994, together with the notes
thereto, included in UFB's Form 10-K for the fiscal year ended June 30, 1994, as
currently on file with the Securities and Exchange Commission (the "S.E.C."),
and the unaudited consolidated balance sheets of UFB and its subsidiaries as of
September 30, 1994, and the related unaudited consolidated income statements and
statements of changes in shareholders' equity and cash flows for the three (3)
months then ended included in UFB's Quarterly Reports on Form 10-Q for the
quarter then ended, as currently on file with the S.E.C., and the year-end and
quarterly Thrift Financial Reports of UFB's wholly-owned thrift subsidiary Union
Federal Savings Bank ("Thrift") for 1993, March 31, 1994, June 30, 1994 and
September 30, 1994, respectively, as currently on file with the Office of Thrift
Supervision (the "O.T.S.") (together, the "UFB Financial Statements"), copies of
which are included in Section 2.04 of the Disclosure Schedule, have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be disclosed therein and except for regulatory
reporting differences required by Thrift's reports) and fairly present in all
material respects the consolidated financial position and the consolidated
results of operations, changes in shareholders' equity and cash flows of the
respective entity and its respective consolidated subsidiaries as of the dates
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and for the periods indicated (subject, in the case of interim financial
statements, to normal recurring year-end adjustments, none of which will be
material).
SECTION 2.05. ABSENCE OF CHANGES. Except as set forth in Section 2.05 of
the Disclosure Schedule, since June 30, 1994, there has not been any material
adverse change in the financial condition, the results of operations or the
business or prospects of UFB and its subsidiaries taken as a whole other than
(i) changes in economic conditions generally affecting the thrift industry and
(ii) any diminution in the value of the securities portfolio or the loan
portfolio of Thrift solely on account of changes in interest rates generally,
nor have there been any events or transactions having such a material adverse
effect which should be disclosed in order to make the UFB Financial Statements
not misleading. Except as set forth in Section 2.05 of the Disclosure Schedule,
since January 31, 1994, there has been no material adverse change in the
financial condition, the results of operations or the business of Thrift other
than (i) changes in economic conditions generally affecting the thrift industry
and (ii) any diminution in the value of the securities portfolio or the loan
portfolio of Thrift solely on account of changes in interest rates generally.
Notwithstanding the foregoing, any changes for which UFB or its subsidiaries,
including Thrift, make provisions or other adjustments solely pursuant to
Section 4.05 hereof shall not be deemed to be a material adverse change.
SECTION 2.06. REGULATORY ENFORCEMENT MATTERS. Except as may be disclosed
in Section 2.06 of the Disclosure Schedule, neither UFB nor any of its
subsidiaries is subject to, or has received any notice or advice that it may
become subject to, any order, agreement or memorandum of understanding with any
federal or state agency charged with the supervision or regulation of banks or
thrifts or bank or thrift holding companies or engaged in the insurance of bank
or thrift deposits or any other governmental agency having supervisory or
regulatory authority with respect to UFB or any of its subsidiaries.
SECTION 2.07. TAX MATTERS. Each of UFB and its subsidiaries has filed with
the appropriate governmental agencies all federal, state and local income,
franchise, excise, sales, use, real and personal property and other tax returns
and reports required to be filed by it. Except as set forth in Section 2.07 of
the Disclosure Schedule, neither UFB nor its subsidiaries are (a) delinquent in
the payment of any taxes shown on such returns or reports or on any assessments
received by it for such taxes; (b) aware of any pending or threatened
examination for income taxes for any year by the Internal Revenue Service or any
state tax agency; (c) subject to any agreement extending the period for
assessment or collection of any federal or state tax; or (d) a party to any
action or proceeding with, nor has any claim been asserted against it by, any
governmental authority for assessment or collection of taxes. None of the tax
returns of UFB or its subsidiaries has been audited by the Internal Revenue
Service or any state tax agency for any period since 1982. Neither UFB nor its
subsidiaries are, to the knowledge of UFB, the subject of any threatened action
or proceeding by any governmental authority for assessment or collection of
taxes. The reserve for taxes in the audited financial statements of UFB for the
year ended June 30, 1994, is adequate to cover all of the tax liabilities of UFB
and its subsidiaries (including, without limitation, income taxes and franchise
fees) that may become payable in future years with respect to any transactions
consummated prior to June 30, 1994.
SECTION 2.08. LITIGATION. Except as may be disclosed in Section 2.08(a) of
the Disclosure Schedule and except for foreclosure and other collection
proceedings commenced in the ordinary course of business by Thrift with respect
to loans in default with respect to which no claims have been asserted against
Thrift, there is no litigation, claim or other proceeding pending or, to the
knowledge of UFB,
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<PAGE>
threatened, against UFB or any of its subsidiaries, or of which the property of
UFB or any of its subsidiaries is or would be subject. No litigation, claim or
other proceeding disclosed in Section 2.08(a) of the Disclosure Schedule is
material to UFB and its subsidiaries taken as a whole, except as may be
otherwise disclosed in Section 2.08(b) of the Disclosure Schedule.
SECTION 2.09. EMPLOYMENT AGREEMENTS. Except as may be disclosed in Section
2.09 of the Disclosure Schedule, neither UFB nor any of its subsidiaries is a
party to or bound by any contract for the employment, retention or engagement,
or with respect to the severance, of any officer, employee, agent, consultant or
other person or entity which, by its terms, is not terminable by UFB or such
subsidiary on thirty (30) days written notice or less without the payment of any
amount by reason of such termination. A true, accurate and complete copy of
each such agreement which is in writing is included in Section 2.09 of the
Disclosure Schedule.
SECTION 2.10. REPORTS. Except as may be disclosed in Section 2.10 of the
Disclosure Schedule, UFB and each of its subsidiaries has filed all reports and
statements, together with any amendments required to be made with respect
thereto, if any, that it was required to file with (i) the O.T.S., (ii) the
Federal Deposit Insurance Corporation (the "F.D.I.C."), (iii) the S.E.C., (iv)
any state securities authorities, (v) Nasdaq, and (vi) any other governmental
authority with jurisdiction over UFB or any of its subsidiaries. As of their
respective dates, each of such reports and documents, including the financial
statements, exhibits and schedules thereto, complied in all material respects
with the relevant statutes, rules and regulations enforced or promulgated by the
regulatory authority with which they were filed, and did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
SECTION 2.11. LOAN PORTFOLIO. Except as may be disclosed in Section 2.11
of the Disclosure Schedule, (i) all loans and discounts shown on the UFB
Financial Statements or which were entered into after the date of the most
recent balance sheet included in the UFB Financial Statements were and will be
made in all material respects for good, valuable and adequate consideration in
the ordinary course of the business of UFB and its subsidiaries, in accordance
in all material respects with sound lending practices, and are not subject to
any material known defenses, setoffs or counterclaims, including without
limitation any such as are afforded by usury or truth in lending laws, except as
may be provided by bankruptcy, insolvency or similar laws or by general
principles of equity; (ii) the notes or other evidences of indebtedness
evidencing such loans and all forms of pledges, mortgages and other collateral
documents and security agreements are and will be, in all material respects,
enforceable, valid, true and genuine and what they purport to be; and (iii) UFB
and its subsidiaries have complied and will prior to the Closing Date comply
with all laws and regulations relating to such loans, or to the extent there has
not been such compliance, such failure to comply will not materially interfere
with the collection of any such loan. All loans and loan commitments extended
by Thrift and any extensions, renewals or continuations of such loans and loan
commitments were made in accordance with customary lending standards of Thrift
in the ordinary course of business. Such loans are evidenced by appropriate and
sufficient documentation based upon customary and ordinary past practices of
Thrift.
SECTION 2.12. INVESTMENT PORTFOLIO. All United States Treasury securities,
obligations of other United States Government agencies and corporations,
obligations of States and political subdivisions of the United States and other
investment securities held by UFB or its subsidiaries, as reflected in the
latest consolidated balance sheet of UFB included in the UFB Financial
Statements, are carried in the aggregate
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at no more than cost adjusted for amortization of premiums and accretion of
discounts in accordance with generally accepted accounting principles,
specifically including but not limited to FAS 115.
SECTION 2.13. EMPLOYEE MATTERS AND ERISA.
(a) Except as may be disclosed in Section 2.13(a) of the Disclosure
Schedule, neither UFB nor any of its subsidiaries has entered into any
collective bargaining agreement with any labor organization with respect to any
group of employees of UFB or any of its subsidiaries and to the knowledge of UFB
there is no present effort nor existing proposal to attempt to unionize any
group of employees of UFB or any of its subsidiaries.
(b) Except as may be disclosed in Section 2.13(b) of the Disclosure
Schedule, (i) UFB and its subsidiaries are and have been in material compliance
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without limitation,
any such laws respecting employment discrimination and occupational safety and
health requirements, and neither UFB nor any of its subsidiaries is engaged in
any unfair labor practice; (ii) there is no unfair labor practice complaint
against UFB or any subsidiary pending or, to the knowledge of UFB, threatened
before the National Labor Relations Board; (iii) there is no labor dispute,
strike, slowdown or stoppage actually pending or, to the knowledge of UFB,
threatened against or directly affecting UFB or any subsidiary; and (iv) neither
UFB nor any subsidiary has experienced any work stoppage or other such labor
difficulty during the past five (5) years.
(c) Except as may be disclosed in Section 2.13(c) of the Disclosure
Schedule, neither UFB nor any subsidiary maintains, contributes to or
participates in or has any liability under any employee benefit plans, as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), including (without limitation) any multiemployer plan (as
defined in Section 3(37) of ERISA, or any nonqualified employee benefit plans or
deferred compensation, bonus, stock or incentive plans, or other employee
benefit or fringe benefit programs for the benefit of former or current
employees of UFB or any subsidiary (the "Employee Plans"). To the knowledge of
UFB, no present or former employee of UFB or any subsidiary has been charged
with breaching nor has breached a fiduciary duty under any of the Employee
Plans. Except as may be disclosed in Section 2.13(c) of the Disclosure
Schedule, neither UFB nor any of its subsidiaries participates in, nor has it in
the past five (5) years participated in, nor has it any present or future
obligation or liability under, any multiemployer plan. Except as may be
disclosed in Section 2.13(c) of the Disclosure Schedule, neither UFB nor any
subsidiary maintains, contributes to, or participates in, any plan that provides
health, major medical, disability or life insurance benefits to former employees
of UFB or any subsidiary. Section 2.13(c) of the Disclosure Schedule includes a
true, accurate and complete copy of each written plan or program disclosed
therein or a summary plan description if such plans or programs are not
available to UFB and, with respect to each such plan or program to the extent
available to UFB, all (i) amendments or supplements thereto, (ii) summary plan
descriptions, (iii) descriptions of all current participants in such plans and
programs and all participants with benefit entitlements under such plans and
programs, (iv) contracts relating to plan documents, (v) actuarial valuations
for any defined benefit plan, (vi) valuations for any plan as of the most recent
date, (vii) determination letters from the Internal Revenue Service, (viii) the
most recent annual report filed with the Internal Revenue Service, (ix)
registration statements on Form S-8 and prospectuses, and (x) trust agreements.
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(d) All liabilities of the Employee Plans have been funded on the basis of
consistent methods in accordance with sound actuarial assumptions and practices,
and no Employee Plan, at the end of any plan year, or at June 30, 1994, had or
has had an accumulated funding deficiency. No actuarial assumptions have been
changed since the last written report of actuaries on such Employee Plans. All
insurance premiums (including premiums to the Pension Benefit Guaranty
Corporation) have been paid in full, subject only to normal retrospective
adjustments in the ordinary course. Except as may be noted on the UFB Financial
Statements, UFB and its subsidiaries have no contingent or actual liabilities
under Title IV of ERISA as of June 30, 1994. No accumulated funding deficiency
(within the meaning of Section 302 of ERISA or Section 412 of the Internal
Revenue Code of 1986, as amended (the "Code")) has been incurred with respect to
any of the Employee Plans, whether or not waived, nor does UFB or any of its
affiliates have any liability or potential liability as a result of the
underfunding of, or termination of, or withdrawal from, any plan by UFB or by
any person which may be aggregated with UFB for purposes of Section 412 of the
Code. No reportable event (as defined in Section 4043 of ERISA) has occurred
with respect to any of the Employee Plans as to which a notice would be required
to be filed with the Pension Benefit Guaranty Corporation. No claim is pending,
or to the knowledge of UFB threatened or imminent with respect to any Employee
Plan (other than a routine claim for benefits for which plan administrative
review procedures have not been exhausted) for which UFB or any of its
subsidiaries would be liable after June 30, 1994, except as is reflected on the
UFB Financial Statements. After June 30, 1994, UFB and its subsidiaries have no
liability for excise taxes under Sections 4971, 4975, 4976, 4977, 4979 or 4980B
of the Code or for a fine under Section 502 of ERISA with respect to any
Employee Plan. All Employee Plans have been operated, administered and
maintained in accordance with the terms thereof and in material compliance with
the requirements of all applicable laws, including, without limitation, ERISA.
SECTION 2.14. TITLE TO PROPERTIES; INSURANCE. Except as may be disclosed
in Section 2.14 of the Disclosure Schedule, (i) UFB and its subsidiaries have
marketable title, insurable at standard rates, free and clear of all liens,
charges and encumbrances (except taxes which are a lien but not yet payable and
liens, charges or encumbrances reflected in the UFB Financial Statements and
easements, rights-of-way, and other restrictions which do not have a material
adverse effect on UFB or its subsidiaries, taken as a whole, and further
excepting in the case of Other Real Estate Owned ("O.R.E.O."), as such real
estate is internally classified on the books of UFB or its subsidiaries, rights
of redemption under applicable law) to all of their real properties; (ii) all
leasehold interests for real property and any material personal property used by
UFB and its subsidiaries in their businesses are held pursuant to lease
agreements which are valid and enforceable in accordance with their terms; (iii)
all such properties comply in all material respects with all applicable private
agreements, zoning requirements and other governmental laws and regulations
relating thereto and there are no condemnation proceedings pending or, to the
knowledge of UFB, threatened with respect to such properties; and (iv) UFB and
its subsidiaries have valid title or other ownership rights under licenses to
all material intangible personal or intellectual property used by UFB or its
subsidiaries in their business, free and clear of any claim, defense or right of
any other person or entity which is material to such property, subject only to
rights of the licensors pursuant to applicable license agreements, which rights
do not materially adversely interfere with the use of such property. All
material insurable properties owned or held by UFB and its subsidiaries are
adequately insured by financially sound and reputable insurers in such amounts
and against fire and other risks insured against by extended coverage and public
liability insurance, as is customary with bank and thrift holding companies of
similar size. Section 2.14 of the Disclosure Schedule sets forth, for each
policy of insurance maintained by UFB and its subsidiaries, the amount and type
of insurance, the name of the insurer and the amount of the annual premium.
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SECTION 2.15. ENVIRONMENTAL MATTERS.
(a) As used in this Agreement, "Environmental Laws" means all local, state
and federal environmental, health and safety laws and regulations in all
jurisdictions in which UFB and its subsidiaries have done business or owned,
leased or operated property, including, without limitation, the Federal Resource
Conservation and Recovery Act, the Federal Comprehensive Environmental Response,
Compensation and Liability Act, the Federal Clean Water Act, the Federal Clean
Air Act, and the Federal Occupational Safety and Health Act.
(b) Except as may be disclosed in Section 2.15 of the Disclosure Schedule,
neither the conduct nor operation of UFB or its subsidiaries nor any condition
of any property presently or previously owned, leased or operated by any of them
violates or violated Environmental Laws in any respect material to the business
of UFB and its subsidiaries and no condition has existed or event has occurred
with respect to any of them or any such property that, with notice or the
passage of time, or both, would constitute a violation material to the business
of UFB and its subsidiaries of Environmental Laws or obligate (or potentially
obligate) UFB or its subsidiaries to remedy, stabilize, neutralize or otherwise
alter the environmental condition of any such property where the aggregate cost
of such actions would be material to UFB and its subsidiaries. Except as may be
disclosed in Section 2.15 of the Disclosure Schedule, neither UFB nor any of its
subsidiaries has received any notice from any person or entity that UFB or its
subsidiaries or the operation or condition of any property ever owned, leased or
operated by any of them are or were in violation of any Environmental Laws or
that any of them are responsible (or potentially responsible) for the cleanup or
other remediation of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials at, on or beneath any such property.
SECTION 2.16. COMPLIANCE WITH LAW. UFB and its subsidiaries have all
licenses, franchises, permits and other governmental authorizations that are
legally required to enable them to conduct their respective businesses in all
material respects and are in compliance in all material respects with all
applicable laws and regulations.
SECTION 2.17. BROKERAGE. Except as may be disclosed in Section 2.17 of the
Disclosure Statement, there are no existing claims or agreements for brokerage
commissions, finders' fees, or similar compensation in connection with the
transactions contemplated by this Agreement payable by UFB or its subsidiaries.
SECTION 2.18. NO UNDISCLOSED LIABILITIES. UFB and its subsidiaries do not
have any material liability, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due (and there is no past or present fact,
situation, circumstance, condition or other basis for any present or future
action, suit or proceeding, hearing, charge, complaint, claim or demand against
UFB or its subsidiaries giving rise to any such liability), except (i) for
liabilities set forth in the UFB Financial Statements, (ii) for normal
fluctuations in the amount of the liabilities referred to in clause (i) above
occurring in the ordinary course of business of UFB and its subsidiaries since
the date of the most recent balance sheet included in the UFB Financial
Statements, which such fluctuations in the aggregate are not material to UFB and
its subsidiaries taken as a whole, and (iii) as may be disclosed in Section 2.18
of the Disclosure Schedule.
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SECTION 2.19. PROPERTIES, CONTRACTS AND OTHER AGREEMENTS. Section 2.19 of
the Disclosure Schedule lists or describes the following:
(a) Each parcel of real property owned by UFB or its subsidiaries and the
principal buildings and structures located thereon;
(b) Each lease of real property to which UFB or its subsidiaries is a party,
identifying the parties thereto, the annual rental payable, the term and
expiration date thereof and a brief description of the property covered;
(c) Each loan and credit agreement, conditional sales contract, indenture or
other title retention agreement or security agreement relating to money borrowed
by UFB or its subsidiaries other than Thrift;
(d) Each guaranty by UFB or any of its subsidiaries of any obligation for
the borrowing of money or otherwise (excluding any endorsements and guarantees
in the ordinary course of business and letters of credit issued by Thrift in the
ordinary course of its business) or any warranty or indemnification agreement;
(e) Each agreement between UFB or any of its subsidiaries and any present or
former officer, director or stockholder of UFB or any of its subsidiaries
(except for deposit or loan agreements entered into in the ordinary course of
Thrift's business);
(f) Each lease or license with respect to personal property involving UFB or
any of its subsidiaries, whether as lessee or lessor or licensee or licensor,
with annual rental or other payments due thereunder in excess of $35,000;
(g) The name and annual salary as of September 30, 1994, of each director or
employee of UFB or its subsidiaries with annual compensation in excess of
$30,000 and any employment agreement or arrangement with respect to each such
person; and
(h) Each agreement, loan, contract, lease, guaranty, letter of credit, line
of credit or commitment of UFB or its subsidiaries not referred to elsewhere in
this Section 2.19 which (i) involves payment by UFB or its subsidiaries (other
than as disbursement of loan proceeds to customers) of more than $25,000
annually or in the aggregate unless, in the latter case, such is terminable
within one (1) year without premium or penalty; (ii) involves payments based on
profits of UFB or its subsidiaries; (iii) relates to the future purchase of
goods or services in excess of the requirements of its respective business at
current levels or for normal operating purposes; or (iv) were not made in the
ordinary course of business.
Copies of each document, plan or contract listed and described in Section 2.19
of the Disclosure Schedule are appended to such Schedule and included in the
Disclosure Schedule.
SECTION 2.20. INTERIM EVENTS. Except as disclosed in Section 2.20 of the
Disclosure Schedule, since June 30, 1994, neither UFB nor its subsidiaries has
paid or declared any dividend or made any other distribution to shareholders or
taken any action which if taken after the date of this Agreement would require
the prior written consent of CNB pursuant to Section 4.01(b) hereof.
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SECTION 2.21. NON-BANKING ACTIVITIES. Except as disclosed in Section 2.21
of the Disclosure Schedule, neither UFB nor any of its subsidiaries engages in
or controls, directly or indirectly, any business or activity which is not
listed at 12 C.F.R. (S)225.25.
SECTION 2.22. STATEMENTS TRUE AND CORRECT. None of the information
supplied or to be supplied by UFB or its subsidiaries for inclusion in (i) the
Registration Statement (as defined in Section 4.06 hereof), (ii) the Proxy
Statement/Prospectus (as defined in Section 4.03 hereof) and (iii) any other
documents to be filed with the S.E.C., Nasdaq or any banking or other regulatory
authority in connection with the transactions contemplated hereby, will, at the
respective times such documents are filed, and, in the case of the Registration
Statement, when it becomes effective, and with respect to the Proxy
Statement/Prospectus, when first mailed to the stockholders of UFB and at the
time of the Shareholders' Meeting (as defined in Section 4.03 hereof), contain
any untrue statement of a material fact, or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they are made, not misleading. All documents that UFB
is responsible for filing with the S.E.C. or any other regulatory authority in
connection with the transactions contemplated hereby will comply as to form in
all material respects with the provisions of applicable law and the applicable
rules and regulations thereunder.
ARTICLE THREE
-------------
REPRESENTATIONS OF CNB AND CBI
------------------------------
CNB and CBI hereby make the following representations and warranties:
SECTION 3.01. ORGANIZATION AND CAPITAL STOCK.
(a) CNB is a corporation duly incorporated and validly existing under the
laws of the State of Indiana with full corporate power and authority to carry on
its business as it is now being conducted. CNB is a bank holding company
registered with the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act of 1956, as amended. CBI is a corporation duly
incorporated and validly existing under the laws of the State of Indiana with
full corporate power and authority to carry on its business as it is now being
conducted.
(b) The authorized capital stock of CNB consists of (i) fifty million
(50,000,000) shares of CNB Common, of which, as of October 1, 1994, 12,254,729
shares were issued and outstanding, and (ii) two million (2,000,000) shares of
preferred stock, of which none are issued and outstanding. All of the issued
and outstanding shares of CNB Common are duly and validly issued and outstanding
and are fully paid and non-assessable.
(c) CBI has authorized capital of ten thousand (10,000) shares of common
stock, par value one dollar ($1.00) per share (the "CBI Common"). As of the
date hereof, one thousand (1,000) shares of CBI Common are issued and
outstanding, fully paid and non-assessable and owned by CNB.
(d) The shares of CNB Common that are to be issued to the stockholders of
UFB pursuant to the Merger have been duly authorized and, when so issued in
accordance with the terms of this
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Agreement, will be validly issued and outstanding, fully paid and nonassessable,
with no personal liability attaching to the ownership thereof.
SECTION 3.02. AUTHORIZATION. The Board of Directors of CNB and the Board
of Directors and sole shareholder of CBI have, by all appropriate action,
approved this Agreement and the Merger and authorized the execution hereof on
their behalf by their respective duly authorized officers and the performance by
such respective entity of their obligations hereunder. Nothing in the articles
of incorporation or bylaws of CNB or CBI, as amended, or any other agreement,
instrument, decree, proceeding, law or regulation (except as specifically
referred to in or contemplated by this Agreement) by or to which either of them
or any of their subsidiaries are bound or subject would prohibit or inhibit CNB
or CBI from entering into and consummating this Agreement and the Merger on the
terms and conditions herein contained. This Agreement has been duly and validly
executed and delivered by CNB and CBI and constitutes a legal, valid and binding
obligation of CNB and CBI, enforceable against CNB and CBI in accordance with
its terms and no other corporate acts or proceedings are required to be taken by
CNB or CBI (including any approvals by the shareholders of CNB or further
approval of the shareholder of CBI) to authorize the execution, delivery and
performance of this Agreement. Except for the requisite approvals of the Office
of the Comptroller of the Currency (the "O.C.C.") and notice to be filed with
the Office of Thrift Supervision (the "O.T.S."), no notice to, filing with,
authorization by, or consent or approval of, any federal or state bank
regulatory authority is necessary for the execution and delivery of this
Agreement or consummation of the Merger by CNB or CBI.
SECTION 3.03. SUBSIDIARIES. Each of CNB's significant subsidiaries (as
such term is defined under S.E.C. regulations) and CBI is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power to own its respective properties and
assets, to incur its respective liabilities and to carry on its respective
business as now being conducted. All of the outstanding shares of Capital stock
of each significant subsidiary of CNB and of CBI are owned by CNB, directly or
indirectly, free and clear of any material liens, encumbrances, or security
interests of third parties. All of the issued and outstanding shares of each
significant subsidiary and of CBI are duly and validly issued and outstanding
and fully paid and non-assessable.
SECTION 3.04. FINANCIAL INFORMATION. The consolidated balance sheets of
CNB and its subsidiaries as of December 31, 1992 and 1993 and related
consolidated statements of income, changes in stockholders' equity and cash
flows for the three (3) years ended December 31, 1993, together with the notes
thereto, included in CNB's Form 10-K for the year ended December 31, 1993, as
currently on file with the S.E.C., and the unaudited consolidated balance sheets
of CNB and its subsidiaries as of March 31, 1994, June 30, 1994 and September
30, 1994 and the related unaudited consolidated income statements and statements
of changes in shareholders' equity and cash flows for the three (3) months, six
(6) months and nine (9) months, respectively, then ended included in CNB's
Quarterly Reports on Form 10-Q for the quarters then ended, as currently on file
with the S.E.C. (together, the "CNB Financial Statements"), have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis (except as may be disclosed therein) and fairly present in all
material respects the consolidated financial position and the consolidated
results of operations, changes in stockholders' equity and cash flows of CNB and
its consolidated subsidiaries as of the dates and for the periods indicated
(subject, in the case of interim financial statements, to normal recurring year-
end adjustments, none of which will be material).
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SECTION 3.05. ABSENCE OF CHANGES. Since December 31, 1993, there has not
been any material adverse change in the financial condition, the results of
operations or the business or prospects of CNB and its subsidiaries taken as a
whole, nor have there been any events or transactions having such a material
adverse effect which should be disclosed in order to make the CNB Financial
Statements not misleading.
SECTION 3.06. LITIGATION. There is no litigation, claim or other
proceeding pending or, to the knowledge of CNB, threatened, against CNB or any
of its subsidiaries, or of which the property of CNB or any of its subsidiaries
is or would be subject which would have a material adverse effect on the
business of CNB and its subsidiaries taken as a whole.
SECTION 3.07. REPORTS. CNB and each of its significant subsidiaries has
filed all material reports and statements, together with any amendments required
to be made with respect thereto, that it was required to file with (i) the
S.E.C., (ii) the Federal Reserve Board, (iii) the "O.C.C.", (iv) the F.D.I.C.,
(v) any applicable state securities or banking authorities having jurisdiction,
(vi) Nasdaq, and (vii) any other governmental authority with jurisdiction over
CNB or any of its significant subsidiaries. As of their respective dates, each
of such reports and documents, as amended, including the financial statements,
exhibits and schedules thereto, complied in all material respects with the
relevant statutes, rules and regulations enforced or promulgated by the
regulatory authority with which they were filed, and did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
SECTION 3.08. COMPLIANCE WITH LAW. CNB and its significant subsidiaries
have all licenses, franchises, permits and other governmental authorizations
that are legally required to enable them to conduct their respective businesses
in all material respects and are in compliance in all material respects with all
applicable laws and regulations.
SECTION 3.09. STATEMENTS TRUE AND CORRECT. None of the information
supplied or to be supplied by CNB or CBI for inclusion in (i) the Registration
Statement, (ii) the Proxy Statement/Prospectus and (iii) any other documents to
be filed with the S.E.C., Nasdaq or any banking or other regulatory authority in
connection with the transactions contemplated hereby, will, at the respective
times such documents are filed, and, in the case of the Registration Statement,
when it becomes effective, and with respect to the Proxy Statement/Prospectus,
when first mailed to the stockholders of UFB and at the time of the
Shareholders' Meeting, contain any untrue statement of a material fact, or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they are made, not
misleading. All documents that CNB is responsible for filing with the S.E.C.,
Nasdaq or any other regulatory authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable law and any rules and regulations thereunder.
SECTION 3.10. REGULATORY ENFORCEMENT MATTERS. Neither CNB nor any of its
subsidiaries is subject to, or has received any notice or advice that it may
become subject to, any order, agreement or memorandum of understanding with any
federal or state agency charged with the supervision or regulation of banks or
bank holding companies or engaged in the insurance of bank or thrift deposits or
any other governmental agency having supervisory or regulatory authority with
respect to CNB or any of its subsidiaries which is materially adverse to CNB and
its subsidiaries taken as a whole.
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SECTION 3.11. UNDISCLOSED LIABILITIES. CNB and its subsidiaries have no
material liability, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due (and there is no past or present fact,
situation, circumstance, condition or other basis for any present or future
action, suit or proceeding, hearing, charge, complaint, claim or demand against
CNB or any subsidiary giving rise to any such liability), except (i) for
liabilities set forth in the CNB Financial Statements, and (ii) for liabilities
of the same type and character as those set forth in the CNB Financial
Statements which have been incurred in the ordinary course of business since the
date of the most recent balance sheet included therein, and (iii) for any
liabilities under or in connection with this Agreement or any other agreements
pursuant to which CNB would acquire control of a bank holding company, bank,
thrift or other institution (whether entered into before or after the date of
this Agreement).
ARTICLE FOUR
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AGREEMENTS OF UFB
-----------------
SECTION 4.01. BUSINESS IN ORDINARY COURSE.
(a) UFB shall not declare or pay any dividend or make any other distribution
to shareholders, whether in cash, stock or other property, after the date of
this Agreement, except that UFB may declare and pay its regular quarterly
dividend on the UFB Common not to exceed $0.15 per share at approximately the
same time during each quarter which it has historically declared and paid such
dividend; provided, however, that UFB and CNB shall cooperate with each other to
coordinate the record and payment dates of their respective dividends for the
quarter in which the Effective Time occurs such that the UFB shareholders shall
receive a quarterly dividend from either UFB or CNB but not from both with
respect to such quarter.
(b) UFB shall, and shall cause each of its subsidiaries to, continue to
carry on after the date hereof its respective business and the discharge or
incurrence of obligations and liabilities, only in the usual, regular and
ordinary course of business, as heretofore conducted, and by way of
amplification and not limitation, UFB and each of its subsidiaries will not,
without the prior written consent of CNB (which shall not be unreasonably
withheld):
(i) issue any UFB Common or other capital stock or any options,
warrants, or other rights to subscribe for or purchase UFB Common or any
other capital stock or any securities convertible into or exchangeable for
any capital stock of UFB or any of its subsidiaries (except for the issuance
of UFB Common pursuant to the valid exercise of UFB Stock Options (as
defined in Section 5.04 hereof) which are outstanding on the date of this
Agreement); or
(ii) directly or indirectly redeem, purchase or otherwise acquire
any UFB Common or any other capital stock of UFB or its subsidiaries; or
(iii) effect a reclassification, recapitalization, splitup,
exchange of shares, readjustment or other similar change in or to any
capital stock or otherwise reorganize or recapitalize; or
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(iv) change its certificate or articles of incorporation or
association or charter, as the case may be, or bylaws; or
(v) grant any increase, other than ordinary and normal increases
consistent with past practices, in the compensation payable or to become
payable to officers or salaried employees, grant any stock options or,
except as required by law or as provided in Section 5.10 hereof, adopt or
make any change in any bonus, insurance, pension, or other Employee Plan,
agreement, payment or arrangement made to, for or with any of such officers
or employees (provided, however, that if the Merger is not closed before
October 1, 1995, the Board of Directors of Thrift, in its sole discretion,
may thereafter extend for one year any one or more of the Employment
Agreements with each of Donald A. Rausch, Ennis R. Griffith, Terry G.
Johnston, and Paul E. Wargel and the Special Termination Agreements with
Steven E. Fowler and J. Ray Justice); or
(vi) borrow or agree to borrow any amount of funds except Federal
Home Loan Bank borrowings and other borrowings in the ordinary course of
business (except that no such borrowings shall be for the purpose of funding
the acquisition of investment securities, even if in the ordinary course of
business), or directly or indirectly guarantee or agree to guarantee any
obligations of others (for purposes of this subsection (vi), borrowing or
agreeing to borrow funds for the purpose of purchasing investment securities
shall not be deemed to be in the ordinary course of business); or
(vii) make or commit to make any new loan or letter of credit or
any new or additional discretionary advance under any existing line of
credit, in principal amounts in excess of $350,000 or that would increase
the aggregate credit outstanding to any one borrower (or group of affiliated
borrowers) to more than $350,000 (excluding for this purpose any accrued
interest), without the prior written consent of CNB, acting through its
Chief Credit Officer or such other designee as CNB may give notice of to
UFB; or
(viii) purchase or otherwise acquire any investment security for
its own account having an average remaining life to maturity greater than
five (5) years or any asset-backed securities other than those issued or
guaranteed by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation
(and UFB shall consult and confer with CNB with respect to all securities
transactions, even in situations where approval is not required hereunder);
or
(ix) increase or decrease the rate of interest paid by Thrift on
any deposit product, including without limitation on certificates of
deposit, except in a manner and pursuant to policies consistent with past
practices; provided, however, that, notwithstanding the foregoing, in no
event shall UFB permit Thrift to pay a rate of interest on any deposit
product which is more than the greater of (i) one-quarter of one percent
(0.0025) above the average of the rates paid on comparable deposit products
by the five (5) highest deposit interest paying banks or other thrifts
located in the market in which such deposit product is offered by Thrift
(or, if fewer than five (5) banks and other thrifts are located in such
market, the average of the rates paid by all banks and other thrifts located
in such market) or (ii) the rate paid by a subsidiary of CNB, if any, in the
market in which such deposit product is offered by Thrift. Thrift shall
determine and document
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its compliance with the provisions of this subsection (ix) each Tuesday or
whenever Thrift otherwise changes the rates paid on its deposit products; or
(x) enter into any agreement, contract or commitment out of the
ordinary course of business or having a term in excess of three (3) months
and involving an aggregate expenditure or commitment of more than $25,000
other than letters of credit, loan agreements, deposit agreements, and other
lending, credit and deposit agreements and documents made in the ordinary
course of business; or
(xi) except in the ordinary course of business, place on any of its
assets or properties any mortgage, pledge, lien, charge, or other
encumbrance; or
(xii) except in the ordinary course of business, cancel or
accelerate any material indebtedness owing to UFB or its subsidiaries or any
claims which UFB or its subsidiaries may possess or waive any material
rights of substantial value; or
(xiii) sell or otherwise dispose of any real property or any
material amount of any tangible or intangible personal property other than
OREO or other properties acquired in foreclosure or otherwise in the
ordinary collection of indebtedness to UFB and its subsidiaries and other
than loans held-for-sale sold in the ordinary course of Thrift's business;
or
(xiv) foreclose upon or otherwise take title to or possession or
control of any real property without first obtaining a phase one
environmental report thereon which indicates that the property is free of
pollutants, contaminants or hazardous or toxic waste materials; provided,
however, that UFB and its subsidiaries shall not be required to obtain such
a report with respect to single family, non-agricultural residential
property of one acre or less to be foreclosed upon unless it has reason to
believe that such property might contain any such waste materials or
otherwise might be contaminated; or
(xv) commit any act or fail to do any act which will cause a breach
of any agreement, contract or commitment and which will have a material
adverse effect on UFB's and its subsidiaries' business, financial condition,
or earnings; or
(xvi) violate any law, statute, rule, governmental regulation, or
order, which violation might have a material adverse effect on UFB's and its
subsidiaries' business, financial condition, or earnings; or
(xvii) purchase any real or personal property or make any other
capital expenditure where the amount paid or committed therefor is in excess
of $50,000.
(c) UFB and its subsidiaries shall not, without the prior written consent of
CNB, engage in any transaction or take any action that would render untrue in
any material respect any of the representations and warranties of UFB contained
in Article Two hereof, if such representations and warranties were given as of
the date of such transaction or action.
(d) UFB shall promptly notify CNB in writing of the occurrence of any matter
or event known to and directly involving UFB, which would not include any
changes in conditions that affect the banking
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industry generally, that is materially adverse to the business, operations,
properties, assets, or condition (financial or otherwise) of UFB and its
subsidiaries taken as a whole.
(e) UFB shall not, on or before the earlier of the Closing Date or the date
of termination of this Agreement, solicit or encourage, or, subject to the
fiduciary duties of its directors as advised by counsel and UFB's investment
banker, hold discussions or negotiations with or provide any information to, any
person in connection with, any proposal from any person for the acquisition of
all or any substantial portion of the business, assets, shares of UFB Common or
other securities of UFB and its subsidiaries. UFB shall promptly (which for
this purpose shall mean within twenty-four hours) advise CNB of its receipt of
any such proposal or inquiry concerning any possible such proposal, the
substance of such proposal or inquiry, and the identity of such person.
SECTION 4.02. BREACHES. UFB shall, in the event it has knowledge of the
occurrence, or impending or threatened occurrence, of any event or condition
which would cause or constitute a breach (or would have caused or constituted a
breach had such event occurred or been known prior to the date hereof) of any of
its representations or agreements contained or referred to herein, give prompt
written notice thereof to CNB and use its best efforts to prevent or promptly
remedy the same.
SECTION 4.03. SUBMISSION TO SHAREHOLDERS. UFB shall cause to be duly
called and held, on a date mutually selected by CNB and UFB, a special meeting
of the shareholders of UFB (the "Shareholders' Meeting") for submission of (a)
this Agreement, and (b) the Merger for approval of such shareholders as required
by the Delaware Corporate Law. In connection with the Shareholders' Meeting,
(i) UFB shall cooperate and assist CNB in preparing and filing a Proxy
Statement/Prospectus (the "Proxy Statement/Prospectus") with the S.E.C. and UFB
shall mail it to its shareholders, (ii) UFB shall furnish CNB all information
concerning itself that CNB may reasonably request in connection with such Proxy
Statement/Prospectus, and (iii) the Board of Directors of UFB shall (subject to
compliance with its fiduciary duties as advised by counsel and to the receipt by
UFB's Board of Directors of the fairness opinion required by Section 6.02(e)
hereof) recommend to its shareholders the approval of this Agreement and the
Merger, and use its best efforts to obtain such shareholder approvals.
SECTION 4.04. CONSENTS TO CONTRACTS AND LEASES. UFB shall use its best
efforts to obtain all necessary consents with respect to all interests of UFB
and its subsidiaries in any material leases, licenses, contracts, instruments
and rights which require the consent of another person for their transfer or
assumption pursuant to the Merger, if any.
SECTION 4.05. CONFORMING ACCOUNTING AND RESERVE POLICIES; RESTRUCTURING
EXPENSES.
(a) Notwithstanding that UFB believes that it and its subsidiaries have
established all reserves and taken all provisions for possible loan losses
required by generally accepted accounting principles and applicable laws, rules
and regulations, UFB recognizes that CNB may have adopted different loan,
accrual and reserve policies (including loan classifications and levels of
reserves for possible loan losses). From and after the date of this Agreement
to the Effective Time, UFB and CNB shall consult and cooperate with each other
with respect to conforming, as reasonably specified in a written notice from CNB
to UFB, based upon such consultation and as hereinafter provided, the loan,
accrual and reserve policies of UFB and its subsidiaries to those policies of
CNB.
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(b) In addition, from and after the date of this Agreement to the Effective
Time, UFB and CNB shall consult and cooperate with each other with respect to
determining, as specified in a written notice from CNB to UFB, based upon such
consultation and as hereinafter provided, appropriate and reasonable accruals,
reserves and charges to establish and take in respect of excess equipment write-
off or write-down of various assets, severance costs, litigation matters,
additional provision for warranty expense, recapture of untaxed bad debt reserve
and other appropriate and reasonable charges and accounting adjustments taking
into account the parties' business plans following the Merger.
(c) UFB and CNB shall consult and cooperate with each other with respect to
determining, as specified in a written notice from CNB to UFB, based upon such
consultation and as hereinafter provided, the amount and the timing for
recognizing for financial accounting purposes the expenses of the Merger and the
restructuring charges related to or to be incurred in connection with the
Merger.
(d) At the request of CNB, UFB shall establish and take, on or before or as
of December 31, 1994, such reserves and accruals as CNB shall reasonably request
to conform UFB's loan, accrual and reserve policies to CNB's policies, shall
establish and take such accruals, reserves and charges in order to implement
such policies in respect of excess facilities and equipment capacity, severance
costs, litigation matters, write-off or write-down of various assets, additional
provision for warranty expense, recapture of untaxed bad debt reserve and other
appropriate accounting adjustments, and to recognize for financial accounting
purposes such expenses of the Merger and restructuring charges related to or to
be incurred in connection with the Merger; provided, however, that UFB shall not
be required to take any such action that is not consistent with generally
accepted accounting principles.
SECTION 4.06. CONSUMMATION OF AGREEMENT. UFB shall use its best efforts to
perform and fulfill all conditions and obligations on its part to be performed
or fulfilled under this Agreement, to effect the Merger and the other
transactions contemplated hereby in accordance with the terms and provisions
hereof and to facilitate and effectuate the transition and integration of the
business and operations of UFB and its subsidiaries with the business and
operations of CNB and its subsidiaries. By way of amplification, and not
limitation, of the foregoing agreements of UFB, UFB shall cooperate with CNB as
reasonably appropriate under the circumstances to facilitate and effectuate the
conversion, as of the Effective Time, of its data processing system as requested
by CNB. UFB shall furnish to CNB in a timely manner all information, data and
documents in the possession of UFB requested by CNB as may be required to obtain
any necessary regulatory or other approvals of the Merger or to file with the
S.E.C. a registration statement on Form S-4 (the "Registration Statement")
relating to the shares of CNB Common to be issued to the shareholders of UFB
pursuant to the Merger and this Agreement and shall otherwise cooperate fully
with CNB to carry out the purpose and intent of this Agreement.
SECTION 4.07. ENVIRONMENTAL REPORTS. UFB shall provide to CNB, as soon as
reasonably practical, but not later than forty-five (45) days after the date
hereof, a report of a phase one environmental investigation on all real property
owned, leased or operated by UFB or its subsidiaries as of the date hereof (but
excluding space in retail and similar establishments leased by UFB for automatic
teller machines or bank branch facilities where the space leased comprises less
than 15% of the total space leased to all tenants of such property) and within
ten (10) days after the acquisition or lease of any real property acquired or
leased by UFB or its subsidiaries after the date hereof (but excluding space in
retail and similar establishments leased by UFB for automatic teller machines or
bank branch facilities where the space leased comprises less than 15% of the
total space leased to all tenants of such property), except as otherwise
provided in Section 4.01(b)(xiv) hereof. If required by the phase one
investigation in CNB's
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reasonable opinion, UFB shall provide to CNB a report of a phase two
investigation on properties requiring such additional study. CNB shall have
fifteen (15) business days from the receipt of any such phase two investigation
report to notify UFB of any dissatisfaction with the contents of such report.
Should the cost of taking all remedial or other corrective actions and measures
(i) required by applicable law, or (ii) recommended or suggested by such report
or reports or prudent in light of serious life, health or safety concerns, in
the aggregate, exceed the sum of $250,000 as reasonably estimated by an
environmental expert retained for such purpose by CNB and reasonably acceptable
to UFB, or if the cost of such actions and measures cannot be so reasonably
estimated by such expert to be such amount or less with any reasonable degree of
certainty, then CNB shall have the right pursuant to Section 7.03 hereof, for a
period of fifteen (15) business days following receipt of such estimate or
indication that the cost of such actions and measures can not be so reasonably
estimated, to terminate this Agreement, which shall be CNB's sole remedy in such
event.
SECTION 4.08. RESTRICTION ON RESALES. UFB shall obtain and deliver to CNB,
at least thirty-one (31) days prior to the Closing Date, the signed agreement,
in the form of Exhibit 4.08 hereto, of each person who may reasonably be deemed
an "affiliate" of UFB within the meaning of such term as used in Rule 145 under
the Securities Act of 1933, as amended (the "Securities Act"), regarding (i)
compliance with the provisions of such Rule 145, and (ii) compliance with the
requirements of Accounting Principles Board Opinion No. 16 regarding the
disposition of shares of UFB Common or CNB Common (or reduction of risk with
respect thereto) until such time as financial results covering at least thirty
(30) days of post-Merger combined operations have been published.
SECTION 4.09. ACCESS TO INFORMATION. UFB shall permit CNB reasonable
access in a manner which will avoid undue disruption or interference with UFB's
normal operations to its properties and shall disclose and make available to CNB
all books, documents, papers and records relating to its assets, stock,
ownership, properties, operations, obligations and liabilities, including, but
not limited to, all books of account (including the general ledger), tax
records, minute books of directors' and stockholders' meetings, organizational
documents, material contracts and agreements, loan files, filings with any
regulatory authority, accountants' workpapers (if available and subject to the
respective independent accountants' consent), litigation files (but only to the
extent that such review would not result in a material waiver of the attorney-
client or attorney work product privileges under the rules of evidence), plans
affecting employees, and any other business activities or prospects in which CNB
may have a reasonable and legitimate interest in furtherance of the transactions
contemplated by this Agreement. CNB will hold any such information which is
nonpublic in confidence in accordance with the provisions of Section 8.01
hereof.
SECTION 4.10. SUBSIDIARY BANK MERGER, BRANCH TRANSFER AND BRANCH CLOSING
TRANSACTIONS. Upon the request of CNB, UFB shall cause Thrift to enter into (i)
a merger agreement (the "Evansville Merger Agreement") with The Citizens
National Bank of Evansville ("Citizens Bank"), a wholly-owned subsidiary of CBI,
providing for the merger (the "Evansville Bank Merger") of Thrift with and into
Citizens Bank, and take all other actions and cooperate with CNB in causing the
Evansville Bank Merger to be effected, including without limitation, causing
Thrift to join Citizens Bank in the filing of all regulatory applications
required to consummate the Evansville Bank Merger; (ii) a purchase and
assumption agreement (the "Jasper P&A Agreement") with Citizens Bank of Jasper,
a wholly-owned subsidiary of CNB located in Jasper, Indiana ("CNB-Jasper"),
providing for the purchase and assumption (the "Jasper P&A") by CNB-Jasper of
the branch office of Thrift located in Jasper, Indiana, and take all other
actions and cooperate with CNB in causing the Jasper P&A to be effected,
including without
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limitation, causing Thrift to join CNB-Jasper in the filing of all regulatory
applications required to consummate the Jasper P&A; (iii) a purchase and
assumption agreement (the "Illinois P&A Agreement") with a wholly-owned
subsidiary of CNB located in Illinois ("CNB-Illinois"), providing for the
purchase and assumption (the "Illinois P&A") by CNB-Illinois of the branch
office of Thrift located in Mt. Carmel, Illinois, and take all other actions and
cooperate with CNB in causing the Illinois P&A to be effected, including without
limitation, causing Thrift to join CNB-Illinois in the filing of all regulatory
applications required to consummate the Illinois P&A; and (iv) a purchase and
assumption agreement (the "Kentucky P&A Agreement") with Citizens Bank of
Kentucky, a wholly-owned subsidiary of CNB located in Kentucky ("CNB-Kentucky"),
providing for the purchase and assumption (the "Kentucky P&A") by CNB-Kentucky
of the branch office of Thrift located in Henderson, Kentucky, and take all
other actions and cooperate with CNB in causing the Kentucky P&A to be effected,
including without limitation, causing Thrift to join CNB-Kentucky in the filing
of all regulatory applications required to consummate the Kentucky P&A. The
Evansville Merger Agreement, the Jasper P&A Agreement, the Illinois P&A
Agreement and the Kentucky P&A Agreement (collectively, the "Subsidiary
Reorganization Agreements") shall provide, in addition to other terms agreeable
to the parties, (a) for the consummation of the Jasper P&A, the Illinois P&A and
the Kentucky P&A immediately prior to the consummation of the Evansville Bank
Merger; and (b) that the obligations of the parties thereunder are conditioned
on the concurrent consummation of the Merger pursuant to this Agreement. UFB
shall cooperate with CNB in planning for and taking all actions necessary to
effect the closing of any branch of Thrift which, at CNB's discretion, is to
occur at or shortly after consummation of the Merger, including making any
necessary regulatory filings and giving any required notices in connection with
such branch closing.
SECTION 4.11. EXPENSE REPORT. UFB shall submit to CNB, not later than
fifteen (15) days after the end of each month, a monthly report (in a form and
with such specificity as is reasonably satisfactory to CNB) detailing all
expenditures resulting from the extraordinary, non-recurring costs associated
with the transactions contemplated by this Agreement, including but not limited
to legal and accounting fees, which have been incurred or otherwise accrued by
UFB during the preceding month.
ARTICLE FIVE
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AGREEMENTS OF CNB AND CBI
-------------------------
SECTION 5.01. REGULATORY APPROVALS AND REGISTRATION STATEMENT. CNB shall
file all regulatory applications required in order to consummate the Merger, the
Evansville Bank Merger, the Jasper P&A, the Illinois P&A and the Kentucky P&A.
CNB shall keep UFB reasonably informed as to the status of such applications and
make available to UFB, upon reasonable request by UFB from time to time, copies
of such applications and any supplementally filed materials. CNB shall file
with the S.E.C. the Registration Statement relating to the shares of CNB Common
to be issued to the shareholders of UFB pursuant to this Agreement, and shall
use its best efforts to cause the Registration Statement to become effective.
At the time the Registration Statement becomes effective, the Registration
Statement shall comply in all material respects with the provisions of the
Securities Act and the published rules and regulations thereunder, and shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
false or misleading, and at the time of mailing thereof to the shareholders of
UFB, at the time of the Shareholders' Meeting and at the Effective Time the
Proxy Statement/Prospectus included as part of the Registration Statement, as
amended or supplemented by any amendment or supplement, shall not contain
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any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not false or misleading. CNB shall
timely file all documents required to obtain all necessary Blue Sky permits and
approvals, if any, required to carry out the transactions contemplated by this
Agreement, shall pay all expenses incident thereto and shall use its best
efforts to obtain such permits and approvals on a timely basis. CNB shall
promptly and properly prepare and file (i) any application required to list on
Nasdaq the shares of CNB Common to be issued pursuant to the Merger, and (ii)
any filings required under the Securities Exchange Act of 1934 (the "Exchange
Act") relating to the Merger and the transactions contemplated herein.
SECTION 5.02. BREACHES. CNB shall, in the event it has knowledge of the
occurrence, or impending or threatened occurrence, of any event or condition
which would cause or constitute a breach (or would have caused or constituted a
breach had such event occurred or been known prior to the date hereof) of any of
its representations or agreements contained or referred to herein, give prompt
written notice thereof to UFB and use its best efforts to prevent or promptly
remedy the same.
SECTION 5.03. CONSUMMATION OF AGREEMENT. CNB and CBI shall use their
respective best efforts to perform and fulfill all conditions and obligations on
their part to be performed or fulfilled under this Agreement and to effect the
Merger in accordance with the terms and conditions of this Agreement.
SECTION 5.04. STOCK OPTIONS.
(a) At the Effective Time, each outstanding option to purchase shares of UFB
Common (a "UFB Stock Option") issued pursuant to the Stock Option and Incentive
Plan of UFB (the "UFB Stock Option Plan") whether or not exercisable or vested,
shall be assumed by CNB as hereinafter provided. Each UFB Stock Option shall be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such UFB Stock Option, the same number of full shares of
CNB Common as the holder of such UFB Stock Option would have been entitled to
receive pursuant to the Merger had such holder exercised such option in full
immediately prior to the Effective Time, at a price per share equal to (y) the
aggregate exercise price for UFB Common otherwise purchasable pursuant to such
UFB Stock Option divided by (z) the number of full shares of CNB Common deemed
purchasable pursuant to such UFB Stock Option. In no event shall CNB be
required to issue fractional shares of CNB Common.
(b) As soon as practicable after the Effective Time, CNB shall deliver to
each holder of UFB Stock Options appropriate notices setting forth such holders'
rights pursuant to the UFB Stock Option Plan, and the agreements evidencing the
grants of such UFB Stock Options shall continue in effect on the same terms and
conditions (subject to the conversion required by this Section 5.04 after giving
effect to the Merger and the assumption by CNB as set forth above). To the
extent necessary to effectuate the provisions of this Section 5.04, CNB may
deliver new or amended agreements reflecting the terms of each UFB Stock Option
assumed by CNB and amend the UFB Stock Option Plan to reflect the terms hereof.
(c) As soon as practicable after the Effective Time, CNB shall file with the
S.E.C. a registration statement on an appropriate form with respect to the
shares of CNB Common subject to such options and shall use its best efforts to
maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
with respect thereto) for so long as such options remain outstanding.
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SECTION 5.05. DIRECTORS AND OFFICERS' LIABILITY INSURANCE AND
INDEMNIFICATION.
(a) Following the Effective Time, CNB will provide the directors and
officers of UFB and its subsidiaries with the same directors' and officers'
liability insurance coverage that CNB provides to directors and officers of its
other banking subsidiaries generally. CNB shall use its best efforts (which
shall not be deemed to require, however, the payment of any special premium or
other charge or expense) to obtain an endorsement to its directors' and
officers' liability insurance policy to cover acts and omissions of the
directors and officers of UFB and its subsidiaries occurring or failing to occur
prior to the Closing Date; provided, however, that if CNB is unable to obtain
such endorsement, then UFB may purchase tail coverage under its existing
director's and officer's liability insurance on such terms and provisions as UFB
deems appropriate provided the premium therefor shall not exceed $25,000.
(b) For six (6) years after the Effective Time, CNB shall cause the
Surviving Corporation (the survivor of the Merger of UFB and CBI following the
Effective Time, the "Surviving Corporation") to indemnify, defend and hold
harmless the present and former officers, directors, employees and agents of UFB
and its subsidiaries (each, an "Indemnified Party") against all losses, expenses
(including attorneys' fees), claims, damages or liabilities arising out of
actions or omissions occurring on or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement) to the full
extent then permitted under the Delaware Corporate Law and by UFB's Articles of
Incorporation as in effect on the date hereof, including provisions relating to
advances of expenses incurred in the defense of any action or suit.
(c) If after the Effective Time the Surviving Corporation or any of its
successors or assigns (i) shall consolidate with or merge into any other
corporation or entity and shall not be the continuing or surviving corporation
or entity of such consolidation or merger or (ii) shall transfer all or
substantially all of its properties and assets to any individual, corporation or
other entity, then and in each such case, proper provision shall be made so that
the successors and assigns of the Surviving Corporation shall assume any
remaining obligations set forth in this Section 5.05. If the Surviving
Corporation shall liquidate, dissolve or otherwise wind up its business, then
CNB shall indemnify, defend and hold harmless each Indemnified Party to the same
extent and on the same terms that the Surviving Corporation was so obligated
pursuant to this Section 5.05.
SECTION 5.06. EMPLOYEE BENEFITS. (a) Generally. CNB shall, with respect
to each person who remains an employee of UFB or its subsidiaries following the
Closing Date (each a "Continued Employee"), provide the benefits described in
this Section 5.06. Subject to the right of subsequent amendment or termination
in CNB's discretion (assuming any such amendment applies to CNB employees
generally), each Continued Employee shall be entitled, as a new employee of a
subsidiary of CNB, to participate in such employee benefit plans, as defined in
Section 3(3) of ERISA, or any non-qualified employee benefit plans or deferred
compensation, stock option, bonus or incentive plans, or other employee benefit
or fringe benefit programs of CNB or its subsidiaries on substantially the same
terms and conditions offered to similarly situated employees of CNB or its
subsidiaries (the "CNB Plans"), if such Continued Employee shall be eligible for
participation therein and otherwise shall not be participating in a similar plan
maintained by UFB after the Effective Time. All such participation shall be
subject to such terms of such plans as may be in effect from time to time and
this Section 5.06 is not intended to give Continued Employees any rights or
privileges superior to those of other employees of CNB subsidiaries. CNB may
terminate or modify all Employee Plans except insofar as benefits thereunder
shall have vested on the Closing Date and cannot be modified and CNB's
obligation under this
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Section 5.06 shall not be deemed or construed so as to provide duplication of
similar benefits but, subject to that qualification, CNB shall, for purposes of
vesting and any age or period of service requirements for commencement of
participation with respect to any CNB Plans in which Continued Employees may
participate, credit each Continued Employee with his or her term of service with
UFB and its subsidiaries.
(b) Consulting Agreement. Upon Mr. Rausch's retirement in February 1996,
CNB shall enter into a consulting agreement, reviewable annually, with Donald A.
Rausch on mutually agreeable terms providing for annual consulting fees of
$40,000.
(c) Supplemental Executive Retirement Plan. As a result of the Merger, at
the Effective Time CBI shall assume all obligations, duties and liabilities of
UFB under the Supplemental Executive Retirement Plan established by UFB for the
benefit of Donald A. Rausch on March 19, 1991, as amended effective January 1,
1994.
(d) Directors. Following the Effective Time, CNB agrees to cause the
directors of UFB who are under age 70 to be elected to the Board of Citizens
Bank or the board of another CNB bank subsidiary, if more appropriate and agreed
to by CNB and such director.
(e) ESOP. The UF Bancorp, Inc. Employee Stock Ownership Plan and related
Trust Agreement (the "ESOP") shall be terminated on or after the Effective Time.
All participants with an account balance under the ESOP shall become fully
vested in such accounts as of the date of such termination. Participants'
benefits under the ESOP shall be distributed, in connection with the ESOP
termination, in a single lump sum or by direct rollover to the Citizens
Incentive Savings Plan or an individual retirement account.
(f) Directors Deferred Compensation Plan. The deferral of directors' fees
under the Directors Deferred Compensation Master Agreement dated August 1, 1993,
and Joinder Agreements signed pursuant thereto will cease as of or after the
Effective Time. Any director fees held in accounts under such plan shall
continue to be held under the plan and accrue interest as provided in such plan.
Citizens Bank, as a result of the Merger, shall assume all obligations, duties
and liabilities of Thrift under such Plan.
(g) Employment Agreements. As a result of the Merger, at the Effective
Time, Citizens Bank shall assume, and CBI shall guarantee such assumption of,
all duties, liabilities and obligations of Thrift which may exist at that time
under the Employment Agreements between Thrift and each of Donald A. Rausch,
Ennis R. Griffith, Terry G. Johnston and Paul E. Wargel, and the Special
Termination Agreements between Thrift and each of Steven E. Fowler and J. Ray
Justice.
SECTION 5.07. ACCESS TO INFORMATION. CNB shall permit UFB reasonable
access in a manner which will avoid undue disruption or interference with CNB's
normal operations to its properties and shall disclose and make available to UFB
all books, documents, papers and records relating to its assets, stock,
ownership, properties, operations, obligations and liabilities, including, but
not limited to, all books of account (including the general ledger), tax
records, minute books of directors' and stockholders' meetings, organizational
documents, material contracts and agreements, loan files, filings with any
regulatory authority, accountants' workpapers (if available and subject to the
respective independent accountants' consent), litigation files (but only to the
extent that such review would not result in a
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material waiver of the attorney-client or attorney work product privileges under
the rules of evidence), plans affecting employees, and any other business
activities or prospects in which UFB may have a reasonable and legitimate
interest in furtherance of the transactions contemplated by this Agreement. UFB
will hold any such information which is nonpublic in confidence in accordance
with the provisions of Section 8.01 hereof.
SECTION 5.08. AUTHORIZATION OF CNB COMMON. The Board of Directors of CNB
shall, prior to the Effective Time, authorize the issuance of the required
number of shares of CNB Common to be issued pursuant to this Agreement, shall
cause such shares to be issued in the Merger to be approved for inclusion on the
Nasdaq, subject to official notice of issuance, and take all other necessary
corporate action to consummate the Merger contemplated hereby.
SECTION 5.09. TAX-FREE REORGANIZATION. CNB and CBI shall take no actions
following the Effective Time which would cause the Merger to lose its status as
a reorganization described in (S)368(a)(2)(D) of the Code. To that end, CBI or
its subsidiaries will continue at least one historic business line of Thrift, or
use at least a significant portion of Thrift's historic business assets in a
business, in each case within the meaning of Treas. Reg. (S)1.368-1(d).
SECTION 5.10. RESTRICTED SHARES. Thrift's Recognition and Retention Plan
and Trust (the "Plan"), which holds 22,242 shares of UFB Common as of the date
hereof, shall be assumed by Citizens Bank and CNB at the Effective Time and
shares of CNB Common, determined by applying the Conversion Ratio to the UFB
Common held in the Plan at the Effective Time, shall be substituted for shares
of UFB Common held in the Plan at the Effective Time, subject to the same
transfer restrictions and other terms and conditions to which such share awards
were subject at the Effective Time.
SECTION 5.11. ACCOUNTING AND REGULATORY MATTERS. Neither CNB nor any of
CNB's significant subsidiaries has taken or will intentionally take any action
that would (i) prevent the transactions contemplated hereby, including the
Merger, from qualifying for pooling of interests accounting treatment or (ii)
prevent or delay the receipt of any regulatory approval referred to in the
Agreement.
SECTION 5.12. COMPLIANCE WITH ANTITRUST AND OTHER LAWS. Each of CNB, CBI
and UFB shall use its best efforts to resolve such objections, if any, which may
be asserted with respect to the Merger by any federal or state governmental
agency or body (collectively, the "Governmental Entities"), including, without
limitation, objections under any antitrust or banking laws. Each of CNB and CBI
shall use its reasonable best efforts to take such actions to resolve any such
objections as may be reasonably required by any such Governmental Entities and
prudent in light of the anticipated benefits to CNB of the transaction
contemplated hereby. Reasonable best efforts shall include, but not be limited
to, the willingness of CNB and CBI to agree and commit to the divestiture of
assets or deposits of Citizens Bank unless the magnitude of such divestiture is
determined by the Board of Directors of CNB, in its sole discretion (but after
consultation with the Board of Directors of UFB and their respective legal and
financial advisors), to materially adversely impact the anticipated financial
condition or results of operations of the surviving corporation in the Merger
(on a consolidated basis) or the anticipated benefits to CNB of the transaction
contemplated hereby after the Effective Time. If CNB or CBI shall determine
that it is necessary or advisable in order to resolve or minimize objections
that may be asserted with respect to the Merger by a Governmental Entity or
otherwise, that CNB or CBI shall not acquire (directly
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<PAGE>
or indirectly) from UFB certain assets or deposit liabilities of Thrift, then
CNB or CBI shall so notify UFB and shall identify those assets and deposit
liabilities, if any, which CNB or CBI proposes that it should not acquire, and
Thrift shall take appropriate steps to divest such assets or deposit
liabilities, provided that the obligation of Thrift to consummate any such
divestiture shall be subject to the condition that the Merger be simultaneously
consummated. In the event a suit is threatened or instituted challenging the
Merger as violative of the antitrust laws, CNB, CBI and UFB shall use their best
efforts, to the extent not inconsistent with the provisions of this Section
5.12, to resist the filing of or resolve any such suit. Notwithstanding
anything contained in this Agreement, the representations and warranties of CNB,
CBI and UFB in this Agreement shall not be deemed to be untrue or breached, CNB,
CBI and UFB shall not be deemed to have failed to perform any covenant or
obligation contained in this Agreement, and no condition to CNB's, CBI's or
UFB's obligation to effect the Merger shall be deemed not to have been
satisfied, solely on account of or as a result of any divestitures or any other
acts taken pursuant to this Section 5.12.
ARTICLE SIX
-----------
CONDITIONS PRECEDENT TO THE MERGER
----------------------------------
SECTION 6.01. CONDITIONS TO CNB'S AND CBI'S OBLIGATIONS. CNB and CBI's
obligations to effect the Merger shall be subject to the satisfaction (or waiver
by CNB) prior to or on the Closing Date of the following conditions:
(a) The representations and warranties made by UFB in this Agreement shall
be true in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made or given on
and as of the Closing Date;
(b) UFB shall have performed and complied in all material respects with all
of its obligations and agreements required to be performed prior to the Closing
Date under this Agreement;
(c) No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of the
Merger shall be in effect, nor shall any proceeding by any bank regulatory
authority or other person seeking any of the foregoing be pending. There shall
not be any action taken, or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the Merger which makes the
consummation of the Merger illegal;
(d) All necessary regulatory approvals, consents, authorizations and other
approvals required by law for consummation of the Merger, the Evansville Bank
Merger, the Jasper P&A, the Illinois P&A and the Kentucky P&A shall have been
obtained and all waiting periods required by law shall have expired;
(e) CNB shall have received all documents required to be received from UFB
on or prior to the Closing Date, all in form and substance reasonably
satisfactory to CNB;
(f) CNB shall have received an opinion letter, dated as of the Closing Date,
from Geo. S. Olive & Co. LLC, its independent public accountants, to the effect
that the Merger will qualify for
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pooling of interests accounting treatment under Accounting Principles Board
Opinion No. 16 if closed and consummated in accordance with this Agreement;
(g) The Registration Statement shall be effective under the Securities Act,
all required state securities approvals or exemptions shall have been obtained,
and no stop orders suspending the effectiveness of the Registration Statement
shall be in effect or proceedings for such purpose pending before or threatened
by the S.E.C. or any state securities agency;
(h) CNB shall have received a ruling of the Internal Revenue Service or an
opinion of its counsel, Lewis, Rice & Fingersh, to the effect that if the Merger
is consummated in accordance with the terms set forth in this Agreement (i) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code; (ii) no gain or loss will be recognized by the holders of shares of
UFB Common upon receipt of Merger Consideration (except for cash received in
lieu of fractional shares); (iii) the basis of shares of CNB Common received by
the shareholders of UFB will be the same as the basis of shares of UFB Common
exchanged therefor; and (iv) the holding period of the shares of CNB Common
received by such shareholders will include the holding period of the shares of
UFB Common exchanged therefor, provided such shares were held as capital assets
as of the Effective Time;
(i) CNB shall have received the environmental reports required by Section
4.07 hereof, and shall not have elected, pursuant thereto and pursuant to
Section 7.03 hereof, to terminate and cancel this Agreement;
(j) The Closing Book Value of UFB shall not be less than the consolidated
shareholders' equity accounts of UFB as of October 31, 1994. As used in the
preceding sentence, the term "Closing Book Value" shall mean the amount of the
consolidated shareholders' equity accounts of UFB, as of the end of the month
immediately preceding the Closing Date, determined in accordance with generally
accepted accounting principles consistently applied with the year ended June 30,
1994, less (i) the amount of any increase in the consolidated shareholders'
equity accounts of UFB resulting from or attributable to the sale of securities
held on and sold after the date of this Agreement or any transactions or
accounting adjustments not in the ordinary course of business effected or
completed after the date of this Agreement, plus (ii) any reduction of
consolidated shareholders' equity theretofore recorded solely as a result of
accruals, reserves or charges taken by UFB at the written request of CNB
pursuant to Section 4.05 hereof, plus (iii) any reduction of consolidated
shareholders' equity theretofore recorded solely as a result of Net Unrealized
Gain/Loss on Securities Available for Sale pursuant to FAS 115; and
(k) The total deposits of Thrift (excluding, for this purpose, the aggregate
amount of certificates of deposit of $99,000 or more in excess of $20 million),
as of the end of the month immediately preceding the Effective Time, shall not
be less than $345 million (less the deposits of any branches of Thrift disposed
of by Thrift at the request of CNB pursuant to Section 5.12 hereof).
SECTION 6.02. CONDITIONS TO UFB'S OBLIGATIONS. UFB's obligation to effect
the Merger shall be subject to the satisfaction (or waiver by UFB) prior to or
on the Closing Date of the following conditions:
(a) The representations and warranties made by CNB and CBI in this Agreement
shall be true in all material respects on and as of the Closing Date with the
same effect as though such representations and warranties had been made or given
on the Closing Date;
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(b) CNB and CBI shall have performed and complied in all material respects
with all of their obligations and agreements hereunder required to be performed
prior to the Closing Date under this Agreement;
(c) No Injunction preventing the consummation of the Merger shall be in
effect, nor shall any proceeding by any bank regulatory authority or other
governmental agency or person preventing the consummation of the Merger be in
effect, nor shall any proceeding by any bank regulatory authority or other
governmental authority or person seeking any of the foregoing be pending. There
shall not be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger which makes the
consummation of the Merger illegal;
(d) All necessary regulatory approvals, consents, authorizations and other
approvals, including the requisite approval of this Agreement and the Merger by
the shareholders of UFB, required by law for consummation of the Merger shall
have been obtained and all waiting periods required by law shall have expired;
(e) The fairness opinion of UFB's investment banker, Kemper Securities,
Inc., originally rendered and delivered to UFB at the meeting of the Board of
Directors of UFB at which this Agreement was approved by such Board of
Directors, to the effect that the transaction contemplated hereby is fair to the
UFB shareholders from a financial point of view, shall have been reaffirmed by
such investment banker on or before the date of the mailing of the
Prospectus/Proxy Statement;
(f) UFB shall have received all documents required to be received from CNB
on or prior to the Closing Date, all in form and substance reasonably
satisfactory to UFB;
(g) The Registration Statement shall be effective under the Securities Act,
all required state securities approvals or exemptions shall have been obtained,
and no stop orders suspending the effectiveness of the Registration Statement
shall be in effect or proceedings for such purpose pending before or threatened
by the S.E.C. or any state securities agency; and
(h) UFB shall have received the ruling of the Internal Revenue Service or
the opinion of counsel contemplated by Section 6.01(h) hereof.
ARTICLE SEVEN
-------------
TERMINATION OR ABANDONMENT
--------------------------
SECTION 7.01. MUTUAL AGREEMENT. This Agreement may be terminated by the
mutual written agreement of CNB and UFB at any time prior to the Closing Date,
regardless of whether approval of this Agreement and the Merger by the
shareholders of UFB shall have been previously obtained.
SECTION 7.02. BREACH OF AGREEMENTS. In the event that there is a material
breach in any of the representations and warranties or agreements of CNB or UFB,
which breach is not cured within thirty (30) days after notice to cure such
breach is given to the breaching party by the non-breaching party, then the non-
breaching party, regardless of whether approval of this Agreement and the Merger
by the
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<PAGE>
shareholders of UFB shall have been previously obtained, may terminate and
cancel this Agreement by providing written notice of such action to the other
party hereto.
SECTION 7.03. ENVIRONMENTAL REPORTS. CNB may terminate this Agreement to
the extent provided by Section 4.07 hereof and this Section 7.03 by giving
written notice thereof to UFB.
SECTION 7.04. FAILURE OF CONDITIONS. In the event any of the conditions to
the obligations of either party are not satisfied or waived on or prior to the
Closing Date, and if any applicable cure period provided in Section 7.02 hereof
has lapsed, then such party may, regardless of whether approval of this
Agreement and the Merger by the shareholders of UFB shall have been previously
obtained, terminate and cancel this Agreement by delivery of written notice of
such action to the other party on such date.
SECTION 7.05. REGULATORY APPROVAL DENIAL. If any regulatory application
filed pursuant to Section 5.01 hereof should be finally denied or disapproved by
the respective regulatory authority, then this Agreement thereupon shall be
deemed terminated and canceled, except as otherwise contemplated by Section 5.12
hereof. A request for additional information or undertaking by CNB, as a
condition for approval, shall not be deemed to be a denial or disapproval.
SECTION 7.06. SHAREHOLDER APPROVAL DENIAL. If this Agreement and the
Merger is not approved by the requisite vote of the shareholders of UFB at the
Shareholders' Meeting, then either party may terminate this Agreement.
SECTION 7.07. REGULATORY ENFORCEMENT MATTERS. In the event that UFB or any
of its subsidiaries shall become a party or subject to any new or amended
written agreement, memorandum of understanding, cease and desist order,
imposition of civil money penalties or other regulatory enforcement action or
proceeding with any federal or state agency charged with the supervision or
regulation of banks or thrifts or bank or thrift holding companies after the
date of this Agreement which is materially adverse to UFB and its subsidiaries
taken as a whole, then CNB may terminate this Agreement.
SECTION 7.08. FALL-APART DATE. If the Closing Date does not occur on or
prior to the first anniversary of the date of this Agreement, then this
Agreement may be terminated by either party by giving written notice thereof to
the other.
SECTION 7.09. TERMINATION FEE. Upon the occurrence of one or more of the
following events (a "Triggering Event"), UFB shall pay to CNB the sum of
$2,000,000:
(a) upon termination of this Agreement by CNB pursuant to Section 7.02
hereof (including, without limitation, upon the entering into of an agreement
between UFB and any third party which is inconsistent with the transactions
contemplated by this Agreement), provided that within twenty-four (24) months of
the date of such termination, an event described in clause (c) or (d) below
shall have occurred;
(b) the failure of UFB's stockholders to approve the Merger and this
Agreement at the Shareholders' Meeting, provided that within twelve (12) months
of the date of such Shareholders' Meeting, an event described in clause (c) or
(d) shall have occurred;
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(c) any person or group of persons (other than CNB) shall acquire, or have
the right to acquire, 50% or more of the UFB Common, exclusive of shares of UFB
Common sold directly or indirectly to such person or group of persons by CNB;
(d) upon the entry by UFB into an agreement or other understanding with a
person or group of persons (other than CNB and/or its affiliates) for such
person or group of persons to acquire, merge or consolidate with UFB or to
purchase all or substantially all of UFB's assets.
As used in this Section 7.09, "person" and "group of persons" shall have the
meanings conferred thereon by Section 13(d) of the Exchange Act. UFB shall
notify CNB promptly in writing upon its becoming aware of the occurrence of any
Triggering Event.
SECTION 7.10. MORTGAGE OPERATIONS LOSSES. CNB may terminate this Agreement
by giving written notice thereof to UFB if, after the date of this Agreement,
there shall be made or there shall otherwise arise or be incurred one or more
Mortgage Operations Losses (as defined below in this Section 7.10) the
reasonable estimated loss amount of which exceed, in the aggregate,
$1,335,167.23. As used in this Section 7.10, the term "Mortgage Operations
Losses" shall mean any claim, demand or notice asserted or threatened at any
time against UFB or any of its subsidiaries or any loss or charge realized or
which should be realized by UFB or any of its subsidiaries which arises from, is
connected with or pertains to (i) the business or operations of Union Security
Mortgage, Inc. ("USM") (including, without limitation, matters related to the
origination and/or sale of loans by USM), (ii) the Stock Sale Agreement (as such
term is defined in Section 2.05 of the Disclosure Schedule), (iii) any guarantee
by UFB or Thrift of any obligation or liability of USM, (iv) loan charges,
provisions or losses of Union Financial Corp. ("UFC"), or (v) any guarantee by
UFB or Thrift of any obligation or liability of UFC, for which, in any such case
listed in (i) through (v) above, there is no Meritorious Defense (as such term
is defined below in this Section 7.10). As used in this Section 7.10, the term
"Meritorious Defense" shall mean any defense to a claim, demand or cause of
action which UFB and its counsel, Barnes & Thornburg, reasonably believe and
independent counsel retained by CNB for such purpose and reasonably acceptable
to UFB determines, based upon such counsel's independent investigation of facts,
is substantially more likely than not to prevail in defeating such claim, demand
or cause of action. It is understood that the claims listed in Section 2.05 of
the Disclosure Schedule or on Exhibit 2.05(2) constitute Mortgage Operations
Losses for purposes of this Section 7.10 with estimated loss amounts as there
set forth (as such estimate may be adjusted from time to time after the
execution hereof as facts and circumstances may warrant). To facilitate the
provisions and intent of this Section 7.10, at the request of CNB, UFB shall
contact any of USM, The Knight Corporation or any investor in or purchaser or
holder of loans originated and/or sold by USM or UFC to inquire of such person's
knowledge of the existence of any Mortgage Operations Loss (or the existence of
facts or circumstances that reasonably could be expected to lead to a Mortgage
Operations Loss), UFB shall permit a representative of CNB to participate in all
such contacts and communications, and UFB shall provide to CNB promptly upon
receipt after the date hereof by UFB or any of its subsidiaries a copy of any
correspondence or other written communication and a summary of any oral
communications pertaining to any Mortgage Operations Claims or any facts or
circumstances that reasonably could be expected to lead to a Mortgage Operations
Claim.
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ARTICLE EIGHT
-------------
GENERAL
-------
SECTION 8.01. CONFIDENTIAL INFORMATION. The parties acknowledge the
confidential and proprietary nature of the "Information" (as herein described)
which has heretofore been exchanged and which will be received from each other
hereunder and agree to hold and keep the same confidential. Such Information
will include any and all financial, technical, commercial, marketing, customer
or other information concerning the business, operations and affairs of a party
that may be provided to the other, irrespective of the form of the
communications, by such party's employees or agents. Such Information shall not
include information which is or becomes generally available to the public other
than as a result of a disclosure by a party or its representatives in violation
of this Agreement. The parties agree that the Information will be used solely
for the purposes contemplated by this Agreement and that such Information will
not be disclosed to any person other than employees and agents of a party who
are directly involved in evaluating the transaction. The Information shall not
be used in any way detrimental to a party, including use directly or indirectly
in the conduct of the other party's business or any business or enterprise in
which such party may have an interest, now or in the future, and whether or not
now in competition with such other party.
SECTION 8.02. PUBLICITY. CNB and UFB shall cooperate with each other in
the development and distribution of all news releases and other public
disclosures concerning this Agreement and the Merger and shall not issue any
news release or make any other public disclosure without the prior consent of
the other party, unless it reasonably believes such is required by law upon the
advice of counsel or is in response to published newspaper or other mass media
reports regarding the transaction contemplated hereby, in which such latter
event the parties shall give reasonable notice, and to the extent practicable,
consult with each other regarding such responsive public disclosure.
SECTION 8.03. RETURN OF DOCUMENTS. Upon termination of this Agreement
without the Merger becoming effective, each party shall deliver to the other
originals and all copies of all Information made available to such party and
will not retain any copies, extracts or other reproductions in whole or in part
of such Information.
SECTION 8.04. NOTICES. Any notice or other communication shall be in
writing and shall be deemed to have been given or made on the date of delivery,
in the case of hand delivery, or three (3) business days after deposit in the
United States Registered Mail, postage prepaid, or upon receipt if transmitted
by facsimile telecopy or any other means, addressed (in any case) as follows:
(a) if to CNB:
CNB Bancshares, Inc.
20 N.W. Third Street
Evansville, Indiana 47739
Attention: H. Lee Cooper, III
Facsimile 812/464-3496
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<PAGE>
with a copy to:
Lewis, Rice & Fingersh
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
Attention: Thomas C. Erb
Facsimile: 314/241-6056
and
(b) if to UFB:
UF Bancorp, Inc.
501 Main Street
Evansville, Indiana 47708
Attention: Donald A. Rausch
Facsimile: 812/435-2413
with copies to:
Barnes & Thornburg
1313 Merchants Bank Bldg.
11 S. Meridian Street
Indianapolis, Indiana 46204
Attention: Claudia V. Swhier
Facsimile: 317/231-7433
or to such other address as any party may from time to time designate by notice
to the others.
SECTION 8.05. LIABILITIES. Except as provided in Section 7.09 hereof, in
the event that this Agreement is terminated pursuant to the provisions of
Article Seven hereof, no party hereto shall have any liability to any other
party for costs, expenses, damages or otherwise; provided, however, that,
notwithstanding the foregoing, in the event that this Agreement is terminated
pursuant to Section 7.02 hereof on account of a willful breach of any of the
representations and warranties set forth herein or any breach of any of the
agreements set forth herein, then the non-breaching party shall be entitled to
recover appropriate damages from the breaching party.
SECTION 8.06. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Except for and as provided in this Section 8.06, no representation, warranty or
agreement contained in this Agreement shall survive the Effective Time or the
earlier termination of this Agreement. The agreements set forth in Sections
5.04, 5.05 and 5.06 hereof shall survive the Effective Time and the agreements
set forth in Sections 7.09, 8.01, 8.02, 8.03 and 8.05 hereof shall survive the
Effective Time or the earlier termination of this Agreement.
SECTION 8.07. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes and cancels any and all prior
discussions, negotiations, undertakings, agreements in principle or other
agreements between the parties relating to the subject matter hereof.
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SECTION 8.08. HEADINGS AND CAPTIONS. The captions of Articles and Sections
hereof are for convenience only and shall not control or affect the meaning or
construction of any of the provisions of this Agreement.
SECTION 8.09. WAIVER, AMENDMENT OR MODIFICATION. The conditions of this
Agreement which may be waived may only be waived by notice to the other party
waiving such condition. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the right
at a later time to enforce the same. This Agreement may be amended or modified
by the parties hereto, at any time before or after approval of the Agreement by
the shareholders of UFB; provided, however, that after any such approval no such
amendment or modification shall reduce the amount or change the form of the
Merger Consideration contemplated by this Agreement to be received by
shareholders of UFB. This Agreement not be amended or modified except by a
written document duly executed by the parties hereto.
SECTION 8.10. RULES OF CONSTRUCTION. Unless the context otherwise
requires: (i) a term has the meaning assigned to it; (ii) an accounting term
not otherwise defined has the meaning assigned to it in accordance with
generally accepted accounting principles; (iii) "or" is not exclusive; and (iv)
words in the singular may include the plural and in the plural include the
singular.
SECTION 8.11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
be deemed one and the same instrument.
SECTION 8.12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns. There shall be no third party beneficiaries hereof, except for and
to the extent of persons with a demonstrable interest in the provisions of
Sections 5.04 and 5.05 hereof.
SECTION 8.13. SEVERABILITY. In the event that any provisions of this
Agreement or any portion thereof shall be finally determined to be unlawful or
unenforceable, such provision or portion thereof shall be deemed to be severed
from this Agreement, and every other provision, and any portion of a provision,
that is not invalidated by such determination, shall remain in full force and
effect. To the extent that a provision is deemed unenforceable by virtue of its
scope but may be made enforceable by limitation thereof, such provision shall be
enforceable to the fullest extent permitted under the laws and public policies
of the State whose laws are deemed to cover enforceability. It is declared to
be the intention of the parties that they would have executed the remaining
provisions without including any that may be declared unenforceable.
SECTION 8.14. GOVERNING LAW; ASSIGNMENT. This Agreement shall be governed
by the laws of the State of Indiana, except to the extent that the Delaware
Corporate Law must govern the Merger procedures, and applicable federal laws and
regulations. This Agreement may not be assigned by either of the parties
hereto.
SECTION 8.15. CERTAIN EXPENSE REIMBURSEMENT. If the Merger is not
consummated for any reason other than (i) on account of a termination of this
Agreement pursuant to Section 7.02 hereof on account of a breach by UFB, (ii)
the failure of UFB's shareholders to approve this Agreement and the Merger,
(iii) the inability to obtain the pooling opinion contemplated by Section
6.01(f) hereof due to the actions of UFB, its affiliates or shareholders, or
(iv) on account of a termination of this Agreement
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pursuant to Section 7.07 hereof, then CNB shall reimburse UFB for (a) all of its
out-of-pocket expenses incurred in obtaining the phase one environmental
investigations pursuant to Section 4.07 hereof, and (b) fifty percent (50%) of
its out-of-pocket expenses incurred in obtaining any phase two environmental
investigation pursuant to Section 4.07 which does not recommend or suggest as
being appropriate the taking of any remedial or corrective actions.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
UF BANCORP, INC.
By /s/ Donald A. Rausch
---------------------------------------------------
Donald A. Rausch
Chairman, President and Chief Executive Officer
CNB BANCSHARES, INC.
By /s/ H. Lee Cooper, III
---------------------------------------------------
H. Lee Cooper, III
Chairman and Chief Executive Officer
CITIZENS BANCSHARES, INC.
By /s/ H. Lee Cooper, III
---------------------------------------------------
H. Lee Cooper, III
Chairman and Chief Executive Officer
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EXHIBIT 1.09(a)
---------------
UFB'S LEGAL OPINION MATTERS
1. The due incorporation, valid existence and good standing of UFB under
the laws of the State of Delaware, its power and authority to own and operate
its properties and to carry on its business as now conducted, and its power and
authority to enter into the Agreement, to merge with CBI in accordance with the
terms of the Agreement and to consummate the transactions contemplated by the
Agreement.
2. The due incorporation or organization, valid existence and good
standing of each of the other subsidiaries of UFB and any subsidiary of any such
subsidiary listed in Section 2.03 of the Disclosure Schedule, their power and
authority to own and operate their properties, the possession of all licenses,
permits and authorizations necessary to carry on their respective businesses as
now conducted.
3. With respect to UFB, to the best knowledge of such counsel, (i) the
number of authorized, issued and outstanding shares of capital stock of UFB on
the Closing Date, (ii) the nonexistence of any violation of the preemptive or
subscription rights of any person, (iii) the number of outstanding UFB Stock
Options, warrants, or other rights to acquire, or securities convertible into,
any equity security of UFB, (iv) the nonexistence of any obligation, contingent
or otherwise, to reacquire any shares of capital stock of UFB, and (v) the
nonexistence of any outstanding stock appreciation, phantom stock or similar
rights, except as disclosed in the Agreement.
4. With respect to UFB's subsidiaries, to the best knowledge of such
counsel, (i) the number of authorized, issued and outstanding shares of capital
stock on the Closing Date and the ownership of all issued shares by UFB, (ii)
the nonexistence of any violation of the preemptive or subscription rights of
any person, (iii) the nonexistence of any outstanding options, warrants, or
other rights to acquire, or securities convertible into, any equity securities
of such subsidiary, (iv) the nonexistence of any obligation, contingent or
otherwise, to reacquire any shares of capital stock of such subsidiary, and (v)
the nonexistence of any outstanding stock appreciation, phantom stock or similar
rights.
5. The due and proper performance of all corporate acts and other
proceedings necessary or required to be taken by UFB to authorize the execution,
delivery and performance of the Agreement, the due execution and delivery of the
Agreement by UFB, and the Agreement as a valid and binding obligation of UFB,
enforceable against UFB in accordance with its terms (subject to the provisions
of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
similar laws affecting the enforceability of creditors' rights generally from
time to time in effect, and equitable principles relating to the granting of
specific performance and other equitable remedies as a matter of judicial
discretion).
6. The execution of the Agreement by UFB, and the consummation of the
Merger and the other transactions contemplated therein, does not violate or
cause a default under UFB's certificate of incorporation or bylaws, or any
statute, regulation or rule or, to the best knowledge of such counsel, any
judgment, order or decree against or any material agreement binding upon UFB or
its subsidiaries.
A-Ex. 1.09(a)-1
<PAGE>
7. To the best knowledge of such counsel, the receipt of all required
consents, approvals (including the requisite approval of the shareholders of
UFB), orders or authorizations of, or registrations, declaration or filings with
or notices to, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, or any other
person or entity required to be obtained or made by UFB or its subsidiaries in
connection with the execution and delivery of the Agreement or the consummation
of the transactions contemplated therein.
8. To the best knowledge of such counsel, the nonexistence of any material
actions, suits, proceedings, orders, investigations or claims pending or
threatened against or affecting UFB or its subsidiaries which, if adversely
determined, would have a material adverse effect upon their respective
properties or assets or the transactions contemplated by the Agreement.
A-Ex. 1.09(a)-2
<PAGE>
EXHIBIT 1.09(b)
---------------
CNB'S LEGAL OPINION MATTERS
1. The due incorporation and valid existence of CNB and CBI under the laws
of the State of Indiana, and their respective power and authority to enter into
the Agreement and to consummate the transactions contemplated thereby.
2. The due and proper performance of all corporate acts and other
proceedings required to be taken by each of CNB and CBI to authorize the
execution, delivery and performance of the Agreement, their due execution and
delivery of the Agreement, and the Agreement as a valid and binding obligation
of CNB and CBI enforceable against CNB and CBI in accordance with its terms
(subject to the provisions of bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforceability of creditors' rights generally from
time to time in effect, and equitable principles relating to the granting of
specific performance and other equitable remedies as a matter of judicial
discretion).
3. The due authorization and, when issued to the shareholders of UFB in
accordance with the terms of the Agreement, the valid issuance of the shares of
CNB Common to be issued pursuant to the Merger, such shares being fully paid and
nonassessable, with no personal liability attaching to the ownership thereof.
4. The execution and delivery of the Agreement by CNB and the consummation
of the transactions contemplated therein, as neither conflicting with, in breach
of or in default under, resulting in the acceleration of, creating in any party
the right to accelerate, terminate, modify or cancel, or violate, any provision
of CNB's articles of incorporation or bylaws, or any statute, regulation, rule,
or, to the best knowledge of such counsel, judgment, order or decree binding
upon CNB which would be materially adverse to the business of CNB and its
subsidiaries taken as a whole.
5. To the best knowledge of such counsel, the receipt of all required
consents, approvals, orders or authorizations of, or registrations, declarations
or filings with or without notices to, any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, or any other person or entity required to be obtained or made by or
with respect to CNB or CBI in connection with the execution and delivery of the
Agreement or the consummation of the transactions contemplated by the Agreement.
A-Ex. 1.09(b)-1
<PAGE>
EXHIBIT 4.08
------------
___________________, 199__
CNB Bancshares, Inc.
20 N.W. Third Street
Evansville, Indiana 47739
Attention: Mr. David L. Knapp
Re: Agreement and Plan of Merger, dated December 12, 1994 (the "Merger
Agreement"), by and among UF Bancorp, Inc. ("UFB"), CNB Bancshares,
Inc. ("CNB") and Citizens Bancshares, Inc. ("CBI")
Gentlemen:
I have been advised that I may be deemed to be an affiliate of UFB, as that
term is defined for purposes of paragraphs (c) and (d) of Rule 145 ("Rule 145")
of the Rules and Regulations of the Securities and Exchange Commission (the
"Commission") promulgated under the Securities Act of 1933, as amended (the
"Securities Act").
Pursuant to the terms and conditions of the Merger Agreement, each share of
common stock of UFB owned by me as of the effective time of the merger
contemplated by the Merger Agreement (the "Merger") may be converted into the
right to receive shares of common stock of CNB and cash in lieu of any
fractional share. As used in this letter, the shares of common stock of UFB
owned by me as of _________________________ (the date 30 days prior to the
anticipated effective time of the Merger) are referred to as the "Pre-Merger
Shares" and the shares of common stock of CNB which may be received by me in the
Merger in exchange for my Pre-Merger Shares are referred to as the "Post-Merger
Shares." This letter is delivered to CNB pursuant to Section 4.08 of the Merger
Agreement.
A. I represent and warrant to CNB and agree that:
1. I shall not make any sale, transfer or other disposition of the
Post-Merger Shares I receive pursuant to the Merger in violation of the
Securities Act or the Rules and Regulations of the Commission promulgated
thereunder.
2. I understand that the issuance of the Post-Merger Shares to me
pursuant to the Merger will be registered with the Commission under the
Securities Act. I also understand that because I may be deemed an
"affiliate" of UFB and because any distributions by me of the Post-Merger
Shares will not be registered under the Securities Act, such Post-Merger
Shares must be held by me unless (i) the sale, transfer or other
distribution has been registered under the Securities Act, (ii) the sale,
transfer or other distribution of such Post-Merger Shares is made in
accordance with the provisions of Rule 145, or (iii) in the opinion of
counsel acceptable to CNB some other exemption from registration under the
Securities Act is available with respect to any such proposed distribution,
sale, transfer or other disposition of such Post-Merger Shares.
A-Ex. 4.08-1
<PAGE>
CNB Bancshares, Inc.
____________________, 199_
Page 2
3. In no event will I sell the Pre-Merger Shares or the Post-Merger
Shares, as the case may be, or otherwise transfer or reduce my risk relative
to the Pre-Merger Shares or Post-Merger Shares, as the case may be, during
the period beginning 30 days prior to the date on which the Merger is
consummated and ending on the date that CNB has published financial results
covering at least 30 days of the combined operations of CNB and UFB.
B. I understand and agree that:
1. Stop transfer instructions will be issued with respect to the
Post-Merger Shares and there will be placed on the certificates representing
such Post-Merger Shares, or any certificate delivered in substitution
therefor, a legend stating in substance:
"The shares represented by this Certificate have been issued to an
affiliate of a party to a transaction with CNB Bancshares, Inc. pursuant
to the provisions of Rule 145 under the Securities Act of 1933. A stop
transfer order with respect to this Certificate has been issued to the
Transfer Agent. The shares represented hereby will be transferred on
the books of CNB Bancshares, Inc. only upon delivery to the Transfer
Agent of evidence, reasonably satisfactory to CNB Bancshares, Inc., that
such transfer complies in all material respects with the provisions of
the Securities Act of 1933 and the rules and regulations thereunder."
2. Unless the transfer by me of Post-Merger Shares is a sale made in
compliance with the provisions of Rule 145(d) or made pursuant to an
effective registration statement under the Securities Act, CNB reserves the
right to place the following legend on the Certificates issued to my
transferee:
"The shares represented by this Certificate have not been registered
under the Securities Act of 1933, as amended, and were acquired from a
person who received such shares in a transaction to which Rule 145 under
the Securities Act of 1933, as amended, applied. The shares have not
been acquired by the holder with a view to, or for resale in connection
with, any distribution thereof within the meaning of the Securities Act
of 1933, as amended, and may not be sold, pledged or otherwise
transferred unless the shares have been registered under the Securities
Act of 1933, as amended, or an exemption from registration is
available."
I understand and agree that the legends set forth in paragraphs 1 and 2
above shall be removed by delivery of substitute Certificates without any legend
if I deliver to CNB a copy of a letter from the staff of the Commission, or an
opinion of counsel in form and substance satisfactory to CNB, to the effect that
no such legend is required for the purpose of the Securities Act.
A-Ex. 4.08-2
<PAGE>
CNB Bancshares, Inc.
____________________, 199_
Page 3
I have carefully read this letter and the Merger Agreement and understand
the requirements of each and the limitations imposed upon the distribution,
sale, transfer or other disposition of Pre-Merger Shares or Post-Merger Shares
by me.
Very truly yours,
A-Ex. 4.08-3
<PAGE>
AMENDMENT TO MERGER AGREEMENT
-----------------------------
This AMENDMENT TO MERGER AGREEMENT (this "Amendment") made this 9th day of
June, 1995, by and among UF BANCORP, INC., a Delaware corporation ("UFB"), CNB
BANCSHARES, INC., an Indiana corporation ("CNB"), and CITIZENS BANCSHARES, INC.,
an Indiana corporation and wholly-owned subsidiary of CNB ("CBI").
RECITALS
--------
A. UFB, CNB and CBI are parties to a certain Agreement and Plan of Merger
dated December 12, 1994 (the "Agreement"). The Agreement generally provides
for CNB's acquisition of UFB by means of the merger of UFB with and into CBI.
B. The parties hereto desire to amend the Agreement as provided herein.
C. All terms used in this Amendment with initial capital letters that are
not otherwise defined herein shall have the meaning ascribed to them in the
Agreement.
In consideration of the premises and the mutual terms and provisions set
forth in this Amendment and the Agreement, the parties agree as follows.
AMENDMENT
---------
SECTION 1. AMENDMENTS.
(a) Section 4.12. The following is hereby added as new Section 4.12
of the Agreement:
"Section 4.12. Transition and Integration of Loan and Deposit Products.
UFB shall, upon the request of CNB, take all actions necessary to facilitate
and effectuate the transition and integration of Thrift's loan and deposit
products with those of CNB-Jasper (with respect to Thrift's office located
in Jasper, Indiana), CNB-Illinois (with respect to Thrift's office located
in Mt. Carmel, Illinois), CNB-Kentucky (with respect to Thrift's offices
located in Henderson, Kentucky) and Citizens Bank (with respect to all other
offices of Thrift) effective as of the anticipated Closing Date. By way of
amplification, and not limitation, of the foregoing agreements of UFB, UFB
shall cause Thrift to (i) notify in writing each of its customers, by means
of a notice mutually satisfactory in terms of form and content to each of
UFB and CNB, to be mailed in advance of the Closing Date as required by law,
of (a) the new deposit fee schedule for deposit products offered by Thrift
to be effective as of the anticipated Closing Date, (b) the product mix to
be offered by subsidiaries of CNB following the Merger, (c) the change from
ledger balance to collected balance for Thrift's "Check Plus", "Super Check
Plus", "Charter Checking", "60+ to 50+ Advantage", "Money Market Deposit
Account" products, effective as of the anticipated Closing Date, (d) the
change in terms on "Money Market Plus" and "Market Growth" products to match
CNB's High Yield MMDA terms, effective as of the anticipated Closing Date,
and (e) the change from daily compounding to simple interest for Thrift's
"Check
AA-1
<PAGE>
Plus" and "Statement Savings" products effective as of the anticipated
Closing Date; (ii) on or before the anticipated Closing Date, discontinue
issuing passbooks and, as of such date, consolidate passbook deposit
products with statement savings deposit products and produce savings
statements on or before the anticipated Closing Date for all passbook
accounts; so as to be effective by the anticipated Closing Date, provide
mutually satisfactory customer notification and change the interest rates
offered on the discontinued passbook products to the CNB rate in effect at
each bank location; (iii) on or before the anticipated Closing Date, issue
certificates in lieu of passbooks for all certificate of deposit products;
(iv) discontinue offering the following CD products: weekly variable IRA,
18 month fixed rate IRA, 36 month fixed rate IRA, 60 month fixed rate IRA, 7
day notice CD, 42 month wildcard, 96 month IRA CD on or before the
anticipated Closing Date; and (v) discontinue the issuance of mortgage loan
passbooks and start using coupon books on all residential mortgage loans
closed by Thrift on or before the anticipated Closing Date.
(b) Section 6.01(k). Subsection (k) of Section 6.01 of the Agreement
is hereby deleted in its entirety.
(c) The representations and warranties of UFB set forth in Sections
2.04, 2.05, 2.10, and 2.22 (except with respect to the Registration Statement,
the Proxy Statement/Prospectus and other documents filed with NASDAQ or any
banking or other regulatory authority in connection with the transactions
contemplated by the Agreement) of the Agreement shall not be deemed to be untrue
or breached and UFB shall not be deemed to have failed to perform any covenant
or obligation contained in the Agreement solely on account of (i) acts taken by
UFB pursuant to Section 4.12 of the Agreement, or (ii) any restatement by UFB of
prior period financial statements to provide for earlier recognition of the
charges and reserves taken or established in the quarter ended December 31,
1994.
SECTION 2. CONTINUED FORCE AND EFFECT. Except as expressly amended or
modified hereby, each of the terms, provisions, covenants, representations and
warranties contained in the Agreement and the Schedules thereto shall remain in
full force and effect.
SECTION 3. MULTIPLE COUNTERPARTS. This Amendment may be executed in
multiple counterparts, each of which shall constitute an original and all of
which taken together shall constitute but one and the same document.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as
of the day and year first above written.
UF BANCORP, INC.
By /s/ Donald A. Rausch
--------------------------------------------------
Donald A. Rausch
Chairman, President and Chief Executive Officer
AA-2
<PAGE>
CNB BANCSHARES, INC.
By /s/ H. Lee Cooper, III
------------------------------------------
H. Lee Cooper, III
Chairman and Chief Executive Officer
CITIZENS BANCSHARES, INC.
By /s/ H. Lee Cooper, III
------------------------------------------
H. Lee Cooper, III
Chairman and Chief Executive Officer
AA-3
<PAGE>
EXHIBIT B
[ ] [ ], 1995
Board of Directors
UF Bancorp, Inc.
501 Main Street
Evansville, Indiana 47708
Members of the Board:
We understand that UF Bancorp, Inc., a Delaware corporation ("UF Bancorp"),
and CNB Bancshares, Inc. ("CNB") have entered into an Agreement and Plan of
Merger dated December 12, 1994, as amended June 9, 1995 (the "Agreement"),
pursuant to which UF Bancorp will be merged into CNB, and CNB will be the
surviving entity (the "Merger"). Pursuant to the Merger, as more fully
described in the Agreement, each of the outstanding shares of UF Bancorp common
stock, par value $0.01 per share (the "UF Bancorp Shares"), will be exchanged
for 1.366 shares (the "Conversion Ratio") of CNB common stock, stated value
$1.00 per share (the "CNB Shares"); provided, however, that: (i) if the average
closing price of CNB Shares (as defined in the Agreement, the "CNB Average
Price") exceeds $36.06, then the Conversion Ratio shall be reduced to an amount
equal to the product of 1.366 and the quotient of $36.06 divided by the CNB
Average Price, and (ii) if the CNB Average Price is less than $26.66, then the
Conversion Ratio shall be increased to an amount equal to the product of
1.366 and the quotient of $26.66 divided by the CNB Average Price.
You have requested our opinion as to whether the Conversion Ratio in the
Merger is fair, from a financial point of view, to the holders of the UF Bancorp
Shares, as of the date hereof.
Kemper Securities, Inc. ("Kemper Securities"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with merger and acquisition transactions, public
offerings, private placements, recapitalizations, and other purposes. Kemper
Securities publishes Equity Roundup, a monthly review of the economy and
securities markets, selected industries, and selected individual stocks. Our
research analysts publish regular reports on individual banks, thrifts, and
their holding companies, as well as other financial institutions. Our firm
makes principal markets in 149 financial institution stocks, including banks,
thrifts, and their holding companies, and we have managed public offerings for
banks, thrifts, and their holding companies, as well as other financial
institutions. With particular regard to our qualifications for rendering an
opinion as to the fairness, from a financial point of view, to holders of the UF
Bancorp Shares of the Conversion Ratio in the Merger, Kemper Securities has
rendered fairness opinions for many other significant capital transactions
involving financial institutions.
For the purposes of this fairness opinion, we believe we are independent of
UF Bancorp and CNB. Other than our service to UF Bancorp in connection with the
Merger and fairness opinion given hereby, we have provided no other professional
services to UF Bancorp or CNB.
B-1
<PAGE>
Board of Directors
UF Bancorp, Inc.
[ ] [ ], 1995
Page 2
In arriving at our opinion, we have, among other things: (i) reviewed CNB's
and UF Bancorp's joint Prospectus/Proxy Statement dated [ ] [ ], 1995; (ii)
reviewed the Agreement; (iii) reviewed UF Bancorp's financial statements and
certain internal management reports and certain publicly available financial and
other data with respect to UF Bancorp and CNB including financial statements for
recent years and interim periods to date and certain other relevant financial
and operating data relating to CNB made available to us from published sources;
(iv) discussed UF Bancorp's history, operations, service areas, asset/liability
structure and quality, financial condition and performance, and prospects, among
other factors, with members of UF Bancorp's management; (v) compared UF Bancorp
and CNB from a financial point of view with certain other companies in the
financial services industry which we deemed relevant; (vi) reviewed the reported
price and trading activity for the UF Bancorp Shares and the CNB Shares; (vii)
reviewed the financial terms of certain recent business combinations in the
thrift industry specifically; (viii) reviewed certain pro forma data for CNB
giving effect to the Merger and other of CNB's pending acquisitions; (ix)
discussed the Merger and the Agreement with UF Bancorp's counsel; (x) reviewed
the results of our efforts as UF Bancorp's financial advisor to solicit,
evaluate, and negotiate acquisition proposals; and (xi) performed such other
studies and analyses as we considered appropriate. We have also taken into
account general economic, market, and financial conditions as well as our
experience in other transactions, our knowledge of the thrift and commercial
banking industries, and our experience in securities valuation.
In rendering this opinion, we have relied without independent verification
upon the accuracy and completeness of the foregoing financial and other
information. We have also assumed that there has been no material change in UF
Bancorp's or CNB's assets, financial condition, results of operations, business,
or prospects since the date of the last financial statements made available to
us for UF Bancorp or CNB, respectively. In addition, we have not made an
independent evaluation, appraisal, or physical inspection of the assets or
individual properties of UF Bancorp or CNB, nor have we been furnished with such
appraisals. Further, our opinion is based on economic, monetary, and market
conditions existing as of the date hereof.
We hereby consent to the inclusion of this opinion as an exhibit to a proxy,
information, registration, or other such statement. Further, we consent to the
use of our firm's name and references to this opinion in such information,
proxy, registration, or other such statement, with such uses and references
being subject to our prior approval.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion as of the date hereof that the Conversion
Ratio in the Merger is fair, from a financial point of view, to holders of the
UF Bancorp Shares.
Sincerely,
KEMPER SECURITIES, INC.
B-2
<PAGE>
EXHIBIT C
<PAGE>
================================================================================
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1994
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number: 0-19523
UF BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 35-1833698
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
501 Main Street, P.O. Box 3125, Evansville, Indiana 47731
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(812) 425-7111
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 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 the 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 ((S)229.405 of this chapter) 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.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 15, 1994, was $39,745,000.
The number of shares of the Registrants Common Stock, par value $.01 per share,
outstanding as of September 15, 1994, was 1,593,693 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
June 30, 1994, are incorporated into Part II. Portions of the Proxy Statement
for the 1994 Annual Meeting of Shareholders are incorporated into Part I and
Part III.
Exhibit Index on Page ___
Page 1 of ___ Pages
================================================================================
<PAGE>
UF BANCORP, INC.
FORM 10-K
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
Item 1. Business................................................................. 1
Item 2. Properties............................................................... 35
Item 3. Legal Proceedings........................................................ 36
Item 4. Submission of Matters to a Vote of Security Holders...................... 37
Item 4.5 Executive Officers of the Registrant..................................... 37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 38
Item 6. Selected Consolidated Financial Data..................................... 39
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation..................................................... 40
Item 8. Financial Statements and Supplementary Data.............................. 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 80
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation................................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 80
Item 13. Certain Relationships and Related Transactions........................... 80
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 80
EXHIBIT INDEX................................................................................ 81
SIGNATURES................................................................................... 83
</TABLE>
<PAGE>
PART I
Item 1. Business.
General
UF Bancorp, Inc. (the "Holding Company") is a Delaware corporation
organized in July of 1991 for the purpose of acquiring all of the outstanding
shares of Union Federal Savings Bank, a federal savings bank (the "Bank") in
its conversion from mutual to stock form (the "Conversion"). The Holding
Company generally is authorized to engage in any activity that is permitted by
the Delaware General Corporation Law.
The assets of the Holding Company consist of the stock of the Bank and
investment securities purchased with the portion of the net proceeds from the
Conversion retained at the Holding Company level. The activities of the
Holding Company are funded by such investment securities and the income thereon
and dividends from the Bank. In the future, activities of the Holding Company
may also be funded through additional dividends from the Bank, sales of
additional stock, borrowings and income generated by other activities of the
Holding Company. At this time, there are no plans regarding such other
activities.
The principal business of the Bank consists of attracting retail
deposits from the general public and investing those funds primarily in loans
secured by first mortgages on owner-occupied, one- to four-family residences and
in mortgage-backed securities. The Bank also originates consumer and, to a much
lesser extent, commercial business loans and commercial real estate (including
multi-family residential) loans. Until June 1, 1993, the Bank conducted mortgage
banking operations through a wholly-owned subsidiary named Union Security
Mortgage, Inc. ("USM"). In January 1993, the Bank formed a new mortgage banking
subsidiary based in Virginia named Union Financial Corp. ("UFC"). Unless
otherwise indicated, discussions regarding the operations of the Bank in this
Form 10-K exclude the mortgage banking operations of USM and UFC.
The Bank's revenues are derived principally from interest on mortgage
loans and mortgage-backed securities, interest and dividends on investment
securities, loan origination and servicing fee income, income from checking
account service charges, and commissions on annuity sales.
The executive offices of the Bank are located in Evansville, Indiana.
Through its network of 16 offices, the Bank currently serves eight counties in
southern Indiana, western Kentucky and the Mt. Carmel area in southern
Illinois. This market area includes the communities of Columbus, Evansville,
Ft. Branch, Jasper, Mt. Vernon, Newburgh, Princeton and Shelbyville in Indiana,
Henderson in Kentucky, and Mt. Carmel in Illinois.
Lending Activities
General. Historically, the Bank has originated fixed-rate mortgage
loans. Since 1982, however, the Bank has emphasized the holding of adjustable
rate mortgage ("ARM") loans and loans with shorter terms to maturity than
traditional 30-year, fixed-rate loans. Management's strategy has been to
increase the percentage of assets in its portfolio with more frequent repricing
or shorter maturities, and in some cases higher yields, than fixed-rate mortgage
loans. In response to customer demand, however, the Bank continues to originate
fixed-rate mortgages. The Bank underwrites these mortgage loans under guidelines
allowing them to be saleable in the secondary market through the Federal Home
Loan Mortgage Corporation (the "FHLMC").
The Bank's primary focus in lending activities is on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences. The Bank also originates consumer and, to a much lesser extent,
commercial business loans and commercial real estate (including multi-family
residential) loans. The Bank has also loaned and advanced approximately
$804,000 for the construction and development of a real estate project to its
wholly-owned subsidiary, UNIFIN, Inc., the developer. See "- Subsidiary and
Other Activities." At June 30, 1994, the Bank's net loan and mortgage-backed
securities portfolio totaled $412.1 million.
Loan applications are initially approved at various levels of authority,
depending on the type, amount and loan-to-value ratio of the loan. Loan
commitments of more than $100,000 but less than $250,000 must be approved by a
committee comprised of senior officers of the Bank. Loan commitments of more
than $250,000 must be approved by the Board of Directors of the Bank. All loan
approvals are ratified by the Board of Directors.
-1-
<PAGE>
Pursuant to the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA"), the aggregate amount of loans that the Bank is
permitted to make to any one borrower, including related entities, or the
aggregate amount that the Bank may invest in any one real estate project, is
limited generally to the greater of 15% of unimpaired capital and surplus or
$500,000. At June 30, 1994, the maximum amount which the Bank could have lent
to any one borrower and the borrower's related entities was approximately $5.8
million. At June 30, 1994, the Bank had no loans with outstanding balances in
excess of this amount. The principal balance of the largest amount outstanding
to any one borrower, or group of related borrowers, was $3.1 million at that
date. See "- Commercial Business Lending."
Loan Portfolio Composition. The following tables set forth information
concerning the composition of the Bank's loan and mortgage-backed securities
portfolios, in dollar amounts and in percentages (before deduction for loans in
process, deferred fees and discounts and allowance for loan losses) as of the
dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
----------------- ----------------- ---------------- ---------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family...........$123,120(1) 70.58% $136,002(2) 74.41% $158,180(3) 80.47% $181,604(4) 84.93% $191,448 85.72%
Commercial real estate....... 30,945 17.74 22,901 12.53 18,707 9.52 17,304 8.09 17,314 7.75
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans..... 154,065 88.32 158,903 86.94 176,887 89.99 198,908 93.02 208,762 93.47
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other Loans
Consumer loans:
Auto....................... 3,738 2.14 11,412 6.24 8,994 4.58 4,307 2.01 4,291 1.92
Loans on deposits.......... 2,456 1.41 2,405 1.31 2,728 1.39 2,880 1.35 3,003 1.34
Unsecured.................. 2,432 1.40 2,400 1.31 1,903 .97 2,163 1.02 2,369 1.07
Credit card receivables.... 1,919 1.10 2,204 1.21 1,562 .79 1,429 .67 967 .43
Home improvement........... 757 .43 637 .35 807 .41 991 .46 881 .39
Education.................. 447 .26 401 .22 390 .20 409 .19 426 .19
Home equity................ 3,547 2.03 --- --- --- --- --- --- --- ---
Other...................... 779 .45 559 .31 363 .18 327 .15 392 .18
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans....... 16,075 9.22 20,018 10.95 16,747 8.52 12,506 5.85 12,329 5.52
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business loans... 4,291 2.46 3,852 2.11 2,936 1.49 2,411 1.13 2,264 1.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans.......... 20,366 11.68 23,870 13.06 19,683 10.01 14,917 6.98 14,593 6.53
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total gross loans.......... 174,431 100.00% 182,773 100.00% 196,570 100.00% 213,825 100.00% 223,355 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Loans in process............ 4,319 2,184 1,335 1,961 1,401
Deferred fees and discounts. 660 693 789 993 501
Allowance for loan losses... 1,535 800 648 620 397
-------- -------- -------- -------- --------
Total loans, net..........$167,917 $179,096 $193,798 $210,251 $221,056
======== ======== ======== ======== ========
(1) Includes $5.0 in residential construction loans.
(2) Includes $3.6 in residential construction loans.
(3) Includes $3.3 in residential construction loans.
(4) Includes $3.8 in residential construction loans.
June 30,
-----------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------- ------------------- ------------------ ------------------ ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Mortgage-backed Securities:
Mortgage-backed Securities...$244,513 100.00% $245,089 100.00% $177,175 100.00% $166,686 100.00% $150,977 100.00%
Less: Discounts on mortgage-
backed securities........... 950 767 1,157 1,130 1,280
-------- -------- -------- -------- --------
Total mortgage-
backed securities...........$243,563 100.00% $244,322 100.00% $176,018 100.00% $165,556 100.00% $149,697 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
-2-
<PAGE>
The following tables set forth the composition of the Bank's loan and
mortgage-backed securities portfolios by fixed and adjustable rate categories
at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1994 1993
------------------------ -----------------------
Amount Percent Amount Percent
----------- ----------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed Rate Loans
Real Estate:
One-to four-family................ $ 58,661 33.63% $ 67,215 36.78%
Commercial real estate............ 7,559 4.34 7,287 3.98
-------- ------ -------- ------
Total real estate loans......... 66,220 37.97 74,502 40.76
-------- ------ -------- ------
Consumer............................ 12,528 7.18 20,018 10.95
Commercial business................. 3,806 2.18 3,300 1.81
-------- ------ -------- ------
Total fixed rate loans.......... 82,554 47.33 97,820 53.52
-------- ------ -------- ------
Adjustable Rate Loans
Real Estate:
One-to four-family................ 64,459 36.95 68,787 37.64
Commercial real estate............ 23,386 13.41 15,614 8.54
-------- ------ -------- ------
Total adjustable real
estate loans.................. 87,845 50.36 84,401 46.18
-------- ------ -------- ------
Consumer............................ 3,547 2.03 --- ---
Commercial business................. 485 .28 552 .30
-------- ------ -------- ------
Total adjustable rate loans....... 91,877 52.67 84,953 46.48
-------- ------ -------- ------
Total loans..................... 174,431 100.00% 182,773 100.00%
-------- ====== -------- ======
Less:
Loans in process.................. 4,319 2,184
Deferred fees and discounts....... 660 693
Allowance for loan loss........... 1,535 800
-------- --------
Total loans, net................ $167,917 $179,096
======== ========
Fixed Rate Mortgage-backed
securities........................ $ 67,513 27.61% $ 68,985 28.15%
Adjustable Rate Mortgage-
backed securities................. 177,000 72.39% 176,104 71.85
-------- ------ -------- ------
Total Mortgage-backed
securities...................... 244,513 100.00% 245,089 100.00%
-------- ====== -------- ======
Less: Discount on mortgage-
backed securities................. 950 767
-------- --------
Total mortgage-backed
securities, net................. $243,563 $244,322
======== ========
</TABLE>
The following schedule sets forth the maturities of the Bank's loan and
mortgage-backed securities portfolio at June 30, 1994. Loans which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses. Management expects
these factors to cause actual maturities to be shorter than those set forth in
the schedule below.
-3-
<PAGE>
<TABLE>
<CAPTION>
Real Estate Loans
----------------------------------------------
One-to Four-
Family and
Due During Mortgage- Commercial
Years Backed Commercial Consumer Business
Ending June 30, Securities Real Estate Construction Loans Loans Total
- --------------- ------------ ----------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
1995 (1)............ $ 1,203 $ 242 $ --- $ 8,399 $1,223 $ 11,067
1996................ 10,845 88 149 1,576 1,635 14,293
1997................ 1,197 202 337 2,159 608 4,503
1998 to 1999........ 5,981 2,338 --- 3,116 703 12,138
2000 to 2004........ 34,084 10,778 73 817 122 45,874
2005 to 2009........ 40,243 6,329 60 8 --- 46,640
2010 to 2014........ 21,124 9,053 94 --- --- 30,271
2015 to 2019........ 111,634 1,915 --- --- --- 113,549
2020 and following.. 136,319 --- 4,290 --- --- 140,609
-------- ------- ------ ------- ------ -------
Total....... $362,630 $30,945 $5,003 $16,075 $4,291 418,944
======== ======= ====== ======= ====== -------
Less:
Undisbursed portion
of loans, discounts,
deferred fees and
interest, and allowance
for loan losses........ 7,464
--------
$411,480
========
</TABLE>
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
The total amount of loans and mortgage-backed securities due after June
30, 1995, which have predetermined interest rates is $144.0 million, while the
total amount of loans and mortgage-backed securities due after such date which
have floating or adjustable interest rates is $263.8 million.
One- to Four-Family Residential Mortgage and Construction Lending.
Residential loan originations are generated by the Bank's marketing efforts,
its present customers, walk-in customers and referrals from real estate brokers
and builders. The Bank has focused its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences. At June 30, 1994, the Bank's one- to four-family
residential mortgage loans, excluding mortgage-backed securities, totaled
$123.1 million, or 29.8% of the Bank's total mortgage loans receivable and
mortgage-backed securities.
Until June 1, 1993, the Bank also originated loans through USM primarily
for sale in the secondary market. Commencing January 1993, it began originating
loans for resale through its new Virginia-based mortgage banking subsidiary,
UFC. UFC's mortgage banking activities are separately described under the
caption "- Subsidiary and Other Activities - Union Security Mortgage, Inc. and
Union Financial Corp."
During the year ended June 30, 1994, the Bank originated $31.1 million
of one- to four-family residential mortgage loans. This represented 52% of the
total loans originated by the Bank during the period. During the year ended June
30, 1994, the Bank also purchased $9.4 million of one- to four-family
residential mortgage loans. Also, the Bank originated for sale and sold $27.6
million of fixed rate one- to four-family residential loans during the fiscal
year. The majority of the sales were to the Federal Home Loan Mortgage
Corporation ("FHLMC") with the servicing retained.
-4-
<PAGE>
The Bank currently makes adjustable-rate one- to four-family residential
mortgage loans in amounts up to 95% of the appraised value of the security
property. For all loans with a loan-to-value ratio in excess of 80%, the Bank
requires private mortgage insurance on the excess amount. The Bank currently
offers one and three year ARM loans at rates determined in accordance with
market and competitive factors for a term of up to 30 years. The loans provide
for a 2% annual cap, and a 5-6 1/2% lifetime cap on interest rate increases over
the rate in effect at the date of origination. The Bank's residential ARM
loans generally do not contain interest rate floors. These loans' annual and
lifetime caps on interest rate increases, and the absence in most cases of any
limitation on interest rate decreases, reduces the extent to which they can
help protect the Bank against interest rate risk. ARM loans are convertible to
fixed-rate loans during the first five years of their life for a predetermined
fee at then current secondary market rates.
The Bank also offers fixed-rate 15- and 30-year mortgage loans that
conform to secondary market standards (i.e., FHLMC, FHA and VA standards).
Interest rates charged on these fixed-rate loans are competitively priced
according to market conditions.
In underwriting residential real estate loans, the Bank evaluates both
the borrower's ability to make monthly payments and the value of the property
securing the loan. Potential borrowers are qualified for fixed-rate loans based
upon the initial or stated rate of the loan. On ARM loans, the borrower is
qualified on the fully indexed rate or on the second year's rate, whichever is
less.
An appraisal of the property securing the loan is obtained on all loan
applications from pre-approved independent fee appraisers. A senior loan
officer with proper lending authority or a loan committee, comprised of senior
officers, reviews each loan application and establishes the terms and
conditions of each approved loan. The Bank handles substantially all of its
own loan closings. Following closing, all loan files and disbursements are
audited by Bank personnel independent of the loan origination and closing
functions. The Bank generally requires, in connection with the origination of
residential real estate loans, title insurance or an opinion of counsel, and
fire and casualty insurance coverage, as well as flood insurance, where
appropriate, to protect the Bank's interest. The cost of this insurance
coverage is paid by the borrower.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
The Bank has enforced due-on-sale clauses in its mortgage contracts for the
purpose of increasing its loan portfolio yield. The yield increase is obtained
through the authorization of assumptions of existing loans at higher rates of
interest and the imposition of assumption fees. ARM loans may be assumed
provided home buyers meet the Bank's underwriting standards and the applicable
fees are paid.
The Bank originates a limited number of loans to finance the
construction of one- to four-family residences. At June 30, 1994, the Bank had
loans to finance the construction of one- to four-family residences totaling
$5.0 million, or approximately 1.2% of the Bank's loan and mortgage-backed
securities portfolio. Substantially all of these loans are made to individuals
who propose to occupy the premises upon completion of construction. Construction
loans are structured for up to a 30-year term with a 12 month construction
phase. Upon completion of the construction phase, these loans continue as
permanent loans of the Bank. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant.
The Bank purchases one- to four-family residential whole loans and loan
participations originated by other lenders. At June 30, 1994, the Bank had 42
groups of whole loans and loan participations (totaling $36.8 million) which
had been purchased. These loans and participation interests are secured by
properties located throughout the United States, with particular concentration
in California and Colorado. At June 30, 1994, no such loans were included in
the Bank's non-performing assets. The Bank qualifies all of its purchases
under its internal underwriting standards. See "- Originations, Purchases and
Sales of Mortgage Loans and Mortgage-Backed Securities."
Mortgage-Backed Securities. The Bank has significant investments in
mortgage-backed securities and has utilized such investments to complement its
mortgage lending activities. At June 30, 1994, mortgage-backed securities
totaled $243.6 million, or 48.3% of total assets. At such date, $177.0 million
of the Bank's mortgage-backed securities carried adjustable rates of interest.
For information regarding the carrying and market values of the Bank's
mortgage-backed
-5-
<PAGE>
securities portfolio, see Notes to Consolidated Financial Statements in the
Holding Company's 1994 Annual Shareholder Report.
At June 30, 1994, $93.6 million, or 38.4% of the mortgage-backed
securities portfolio, was insured or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), or FHLMC. Non-guaranteed Participation Certificates ("PCs") totaled
$150.0 million or 61.6% of the Bank's net mortgage-backed securities portfolio.
Non-guaranteed PCs collateralized by GNMA, FNMA, or FHLMC PCs totaled $5.1
million, while $119.4 million were rated "AA" or better and $11.1 million were
rated "A1" or "A2" by either Moody's Investors Service, Inc. ("Moody's) or
Standard & Poor's Corporation rating services. One non-guaranteed PC of $966,000
was rated "Baa3," and two PC's totalling $4.8 million were rated "Baa1," by
Moody's. Non-guaranteed and non-rated PCs totaled $8.4 million, of which $7.9
million have some form of credit enhancement, such as private mortgage insurance
covering a percentage of any losses or subordinate classes which absorb all
losses up to a certain percentage. The only non-rated PC without additional
credit enhancement has a book value of $520,000 and is backed by conventional
one- to four-family mortgage loans with a total unpaid principal balance of
$630,000.
Commercial Real Estate Lending. The Bank has originated commercial real
estate loans, including multi-family residential real estate loans, in its
market area and has purchased participation interests in loans from other
financial institutions. At June 30,1994, the Bank had $30.9 million in
commercial real estate loans, representing 7.5% of the Bank's total loan and
mortgage-backed securities portfolio. Whole commercial real estate loans
purchased and participation interests in commercial real estate loans totaled
$13.8 million at June 30, 1994, or 44.5% of the Bank's commercial real estate
loan portfolio.
The Bank's commercial real estate loan portfolio includes loans secured
by multi-family residential property, office buildings, retail stores,
warehouses, and other non-residential buildings, most of which are located in
the Bank's market area. Commercial real estate loans are generally originated in
amounts of up to 75% of the appraised value of the property securing the loan.
The Bank generally requires borrowers to provide personal guarantees on
commercial real estate loans. While in the past it has been the Bank's policy to
originate commercial real estate loans with fixed rates, it is the current
policy to originate commercial real estate loans with adjustable rates, which
adjust to a rate based upon a margin above the one year treasury bill constant
maturity index.
Multi-family residential loans comprise the largest portion of the
Bank's commercial real estate portfolio. Multi-family residential loans, like
commercial real estate loans, were in the past generally originated with fixed
interest rates. However, it is currently the Bank's policy to originate multi-
family residential loans with adjustable interest rates for terms of up to
twenty years and to carry a loan-to-value ratio not greater than 75%. The Bank
requires a positive net operating income to debt service ratio for loans secured
by multi-family residential property. Loans secured by non-owner occupied
properties of more than four units are qualified on the basis of rental income
generated by the property. On loans secured by non-owner occupied properties of
four units or less, the Bank will qualify the borrower on the basis of the
borrower's personal income and rental income generated by the property.
The Bank's largest amount of commercial real estate loans outstanding at
June 30, 1994, to any one borrower, or group of related borrowers, was $3.1
million. This amount is comprised of two (2) loans on multi-family residential
properties located in Irving and Garland, Texas with loan to value ratios of
70% and 59%, respectively, which were fully performing on June 30, 1994. The
second largest real estate loan outstanding at June 30, 1994, was $2.0 million.
This loan is a participation on a total loan of $2.9 million, is on a
commercial retail and office property in Aspen, Colorado, has a loan to value
ratio of 55%, and was fully performing at June 30, 1994. The Bank also has a
loan of $1.4 million secured by a 160 unit apartment complex in Henderson,
Kentucky. The Bank originated the loan in 1977. The Bank considers this loan
to be of concern due to minor delinquencies in the past. See "- Non-Performing
Assets - Other Loans of Concern." The Bank has 19 other commercial real estate
loans including multi-family residential loans (two of which are participations
and 13 of which were whole loan purchases), each of which has existing balances
in excess of $500,000.
The Bank generally purchases loans and loan participations with
loan-to-value ratios of 75% or less. Appraised values are required to be
estimated by independent appraisers to determine that the property to be
mortgaged satisfies
-6-
<PAGE>
these loan-to-value requirements. In purchasing any loan, the Bank must be
satisfied that the loan is based on the economic viability of the property and
the creditworthiness of the borrower. Creditworthiness is determined by
considering the character, experience, management and financial strength of the
borrower, and the ability of the property to generate adequate funds to cover
both operating expenses and debt service.
Commercial real estate lending affords the Bank an opportunity to
receive interest at rates higher than those generally available from residential
lending. Nevertheless, loans secured by commercial real estate properties are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. If the cash flow from the project is
reduced (for example, if leases are not obtained or renewed), the borrower's
ability to repay the loan may be impaired. The Bank attempts to minimize these
risks through its underwriting standards and by lending primarily on existing
income-producing properties.
Consumer Lending. Federal laws and regulations permit federally
chartered savings associations to make secured and unsecured consumer loans in
an aggregate amount of up to 35% of the association's assets. In addition, a
federally chartered savings association has lending authority above this limit
for certain consumer loans, such as property improvement loans and deposit
account secured loans. Management considers consumer lending to be an important
component of its strategic plan. Specifically, consumer loans generally have
shorter terms to maturity (thus reducing the Bank's exposure to changes in
interest rates) and carry higher rates of interest than do one- to four-family
residential mortgage loans. In addition, management believes that the offering
of consumer loan products helps to expand and create stronger ties to its
existing customer base, by increasing the number of customer relationships and
providing cross-marketing opportunities.
The Bank offers a variety of secured consumer loans, including auto
loans and loans secured by savings deposits. In addition, the Bank offers home
improvement, education and other types of unsecured loans. Since April 1992, the
Bank has also offered home equity loans and classic car loans. The Bank
currently originates all of its consumer loans in its market area (other than
the classic car loans discussed below). The Bank does not originate consumer
loans on an indirect basis (i.e., where loan contracts are purchased from
retailers of goods or services which have extended credit to their customers).
The Bank's consumer loans are short-term, fixed-rate loans. Consumer
loan terms vary according to the type of collateral, length of contract and
creditworthiness of the borrower. Terms to maturity vary up to 60 months. At
June 30, 1994, the Bank's consumer loan balances totaled $16.1 million, or 3.9%
of its total loan and mortgage-backed securities portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
During fiscal 1988, the Bank began offering VISA/Mastercard credit card
accounts. At June 30, 1994, approximately 3,110 credit card accounts had been
opened, with an aggregate outstanding balance of $1.9 million and unused credit
available of $3.3 million. The Bank presently charges an annual membership fee
of $15 and an annual rate of interest of 16.32%.
The Bank entered into an agreement in April 1991 with a loan broker in
Ohio for the purpose of funding loans for the purchase of classic cars. The
loans carry a fixed rate of interest, are made for a five-year term with up to a
fifteen-year amortization schedule, and are originated with a loan-to-value
ratio not greater than 70%. The Bank underwrites each appraised loan in
accordance with its normal consumer loan standards. Each of these loans is
reviewed by the Senior Vice President and Lending Operations Officer of the
Bank, and all loans over $100,000 must be approved by either the officer loan
committee or the Board of Directors. Effective April 1, 1994, the Bank sold $8.5
million of its classic car loan portfolio. At June 30, 1994, the Bank had 19
loans aggregating $1.0 million secured by classic cars, all of which were fully
performing at that date. The largest single loan totaled $144,000. The Bank's
current policy is to
-7-
<PAGE>
limit its activity in loans secured by classic cars to no more than 1.5% of the
Bank's total assets (or 2% of assets provided there are plans to sell the amount
in excess of 1.5%) and to limit its total amount of classic car loans to any one
borrower (or group of related borrowers) to $1.0 million and to $600,000 for any
one car. Because of the recent death of the chief executive officer of the loan
broker, the Bank expects future activity in its classic car lending to be
substantially less than in the past.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
credit card receivables, or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Further, the Bank's classic car lending
activities were only recently instituted, and the Bank may experience an
increased level of delinquencies in this loan portfolio as these loans age.
Although the level of delinquencies in the Bank's consumer loan portfolio has
generally been low (at June 30, 1994, $25,000, or approximately 0.16% of the
consumer loan portfolio, was 60 days or more delinquent), there can be no
assurance that delinquencies will not increase in the future.
Commercial Business Lending. Federal regulations authorize federally
chartered thrift institutions to make secured or unsecured loans for
commercial, corporate, business and agricultural purposes. The aggregate
amount of such loans outstanding may not exceed 10% of such institution's
assets. In addition, another 10% of total assets may be invested in commercial
equipment and consumer leasing and the Bank may use any or all of the 35%
consumer category described above for inventory and floor plan financing.
The Bank engages in a limited amount of commercial business lending
activities. At June 30, 1994, the Bank had approximately $4.3 million in
commercial business loans outstanding, $3.0 million of which is for the funding
of leases for automobiles. These lease funding loans are secured by the leased
automobiles, as well as by an assignment of the automobile leases to the Bank.
All of the Bank's commercial business loans have been to borrowers in its
market area.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his employment and other income
and which are secured by real property, the value of which tends to be more
easily ascertainable, business loans are of higher risk and typically are made
on the basis of the borrower's ability to make repayment from the cash flow of
his business, and are generally secured by business assets such as accounts
receivable, inventory and equipment. Nonetheless, the availability of funds for
the repayment of business loans may be substantially dependent on the success of
the business itself. Further, the collateral, if any, securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. At June 30, 1994, all of the Bank's
commercial business loans were performing in accordance with their terms.
Originations, Purchases and Sales of Mortgage Loans and Mortgage-Backed
Securities
As described above, the Bank originates real estate loans through
marketing efforts, the Bank's customer base, walk-in customers, and referrals
from real estate brokers and builders. The Bank originates both adjustable-rate
and fixed-rate loans. Its ability to originate loans is dependent upon the
relative customer demand for fixed-rate or ARM loans in the origination market,
which is affected by the term structure (short-term compared to long-term) of
interest rates as well as the current and expected future level of interest
rates.
The Bank has a portfolio of mortgage-backed securities which it holds
for investment. Such mortgage-backed securities can serve as collateral for
borrowings and, through repayments, as a source of liquidity. For information
regarding the carrying and market values of the Bank's mortgage-backed
securities portfolio, see Notes to Consolidated Financial Statements in the
Holding Company's 1994 Annual Shareholder Report. Under the risk-based capital
requirement, GNMA mortgage-backed securities have a risk-weighting of 0%, and
FNMA, FHLMC and privately issued AA-rated mortgage-backed securities have a
risk-weighting of 20%, in contrast to the 50% risk-weight carried by residential
loans.
-8-
<PAGE>
From time to time, the Bank purchases whole loans, loan participations
and mortgage-backed securities in accordance with its ongoing asset/liability
management objectives. The Bank purchases loans from private investors, such as
other thrift institutions, banks and insurance companies on the basis of its
internal underwriting standards.
The following table sets forth the loan origination, purchase, sale and
repayment activities of the Bank, exclusive of activities by its mortgage
banking subsidiary, for the periods indicated. See "- Subsidiary and Other
Activities" for a description of the activities of the Bank's mortgage banking
operations.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Beginning balance - loans............................. $179,096 $193,798 $210,251
Loans originated:
One- to four-family residential................... 31,074 18,402 24,229
Commercial real estate............................ 12,703 991 1,383
Consumer loans.................................... 12,956 11,259 12,256
Commercial business............................... 3,605 3,001 2,749
-------- -------- --------
Total loans originated.......................... 60,338 33,653 40,617
Purchases:
One- to four-family residential..................... 9,358 11,480 5,482
Sales and repayments:
Classic car loans sold.............................. 8,541 --- ---
Real estate loans sold.............................. --- --- ---
Principal repayments and other reductions (net)..... 72,334 59,835 62,552
-------- -------- --------
Net increase (decrease) loans......................... (11,179) (14,702) (16,453)
-------- -------- --------
Ending balance-loans.................................. $167,917 $179,096 $193,798
======== ======== ========
Beginning balance - mortgage-backed securities........ $244,322 $176,018 $165,556
Purchases........................................... 69,893 115,232 61,882
Sales............................................... --- --- 5,154
Principal repayments, and other..................... 70,652 46,928 46,266
-------- -------- --------
Net increase (decrease) mortgage-backed securities.... (759) 68,304 10,462
-------- -------- --------
Ending balance-mortgage-backed securities............. $243,563 $244,322 $176,018
======== ======== ========
</TABLE>
Non-Performing Assets
When a borrower fails to make a required payment by the end of the month
in which the payment is due, the Bank generally institutes collection
procedures. In most cases, delinquencies are cured promptly; however, if a loan
has been delinquent for more than 60 days, the Bank contacts the borrower in
order to determine the reason for the delinquency and to effect a cure, and,
where appropriate, reviews the condition of the property and the financial
circumstances of the borrower. Based upon the results of any such
investigation, the Bank may (i) accept a repayment program for the arrearage
from the borrower; (ii) seek evidence, in the form of a listing contract, of
efforts by the borrower to sell the property if the borrower has stated that he
is attempting to sell; (iii) request a deed in lieu of foreclosure; or (iv)
initiate
-9-
<PAGE>
foreclosure proceedings. When a loan payment is delinquent for three or more
months, the Bank generally will initiate foreclosure proceedings. Interest
income on loans at this point is reduced by the full amount of accrued and
uncollected interest.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 1994, in dollar amounts and as a percentage of the
Bank's total loan and mortgage-backed securities portfolio. The amounts
presented represent the total remaining principal balances of the related
loans, rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Mortgage Consumer
----------------------- -----------------------
Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
60-89 days................. 10 $480 .12% 2 $ 4 .00%
90 days and over........... 5 147 .04% 19 21 .01%
-- ---- --- -- --- ---
Total delinquent loans... 15 $627 .16% 21 $25 .01%
== ==== === == === ===
</TABLE>
The table below sets forth the amounts and categories of non-performing
assets of the Bank at the dates indicated. All loans which are 90 days past
due are placed on non-accrual status. For all years presented, there are no
troubled debt restructurings (which involved forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates). Foreclosed assets include assets acquired in settlement of
loans.
<TABLE>
<CAPTION>
June 30,
------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-Performing Assets
Non-accruing loans:
One- to four-family............. $ 147 $ 298 $ 445 $1,977 $2,115
Consumer........................ 21 128 49 28 57
------ ------ ------ ------ ------
Total......................... 168 426 494 2,005 2,172
------ ------ ------ ------ ------
Foreclosed assets:
Real estate owned............... 1,472 1,702 1,475 690 662
Other repossessed assets........ --- --- 2 18 13
------ ------ ------ ------ ------
Total......................... 1,472 1,702 1,477 708 675
------ ------ ------ ------ ------
Total non-performing assets....... $1,640 $2,128 $1,971 $2,713 $2,847
====== ====== ====== ====== ======
Total as a percentage of
total assets................ 0.33% 0.43% 0.42% 0.59% 0.66%
====== ====== ====== ====== ======
</TABLE>
For the year ended June 30, 1994, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $12,000. The amount that was included in interest
income on such loans was $6,000 for the year ended June 30, 1994.
Non-Accruing Loans. As of June 30, 1994, the Bank had $168,000 in net
book value of non-accruing loans. The Bank's largest non-accruing loan had a
carrying value of $79,000 at June 30, 1994. No other non-accruing loan
exceeded $23,000 at June 30, 1994.
-10-
<PAGE>
Foreclosed Assets. As of June 30, 1994, the Bank had $1.5 million of
foreclosed assets. Real estate owned included 11 separate properties, 9 of
which were single family residences. The largest foreclosed asset was a single
family residence with a net carrying value of $574,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 1994, there was also an aggregate of
$5,220,000 in net book value of loans with respect to which known information
about the possible credit problems of the borrowers, the cash flows of the
security properties, or concerns about documentation have caused management to
have doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories. The largest portion of this category is a
real estate loan to a single borrower totalling $1.4 million. Management does
not currently anticipate any losses on these loans. See "- Commercial Real
Estate Lending." At June 30, 1994, the Bank had no other loans (or group of
related loans) of concern with a net book value in excess of $17,000.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "special mention" by management. The OTS has
issued a notice of proposed rulemaking that would remove special mention assets
from the OTS's classification of assets scheme of adversely affected assets.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's Principal Supervisory Agent, who may
order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. Total
classified assets at June 30, 1994, were $1.7 million, substantially all of
which were classified "substandard." Not all classified assets are non-
performing assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risk inherent in its loan portfolio and changes in the nature and volume of its
loan activity. Such evaluation, which includes a review of all loans of which
full collectibility may not be reasonably assured, considers among other
matters, the estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan allowance. At June 30,
1994, the Bank had an allowance for loan losses of $1,535,000. See Notes to
Consolidated Financial Statements in the Holding Company's 1994 Annual
Shareholder Report.
-11-
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period..... $ 800 $648 $620 $397 $213
Charge-offs:
Real estate -mortgage............ 75 102 81 56 12
Consumer......................... 114 50 133 121 135
Commercial business.............. --- --- --- 8 ---
------ ---- ---- ---- ----
Total.......................... 189 152 214 185 147
------ ---- ---- ---- ----
Recoveries:
Mortgage......................... 3 10 --- --- ---
Consumer......................... 7 9 11 17 12
------ ---- ---- ---- ----
Total.......................... 10 19 11 17 12
------ ---- ---- ---- ----
Net charge-offs.................... 179 133 203 168 135
Provision for loan losses.......... 914 285 231 391 319
------ ---- ---- ---- ----
Balance at end of period........... $1,535 $800 $648 $620 $397
====== ==== ==== ==== ====
Net charge-offs as a percentage
of average loans outstanding..... .10% .07% .10% .08% .06%
====== ==== ==== ==== ====
Allowance for loan losses as
a percentage of non-performing
loans at the end of the period... 913.69% 187.79% 131.17% 30.92% 18.28%
====== ====== ====== ====== ======
Allowance for loan losses as
a percentage of loans at
the end of the period............ .91% .44% .33% .29% .18%
=== === === === ===
</TABLE>
When the Bank repossesses property it is thereafter classified as other
real estate owned. Any gains or losses (realized or reserved for) thereafter
are treated as other real estate owned activity, not mortgage loan activity.
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------------- -------------------- -------------------- -------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Loans in each Loans in each Loans in each Loans in each Loans in each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate........... $ 980 88.32% $375 86.94% $321 90.0% $310 92.9% $224 93.4%
Consumer.............. 275 9.22 275 10.95 242 8.5 230 6.0 173 5.6
Commercial Business... 80 2.46 60 2.11 45 1.5 40 1.1 --- 1.0
Unallocated........... 200 --- 90 --- 40 --- 40 --- --- ---
------ ------ ---- ------ ---- ----- ---- ----- ---- -----
Total................. $1,535 100.00% $800 100.00% $648 100.0% $620 100.0% $397 100.0%
====== ====== ==== ====== ==== ===== ==== ===== ==== =====
</TABLE>
Investment Activities
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained
liquid assets at levels above minimum requirements imposed by the OTS
regulations and at levels believed adequate to meet the requirements of normal
operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed
-12-
<PAGE>
and updated to assure that adequate liquidity is maintained. For June 1994, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 8.0%.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives.
At June 30, 1994, the Bank's interest-bearing deposits with banks
totaled $11.7 million, or 2.3% of total assets, and its investment securities
totaled $26.5 million, or 5.3% of total assets. It is the Bank's general policy
to purchase investment securities which are U.S. Government securities and
federal agency obligations and other issues that are rated investment grade or
have credit enhancers. At June 30, 1994, the average term to maturity or
repricing of the investment securities portfolio was 1.4 years.
The following table sets forth the composition of the Bank's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
1994 1993 1992
----------------- ------------------- -----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------ ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks...... $11,681 100.00% $ 6,834 100.00% $14,183 100.00%
======= ====== ======= ====== ======= ======
Investment securities
U.S. government securities.............. 6,718 18.69 $ 6,580 44.69% $ 3,117 33.97
Federal agency obligations.............. 16,210 45.10 --- --- --- ---
Corporate............................... 3,616(1) 10.06 143(2) .97 171(2 ) 1.86
------- ------ ------- ------ ------- ------
Total investment securities........... 26,544 73.85 6,723 45.66 3,288 35.83
------- ------ ------- ------ ------- ------
Federal funds sold........................ 3,300 9.18 3,000 20.38 1,900 20.71
FHLB stock................................ 6,101 16.97 5,000 33.96 3,987 43.46
------- ------ ------- ------ ------- ------
Total investment securities,
Federal funds sold and FHLB stock....... $35,945 100.00% $14,723 100.00% $ 9,175 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term
to repricing of investment securities,
excluding Federal funds sold and,
FHLB stock.............................. 1.39 yrs. 1.88 yrs. 1.02 yrs.
___________________
</TABLE>
(1) This is an unrated subordinate class of a pool of $27.8 million in
classic car loans issued as a pass-through security on April 1, 1994.
Credit enhancements include an initial cash reserve fund of $1 million.
Additionally, the first $500,000 of excess servicing will also be deposited
to the cash reserve, which is then required to remain at a minimum balance
of $1.5 million. Additional credit enhancement includes the excess
servicing of the issue. (The Bank services the loans securitizing the
issue and also participates in the excess servicing of the entire issue.)
(2) Citicorp notes rated BAA2 by Moody's Investors Service, Inc.
-13-
<PAGE>
The composition and maturities of the investment securities portfolio at
June 30, 1994, excluding FHLB of Indianapolis stock and other government agency
stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1994
----------------------------------------------------------------
(Dollars in Thousands)
Less than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
------ ------ ------ -------- ----------
Book Book Book Book Book Market
Value Value Value Value Value Value
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury.................. $6,718 $ --- $ --- $ --- $ 6,718 $ 6,718
Federal agency obligations..... --- 15,210 1,000 --- 16,210 16,050
Corporate...................... --- --- --- 3,616 $ 3,616 $ 3,616
------ ------- ------ ------ ------- -------
Total investment securities.. $6,718 $15,210 $1,000 $3,616 $26,544 $26,384
====== ======= ====== ====== ======= =======
Weighted average rate.......... 3.86% 6.57% 5.00% 11.70% 6.52%
====== ======= ====== ====== =======
</TABLE>
The Bank's investment securities portfolio at June 30, 1994 contained
neither tax-exempt securities nor securities of any issuer with an aggregate
book value in excess of 10% of the Bank's retained income, excluding securities
issued by the United States Government, or its agencies.
At June 30, 1994, the Bank held $243.6 million and $26.5 million of
mortgage-backed securities and investment securities, respectively, with a
market value of $240.7 million and $26.4 million, respectively.
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and prepayment of loan principal (including mortgage-backed securities),
borrowings, maturities of investment securities, mortgage-backed securities and
short-term investments, and funds provided from operations.
Borrowings, predominantly from the FHLB of Indianapolis, may be used on
a short-term basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels, and may be used on a longer-term basis to
support expanded lending activities.
Deposits. The Bank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook and
statement accounts, NOW and checking accounts, and money market and certificate
accounts. The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits. The Bank solicits
deposits from its market area only, and does not use brokers to obtain deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook and statement savings, NOW and
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificate deposits, and the rates
paid on these deposits, has been and will continue to be significantly affected
by market conditions.
Under regulations adopted by the FDIC, well capitalized insured
depository institutions (those with a ratio of total capital to risk-weighted
assets of not less than 10%, with a ratio of core capital to risk-weighted
assets of not less than 6%, with a ratio of core capital to total assets of not
less than 5% and which have not been notified that they are in troubled
condition) may accept brokered deposits without limitations. Undercapitalized
institutions (those that fail to meet minimum regulatory capital requirements)
are prohibited from accepting brokered deposits. Adequately capitalized
institutions (those that are neither well-capitalized nor undercapitalized) are
prohibited from accepting brokered deposits
-14-
<PAGE>
unless they first obtain a waiver from the FDIC. Under these standards, the Bank
would be deemed a well-capitalized institution.
An undercapitalized institution may not solicit deposits by offering
rates of interest that are significantly higher than the prevailing rates of
interest on insured deposits (i) in such institution's normal market areas; or
(2) in the market area in which such deposits would otherwise be accepted.
Adequately capitalized institutions, whether or not they accept brokered
deposits pursuant to a waiver from the FDIC, are prohibited from paying a rate
of interest on such funds which, at the time such funds are accepted,
significantly exceeds (1) the rate paid on deposits of similar maturity in such
institution's normal market area for deposits accepted in the institution's
normal market area; or (2) the "national rate" paid on deposits of comparable
maturity for deposits accepted outside the institution's normal market area.
The national rate is (1) 120 percent of the current yield on similar maturity
U.S. Treasury obligations, or (2) in the case of any deposit at least half of
which is uninsured (institutional or wholesale deposits), 130 percent of such
applicable yield. A rate is deemed to be "significantly" higher or excessive
if it exceeds by more than 75 basis points the applicable benchmark (i.e., the
local rate or national rate).
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
1994 1993 1992
----------------- ----------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates:
4.00 and under $ 89,920 23.48% $ 94,775 24.83% $ 38,521 9.86%
4.01 - 6.00% 107,368 28.04 87,964 23.04 104,811 26.83
6.01 - 8.00% 22,409 5.85 43,544 11.41 84,534 43.77
8.01 - 10.00% 10,049 2.63 18,154 4.76 43,344 11.09
10.01 - 12.00% 575 .15 822 .22 780 .20
12.01% and over 17 .00 94 .02 93 .02
-------- ------ -------- ------ -------- ------
Total certificates 230,338 60.15 245,353 64.28 272,083 69.63
-------- ------ -------- ------ -------- ------
Other Accounts:
Passbook and statement accounts 57,104 14.91 48,500 12.71 39,836 10.20
Money market accounts 26,604 6.95 27,508 11.99 26,403 6.76
NOW accounts 58,168 15.19 53,662 9.27 45,317 11.69
Non-interest bearing checking 10,702 2.80 6,689 1.75 7,112 1.72
-------- ------ -------- ------ -------- ------
Total other accounts 152,578 39.85 136,359 35.72 118,668 30.37
-------- ------ -------- ------ -------- ------
Total deposits $382,916 100.00% $381,712 100.00% $390,751 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the savings flows at the Bank during the
periods indicated. Net increase (decrease) refers to the amount of deposits
during a period less the amount of withdrawals during the period. The net
withdrawals (before interest credited) during the years ended June 30, 1992,
1993; and 1994, reflect management's strategy of conservatively pricing most
deposits to better control the Bank's cost of funds. Deposit flows at savings
institutions may also be influenced by external factors such as governmental
credit policies, market interest rate levels and alternative investment
opportunities.
-15-
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Opening Balance................... $381,712 $390,751 $400,576
Net deposits (withdrawals)........ (13,877) (20,831) (26,509)
Interest credit................... 15,081 11,792 16,684
-------- -------- --------
Ending balance.................... $382,916 $381,712 $390,751
======== ======== ========
Net increase (decrease)........... $ 1,204 $ (9,039) $ (9,825)
======== ======== ========
Percent increase (decrease)....... 0.32% (2.31)% (2.45)%
======== ======== ========
</TABLE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1994.
<TABLE>
<CAPTION>
0.00- 4.01- 6.01- 8.01- 10.01- 12.01% Percent
4.00% 6.00% 8.00% 10.00% 12.00% and over Total of Total
----- ----- ----- ------ ------ -------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit
amounts maturing in
ended:
June 30, 1995............ $74,926 $ 33,949 $ 6,199 $ 5,261 $291 $17 $120,643 52.4%
June 30, 1996............ 14,988 33,905 5,494 4,775 284 0 59,446 25.8
June 30, 1997............ 6 14,289 10,463 2 0 0 24,760 10.7
Thereafter............... 0 25,225 253 11 0 0 25,489 11.1
------- -------- ------- ------- ---- --- -------- -----
Total.................. $89,920 $107,368 $22,409 $10,049 $575 $17 $230,338 100.0%
======= ======== ======= ======= ==== === ======== =====
Percent of total....... 39.04% 46.61% 9.73% 4.36% .25% .01% 100.0%
===== ===== ==== ==== === === =====
</TABLE>
The following table sets forth the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1994.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------
3 Over Over Over
Months 3 to 6 6 to 12 12
or less Months Months Months Total
------- ------ ------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000........................ $39,372 $23,949 $42,322 $102,668 $208,311
Certificates of deposit of
$100,000 or more................ 2,893 1,962 3,250 6,841 14,946
Public funds...................... 5,874 399 622 186 7,081
------- ------- ------- -------- --------
Total certificates of deposit..... $48,139 $26,310 $46,194 $109,695 $230,338
======= ======= ======= ======== ========
</TABLE>
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds or can be invested at a positive rate of return. In addition,
the Bank has relied upon selected borrowings for short-term liquidity needs.
-16-
<PAGE>
The only borrowings utilized by the Bank in recent years have been
advances from the FHLB of Indianapolis. The Bank obtains advances from the FHLB
of Indianapolis upon the security of its capital stock of the FHLB of
Indianapolis and certain of its mortgage loans. Such advances are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. At June 30, 1994, the Bank's FHLB of Indianapolis
advances totaled $68.8 million, representing 13.7% of total assets.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances............................... $120,000 $100,000 $47,000
Average Balance:
FHLB advances............................... $ 58,939 $ 57,741 $33,371
Weighted average interest rate during year.. 5.83% 5.88% 7.98%
</TABLE>
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1994 1993 1992
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances.............................. $68,800 $58,000 $31,000
Weighted average interest rate
paid on FHLB advances.................... 5.83% 5.28% 8.41%
</TABLE>
Subsidiary and Other Activities
As a federally chartered savings bank, the Bank is permitted by OTS
regulations to invest up to 2% of its assets, or $9.9 million at June 30, 1994,
in the stock of, or unsecured loans to, service corporation subsidiaries. As
of such date, the net book value of the Bank's investment in and unsecured
loans to its service corporations, exclusive of Union Financial Corp. ("UFC"),
was $400,000. The Bank may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner-city or community
development purposes. OTS regulations do not impose specific limitations on
the amount the Bank may invest in UFC, its operating subsidiary; however, the
OTS may at any time impose such limitations for supervisory, legal, safety or
soundness reasons.
During the fiscal year ended June 30, 1994, the Bank had three wholly-
owned subsidiaries, engaged in real estate development, insurance and securities
brokerage, and mortgage banking. Another of the Bank's wholly-owned
subsidiaries was sold effective May 31, 1993 to an unrelated entity. The
following is a description of the subsidiaries' principal activities.
Union Security Mortgage, Inc. and Union Financial Corp. Union Security
Mortgage, Inc. ("USM") is a mortgage banking company based in Santa Ana,
California, and was a wholly-owned subsidiary of the Bank until May 31, 1993,
the date on which complete ownership of USM was sold to an unrelated third
party. During the Bank's ownership of USM, USM originated, sold and serviced
conventional single family residential loans through its main office and a
satellite office located in Woodland Hills, California. The principal sources
of revenue for USM were loan origination fees, gains (or losses) from the sale
of loans, loan servicing fees and gains from the sale of loan servicing rights.
USM charged a $545 fee at the time of funding on all mortgages, which
represented the underwriting, loan document and wire transfer charges of USM.
-17-
<PAGE>
The primary operation of the business of USM was wholesale, which
involved the origination of loans by mortgage brokers in USM's name. Each loan
submitted by a mortgage broker was accepted only after review by one of USM's
loan underwriters. USM originated only conventional loans, although it was an
approved FHA Direct endorsement, VA Automatic and GNMA seller servicer. During
the Bank's ownership of USM, USM's guidelines for underwriting conventional
conforming loans complied with the underwriting criteria prescribed by FNMA and
FHLMC. USM originates other single-family residential loans with a view to
resale to private mortgage investors, and in underwriting these loans, USM
utilized guidelines and property standards specified by the various investors.
USM did not make loans with a loan-to-value ratio greater than 80% unless the
portion of the loans in excess of an 80% ratio was covered by private mortgage
insurance. During the eleven-month period ended June 1, 1993, USM funded $620
million of mortgage loans. Substantially all of these loans were sold to
unaffiliated third party investors.
USM customarily sold all of the loans that it originated. Loans were
generally sold to buyers in the secondary market on a non-recourse basis
(except for limited recourse provisions which generally ran from 90 to 120 days
from the date of sale), either as individual whole loans or as a packaged pool
of loans. Immediately upon origination, loans were assigned to the Bank
(where they were held for sale). The loans were reassigned back to USM
immediately prior to being sold in the secondary market. The loans were held
for sale by the Bank from their funding date until they were sold to investors,
a period which generally ranged from ten to ninety days. USM offered thirty
day interest rate locks to its borrowers prior to funding.
Through a third party, USM serviced most of the mortgage loans it
originated. USM reviewed the servicing performance on a monthly basis. Loan
servicing included collecting and remitting loan payments, accounting for
principal and interest, holding escrowed funds for payment of taxes and
insurance, making inspections as required of the mortgage premises, contacting
delinquent mortgagors, supervising foreclosures in the event of unremedied
defaults, and generally administering the loans for the investors to whom they
have been sold. USM received fees for servicing mortgage loans, generally
ranging from 25 to 30 basis points per annum on the remaining principal
balances of the loans. USM accounted for the revenues associated with the sale
of loans, in which servicing was retained, in conformity with the requirements
of Statement of Financial Accounting Standards No. 65. This method required
that the contracted sales price be adjusted, for purposes of determining gain
or loss on the sale, to provide for the recognition of a normal servicing fee
over the estimated servicing lives of the loans. The amount of revenue
recognized from the sale of loans was the estimated sales price that would have
been obtained if a normal this estimated sales present value of the difference
between the contractual and normal servicing fees over the estimated life of the
loan. This adjustment resulted in a receivable which is realized through the
receipt of the contractual servicing fee. During that portion of the 1993
fiscal year ended June 1, 1993, USM sold $623 million of loans, $229 million
with the servicing included thereon.
USM's servicing portfolio was subject to reductions by reason of normal
amortization, prepayment or foreclosure of outstanding loans and periodic sales
of loan servicing rights. In addition, in order to improve its earnings, USM,
in prior years, sold portions of its servicing portfolio to other mortgage
servicers.
USM sold, primarily to other mortgage bankers, banks, savings and loans
and other mortgage servicers, a portion of the loan servicing rights associated
with loans originated by USM during the year. In general, the decision to buy
or sell servicing rights was based upon management's assessment of USM's current
and future earnings objectives and the market value of servicing rights.
Effective June 1, 1993, the Bank sold complete ownership of its then
wholly owned subsidiary, USM, to the Knight Corporation ("Knight"). While the
Bank owned USM, USM originated, sold and serviced conventional single family
residential loans through its offices in Santa Ana and Woodland Hills,
California. USM customarily sold all of the loans that it originated to buyers
in the secondary market on a non-recourse basis, either as individual whole
loans or as a packaged pool of loans. However, subsequent to the sale of the
loans it originated USM remained potentially liable for losses incurred by a
purchaser, including unpaid principal and interest, under certain
representations and warranties made to the purchaser at the time of sale. In
certain circumstances (for example, when the debtor made fraudulent
misrepresentations to USM in the origination process), USM was liable for a
purchaser's losses on a defaulted loan, regardless of whether the loan was
recourse or non-recourse, if there had been a breach of the
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representations and warranties made to the purchaser by USM. Such fraud might
occur with respect to tax returns, employment verifications, and deposits and
appraisals provided at the time of origination. In connection with the sale of
USM on June 1, 1993, the Bank contractually assumed liability to the Knight
Corporation for losses and repurchase demands resulting from breaches of the
representations and warranties. Moreover, in certain cases the Bank separately
guaranteed USM's obligations to loan purchasers pursuant to guarantees signed by
the Bank prior to the sale of USM. Although USM dissolved in 1994, and the Bank
is less likely to be asked to indemnify the Knight Corporation for claims
against USM for any breach of the representations and warranties, the Bank
remains obligated under certain of the separate guarantees to loan purchasers
for losses relating to USM's prior operations.
When fraud claims relating to loans originated by USM began to surface
in fiscal 1993, they were thought to be aberrational. However, additional
repurchase claims arose in 1994, and the Company discovered that these claims,
some of which were based on fraud, were arising in California because of the
prior sharp increases in the value of single family homes. During 1990 and
1991, borrowers not capable of meeting mortgage payments obtained loans based
on fraud with the apparent expectation that they could profit from the resale
of the homes in the rising home market. However, the California economy
deteriorated and housing values dropped sharply. As a result, borrowers were
unable to sell their homes at a profit and pay off the mortgage loans. As
borrowers defaulted, the fraud was discovered and the repurchase and warranty
loss claims occurred. By fiscal 1994, lenders and the public were generally
aware of the fraud schemes in California and the California housing market had
stabilized.
In June 1994, the Company identified eight loans with an aggregate
outstanding loan balance of $1,048,000 at June 30, 1994, which had been sold to
the Federal Home Loan Mortgage Corporation and a loan sold to the Federal
National Mortgage Corporation with a loan balance of $161,000 at June 30, 1994,
which appeared to have involved broker fraud. During the year ended June 30,
1994, the Bank incurred approximately $116,000 in losses relating to warranty
claims on two loans, and provided for $1,482,000. At June 30, 1994, the Bank
had eight warranty loss claims pending and the estimated potential loss from
these known claims totalled $651,000. The Company believes six of those eight
claims are without merit and that only two, with an estimated liability of
$133,000, have any merit. The Company's allowance for warranty losses was
$1,366,000 at June 30, 1994, which management considers adequate. For the
fiscal years 1993 and 1992, USM had losses of $456,000 and $111,000,
respectively, under these guarantees.
The following table summarizes certain information as to the loan
servicing portfolios of USM and loans funded by USM at the dates and for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1993* 1992
----- ----
(In Thousands)
<S> <C> <C>
Loans funded...................................... $619,567 $714,156
Loans serviced for others at end of period........ 720,354 405,896
</TABLE>
_____________________
* Through June 1
In January 1993, the Bank formed a new mortgage banking subsidiary based
in Virginia named Union Financial Corp. ("UFC"). UFC originates, sells and
services conventional single family residential loans through its main office.
The principal sources of revenue for UFC are loan origination fees, gains (or
losses) from the sale of loans, loan servicing fees and gains from the sale of
loan servicing rights.
The primary operation of the business of UFC is wholesale, which
involves the origination of loans by mortgage brokers in UFC's name. Each loan
submitted by a mortgage broker is accepted only after review by one of UFC's
loan underwriters. UFC originates only conventional loans, although it is an
approved FHA Direct endorsement and VA Automatic seller servicer. UFC's
guidelines for underwriting conventional conforming loans complies with the
underwriting criteria prescribed by FNMA and FHLMC. UFC originates other single-
family residential loans with a view to resale to private mortgage investors,
and in underwriting these loans, UFC utilizes guidelines and property standards
specified by the various investors. UFC does not make loans with a loan-to-
value ratio greater than 80% unless the portion of the loans in excess of an 80%
ratio is covered by private mortgage insurance.
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UFC customarily sells all of the loans that it originates. Loans are
generally sold to buyers in the secondary market on a non-recourse basis
(except for limited recourse provisions which generally ran from 90 to 120 days
from the date of sale), either as individual whole loans or as a packaged pool
of loans.
UFC services the mortgage loans it sells on a servicing retained basis.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrowed funds for payment of taxes and
insurance, making inspections as required of the mortgage premises, contacting
delinquent mortgagors, supervising foreclosures in the event of unremedied
defaults, and generally administering the loans for the investors to whom they
have been sold. UFC receives fees for servicing mortgage loans, generally
ranging from 25 to 30 basis points per annum on the remaining principal
balances of the loans. UFC accounts for the revenues associated with the sale
of loans, in which servicing is retained, in conformity with the requirements
of Statement of Financial Accounting Standards No. 65. This method requires
that the contracted sales price be adjusted, for purposes of determining gain
or loss on the sale, to provide for the recognition of a normal servicing fee
over the estimated servicing lives of the loans. The amount of revenue
recognized from the sale of loans is the estimated sales price that would have
been obtained if a normal servicing rate had been negotiated. UFC determines
this estimated sales price by adjusting the contracted sales price by the
present value of the difference between the contractual and normal servicing
fees over the estimated life of the loan. This adjustment results in a
receivable which is realized through the receipt of the contractual servicing
fee. During the 1994 fiscal year, UFC sold $413 million of loans, $328 million
with the servicing included thereon.
UFC's servicing portfolio is subject to reductions by reason of normal
amortization, prepayment or foreclosure of outstanding loans and periodic sales
of loan servicing rights.
UFC sold a portion of the loan servicing rights associated with loans
originated by UFC during the year. In general, the decision to buy or sell
servicing rights is based upon management's assessment of UFC's current and
future earnings objectives and the market value of servicing rights.
Subsequent to the sale of the loans it originates, UFC remains
potentially liable for losses incurred by a purchaser, including unpaid
principal and interest, under certain representations and warranties made to the
purchaser at the time of the sale. Under certain circumstances (for example,
when the debtor made fraudulent misrepresentations to UFC in the origination
process), UFC may become liable for a purchaser's losses on a defaulted loan,
regardless of whether the loan is recourse or nonrecourse, if there has been a
breach of the representations and warranties made to the purchaser by UFC. For
fiscal 1994, UFC had no losses under these guarantees.
UFC's operations during the year resulted in a profit of $29,000. The
following table summarizes the operations of UFC for the year ended June 30,
1994:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Gross income,
principally fees on loans........................ $ 3,755
Operating expenses,
principally personnel expenses................... 3,711
--------
Income before taxes................................ 44
Income tax......................................... 15
--------
Net income......................................... $ 29
========
Loans funded....................................... $419,907
Loans sold......................................... $413,129
Servicing portfolio
at June 30, 1994................................. $ 44,800
</TABLE>
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<PAGE>
As described above with respect to USM, UFC has potential liability
under representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights at the time of the sale of the
mortgage loan or servicing rights. If there has been a breach of such
representations or warranties, UFC may become liable for the unpaid principal
and interest on defaulted loans (whether recourse or nonrecourse). UFC had no
losses under these guarantees during the 1994 fiscal year.
UNIFIN Inc. ("UNIFIN") is engaged in the development of real estate.
Currently UNIFIN owns and is developing a duplex condominium project on a
17-acre tract in north Evansville. At June 30, 1994, the project was
approximately 80% complete, with 42 units constructed and sold. The project
currently has four units under construction. At June 30, 1994, the Bank's
total equity investment in the project was $174,000. The Bank also had
unsecured loans to UNIFIN of $132,000 and secured loans of $671,000. The
project was originally scheduled to be completed in 1991. Sales have been
slower than projected, however, and management now expects completion of the
project to be delayed until at least 1996.
Management's policy since inception of the project has been to have a
maximum of four units under construction or completed and held for sale at any
one time. This restriction has minimized carrying costs and limited UNIFIN's
risk in this project. Also, due to the slower than anticipated sales, carrying
costs, including interest of the project, are currently being capitalized only
on units under construction or held for sale.
Real estate development activities involve risks that could have an
adverse effect on the profitability of the Bank. UNIFIN has incurred certain
costs to acquire land, develop the site, commence construction, and engage in
marketing activities. The construction phase for this project is approximately
80% complete, and the Bank had $245,000 in unallocated development costs as of
June 30, 1994. To the extent some or all of the remaining individual units are
not constructed and/or sold, the unallocated development costs relating to such
units would have to be written off.
In addition to the risks involved in real estate development activities,
pursuant to FIRREA, for purposes of determining its capital requirements, the
Bank is required to deduct from capital certain investments in and loans to
UNIFIN. FIRREA provides a transitional rule that phases in the deduction over
a five-year period for investments in and certain loans to UNIFIN for its real
estate development activities as of April 12, 1989. Loans to and investments
in UNIFIN for such activities after that date are required to be totally
deducted from capital in determining the Bank's capital requirements. Thus, as
of June 30, 1994, the Bank deducted from its capital its total investment in
and loans to UNIFIN. See "Regulation--Regulatory Capital."
Community Insurance Associates, Inc. ("CIA") is engaged in the sale of
property, life and casualty insurance, and tax-deferred annuities and
securities. Included in CIA is the Annuity and Securities Sales Division
("MOSI Division"). The MOSI Division, which is the securities brokerage
division of the subsidiary, sells products through Marketing One Securities,
Incorporated, a company not affiliated with the Bank. In December 1989 and
June 1993, CIA paid dividends of $400,000 and $500,000, respectively, to the
Bank. CIA paid no dividends to the Bank in fiscal year 1994. At June 30, 1994,
the Bank had an equity investment in CIA of $89,000.
Pedcor Investments ("Pedcor"). The Bank is a 24.75% limited partner in
Pedcor, a limited partnership organized to build, own and operate a 208 unit
apartment complex in Indianapolis, Indiana. The project, operated as a
multi-family, low income housing project, qualifies for low income housing tax
credits. The project is complete and performing as planned. The Bank
committed to invest approximately $1.4 million at inception. As of June 30,
1994, the Bank had a $515,000 net investment in Pedcor with four additional
annual capital contributions totaling $398,000 remaining to be paid by the
Bank. The additional contributions will be used for operating and other
expenses of the partnership. These payments are contingent upon the Bank not
exercising a put option which would require the general partners to buy out the
Bank's interest in the partnership for a nominal amount.
The Bank has been informed by the OTS that this investment is
permissible for a national bank and, as such, is not required to be deducted
from capital for regulatory purposes.
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<PAGE>
Competition
The Bank faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks and
mortgage bankers making loans secured by real estate located in the Bank's
market areas. Commercial banks and finance companies provide vigorous
competition in consumer lending.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from other savings
institutions and commercial banks located in the same communities. The Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, and convenient branch locations
with interbranch deposit and withdrawal privileges at each. Automated teller
machine ("ATM") facilities are available at most branch locations.
The Bank considers its primary market area to be the Greater Evansville
Metropolitan Area, which is composed of Warrick, Posey, Vanderburgh and Gibson
Counties, Indiana, and Henderson County, Kentucky. As of June 30, 1994, there
were approximately 36 financial institutions serving the Bank's primary market
area. The Bank estimates its share of the savings market in its primary market
area to be less than 10%. The Bank also has branches in and serves Bartholomew
County, Indiana and the communities of Jasper and Shelbyville, Indiana and Mt.
Carmel, Illinois.
Competition has increased in recent years due to changes in Indiana law
permitting (1) state wide branching by national and state banks and savings
associations and (2) nationwide acquisitions on a reciprocal basis of and by
Indiana bank and bank holding companies.
In addition, Indiana law permits acquisitions of certain federal and
state SAIF-insured savings associations and their holding companies located in
Indiana, Ohio, Kentucky, Illinois, and Michigan (the "District") by other
savings associations located in the District. The Indiana statute also
authorizes Indiana savings associations to acquire other savings associations in
the District.
Unlike prior federal law which permitted bank holding companies to
acquire only failing savings associations, FIRREA now permits bank holding
companies to acquire healthy savings associations. Savings associations may also
acquire banks under federal law. See "Regulation--Acquisitions or Dispositions."
To date, several bank holding company/healthy savings association acquisitions
in Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Bank.
Employees
At June 30, 1994, the Bank and its subsidiaries had a total of 236
employees, including 59 part-time employees. The Bank's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the FDIC. The Bank is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval and the associations
must file reports with these governmental agencies about their activities and
their financial condition. Periodic compliance examinations of the Bank are
conducted by the OTS which has, in conjunction with the FDIC in certain
situations, examination and enforcement powers. This supervision and regulation
are intended primarily for the protection of depositors and federal deposit
insurance funds. The Bank is also subject to certain reserve requirements under
regulations of the Board of Governors of the Federal Reserve System ("FRB").
In November, 1993, the Clinton Administration announced that it is
considering legislation that would consolidate the supervision and regulation
of all U.S. financial institutions in one administrative body (the "Clinton
Legislation"). It cannot be predicted with certainty whether or when the
Clinton Legislation will be enacted or the extent to which the Bank would be
affected thereby.
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<PAGE>
An OTS regulation establishes a schedule for the assessment of fees upon
all savings associations to fund the operations of the OTS. The regulation also
establishes a schedule of fees for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be paid on
a semiannual basis, is based upon the savings association's total assets,
including consolidated subsidiaries, as reported in a recent quarterly thrift
financial report. Currently, the assessment rates range from .0172761% of assets
for associations with assets of $67 million or less to .0045864% for
associations with assets in excess of $35 billion. The Bank's semiannual
assessment under this assessment scheme, based upon its total assets at March
31, 1994, was $53,800.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") became effective December 19, 1991. Among other things FedICIA
requires that on-site examinations of the Bank by the OTS occur at least once
every 12 months (unless the FDIC has conducted a full-scope examination during
the period in question). FedICIA also authorizes the FDIC to assess insured
institutions for the cost of FDIC examinations and requires the OTS to assess
federal associations for the costs of its examinations.
FedICIA also requires the Bank's management to file annual reports on
the financial condition of the Bank with the FDIC and OTS for any fiscal year in
which the Bank has $500 million or more in assets at the beginning of such
fiscal year. A related provision mandates annual audits (of the Bank or the
Holding Company) by independent accountants and the establishment of an audit
committee of outside directors (which the Bank already has). The auditors will
be required to attest to certain information provided by management in the
annual report, which will be publicly available.
Pursuant to FedICIA, the OTS is required to prescribe standards for
federally insured savings associations related to (a) internal controls,
information systems and internal audit systems; (b) loan documentation; (c)
credit underwriting; (d) interest rate exposure; (e) asset growth; and (f)
compensation, fees and benefits. The compensation standards must prohibit as
an unsafe and unsound practice any employment contract, compensation or benefit
agreement, fee arrangement, perquisite, stock option plan, post-employment
benefit or other compensatory arrangement that would provide any executive
officer, employee, director or principal shareholder with excessive
compensation, fees or benefits or that could lead to material financial loss to
the institution. The OTS is also charged by FedICIA with prescribing standards
for federally insured savings associations and their holding companies
specifying (a) a maximum ratio of classified assets to capital; (b) minimum
earnings sufficient to absorb losses without impairing capital; and (c) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of the association or its holding company. The OTS, along with
the other banking agencies with respect to similar standards they must
establish, proposed regulations relating to such standards. The impact of
these standards on the operations of the Bank cannot be ascertained until the
final regulations are issued.
FedICIA also requires the OTS and other federal banking agencies to
develop jointly a method for insured depository institutions to provide
supplemental disclosure of the estimated fair market value of assets and
liabilities, to the extent feasible and practicable, in financial statements or
reports required to be filed with the federal banking agencies.
FedICIA also included the Truth in Savings Act, which requires the FRB
to establish regulations providing for clear and uniform disclosure of the
rates, fees and terms of deposit accounts. The FRB has adopted regulations,
which became effective June 21, 1993, requiring a specific disclosure before an
account is opened, in regularly provided statements and in advertisements,
announcements and solicitations initiated by a depository institution. The
regulations prescribe detailed disclosure of deposit account yield information,
minimum balance requirements and fee impact on the yield. The regulations also
establish certain recordkeeping requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
banks. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings associations
and other member financial institutions. The Bank is required to hold shares
of capital stock in the FHLB of Indianapolis in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each calendar year, .3% of its assets or 1/20 (or such greater fraction
established by the
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<PAGE>
FHLB) of outstanding FHLB advances, commitments, lines of credit and letters of
credit. The Bank is currently in compliance with this requirement. At June 30,
1994, the Bank's investment in stock of the FHLB of Indianapolis was $6.1
million.
In past years, the Bank received dividends on its FHLB stock. Certain
provisions of FIRREA require all 12 FHLB's to provide funds for the resolution
of troubled savings associations and to establish affordable housing programs
through direct loans or interest subsidies on advances to members to be used
for lending at subsidized interest rates for low-and moderate-income,
owner-occupied housing projects, affordable rental housing, and certain other
community projects. These contributions and obligations could adversely affect
the value of FHLB stock in the future. For the year ending June 30, 1994,
dividends paid to the Bank totaled $329,485, for an annual rate of 5.72%. A
reduction in value of such stock may result in a corresponding reduction in the
Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. FIRREA prescribes eligible collateral as first
mortgage loans less than 90 days delinquent or securities evidencing interests
therein, securities (including mortgage-backed securities) issued, insured or
guaranteed by the federal government or any agency thereof, FHLB deposits and,
to a limited extent, real estate with readily ascertainable value in which a
perfected security interest may be obtained. Other forms of collateral may be
accepted as over collateralization or, under certain circumstances, to renew
advances outstanding on the date of enactment of FIRREA. All long-term
advances are required to provide funds for residential home financing and the
FHLB has established standards of community service that members must meet to
maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Liquidity
For each calendar month, the Bank is required to maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions
and is currently 5%. OTS regulations also require each member savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and short-term borrowings during the preceding calendar month.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The daily average liquidity of the Bank for June, 1994, was 8.0%
which exceeded the then applicable 5% liquidity requirement. Its average short-
term liquidity ratio for June, 1994, was 4.7%. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirements.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the name and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
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<PAGE>
The association's written real estate lending policies must be reviewed
and approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Insurance of Deposits
The FDIC administers two separate insurance funds, which are not
commingled: one primarily for federally insured banks ("BIF") and one primarily
for federally insured savings associations ("SAIF"). As the federal insurer of
deposits of savings associations, the FDIC determines whether to grant insurance
to newly-chartered savings associations, has authority to prohibit unsafe or
unsound activities and has enforcement powers over savings associations (usually
in conjunction with the OTS or on its own if the OTS does not undertake
enforcement action).
Deposit accounts in the Bank are generally insured by the SAIF to a
maximum of $100,000 for each insured depositor. As a condition to such
insurance, the FDIC is authorized to issue regulations and, in conjunction with
OTS, conduct examinations and generally supervise the operations of its insured
members. This supervision extends to a comprehensive regulatory scheme
governing, among other things, the form of deposit instruments issued by savings
associations, and certain aspects of their lending activities, including
appraisal requirements, private mortgage insurance coverage and lending
authority.
Effective January 1, 1993, the FDIC adopted a final rule that implements
a transitional risk-based assessment system whereby a base insurance premium,
yet unspecified, will be adjusted according to the capital category and
subcategory of an institution to one of three capital categories consisting of
(1) well capitalized, (2) adequately capitalized, or (3) undercapitalized, and
one of three subcategories consisting of (a) healthy, (b) supervisory concern,
or (c) substantial supervisory concern. An institution's assessment rate will
depend on the capital category and supervisory category to which it is assigned.
Assessment rates will range from 23 basis points for an institution in the
highest category (i.e., well capitalized) to 31 basis points for an institution
in the lowest category (i.e., undercapitalized and substantial supervisory
concern). The supervisory subgroup to which an institution is assigned by the
FDIC is confidential and may not be disclosed. The Bank's deposit insurance
assessments may increase depending upon the category and subcategory, if any, to
which the Bank is assigned by the FDIC. Any increase in insurance assessments
could have an adverse effect on the earnings of the Bank.
When the Resolution Trust Corporation's (the "RTC's") new case
resolution authority expires in 1995, the SAIF will assume jurisdiction over,
and the financial responsibility for, the resolution over all new troubled
associations, and will have responsibility for resolution of certain troubled
institutions prior to that time. In the absence of adequate funding, the current
SAIF insurance premium assessment schedule could rise to pay for the resolution
of troubled institutions. Moreover, since the reserve ratio of BIF is currently
higher than that of SAIF, it is anticipated that BIF premiums may start
declining in the next year or so. Such events could cause disparity between the
assessment rates of SAIF and BIF members. While the magnitude of the competitive
advantage of BIF-insured institutions and its impact on the Bank's results of
operations, cannot be determined at this time, a significant increase in SAIF
premiums or decrease in BIF premium could place the Bank at a material
competitive disadvantage. In any case, a material increase in SAIF premiums
would likely have an adverse effect on the operating expenses and results of
operations of the Bank.
Until the SAIF is recapitalized such that it reaches a 1.25% reserve
ratio (the "SAIF Capitalization Date"), banks and savings associations are
generally barred from switching insurance funds. There are limited exceptions,
such as when a bank acquires a savings association in default or in danger of
default, if the benefits to the SAIF or the RTC equal or exceed the assessment
income that will be lost during the moratorium. After the SAIF Capitalization
Date, any insured depository institution may switch insurance funds, but only
after paying an exit fee to the old fund and an entrance fee to the new fund.
See "--Acquisitions and Dispositions." Notwithstanding the foregoing, FIRREA
does not prohibit savings association to bank charter conversions during the
moratorium, as long as SAIF premiums continue to be paid.
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Regulatory Capital
Regulations under FIRREA have established three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and
related surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
servicing rights and purchased credit card relationships (which may be included
in an amount up to 50% of core capital, but which are to be reported on an
association's balance sheet at the lesser of 90% of their fair market value or
100% of their remaining unamortized book value), less nonqualifying
intangibles. Under the tangible capital requirement, a savings association
must maintain tangible capital (core capital less all intangible assets except
purchased mortgage servicing rights and purchased credit card relationships
which may be included after making the above-noted adjustments) of at least
1.5% of total assets. Under the risk-based capital requirements, a minimum
amount of capital must be maintained by a savings association to account for
the relative risks inherent in the type and amount of assets held by the
savings association. Currently, the risk-based capital requirement requires a
savings association to maintain capital (defined generally for these purposes
as core capital plus general valuation allowances and permanent or maturing
capital instruments such as preferred stock and subordinated debt less assets
required to be deducted) equal to 8.0% of risk-weighted assets. Assets are
ranked as to risk in one of four categories (0-100%) with a credit risk-free
asset such as cash requiring no risk-based capital and an asset with a
significant credit risk such as a non-accrual loan being assigned a factor of
100%. At June 30, 1994, based on the capital standards then in effect, the
Bank was in compliance with the capital requirements mandated by FIRREA.
The Comptroller of the Currency, effective December 31, 1990, adopted a
new minimum leverage ratio of 3% Tier 1 capital-to-total assets for the highest
rated national banks, with an additional requirement of 100 to 200 basis points
for all other national banks. FIRREA requires that the capital standards for
savings associations be no less stringent than those applicable to national
banks. Accordingly, the OTS has proposed revised capital regulations imposing a
minimum core capital requirement of 3% for the highest rated savings
associations, with an additional requirement of 100 to 200 basis points for all
other savings associations. These regulations have not become effective and
there can be no assurance as to whether, or in what form, such regulations will
be adopted.
The OTS has issued a final rule (which becomes effective September 30,
1994) which sets forth the methodology for calculating an interest rate risk
component to be incorporated into the OTS regulatory capital rule. Under the
new rule, only savings associations with above normal interest rate risk
(institutions whose portfolio equity would decline in value by more than 2% of
assets in the event of a hypothetical 200-basis-point move in interest rates)
will be required to maintain additional capital for interest rate risk under
the risk-based capital framework. An institution with an "above normal" level
of exposure will have to maintain additional capital equal to one half the
difference between its measured interest rate risk (the most adverse change in
the market value of its portfolio resulting from a 200-basis-point move in
interest rates divided by the estimated market value of its assets) and 2%,
times the market value of its assets. That dollar amount of capital is in
addition to an institution's existing risk-based capital requirement.
If an association is not in compliance with the capital requirements
imposed by FIRREA the OTS is required to prohibit asset growth and to impose a
capital directive that may restrict, among other things, the payment of
dividends and officers' compensation. In addition to the specific sanctions
provided in FIRREA for failing to meet the capital requirements, the OTS and the
FDIC generally are authorized to take enforcement actions against a savings
association that fails to meet its capital requirements, which actions may
include restrictions on operations and banking activities, the imposition of a
capital directive, a cease and desist order, civil money penalties or harsher
measures such as the appointment of a receiver or conservator or a forced merger
into another institution.
In FedICIA, certain regulatory action is mandated or recommended for
savings associations that are deemed to be well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of
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the institution. OTS regulations define these capital levels as follows: (1)
well-capitalized associations must have total risk-based capital of at least
10%, core risk-based capital (consisting only of items that qualify for
inclusion in core capital) of at least 6% and a leverage ratio of at least 5%
and are not subject to any order or written directive of the OTS to maintain a
specific capital level for any capital measure; (2) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of 8%, core risk-based capital of 4% and a leverage ratio of 4% (except
for institutions receiving the highest examination rating, in which case the
requirement is 3%), but which are not well capitalized; (3) undercapitalized
associations are those that do not meet the requirements for adequately
capitalized associations, but that are not significantly undercapitalized; (4)
significantly undercapitalized associations have total risk-based capital of
less than 6%, core risk-based capital of less than 3% and a leverage ratio of
less than 3%; and (5) critically undercapitalized associations are those with
tangible capital of less than 2% of total assets. In addition, the OTS can
downgrade an association's designation notwithstanding its capital level, based
on less than satisfactory examination ratings in areas other than capital or if
the institution is deemed to be in an unsafe or unsound condition. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Significantly undercapitalized institutions must restrict
the payment of bonuses and raises to their senior executive officers.
Furthermore, a critically undercapitalized institution must be placed in
conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. It will also be
prohibited from making payments on any subordinated debt securities without the
prior approval of the FDIC and will be subject to significant additional
operating restrictions. The Bank's capital at June 30, 1994, meets the standards
for a well-capitalized association.
FedICIA prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
plan until the institution has been adequately capitalized on an average during
each of four consecutive calendar quarters and must provide adequate assurances
of performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized, or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution at the time the institution fails to comply with
its capital restoration plan.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is in need of more than normal supervision. The Bank is currently a
Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its Fully Phased-in
Capital Requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
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Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves against
its transaction accounts (primarily checking and NOW accounts) and non-personal
money market deposit accounts. These regulations generally require that reserves
be maintained against transaction accounts in the amount of 3% of the total of
such accounts up to $51.9 million (subject to adjustment by the FRB), plus 10%
(subject to adjustment by the FRB between 8% and 14%) of the total in excess of
$51.9 million. In addition, a reserve of 3% (subject to adjustment by the FRB
between 0% and 9%) must be maintained on non-personal money market deposit
accounts that have original maturities of less than one and one-half years. No
reserve is required to be maintained on non-personal time deposits. Current law
permits savings associations to designate and exempt $4.0 million of reservable
liabilities from these reserve requirements. The effect of these reserve
requirements is to increase the Bank's cost of funds. The Bank is in compliance
with its reserve requirements.
A federal savings association, like other depository institutions
maintaining reservable accounts, may borrow from the Federal Reserve Bank
"discount window," but the FRB's regulations require the savings association to
exhaust other reasonable alternative sources, including borrowing from its
regional FHLB, before borrowing from the Federal Reserve Bank. FedICIA imposes
certain limitations on the ability of undercapitalized depository institutions
to borrow from Federal Reserve Banks.
Transactions with Affiliates
Transactions between savings associations and any affiliate are governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
association is any company or entity which controls, is controlled by or is
under common control with the savings association. In a holding company context,
the parent holding company of a savings association (such as the Holding
Company) and any companies controlled by such parent holding company are
affiliates of the savings association. The subsidiaries of a savings
association, however, are not deemed affiliates under Section 23A and 23B;
however, transactions between a subsidiary of a savings association and any of
the affiliates of a savings association are subject to the requirements and
limitations of Sections 23A and 23B.
Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in covered transactions with
any one affiliate to an amount equal to 10% of such association's capital stock
and surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the association or subsidiary as those provided to a non-
affiliate. The term covered transaction includes the making of loans, purchase
of assets, issuance of a guarantee and similar types of transactions.
In addition to the restrictions imposed by Sections 23A and 23B, FIRREA
provides that no savings association may (i) loan or otherwise extend credit to
an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes, or similar obligations of any affiliate,
except for affiliates which are subsidiaries of the savings association.
FIRREA also extended to savings associations the restrictions contained
in Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal shareholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% shareholder of a savings association (18% in
the case of institutions located in an area with less than 30,000 in
population), and certain affiliated entities of either, may not exceed together
with all other outstanding loans to such person and affiliated entities the
association's loan-to-one-borrower limit as established by FIRREA (generally
equal to 15% of the institution's unimpaired capital and surplus and an
additional 10% of such capital and surplus for loans fully secured by certain
readily marketable collateral). Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% shareholders of a savings association,
and their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the association with any "interested"
director not participating in the voting. Currently, the FRB requires board of
director approval for loans to directors, officers, and 10% shareholders
(including all other outstanding loans to such persons) above the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, the FRB requires
that loans to directors, executive officers and principal shareholders be made
on terms
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substantially the same as offered in comparable transactions to other
unaffiliated parties. FedICIA also extends to federal savings associations
certain additional limitations found in Section 22(g) of the Federal Reserve Act
on loans made to executive officers.
Holding Company Regulation
The Holding Company is regulated as a "non-diversified unitary savings
and loan holding company" within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), and subject to regulatory oversight of the Director of the
OTS. As such, the Holding Company is registered with the OTS and thereby subject
to OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Holding Company and with other companies
affiliated with the Holding Company.
HOLA generally prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from (i) acquiring control of any
other savings association or savings and loan holding company or controlling the
assets thereof or (ii) acquiring or retaining more than 5 percent of the voting
shares of a savings association or holding company thereof which is not a
subsidiary. Additionally, under certain circumstances a savings and loan hold
company is permitted to acquire, with the approval of the Director of the OTS,
up to 15 percent of previously unissued voting shares of an under-capitalized
savings association for cash without that savings association being deemed
controlled by the holding company. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary institution, or any other savings and loan holding company.
The Holding Company's Board of Directors presently intends to operate
the Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company. However, if the Director of OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings association, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
(QTL) test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1994, the Bank's asset composition was in excess
of that required to qualify the Bank as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
institution other than through a merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any
of its subsidiaries (other than the Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity other than
(i) furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust,
(vi) those activities previously directly authorized by the FSLIC by regulation
as of March 5, 1987, to be engaged
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in by multiple holding companies or (vii) those activities authorized by the FRB
as permissible for bank holding companies, unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the Director of the OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or
if the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an
acquisition resulting in a multiple savings and loan holding company
controlling savings associations in more than one state in the case of certain
emergency thrift acquisitions.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the 1934 Act. The Holding Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
1934 Act and the rules of the SEC thereunder.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration or unless sold in accordance
with the resale restrictions of Rule 144 under the 1933 Act. If the Holding
Company meets the current public information requirements under Rule 144, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including the two-year holding period and those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test include: (i) loans made to
purchase, refinance, construct, improve or repair domestic residential housing
or manufactured housing; (ii) home equity loans; (iii) mortgage-backed
securities; (iv) direct or indirect existing obligations of either the FDIC or
the FSLIC for ten years from the date of issuance, if issued prior to July 1,
1989; (v) obligations of the FDIC, FSLIC, FSLIC Resolution Fund and the
Resolution Trust Corporation for a five year period from July 1, 1989, if
issued after such date; (vi) FHLB stock; (vii) 50% of the dollar amount of
residential mortgage loans originated and sold within 90 days of origination;
(viii) investments in service corporations that derive at least 80% of their
gross revenues from activities directly related to purchasing, refinancing,
constructing, improving or repairing domestic residential real estate or
manufactured housing; (ix) 200% of the dollar amount of loans and investments
made to acquire, develop and construct one to four-family residences that are
valued at no more than 60% of the median value of homes constructed in the
area; (x) 200% of the dollar amount of loans for the acquisition or improvement
of residential real property, churches, schools, and nursing homes located
within, and loans for any purpose to any small business located within, an area
where credit needs of its low and moderate income residents are determined not
to have been adequately met; (xi) loans for the purchase, construction,
improvement or upkeep of churches, schools, nursing homes and hospitals not
qualified under (x); (xii) up to 10% of portfolio assets held in consumer loans
or loans for educational purposes; and (xiii) FHLMC and FNMA stock. However,
the aggregate amount of investments in categories (vii)-(xiii) which may be
taken into account for the purpose of whether an institution meets the new QTL
test cannot exceed 15% of portfolio assets. Portfolio assets under the new QTL
test include all of an association's assets less (i) goodwill and other
intangibles, (ii) the value of property used by the association to conduct its
business, and (iii) its liquid assets as required to be maintained under law up
to 20% of total assets.
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A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under either the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 1994, 93.0% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
Acquisitions or Dispositions
FIRREA amended provisions of the Bank Holding Company Act of 1956, as
amended, to specifically authorize a bank holding company, upon receipt of
appropriate approvals from the FRB and the Director of the OTS, to acquire
control of any savings association or holding company thereof wherever located.
Similarly, a savings and loan holding company may now acquire control of a
bank. Moreover, FedICIA provides that, subject to the five-year moratorium
provisions concerning conversions of SAIF to BIF members and vice versa,
federal savings associations may acquire or be acquired by any insured
depository institution. Tandem restrictions on operations of savings
association and bank affiliates were also eliminated by FIRREA. Pursuant to
rules promulgated by the FRB pursuant to FIRREA, a savings association acquired
by a bank holding company (i) may, so long as the savings association continues
to meet the QTL test, continue to branch to the same extent as permitted to
other non-affiliated savings associations similarly chartered in the state, and
(ii) cannot continue any non-banking activities not authorized for bank holding
companies. Savings associations acquired by a bank holding company may, if
located in a state where the bank holding company is legally authorized to
acquire a bank, be converted to the status of a bank but deposit insurance
assessments and payments continue to be paid by the association to the SAIF. A
savings association so converted to a bank becomes subject to the branching
restrictions applicable to banks. Also, under FedICIA, any insured depository
institution may merge with, acquire the assets of, or assume the liabilities of
any other insured depository institution with the appropriate regulatory
approvals if (i) continued payments of deposit insurance are made on the
acquired savings association's deposits (including an assumed rate of growth in
such deposits) to SAIF (if the acquired institution was a SAIF member) or to
BIF (if the acquired institution was a BIF member), (ii) the acquiring
institution and any holding company in control thereof meet all applicable
capital requirements at the time of the transaction, and (iii) if the acquiring
institution is a BIF member, the transaction meets the Douglas amendment
requirements of 3(d) of the Bank Holding Company Act of 1956.
A bank or savings association may sell branches and transfer deposit
liabilities to a savings association or bank that is a member of an insurance
fund which differs from the fund of the transferor without violating the 5-year
moratorium on switching insurance funds that is described above in "--Insurance
of Deposits." To be permitted, the transfer must be approved by the FDIC and
the amount of deposits transferred must not exceed 35% of the lesser of (a) the
transferor's deposits as of May 1, 1989 (plus net interest on those accounts)
or (b) the transferor's total deposits on the date of transfer, FIRREA requires
exit and entrance fees in connection with such dispositions. Currently, the
SAIF to BIF exit fee is .90% of the deposit base being transferred, and the
SAIF to BIF entrance fee is BIF's reserve ratio (the
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ratio of the net worth of BIF to the value of the aggregate total domestic
deposits held in BIF) times the deposit base being transferred. There are also
special entrance and exit fees for insured deposits transfers in failed savings
association resolutions. The resulting or acquiring institution is liable for
the fees.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to
claims of depositors, secured creditors, and holders of subordinated debt,
other than affiliates.
Branching
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in (S)7701(a)(19) of the Internal Revenue Code
of 1986, as amended (the "Code") or the asset composition test of (S)7701(c) of
the Code. Branching that would result in the formation of a multiple savings
and loan holding company controlling savings associations in more than one
state are permitted if the law of the state in which the savings association to
be acquired is located specifically authorizes acquisition of its
state-chartered associations by state-chartered associations or their holding
companies in the state where the acquired association or holding company is
located.
Legislation has been introduced in both houses of Congress that would
permit banks to branch on a nationwide basis and their holding companies to
acquire banks, wherever situated, without regard to the laws of the individual
states. It is uncertain whether or when such interstate banking legislation may
be passed, and, if passed, what the final contents of such legislation will be.
If passed, however, such legislation may result in increased competition within
the Bank's market area.
Community Reinvestment Act Matters
Under FIRREA, ratings of depository institutions under the Community
Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure includes
both a four-unit descriptive rating -- using terms such as satisfactory and
unsatisfactory -- and a written evaluation of each institution's performance.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
The FHLBs have established an "Affordable Housing Program" to subsidize the
interest rate of advances to member associations engaged in lending for
long-term, low- and moderate-income, owner-occupied and affordable rental
housing at subsidized rates. The examiners have determined that the Bank has a
satisfactory record of meeting community credit needs.
TAXATION
Federal Taxation
Savings associations, such as the Bank, are permitted to compute bad
debt deductions using either the bank experience method or the percentage of
taxable income method. In the case of the percentage of taxable income method,
the portion of taxable income (as specially adjusted for purposes of application
of this method) that may be deducted as an addition to a reserve for bad debts
is set at 8%. Any savings association which holds 60% of its assets in
qualifying assets, defined as loans which are secured by an interest in improved
real property or secured by an interest in real property that is to be improved
out of the proceeds of the loan, will be eligible for the full 8% of taxable
income deduction. The 8% amount must be reduced (but not below zero) by the
amount determined to be a reasonable addition to the reserve for losses on
nonqualifying loans. Reserves for nonqualifying loans are computed on the basis
of a six-year moving average of the Bank's own experience.
The excess of the percentage of taxable income deduction over the
deduction that would have been allowable on the basis of actual experience is
treated as a preference item for the purpose of computing the corporate minimum
tax.
-32-
<PAGE>
In addition, the bad debt deduction cannot exceed the amount necessary
to increase the year end balance in the bad debt reserve accumulated for
"qualifying real property loans" to an amount equal to 6% of such loans
outstanding at the end of the taxable year. The bad debt reserve deduction is
also limited to the amount by which 12% of deposits at year-end exceeds the sum
of the the Bank's surplus, undivided profits, and reserves, as defined for
federal income tax purposes, at the beginning of the year.
A savings bank organized in stock form which utilizes the percentage
method bad debt reserve deduction described above will be subject to recapture
taxes on such reserve in the event it makes certain types of distributions to
its shareholders. Cash dividends may be paid out of unappropriated retained
earnings without the imposition of any tax on a savings bank to the extent that
the amounts paid as dividends do not exceed such saving bank's current or
accumulated earnings and profits as calculated for federal income tax purposes.
Stock redemptions, dividends paid in excess of a saving bank's current or
accumulated earnings and profits as calculated for tax purposes, and other
distributions made with respect to a savings bank's stock, however, are deemed
under applicable provisions of the Code to be made from the savings bank's tax
bad debt reserve. To the extent additions to a savings bank's bad debt reserves
for qualifying real property loans deducted for federal income tax purposes
exceed the allowable amount of such reserves computed under the experience
method and to the extent of the saving bank's supplemental reserves for losses
on loans ("Excess"), such Excess may not, without adverse tax consequences, be
utilized for payment of cash dividends or other distributions to a shareholder
(including distributions on redemption, dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a savings bank to a shareholder is treated as made: first out of the
savings bank's current and post-1951 accumulated earnings and profits; second
out of the Excess; and third out of such other accounts as may be proper. To the
extent a distribution to a shareholder by the savings bank is deemed paid out of
its Excess under these rules, the Excess would be reduced and the savings bank's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the Excess. The amount
of tax that would be payable upon any distribution which is being treated as
having been made from a savings bank's bad debt reserve could result in a tax
which is equal to approximately 50% of the amount of such distributions, unless
offset by net operating losses. At June 30, 1994, the Bank had $19 million of
tax-paid retained earnings from which cash dividends could be paid without
causing any federal income tax to be paid by the Bank.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences can be credited against regular tax due in
later years.
For federal income tax purposes, the Bank had been reporting its income
and expenses on the accrual method of accounting. The Holding Company and its
subsidiaries file consolidated federal income tax returns on a fiscal year
basis. The Holding Company's and the Bank's federal income tax returns have not
been audited in the last five years.
State Taxation
For its taxable period beginning January 1, 1990, the Bank became
subject to Indiana's new Financial Institutions Tax ("FIT"), which is imposed at
a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for
purposes of FIT, begins with taxable income as defined by Section 63 of the Code
and, thus, incorporates federal tax law to the extent that it affects the
computation of taxable income. Federal taxable income is then adjusted by
several Indiana modifications, the most notable of which is the required addback
of interest that is tax-free for federal income
-33-
<PAGE>
tax purposes. Other applicable state taxes include generally applicable sales
and use taxes plus real and personal property taxes.
As a Delaware holding company, the Holding Company is exempt from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. The Holding Company is also subject
to an annual franchise tax imposed by the State of Delaware.
Current Accounting Issues
Accounting for Debt and Equity Securities. In 1993, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS No. 115"). SFAS No. 115
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. Those investments are classified and accounted for as follows:
Debt securities that the holder has the positive intent and ability to
hold until maturity are classified as held for investment and reported at
amortized cost. Securities that can be held for indefinite periods of time,
including those that may be used in an asset/liability management strategy, are
not classified as held for investment. This means that securities that could be
sold in response to changing interest rates, changes in prepayment risks,
increased loan demand, general liquidity needs, or other similar factors are not
classified as held for investment. However, securities that are held for
investment could be sold before they mature if the issuer's creditworthiness
deteriorates significantly. Debt and equity securities classified as available
for sale are reported at fair value, or marked to market. Unrealized gains and
losses are not included in income and are reported as a separate component of
equity. Debt and equity securities classified as held for current resale are
classified as trading securities and reported at gains and losses included in
income. Transfers between categories should be accounted for at fair value. For
any sales or transfers of securities classified as held for investment, the cost
basis, the realized gain or loss, and the circumstances leading to the decision
to sell are disclosed. SFAS No. 115 was adopted by the Company on July 1, 1994.
(See Note 2 of "Notes to Consolidated Financial Statements"). At that date,
investment securities with an approximate carrying value of $6,718,000 and
mortgage-backed securities with an approximate carrying value of $177,800,000
were reclassified as available for sale. These reclassifications resulted in a
decrease in total stockholders' equity, net of taxes, of $1,844,000. All other
investment and mortgage-backed securities were classified as "held to maturity"
at June 30, 1994.
At June 30, 1994, the book value of the Holding Company's investment and
mortgage-backed securities exceeded the market value by $3.0 million. The
Holding Company also had $9.6 million of mortgage loans held for sale at June
30, 1994.
At the time of purchase of new securities, management of the Company
makes a determination as to the appropriate classification of securities as
available for sale or held to maturity. Debt and mortgage-backed securities
purchased with the positive intent and ability to hold to maturity are
classified as held to maturity. Securities may be transferred to held to
maturity from available for sale. Other debt and mortgage-backed securities that
will be held for indefinite periods of time, such as securities that may be sold
in response to interest rate change or anticipated liquidity needs, are
classified as available for sale.
Accounting for Impairment of Loans. In 1993, FASB issued SFAS No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"). The purpose
of SFAS No. 114 is to eliminate inconsistencies in the accounting among
different types of creditors for loans with similar collection problems by
requiring a single method for measuring impaired loans. A loan is considered
impaired when, based on current information and events it is probable that
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. A bank will measure certain impaired loans
pursuant to SFAS No. 114 at a discounted amount on the balance sheet based on
the present value amount of the expected future cash flows using the loan's
effective interest rate. A valuation reserve should be recorded if the present
value of the expected cash flows is less than the recorded amount of the loan.
Formally restructured loans and loans evaluated as groups or pools of
homogeneous loans (e.g. single family residence) are excluded from SFAS No.
114. In October, 1994, the FASB issued SFAS No. 118 ("SFAS No. 118"), entitled
Accounting by Creditors of Impairment of Loan - Income Recognition and
Disclosures. SFAS No. 118 amends the
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<PAGE>
disclosure requirements in SFAS No. 114 to require information about the
recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The effective date
of SFAS No. 114 and 118 is for fiscal years beginning after December 31, 1994.
The Company will adopt SFAS No. 114 and 118 July 1, 1995, and management does
not anticipate a material impact on earnings or financial condition as a result
of adoption.
Derivative Financial Statements and Fair Value Disclosures. In October,
1994, FASB issued SFAS No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments ("SFAS No. 119"). SFAS No.
119 requires disclosures about derivative financial instruments--futures,
forward, swap and option contracts, and other financial instruments with
similar characteristics (e.g., interest rate caps or floors and loan
commitments). The definition of derivatives excludes all on-balance-sheet
receivables and payables, including those that "derive" their values or cash
flows from the price of another security or index, such as mortgage-backed
securities, and interest-only and principal-only obligations.
This Statement requires disclosures about amounts, nature and terms of
derivatives that are not subject to SFAS No. 105 because they do not result in
off-balance-sheet risk of accounting loss. It requires that distinction
between the differing disclosure be made for financial instruments held or
issued for trading purposes and financial instruments held or issued for
purposes other than for trading. The required disclosures, either in the body
of the financial statements or in the footnote, include the face or contract
amount (or notional principal amount) and the nature and terms, including, at a
minimum, a discussion of (1) the credit and market risk of those instruments,
and (2) the cash requirements of those instruments, and (3) the related
accounting policy.
This Statement amends SFAS No. 105 and 107 to require disaggregation of
information about financial instruments with off-balance-sheet risk of
accounting loss and to require that fair value information be presented without
combining, aggregating, or netting the fair values of derivatives with the fair
value of nonderivatives and be presented together with the related carrying
amounts in the body of the financial statements, a single footnote, or a
summary table in a form that makes it clear whether the amounts represent
assets or liabilities. The Company will adopt SFAS No. 119 effective June 30,
1995. The Company believes that SFAS No. 119 will not have a material impact
on its financial position or results of operations.
Accounting for Taxes. In February, 1992, the Financial Accounting
Standards Board (the FASB) issued Statement of Financial Accounting Standards
No. 109 ("FAS 109"). FAS 109 adopts an asset and liability approach for
financial accounting and reporting of income taxes which, among other things,
will require companies to take into account changes in the tax rates when
valuing the deferred income tax accounts recorded on the balance sheet. In
addition, FAS 109 provides that a deferred tax liability or asset shall be
recognized for the estimated future tax effects attributable to temporary
differences and loss carryforwards. Temporary differences include differences
between financial statement income and tax return income which are expected to
reverse in future periods as well as differences between the tax bases of
assets and liabilities and their amounts for financial reporting which are also
expected to be settled in future periods. The accounting pronouncement also
provides that to the extent a deferred tax asset is established which is not
realizable, a valuation allowance shall be established against such asset.
Among the provisions of FAS 109 impacting savings associations is the
tax treatment of bad debt reserves. FAS 109 provides that a deferred tax asset
is to be recognized for the bad debt reserve established for financial reporting
purposes and requires a deferred tax liability to be recorded for increases in
the tax bad debt reserve since January 1, 1988, the effective date of certain
changes made by the Tax Reform Act of 1986 to the calculation of savings
associations' bad debt deduction. The Holding Company adopted the Statement
effective July 1, 1993. The cumulative effect of this accounting change
increased 1994 operating results by $300,000.
Item 2. Properties
At June 30, 1994, the Bank conducted its business from its main office
at 501 Main Street, Evansville, Indiana, and 15 branch offices. All offices are
full-service offices.
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<PAGE>
The table on the following page provides certain information with
respect of the Holding Company's and the Bank's offices as of June 30, 1994. The
total net book value of the premises and equipment at June 30, 1994, was $9.2
million.
<TABLE>
<CAPTION>
Date Net Book Value at
Owned or Acquired/ June 30, 1994
Location Leased Leased -----------------
- -------- -------- --------- (In Thousands)
<S> <C> <C> <C>
501 Main
Evansville, IN Owned 1963 $2,872
300 Second Street
Henderson, KY Owned 1949 1,093
4451 First Avenue
Evansville, IN Owned 1968 226
7722 State Highway 66
Newburgh, IN Owned 1978 226
707 N. St. Joe
Evansville, IN Owned 1978 256
400 Southwind Plaza
Mt. Vernon, IN Owned 1976 124
499 N. Green River Road
Evansville, IN Owned 1983 624
1102 Newton Street
Jasper, IN Owned 1979 137
107 S. Hart
Princeton, IN Owned 1983 489
435 Washington Street
Columbus, IN Owned 1986(1) 368
2177 Twenty-Fifth Street
Columbus, IN Owned 1986(1) 213
811 E. Mulberry
Ft. Branch, IN Owned 1987 414
25 Public Square
Shelbyville, IN Owned 1989(1) 534
Highway 41 and Marywood Drive
Henderson, KY Leased - expires 1976 57
January 1996 (2)
1300 S. Green River Road
Evansville, IN Leased - expires 1990 ---
August 1998 (2)
631 Market Street
Mt. Carmel, IL Owned 1991 187
</TABLE>
__________________
(1) Acquired through merger.
(2) Lease expiration dates represent the Bank's final renewal option dates,
if applicable.
The Bank maintains an on-line data base of depositor and borrower
customer information. The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 1994, was $198,000.
Item 3. Legal Proceedings
The Holding Company and its subsidiaries are involved as plaintiff or
defendant in various actions arising in the normal course of their businesses.
While the ultimate outcome of these proceedings cannot be predicted with
certainty, it is the opinion of management, after consultation with counsel,
that the resolution of these proceedings should not have a material effect on
the Holding Company's consolidated financial position.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended June 30, 1994.
Item 4.5 Executive Officers of the Registrant
Presented below is certain information regarding the executive officers
of the Holding Company:
Name Positions With Holding Company and the Bank
- ---- -------------------------------------------
Donald A. Rausch Chairman of the Board, President and Chief Executive
Officer of the Holding Company and the Bank
Ennis R. Griffith Senior Vice President, Chief Financial Officer, and
Secretary/Treasurer of the Holding Company and the Bank
Terry G. Johnston Senior Vice President, Lending Operations Officer of the
Holding Company and the Bank.
Paul E. Wargel Senior Vice President, Residential Lending Manager of
the Bank
J. Ray Justice Vice President/Administration of the Bank
Steven E. Fowler Vice President/Financial Services of the Bank
Donald A. Rausch. (Age 63) Mr. Rausch is Chairman of the Board,
President and Chief Executive Officer of the Holding Company and the Bank. He
joined the Bank in 1956 as a loan officer, became Executive Vice President in
1968 and President and Chief Executive Officer in 1971. Mr. Rausch is a past
director of the FHLB of Indianapolis and served on the Executive Committee of
the United States League of Savings Institutions from November 1987 to November
1990. He is a past chairman of the Indiana League of Savings Institutions. Mr.
Rausch has been a director of Southern Indiana Gas and Electric Company since
1981.
Ennis R. Griffith. (Age 51) Mr. Griffith is the Chief Financial Officer
of the Holding Company and the Bank, manages its investment and mortgage-backed
securities portfolio and is responsible for accounting functions. He has held
his current position since 1984. He also serves as Corporate Secretary and
Treasurer of the Holding Company and the Bank. Mr. Griffith joined the Bank in
1974.
Terry G. Johnston. (Age 52) Mr. Johnston joined the Bank in July 1990
as the Bank's senior lending officer. He is responsible for all Holding Company
lending operations, including real estate, consumer and commercial lending.
Prior to joining the Bank, he was a Senior Vice President and Division Manager
of Bank One, Richmond, Indiana, for 13 years.
Paul E. Wargel. (Age 59) Mr. Wargel is responsible for origination and
supervision of the Bank's one- to four-family residential lending, a position
he has held since June 1990. Mr. Wargel previously managed the Bank's home
office mortgage origination functions. He has been with the Bank since 1957.
J. Ray Justice. (Age 56) Mr. Justice is responsible for the Bank's
Human Resources functions, management of properties used for Bank operations and
the Bank's branch office network. Mr. Justice has held his current positions
since 1982. He joined the Bank in 1968.
Steven E. Fowler. (Age 46) Mr. Fowler is responsible for the funds
acquisition functions of the Bank. He manages the development of deposit
products, annuity/securities sales operations and marketing activities. He
joined the Bank in 1972.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Bank converted from a federal mutual savings bank to a federal stock
savings bank effective October 30, 1991 (the "Conversion") and simultaneously
formed a savings and loan holding company, UF Bancorp, Inc. The Holding
Company's common stock, $.01 per share par value ("Common Stock"), is quoted on
the National Association of Securities Dealers Automated Quotation ("NASDAQ"),
National Market System, under the symbol "UFBI." The following table sets
forth the high and low prices, as reported by NASDAQ, for the quarters
indicated. Such over-the-counter quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. The table also sets forth dividends per share
paid during such quarters.
<TABLE>
<CAPTION>
Price Range
----------- Dividends
Quarter Ended High Low Per Share
------------- ---- --- ---------
<S> <C> <C> <C>
September 30, 1992 $17 5/8 $15 .10
December 31, 1992 19 16 1/4 .11
March 31, 1993 22 5/8 17 7/8 .11
June 30, 1993 22 3/4 19 1/4 .11
September 30, 1993 27 3/4 22 3/4 .11
December 31, 1993 28 1/2 22 1/2 .125
March 31, 1994 26 1/4 23 .125
June 30, 1994 29 1/4 22 1/2 .125
</TABLE>
It is currently the policy of the Holding Company's Board of Directors
to continue to pay quarterly dividends at this rate, but any future dividends
are subject to the Board's discretion based on its consideration of the Holding
Company's operating results, financial condition, capital, income tax
considerations, regulatory restrictions and other factors.
Since the Holding Company has no independent operations or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to its shareholders is directly dependent upon the
earnings on its investment securities and ability of the Bank to pay dividends
to the Holding Company.
Under OTS regulations, a converted savings association may not declare
or pay cash dividends if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a capital distribution, which includes, among other things, cash dividends,
will depend upon in which one of three categories, based upon levels of capital,
that savings association is classified. The Bank is a Tier one institution and
therefore would be able to pay cash dividends to the Holding Company during any
calendar year up to 100% of its net income during that calendar year plus the
amount that would reduce by one half its surplus capital ratio (the excess over
its fully phased-in capital requirements) at the beginning of the calendar year.
See "Regulation -- Capital Distributions Regulation." Prior notice of any
dividend to be paid by the Bank to the Holding Company will have to be given to
the OTS.
Income of the Bank appropriated to bad debt reserves and deducted for
federal income tax purposes is not available for payment of cash dividends or
other distributions to the Holding Company without the payment of federal
income taxes by the Bank on the amount of such income deemed removed from the
reserves at the then-current income tax rate. At June 30, 1994, approximately
$8.2 million of the Bank's retained income represented bad debt deductions for
which no federal income tax provision had been made. See "Taxation -- Federal
Taxation."
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by the Holding Company. Delaware law, however, generally
limits dividends of the Holding Company to an amount equal to the excess of its
net assets (the amount by which total assets exceed total liabilities) over its
paid-in capital or, if there is no such excess, to its net profits for the
current and immediately preceding fiscal year.
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<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ----------- ----------- ---------- ----------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets......................... $503,883 $489,526 $470,677 $460,766 $430,848
Loans receivable, net................ 167,917 179,096 193,798 210,251 221,056
Mortgage backed securities........... 243,563 244,322 176,018 165,556 149,697
Investment securities................ 26,544 6,723 3,288 6,132 13,272
Deposits............................. 382,916 381,712 390,751 400,576 377,033
FHLB advances........................ 68,800 58,000 31,000 32,000 26,000
Stockholders' equity................. 46,385 44,519 41,803 22,890 20,632
Per share:
Book value................... 29.11 26.54 23.76
Selected Operations Data:
Interest income...................... $ 31,852 $ 35,791 $ 39,600 $ 40,307 $ 39,238
Interest expense..................... 18,520 20,727 26,419 29,836 30,404
-------- -------- -------- -------- --------
Net interest income................ 13,332 15,064 13,181 10,471 8,834
Provision for loan losses............ 914 285 231 391 319
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses.................... 12,418 14,779 12,950 10,080 8,515
Mortgage loan origination fees....... 3,724 4,457 6,112 2,297 2,265
Loan servicing fees.................. 1,977 1,583 624 432 447
Service charges on deposit accounts.. 819 755 704 650 592
Insurance commissions................ 255 635 537 346 314
Gain on sale of subsidiary........... 962 747 -- -- --
Other operating income............... 394 256 297 168 261
Other expenses....................... (14,798) (15,168) (13,744) (10,442) (9,909)
-------- -------- -------- -------- --------
Income before income taxes and
change in accounting method....... 5,751 8,044 7,480 3,531 2,485
Income tax expense................... 2,072 3,094 2,735 1,273 759
-------- -------- -------- -------- --------
Net income before change in
accounting method.................. 3,679 4,950 4,745 2,258 1,726
-------- -------- -------- -------- --------
Cumulative effect of
accounting change.................. 300 -- -- -- --
-------- -------- -------- -------- --------
Net income........................... $ 3,979 $ 4,950 $ 4,745 $ 2,258 $ 1,726
======== ======== ======== ======== ========
Per share:
Net income before cumulative
effect of accounting change...... $2.14 $2.74 (1)
Net income......................... 2.31 2.74 (1)
Cash dividends..................... .49 .43 $.10
Year Ended June 30,
------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ----------- ----------- ---------- ----------
Other Data:
Interest rate spread information:
Average during period.............. 2.56% 2.95% 2.65% 2.33% 2.02%
At end of period................... 2.71 3.12 2.88 2.63 2.07
Net interest margin (2).............. 2.86 3.27 2.95 2.52 2.21
Net interest income to operating
expenses (excluding the mortgage
banking subsidiaries).............. .92x 1.68x 1.49x 1.33x 1.17x
Average interest-earning assets to
average interest-bearing
liabilities........................ 1.08% 1.07% 1.05% 1.03% 1.02%
Non-performing assets to total
assets at end of period (3)........ .33 .43 .42 .59 .66
Return on assets (net income to
average assets).................... .80 1.02 1.00 .51 .41
Net income to average equity......... 8.69 11.42 13.60 10.38 8.73
Stockholders' equity to total assets
(end of period).................... 9.21 9.09 8.88 4.97 4.79
Average stockholders' equity to average
total assets....................... 9.25 8.89 7.35 4.94 4.67
Operating expenses to average total
assets (excluding the mortgage.....
banking subsidiary)................ 2.24 1.80 1.86 1.77 1.72
Operating expenses to average total
assets (including the mortgage
banking subsidiary)................ 2.99 3.11 2.90 2.34 2.34
Number of full-service offices....... 16 16 16 16 15
Number of NOW and checking accts..... 19,672 18,751 17,997 16,256 15,723
Number of other deposit accounts..... 39,006 40,018 42,522 45,752 46,037
Mortgage loans serviced for others
(in thousands)..................... $661,980 $787,270 $448,995 $164,629 $84,626
</TABLE>
- -------------------------------------
(1) Common Stock was issued in the conversion of the Bank to stock form on
October 30, 1991. Net income per share is not meaningful because shares were
outstanding for only a portion of the year.
(2) Net interest income divided by average interest-earning assets.
(3) Loans that are 90 days or more delinquent, non-performing investment and
mortgage-backed securities (of which the Bank has had none during the
periods indicated), as well as foreclosed assets.
-39-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
General
The Company was formed as part of the conversion of the Bank from a
federal mutual savings bank to a federal stock savings bank and is a unitary
savings and loan holding company. The Company has no other business activity
other than being the holding company for the Bank and its subsidiaries.
The Company's net income is primarily dependent upon the difference (or
"spread") between the average yield earned on loans, mortgage-backed securities
and investments and the average rate paid on deposits and borrowings, as well
as the relative amounts of such assets and liabilities. The interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. The Bank, like other
thrift institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
The Company's interest expense is a product of the interest paid on
deposits and borrowed funds. The Company emphasizes and promotes consumer
checking and NOW accounts principally from its market area. These types of
deposits tend to be less susceptible to rapid changes in volume and interest
rate.
In January 1993, the Company formed a new mortgage banking subsidiary
based in Virginia, Union Financial Corp. (UFC), and effective May 31, 1993, sold
its California mortgage banking subsidiary, Union Security Mortgage (USM).
The Company's net income is also affected by, among other things, gains
and losses on sales of foreclosed property, provisions for loan losses, service
charge fees and subsidiary activities, operating expenses and income taxes.
Additionally, net income is also affected by the risks inherent in the
operations of the mortgage banking subsidiary. These risks are, among other
things, (i) the effect of changing economic conditions and interest rates on
loan demand; (ii) fluctuating interest rates; and (iii) significant changes in
the secondary mortgage market, including the operations, level of activity or
underwriting criteria of the Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation or Government National Mortgage Association. Moreover,
the mortgage banking subsidiary has, in the normal course of its business,
commitments to fund loans and commitments to sell loans each of which has off-
balance sheet risk which ultimately may affect the Company's net income. In
addition, UFC and the Bank are subject to certain repurchase obligations or
potential liability for loans sold by UFC and USM if certain representations and
warranties made to the purchaser at the time of sale prove false. See
"Comparison of Years Ended June 30, 1994 and June 30, 1993 - Other Expenses."
The Company's operating strategy over the past several years has been to
strengthen capital and increase profitability, while controlling interest rate
risk and credit risk, and also attempting to increase its loans serviced for
others.
Asset Quality
The Company has historically maintained a high level of quality assets.
Non-performing assets (including repossessed assets), as a percentage of total
assets, were .33% at June 30, 1994, and .43% at June 30, 1993. Of the
Company's $1.6 million of non-performing assets at June 30, 1994, the largest
single asset was a single family home with a book value of $574,000, and no
other single asset (or group of related assets) exceeded $321,000 in book
value. Management believes that the Company's favorable asset quality results
from its emphasis on the origination and purchasing of loans secured by one- to
four-family, owner-occupied homes and on the purchase of mortgage-backed
securities secured by similar types of loans as well as from favorable economic
conditions which have prevailed in its market area. At June 30, 1994,
approximately 88% of the Bank's loan and mortgage-backed securities portfolio
consisted of one- to four-family mortgage loans (exclusive of construction
loans) and mortgage-backed securities.
-40-
<PAGE>
Asset/Liability Management
The Company's asset/liability management is primarily dependent on the
Bank's asset/liability management which has been directed since the early 1980s
toward reducing its exposure to fluctuations in interest rates. At June 30,
1994, the Bank's cumulative one-year gap was a positive 20.5%. The effect of
this positive one year interest rate sensitivity gap position is to tend to
minimize the extent to which the Bank's operations are negatively affected by
increases in interest rates. Consequently, a general rise in interest rates
may not reduce net interest income to the extent that might occur if the Bank's
balance sheet was more evenly matched. Despite its positive interest rate
sensitivity gap position, it is still possible for the Bank to be adversely
affected by changes in interest rates.
A positive gap for a given period means that the amount of interest-
earning assets maturing or otherwise repricing within such period is greater
than the amount of interest-bearing liabilities maturing or otherwise repricing
within the same period. Accordingly, in a rising interest rate environment, an
institution with a positive gap generally experiences a greater increase in the
yield on its assets than in the cost of its liabilities. Conversely, a falling
interest rate environment will generally have an unfavorable impact on an
institution with a positive gap because its cost of funds will generally
decrease less rapidly than the yield on its assets. Changes in interest rates
generally have the opposite effect on an institution with a negative gap. A
rising interest rate environment imposes risks on an institution with a negative
gap, because the increased interest cost of its liabilities generally will
exceed the increased yield on its assets.
The Bank's asset/liability management strategy emphasizes the holding of
adjustable rate loans and adjustable rate mortgage-backed securities in its
portfolio. In addition, other loans are originated and fixed rate
mortgage-backed securities are purchased which have shorter terms to maturity
or reprice more frequently than do long term fixed rate mortgage loans, yet
which provide a positive margin over the Bank's cost of funds. At June 30,
1994, adjustable rate loans and adjustable rate mortgage-backed securities
totaled $260.3 million, or 63% of the Bank's total loan and mortgage-backed
securities portfolio. In response to customer demand, however, the Bank has
continued to originate fixed rate mortgage loans. To the extent the Bank can
maintain its positive interest rate sensitivity gap, management does not
believe this decision will have a material effect on its operating results and
intends to continue to hold fixed rate products in its portfolio.
The Bank has also emphasized retail checking accounts, which generally
are considered to be low interest rate, long term core deposits. At June 30,
1994, checking account deposits totaled $68.9 million, or 18.0% of total
deposits. In recent years, the Bank has not engaged in the purchase or sale of
financial futures, options or interest rate swaps as part of its asset/liability
management strategies.
In preparing the table below, it has been assumed that: (i) adjustable-
rate first mortgage loans will prepay at a rate of 18% per year; (ii) fixed-
maturity deposits will not be withdrawn prior to maturity; and (iii) other
deposits are withdrawn or reprice as follows: passbook accounts at the rate of
17% within one year, 25.8% between one and three years, 16.8% between three and
five years, and 40.4% over five years; transaction accounts at the rate of 37%
within one year, 33.9% between one and three years, 9.1% between three and five
years, and 20% over five years; and money market accounts at the rate of 79%
within one year, 11% between one and three years, 5.2% between three and five
years and 4.8% over five years.
Weighted average interest rates have been calculated for fixed-rate
first mortgage loans and mortgage-backed securities based on contractual
maturities within the following categories: 1 month; 2 months; 3 months; 4
months; 5 months; 6 months; greater than 6-9 months; greater than 9 months - 1
year; greater than 1-3 years; greater than 3-5 years; greater than 5-10 years;
greater than 10-20 years; and greater than 20 years. Using these
classifications, fixed-rate mortgage loans and mortgage-backed securities are
assumed to prepay annually as follows:
<TABLE>
<CAPTION>
Weighted Average Prepayment
Interest Rate: Assumption
-------------- ----------
<S> <C>
Less than 8.00%............ 9.00%
8.00 to 8.99%............ 15.00
9.00 to 9.99%............ 24.00
10.00 to 10.99%............ 35.00
11.00 and over............. 49.00
</TABLE>
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (i) the rate of
interest to
-41-
<PAGE>
be paid on an asset or liability may adjust periodically on the basis of an
index; (ii) an asset or liability such as a mortgage loan may amortize,
permitting reinvestment of cash flows at the then-prevailing interest rates; or
(iii) an asset or liability may mature, at which time the proceeds can be
reinvested at current market rates. The following table does not necessarily
indicate the impact of general interest rate movements on the Bank's net
interest yield because the repricing of certain categories of assets and
liabilities is subject to competitive and other pressures beyond the Bank's
control. As a result, certain assets and liabilities indicated as maturing or
otherwise repricing within a stated period may, in fact, mature or reprice at
different times and at different volumes.
<TABLE>
<CAPTION>
At June 30, 1994
-------------------------------------------------------------------------
Maturing or Repricing
-------------------------------------------------------------------------
1-3 4-12 Over
Months Months 1-3 Yrs. 3-5 Yrs. 5 Years Total
------ ------ -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Fixed rate one- to four-family
(including mortgage-backed securities),
commercial real estate and
construction loans....................... $ 15,053 $ 21,015 $ 40,507 $16,628 $38,170 $131,373
Adjustable rate one- to four-family
(including mortgage-backed
securities), commercial real estate
and construction loans................... 92,823 167,503 0 0 0 260,326
Commercial business loans.................. 1,185 1,309 1,511 179 107 4,291
Consumer loans............................. 7,006 2,304 4,810 5,328 243 19,691
Advances collateralized by loans
held for sale............................ 9,623 0 0 0 0 9,623
Investment securities and other............ 16,203 5,496 5,210 10,000 7,101 44,010
-------- -------- -------- ------- ------- --------
Total interest-earning assets.......... 141,893 197,627 52,038 32,135 45,621 469,314
-------- -------- -------- ------- ------- --------
Deposits:
Passbook and statement accounts.......... 2,539 7,167 14,746 9,613 23,039 57,104
NOW and Money Market Accounts............ 17,352 35,568 21,630 3,281 6,941 84,772
Certificates of Deposit.................. 53,696 75,888 76,739 22,899 1,116 230,338
-------- -------- -------- ------- ------- --------
Total interest-bearing deposits........ 73,587 118,623 113,115 35,793 31,096 372,214
FHLB advances.............................. 48,000 0 20,000 0 800 68,800
-------- -------- -------- ------- ------- --------
Total interest-bearing liabilities..... 121,587 118,623 133,115 35,793 31,896 441,014
-------- -------- -------- ------- ------- --------
Interest-earning assets less interest-
bearing liabilities...................... $ 20,306 $ 79,004 $(81,077) $(3,658) $13,725 $ 28,300
======== ======== ======== ======= ======= ========
Cumulative interest rate
sensitivity gap.......................... $ 20,306 $ 99,310 $ 18,233 $14,575 $28,300
======== ======== ======== ======= =======
Cumulative interest rate sensitivity gap
as percentage of total assets at
June 30, 1994............................ 4.20% 20.53% 3.77% 3.02% 5.85%
Cumulative interest rate sensitivity gap
as percentage of total assets at
June 30, 1993............................ 4.25 16.80 (2.96) (8.20) 4.79
Cumulative interest rate sensitivity gap
as percentage of total assets at
June 30, 1992............................ -- 13.23 (.10) (4.88) 5.11
Cumulative interest rate sensitivity gap
as percentage of total assets at
June 30, 1991............................ -- 5.37 (7.97) (9.33) 1.04
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgage
("ARM") loans, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in
-42-
<PAGE>
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
Results of Operations
Average Balances, Interest Rates and Yields. The following table
presents for the Company for the periods indicated the average balance sheet
including the average balances of each category of interest-earning assets,
together with resultant yields, and interest-bearing liabilities, together with
the net interest margin. The table does not reflect any effect of income taxes.
The average loan balances include the balances of non-accruing loans. The yields
and costs for the periods indicated include fees which are considered
adjustments to yield.
<TABLE>
<CAPTION>
Year Ended June 30,
1994 1993 1992
---------------------------- ---------------------------- ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ----- ----------- ------- ------ ------------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans......................... $176,310 $14,742 8.36% $189,713 $17,049 8.99% $205,162 $20,472 9.98%
Mortgage-backed securities.... 234,634 13,978 5.96 200,570 14,164 7.06 165,626 13,500 8.15
Investment securities......... 8,214 412 5.02 5,472 242 4.42 6,278 451 7.18
Other interest-earning assets. 47,159 2,720 5.77 65,184 4,336 6.65 69,960 5,177 7.40
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets. 466,317 31,852 6.83 460,939 35,791 7.76 447,026 39,600 8.86
-------- ------- ---- -------- ------- ---- -------- ------- ----
Other assets.................... 28,496 26,460 26,686
-------- -------- --------
Total assets............... $494,813 $487,399 $473,712
======== ======== ========
Interest-bearing liablilities:
NOW and Money Market Accounts. $ 85,498 2,493 2.92 $ 78,897 2,584 3.28 $ 68,155 3,126 4.59
Passbook Accounts............. 55,625 1,436 2.58 44,749 1,461 3.26 34,742 1,570 4.52
Certificates of Deposit....... 233,518 11,152 4.78 249,919 13,284 5.32 288,917 19,061 6.60
--------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits................ 374,641 15,081 4.03 373,565 17,329 4.64 391,814 23,757 6.06
FHLB advances................. 58,939 3,439 5.83 57,741 3,398 5.88 33,371 2,662 7.98
--------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities................. 433,580 18,520 4.27 431,306 20,727 4.81 425,185 26,419 6.21
--------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest bearing liabilities 15,469 12,779 13,695
Stockholders' equity............ 45,764 43,314 34,832
--------- -------- --------
Total liabilities and
stockholders' equity.......... $494,813 $487,399 $473,712
========= ======== ========
Net interest income/interest
rate spread................... $13,332 2.56% $15,064 2.95% $13,181 2.65%
======= ==== ======= ==== ======= ====
Net interest margin(1)......... 2.86% 3.27% 2.95%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities.................... 1.08 1.07 1.05
========= ======== ========
__________________
(1) Net interest margin is net interest income divided by average interest-earning assets.
</TABLE>
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rate (i.e.,
changes in rate multiplied by prior volume) and (ii) changes in volume (i.e.,
changes in volume multiplied by prior rate). Changes attributable to both rate
and volume which cannot be segregated have been allocated proportionately to
the changes due to volume and the changes due to rate.
-43-
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30 Year Ended June 30
--------------------------------------------- -----------------------------------------
1994 vs. 1993 1993 vs. 1992
--------------------------------------------- -----------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------------- Increase -------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- -------- ------------ ---------- --------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................ ($1,200) ($1,107) ($2,307) ($1,543) ($1,880) ($3,423)
Mortgage-backed securities........... 2,542 (2,728) (186) 2,857 (2,193) 664
Investment securities................ 121 49 170 (58) (151) (209)
Other interest-earning assets........ (1,200) (416) (1,616) (353) (488) (841)
------- -------- ---------- --------- -------- ------------
Total interest-earning assets..... 263 (4,202) (3,939) 903 (4,712) (3,809)
------- -------- ---------- --------- -------- ------------
Interest-bearing liabilities:
NOW and Money Market Accounts........ 217 (308) (91) 494 (1,036) (542)
Passbook Savings..................... 386 (411) (25) 440 (549) (109)
Certificates of Deposit.............. (872) (1,260) (2,132) (2,576) (3,201) (5,777)
------- -------- ---------- --------- -------- ------------
Total deposits..................... (269) (1,979) (2,248) (1,642) (4,786) (6,428)
FHLB advances........................ 72 (31) 41 1,956 (1,220) 736
------- -------- ---------- --------- -------- ------------
Total interest-bearing liabilities. (197) (2,010) (2,207) 314 (6,006) (5,692)
------- -------- ---------- --------- -------- ------------
Increase (decrease) in net
interest income.................... $ 460 ($2,192) ($1,732) $ 589 $1,294 $ 1,883
======= ======== ========== ========= ======== ============
</TABLE>
-44-
<PAGE>
The following table presents the yields received on loans, investments and
other interest-earning assets, the rates paid on savings deposits and borrowings
and the resultant interest rate spreads at the dates and for the periods
indicated. Weighted average balances are based on average daily balances.
<TABLE>
<CAPTION>
At June 30,
----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable............................. 7.89% 8.60% 9.35%
Mortgage-backed securities................... 6.29 6.98 8.18
Investment securities........................ 6.51 4.60 5.24
Other interest-earning assets................ 5.66 6.12 6.78
---- ---- ----
Total interest-earning assets.............. 6.84 7.55 8.46
---- ---- ----
Weighted average rate paid on:
NOW and Money Market Accounts................ 2.57 3.15 3.94
Passbook Savings............................. 2.75 3.10 4.00
Certificates of Deposit...................... 4.60 4.92 5.93
---- ---- ----
Total interest-bearing deposits............ 3.82 4.30 5.36
FHLB advances and other borrowings........... 5.83 5.28 8.31
---- ---- ----
Total interest-bearing liabilities......... 4.13 4.43 5.58
---- ---- ----
Spread......................................... 2.71% 3.12% 2.88%
==== ==== ====
Year Ending June 30,
----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Average yield on:
Loans receivable............................. 8.36% 8.99% 9.98%
Mortgage-backed securities................... 5.96 7.06 8.15
Investment securities........................ 5.02 4.42 7.18
Other interest-earning assets................ 5.77 6.65 7.40
---- ---- ----
Total interest-earning assets.............. 6.83 7.76 8.86
---- ---- ----
Average rate paid on:
NOW and Money Market Accounts................ 2.92 3.28 4.59
Passbook Savings............................. 2.58 3.26 4.52
Certificates of Deposit...................... 4.78 5.32 6.60
---- ---- ----
Total interest-bearing deposits............ 4.03 4.64 6.06
FHLB advances and other borrowings........... 5.83 5.88 7.98
---- ---- ----
Total interest-bearing liabilities......... 4.27 4.81 6.21
---- ---- ----
Spread......................................... 2.56 2.95 2.65
---- ---- ----
Net interest margin (net interest earnings
divided by average interest-earning assets).. 2.86% 3.27% 2.95%
==== ==== ====
</TABLE>
-45-
<PAGE>
Condensed Consolidating Income Statement
The following are condensed consolidating income statements for the years
ended June 30, 1994 and 1993, showing the operations of the Company, the Bank
and other subsidiaries ("Company and other subsidiaries") separately from the
operations of the mortgage banking subsidiaries, Union Financial Corp. ("UFC")
and Union Security Mortgage, Inc. ("USM"). USM was sold effective May 31, 1993
while UFC began operations in January, 1993. The loan servicing portfolio of USM
of approximately $720 million was transferred to Union Federal immediately prior
to the sale. Loan servicing income and the related servicing expense of USM was
$1,250,000 and $423,000, respectively, for the year ended June 30, 1993.
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1994 June 30, 1993
--------------------------------- -------------------------------------------
Company Company
and other and other
Subsidiaries UFC Total Subsidiaries USM UFC Total
------------ ------ ----- ------------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Net interest income............... $13,266 $ 66 $13,332 $14,728 $ 344 $ (8) $15,064
Provision for loan losses....... 914 -- 914 285 -- -- 285
------- ------ ------- ------- ------ ------ -------
Net interest income after
provision for loan losses....... 12,352 66 12,418 14,443 344 (8) 14,779
------- ------ ------- ------- ------ ------ -------
Other income...................... 4,442 3,689 8,131 3,297 4,786 350 8,433
Other expenses.................... 11,087 3,711 14,798 8,748 5,829 591 15,168
------- ------ ------- ------- ------ ------ -------
Income (loss) before taxes........ 5,707 44 5,751 8,992 (699) (249) 8,044
Income taxes...................... 2,057 15 2,072 3,328 (150) (84) 3,094
------- ------ ------- ------- ------ ------ -------
Net income (loss) before change
in accounting method............ 3,650 29 3,679 5,664 (549) (165) 4,950
Change in accounting
method.......................... 300 -- 300 -- -- -- --
------- ------ ------- ------- ------ ------ -------
Net income (loss)................. $ 3,950 $ 29 $ 3,979 $ 5,664 $ (549) $ (165) $ 4,950
======= ====== ======= ======= ====== ====== =======
</TABLE>
COMPARISON OF YEARS ENDED JUNE 30, 1994 AND JUNE 30, 1993.
General. Total assets were $503.9 million at June 30, 1994 compared to
$489.5 million at June 30, 1993. This $14.4 million increase resulted primarily
from increases in investment securities of $19.8 million and cash and cash
equivalents of $6.0 million, partially offset by decreases in loans of $11.2
million. The increase in assets was funded primarily by an increase in FHLB
advances of $10.8 million and the net earnings for the year of approximately
$4.0 million.
Net income decreased $971,000 or 19.6% to $3,979,000 or $2.31 per share for
the year ended June 30, 1994 compared to $4,950,000 or $2.74 per share for the
prior year. The 1994 figures include a $300,000 or $.17 per share increase
resulting from the cumulative effect of the Company's adoption of Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes, in
the first quarter of the fiscal year 1994. Net income of $3,679,000 or $2.14 per
share before the accounting change was down $1,271,000 or 25.7% from the prior
year's figure. Because of a lesser amount of average shares outstanding, net
income on a per share basis was down $.60 or 21.9%. UFC had net income of
$29,000 in fiscal 1994 compared to a net loss of $165,000 in fiscal 1993, while
USM, which was sold effective May 31, 1993, had a net loss of $549,000 in fiscal
1993. (See "Condensed Consolidating Income Statement"). As discussed in more
detail below, this $743,000 increase in net after tax income of the Company's
mortgage banking subsidiaries was offset at the other Company operations by a
$1,462,000 decrease in interest income over interest expense and an increase in
other expense of $2,339,000 offset by an increase in other income of $1,145,000
and a decrease in income taxes of $1,022,000. (See "Condensed Consolidated
Income Statement").
Interest Income. The $3,939,000 decrease in interest income in fiscal 1994
was primarily the result of a decrease in average yield on earning assets to
6.83% from 7.76% the prior year, which more than offset the increased earnings
on the $5.4 million increase in average interest earning assets. While market
interest rates have recently risen, the decrease in yield was due to prior
market declines in interest rates which caused: (1) rates on the adjustable rate
loans and mortgage-backed securities in the Company's portfolio to decrease; and
(2) a continuing increased level of prepayments of the higher rate fixed rate
loans and mortgage-backed securities which could be replaced only with items
paying lesser rates.
-46-
<PAGE>
Interest Expense. Although average deposits increased $1.1 million,
deposit interest expense declined by $2,248,000 as a result of a decline in the
average rates paid on total deposits to 4.03% from 4.64% and a decline in the
average balance of certificates of deposit of $16.4 million. (Certificates of
Deposit generally pay higher rates than other types of deposits such as
passbook accounts and checking accounts.)
Provision for Loan Losses. The Company provided $914,000 for loan losses
for the year ended June 30, 1994. This amount was provided primarily because of
the increased risks related to eight California loans with a principal balance
of $1,444,000 at June 30, 1994, repurchased by USM or the Bank pursuant to
obligations based on representations and warranties made to the purchasers of
such loans and because of concerns about three large credits with a principal
balance of $5,159,000 at June 30, 1994. With net charge-offs and recoveries of
$179,000 during the year, the allowance for loan losses increased from $800,000
to $1,535,000. With this $735,000 increase in allowance for loan losses and with
non-performing loans declining to $168,000 at June 30, 1994, from $426,000 at
the prior year end, the ratio of allowance for loan losses to non-performing
loans increased to 914% at June 30, 1994 compared to 188% at June 30, 1993. The
allowance for loan losses to net total loans was .91% at June 30, 1994 compared
to .45% at June 30, 1993. The Company believes the allowance for loan losses to
be adequate under its circumstances.
Other Income. Other income declined a net $302,000 for the year ended June
30, 1994 from fiscal 1993. The primary components of the decline were
decreases of mortgage loan origination fees of $733,000 and insurance
commissions of $380,000 offset by increases in loan servicing fees of $394,000,
gain on sale of subsidiary of $215,000 and gain on sale of consumer loans of
$150,000.
Mortgage loan origination fees include fees received from closing loans,
fees received for the sale of loans on a "servicing released" basis, and gains
from the sale of loan servicing rights. While fiscal 1994 includes $575,000 in
gains from UFC's sale of approximately $50 million of loan servicing rights on
loans which were originally sold "servicing retained", mortgage loan
origination fees declined because of an overall decrease in total loan sales
production. (See following table.)
<TABLE>
<CAPTION>
Loan Sales Of The Mortgage Banking Subsidiaries
(In Thousands)
<S> <C> <C> <C>
Year Servicing Servicing
Ending Retained Released Total
------ --------- --------- -----
June 30, 1994 (1) $ 85,580 $327,549 $413,129
June 30, 1993 (2) $394,192 $228,654 $622,846
___________
(1) 100% are sales of UFC.
(2) 100% are sales of USM, which was sold effective May 31, 1993.
</TABLE>
Insurance commissions are primarily fees the Company receives from various
insurance companies on the sale of tax deferred annuity products. The Company
believes the sales volume has declined from prior year's volumes because of a
combination of a decline in the interest rates offered by the insurance
companies and new local competition from several financial institutions.
Loan servicing fees increased because of an increase in the average loan
servicing portfolio to $719 million for fiscal 1994 from $627 million average
the prior year.
On May 31, 1993, the Bank sold the operations and stock of its wholly owned
California mortgage bank subsidiary, Union Security Mortgage, Inc. (USM). The
sale price consisted of a cash payment for the net assets and liabilities sold
and post-closing date payments to be made based on a percentage of loans funded
by USM over the twelve months following May 31, 1993.
$962,000 of net post-closing date payments for loans closed in fiscal 1994
were recorded as additional gain on sale which exceeded the fiscal 1993 portion
of the gain on sale of $747,000 by $215,000.
Other Expenses. Other expenses decreased $370,000 for the year ended June
30, 1994 from fiscal 1993. The major components of the decrease were a
decrease in salary and benefits expense of $1,427,000 and communications
-47-
<PAGE>
and supplies, etc. of $131,000 offset by increased deposit insurance expense of
$208,000 and increased warranty loss expense of $1,026,000. The decreases in
salary and benefits expense and communications expense relates almost entirely
to USM expenses and their no longer being a part of the Company. Increased
deposit insurance expenses relates primarily to a one time $175,000 FDIC
secondary reserve refund which was credited to expense in fiscal 1993.
Effective June 1, 1993, the Bank sold complete ownership of its then
wholly owned subsidiary, USM, to the Knight Corporation ("Knight"). While the
Bank owned USM, USM originated, sold and serviced conventional single family
residential loans through its offices in Santa Ana and Woodland Hills,
California. USM customarily sold all of the loans that it originated to buyers
in the secondary market on a non-recourse basis, either as individual whole
loans or as a packaged pool of loans. However, subsequent to the sale of the
loans it originated USM remained potentially liable for losses incurred by a
purchaser, including unpaid principal and interest, under certain
representations and warranties made to the purchaser at the time of sale. In
certain circumstances (for example, when the debtor made fraudulent
misrepresentations to USM in the origination process), USM was liable for a
purchaser's losses on a defaulted loan, regardless of whether the loan was
recourse or non-recourse, if there had been a breach of the representations and
warranties made to the purchaser by USM. Such fraud might occur with respect to
tax returns, employment verifications, and deposits and appraisals provided at
the time of origination. In connection with the sale of USM on June 1, 1993, the
Bank contractually assumed liability to the Knight Corporation for losses and
repurchase demands resulting from breaches of the representations and
warranties. Moreover, in certain cases the Bank separately guaranteed USM's
obligations to loan purchasers pursuant to guarantees signed by the Bank prior
to the sale of USM. Although USM dissolved in 1994, and the Bank is less likely
to be asked to indemnify the Knight Corporation for claims against USM for any
breach of the representations and warranties, the Bank remains obligated under
certain of the separate guarantees to loan purchasers for losses relating to
USM's prior operations.
When fraud claims relating to loans originated by USM began to surface
in fiscal 1993, they were thought to be aberrational. However, additional
repurchase claims arose in 1994, and the Company discovered that these claims,
some of which were based on fraud, were arising in California because of the
prior sharp increases in the value of single family homes. During 1990 and
1991, borrowers not capable of meeting mortgage payments obtained loans based
on fraud with the apparent expectation that they could profit from the resale
of the homes in the rising home market. However, the California economy
deteriorated and housing values dropped sharply. As a result, borrowers were
unable to sell their homes at a profit and pay off the mortgage loans. As
borrowers defaulted, the fraud was discovered and the repurchase and warranty
loss claims occurred. By fiscal 1994, lenders and the public were generally
aware of the fraud schemes in California and the California housing market had
stabilized.
In June 1994, the Company identified eight loans with an aggregate
outstanding loan balance of $1,048,000 at June 30, 1994, which had been sold to
the Federal Home Loan Mortgage Corporation and a loan sold to the Federal
National Mortgage Corporation with a loan balance of $161,000 at June 30, 1994,
which appeared to have involved broker fraud. At June 30, 1994, no claims had
been made regarding these loans.
During the year ended June 30, 1994, the Bank incurred approximately
$116,000 in losses relating to warranty claims on two loans, and provided for
$1,482,000. At June 30, 1994, the Bank had eight warranty loss claims pending
and the estimated potential loss from these known claims totalled $651,000.
The Company believes six of those eight claims are without merit and that only
two, with a potential liability of $133,000, have any merit. The Company's
allowance for warranty losses was $1,366,000 at June 30, 1994, which management
considers adequate.
COMPARISON OF YEARS ENDED JUNE 30, 1993 AND JUNE 30, 1992
General. Total assets were $489.5 million at June 30, 1993, compared to
$470.7 million at June 30, 1992. This $18.8 million increase resulted
primarily from increases in mortgage-backed securities of $68.3 million,
investment securities of $3.4 million, and prepaid expenses and other assets of
$4.1 million, partially offset by decreases in loans of $14.7 million, loans
held for sale of $38 million, and cash and cash equivalents of $7 million. The
increase in assets was funded primarily by increases in FHLB advances of $27
million offset by a decrease in deposits of $9 million.
-48-
<PAGE>
Net income increased $205,000 or 4.3%, to $4,950,000 for the year ended
June 30, 1993, compared to $4,745,000 for the prior year. USM, which was sold
effective May 31, 1993, had a net loss of $549,000 in fiscal 1993 versus net
income of $959,000 in fiscal 1992. This $1,508,000 decrease in net after tax
income at USM was more than offset at the other Company operations, primarily
as follows: interest income over interest expense increased $1,883,000; other
income, which includes the gain on the sale of USM of $747,000, increased
$1,847,000; and other expenses and income taxes increased $539,000 and
$1,186,000, respectively.
Interest Income. The $3,809,000 decrease in interest income in fiscal
1993 was primarily the result of a decrease in the average yield on interest
earning assets for fiscal 1993 to 7.76% from 8.86% the prior year, which more
than offset the increased earnings on the $13.9 million increase in average
interest earnings assets. The decrease in yield was due to the recent years'
decline in market rates which caused: (1) rates on the adjustable rate loans and
mortgage-backed securities in the Company's portfolio to decrease; and (2) a
continuing increased level of prepayments of the higher rate fixed rate loans
and mortgage-backed securities which could be replaced only with items paying
lesser rates.
Interest Expense. Average interest bearing deposits declined by $18.2
million and the average rates paid on deposits declined to 4.64% from 6.06%,
resulting in a decrease in deposit interest expense of $6,428,000. Interest
paid on FHLB advances increased $736,000 because the effect of the average
balance increase of $24.4 million offset the decline in the average rates from
7.98% to 5.88%.
Provision for Loan Losses. The Company provided $285,000 for loan
losses for the year ended June 30, 1993. With net charge-offs and recoveries of
$133,000 during the year, the allowance for loan losses increased from $648,000
to $800,000. With this $152,000 increase in the allowance for loan losses and
with non-performing loans declining to $426,000 at June 30, 1993, from $494,000
the prior fiscal year end, the ratio of allowance for loan losses to
non-performing loans increased to 188% at June 30, 1993, compared to 131% at
June 30, 1992.
Other Income. Other income increased a net $159,000 in fiscal 1993 over
the prior year. The principal components of the increase were the $747,000
gain on sale of USM and increased loan servicing fees of $959,000 offset by a
decline in mortgage loan origination fees of $1,655,000.
Loan servicing fees increased because of the larger average balance in
the loans serviced for others' portfolios. Loan origination fees declined
because of a decrease in the total volume of loan sales in fiscal 1993 compared
to 1992 as well as a decline in the "servicing released" portion of the total
sales. (Generally, when loans are sold "servicing released", they are priced at
a premium when compared to sales on a "servicing retained" basis. Therefore,
immediate income or loss is recognized on "servicing released" sales while,
generally, servicing income is recognized over the life of the loans on
"servicing retained" sales.)
Also included in loan origination fee income for the year ended June 30,
1992, was a pre-tax gain of $467,000 on the bulk sale of a $60.6 million of the
loan servicing portfolio. There were no similar bulk sales in fiscal 1993.
The following table summarizes the loan sales of USM: (dollars in
thousands)
<TABLE>
<CAPTION>
Year Servicing Servicing
Ending Retained Released Total
------ -------- -------- -----
<S> <C> <C> <C>
June 30, 1993 $394,192 $ 228,654 $622,846
June 30, 1992 356,730 351,360 708,090
-------- --------- --------
Increase (Decrease) $ 37,462 $(122,706) $(85,244)
======== ========= ========
</TABLE>
The amount of loans serviced for others by the Company at June 30, 1993,
was $787 million, up from $449 million at June 30, 1992, and $165 million at
June 30, 1991.
Other Expenses. Other expenses increased $1,424,000 for the year ended
June 30, 1993, over fiscal 1992, $885,000 of which relates to USM and $539,000
to the remainder of the Company.
-49-
<PAGE>
USM's major components of other expense changes were: (a) During fiscal
1993 USM experienced warranty losses on sold loans of $456,000 compared to
$111,000 for fiscal 1992. A loss of $375,000 was experienced on one loan which
the borrowers fraudulently falsified their income and subsequently defaulted.
The security property had experienced dramatic depreciation. (b) Loan
servicing expenses (included in "Other Operating Expenses") increased
approximately $222,000 due to the larger loans serviced for others' portfolio.
(c) Salary and benefits were up $138,000, premises and equipment expenses were
up $70,000, and data processing expenses were up $63,000, all due to continued
increase in operations at USM.
For the Company operations exclusive of USM, the major components of
other expense changes were:
(a) Salaries and benefits were up $464,000, of which $410,000 was the
amount recorded by UFC which began operation in January, 1993. (b) Deposit
insurance was $185,000 less than in fiscal 1992 because of lesser amount of
deposits and because the FDIC elected to refund a secondary reserve of
$175,000, which was credited to expense. (c) The remaining increases primarily
represent the expenses of UFC which began operations in January, 1993.
Income Taxes. Income taxes increased for the year ended June 30, 1993
due to the increase in income before taxes as compared to the prior year.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits, advances from the
FHLB of Indianapolis, amortization and prepayment of loan principal (including
mortgage-backed securities) and, to a lesser extent, sales or maturities of
investment securities, mortgage-backed securities, and short-term investments
and operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions, and competition,
and, most recently, the restructuring of the thrift industry. The Bank
generally manages the pricing of its deposits to maintain a steady deposit
balance, but has from time to time decided not to pay deposit rates that are as
high as those of its competitors, and, when necessary, to supplement deposits
with longer term and/or less expensive alternative sources of funds.
Federal regulations historically have required the Bank to maintain
minimum levels of liquid assets. The required percentage has varied from time to
time based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government and corporate
securities and other obligations generally having remaining maturities of less
than five years. The Bank has historically maintained its liquidity ratio at
levels in excess of those required. For June, 1994, the Bank's liquidity ratio
was 8.0%.
The primary investing activities of the Company are lending and
purchasing mortgage-backed securities and investment securities. For fiscal
1994, investment activities used a net $8.2 million of cash. Loan repayments
exceeded originations by $19.2 million and mortgage-backed securities repayments
of $71.9 million provided part of the funds for the purchase of $69.9 million of
mortgage-backed securities, $9.4 million of loans and $28.5 million of
investment securities. With the recent increases in market interest rates, the
Company is expecting a decrease in prepayments of its mortgage loans and
mortgage-backed securities. For fiscal 1993, investment activities used a net
$59.7 million of cash. Loan repayments exceeded originations by $25.3 million
and mortgage-backed securities repayments of $47.4 million provided part of the
funds for the purchase of $115.2 million of mortgage-backed securities and $11.5
million of loans. The additional mortgage-backed securities were purchased
primarily in anticipation of the decline in loans held for sale of USM and to
augment the Company's net interest income. The increased activities in
originations and repayments during fiscal 1993 were caused by increased loan
demand and refinancings primarily due to declining interest rates during the
period.
The primary financing activities of the Company are deposits and FHLB
advances. For the year ended June 30, 1994, partially offsetting the funds
provided by the increase in FHLB advances of $10.8 million, was a $2.2 million
purchase of treasury stock. For the year ended June 30, 1993, partially
offsetting the funds provided by the increase in FHLB advances of $27 million,
were a net decrease of deposits of $9 million and a $2 million purchase of
treasury stock.
-50-
<PAGE>
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) the projected amount
of loans to be originated by the mortgage banking subsidiary and held for
re-sale by the Bank, (iii) expected deposit flows, (iv) yields available on
interest-bearing deposits, and (v) the objective of its asset/liability
management program. Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations. If
the Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral eligible for reverse
repurchase agreements. The Company's liquidity depends on earnings on its
investment securities and cash dividends from the Bank. See Notes to
Consolidated Financial Statements.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At June 30, 1994, the Bank (excluding UFC) had
outstanding commitments to extend credit which amounted to $5.6 million. UFC
had commitments to fund loans of $35.6 million at June 30, 1994. UFC had
commitments to sell $27.7 million of loans and $8 million of mortgage-backed
securities to offset the commitments to fund loans. See Notes to Consolidated
Financial Statements.
Certificates of deposit scheduled to mature in one year or less at June
30, 1994, totaled $120.6 million. Management believes that a significant portion
of such deposits will remain with the Bank. At June 30, 1994, the Bank had $5
million of fixed-rate advances from the FHLB of Indianapolis which mature in one
year or less.
At June 30, 1994, the Bank is in full compliance with its capital
requirements as follows:
<TABLE>
<CAPTION>
Core Tangible Risk-Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Amount $36,898 $36,898 $37,711
As a percent of assets,
as defined 7.48% 7.48% 19.71%
Required Amount $14,800 $ 7,200 $15,307
As a percent of assets,
as defined 3.00% 1.50% 8.00%
Capital in excess of
required amount $22,098 $29,698 $22,404
</TABLE>
-51-
<PAGE>
Item 8. Financial Statements and Supplementary Data
Quarterly Results of Operations
The following is a summary of the quarterly results of operations for
the years ended June 30, 1994, and 1993:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
June 30, March 31, December 31, September 30,
1994 1994 1993 1993
------- --------- ----------- -------------
(Dollars in Thousands, except Per Share Data)
<S> <C> <C> <C> <C>
Fiscal 1994
Interest income.......... $7,252 $7,569 $8,720 $8,311
Interest expense......... 4,251 4,395 5,009 4,865
------ ------ ------ ------
Net interest income..... 3,001 3,174 3,711 3,446
Provision for loan
losses.................. 667 83 82 82
------ ------ ------ ------
Net interest income
after provision for
loan losses............ 2,334 3,091 3,629 3,364
====== ====== ====== ======
Other income............. 1,769 1,782 2,416 2,164
Other expenses........... 4,481 3,361 3,700 3,256
------ ------ ------ ------
Income before income
taxes and change in
accounting method...... (378) 1,512 2,345 2,272
Income taxes............. (213) 487 916 882
------ ------ ------ ------
Net income before change
in accounting method.... (165) 1,025 1,429 1,390
------ ------ ------ ------
Change in accounting
method................. 0 0 0 300
------ ------ ------ ------
Net Income.............. $ (165) $1,025 $1,429 $1,690
====== ====== ====== ======
Earnings per share...... $ (.10) $ .61 $ .83 $ .96
Dividends declared per
share.................. $ .125 $ .125 $ .125 $ .11
Three Months Ended
--------------------------------------------------
June 30, March 31, December 31, September 30,
1993 1993 1992 1992
-------- --------- ------------ -------------
(Dollars in Thousands, except Per Share Data)
Fiscal 1993
Interest income.......... $8,893 $8,551 $9,325 $9,022
Interest expense......... 5,191 4,758 5,277 5,501
Net interest income..... 3,702 3,793 4,048 3,521
Provision for loan losses 83 82 60 60
Net interest income
after provision for
loan losses............ 3,619 3,711 3,988 3,461
Other income............ 3,009 1,672 1,638 2,114
Other expenses.......... 4,194 3,585 3,877 3,512
Income before income
taxes................. 2,434 1,798 1,749 2,063
Income taxes............ 1,045 693 594 762
Net income.............. $1,389 $1,105 $1,155 $1,301
Earnings per share...... $ .79 $ .61 $ .63 $ .71
Dividends declared per
share.................. $ .11 $ .11 $ .11 $ .10
</TABLE>
-52-
<PAGE>
Independent Auditor's Report
Board of Directors
UF Bancorp, Inc.
Evansville, Indiana
We have audited the consolidated statement of financial condition of UF Bancorp,
Inc. and subsidiary corporations as of June 30, 1994 and 1993, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Union Security Mortgage, Inc., a wholly-owned subsidiary (sold
effective May 31, 1993), which statements reflect net profit (loss) of
$(549,000) and $959,000 for the eleven months and year ended June 30, 1993, and
1992. Those statements were audited by another auditor whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for Union Security Mortgage, Inc., is based solely on the report of the other
auditor.
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 and the report of the other auditor provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor, the
consolidated financial statements described above present fairly, in all
material respects, the consolidated financial position of UF Bancorp, Inc. and
subsidiary corporations as of June 30, 1994, and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1994, in conformity with generally accepted accounting principles.
As discussed in the notes to consolidated financial statements, the Company has
restated its June 30, 1994 financial statements for both the Company's allowance
for loan and warranty losses.
As discussed in the notes to consolidated financial statements, the Company
changed its method of accounting for income taxes on July 1, 1993.
Geo S. Olive & Co. LLC
Evansville, Indiana
August 6, 1994, except for the
restatement and subsequent
events note, for which the
date is June 7, 1995.
-53-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Financial Condition
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- --------- ---------
<S> <C> <C>
(Restated)
Assets
Cash $ 13,021 $ 12,193
Federal funds sold 3,300 3,000
Short-term interest-bearing deposits 11,681 6,834
--------- ---------
Total cash and cash equivalents 28,002 22,027
Investment securities--market value $26,384 and $6,730 26,544 6,723
Mortgage-backed securities--market value $240,710 and
$246,541 243,563 244,322
Loans, net 167,917 179,096
Loans held for sale 9,623 10,066
Real estate acquired in settlement of loan, net 1,472 1,702
Premises and equipment 9,166 10,153
Federal Home Loan Bank of Indianapolis stock, at cost 6,101 5,000
Interest receivable 2,955 3,157
Prepaid expenses and other assets 8,540 7,280
--------- ---------
Total assets $503,883 $489,526
========= =========
Liabilities
Deposits $382,916 $381,712
Advances from Federal Home Loan Bank of Indianapolis 68,800 58,000
Interest payable 1,424 1,485
Other liabilities 4,358 3,810
--------- ---------
Total liabilities 457,498 445,007
========= =========
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--1,000,000 shares
Common stock, $.01 par value
Authorized--4,000,000 shares
Issued--1,858,463 shares 19 19
Additional paid-in capital 17,334 17,241
Retained earnings-substantially restricted 34,852 31,661
--------- ---------
52,205 48,921
Treasury stock--at cost--264,770 and 180,892 shares (5,308) (3,070)
ESOP loan guarantee (272) (972)
Unearned compensation (240) (360)
--------- ---------
Total stockholders' equity 46,385 44,519
--------- ---------
Total liabilities and stockholders' equity $503,883 $489,526
========= =========
</TABLE>
See notes to consolidated financial statements.
-54-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
------------------ -------- -------- --------
<S> <C> <C> <C>
(Restated)
Interest Income
Loans $ 14,742 $ 17,049 $ 20,472
Mortgage-backed securities 13,978 14,164 13,500
Federal funds sold 257 253 261
Time deposits 262 287 416
Investment securities 412 242 451
Other interest and dividends 301 526 467
Loans held for sale 1,900 3,270 4,033
-------- -------- --------
31,852 35,791 39,600
-------- -------- --------
Interest Expense
Deposits 15,081 17,329 23,757
Advances from Federal Home Loan Bank
of Indianapolis 3,145 3,312 2,600
Other 294 86 62
-------- -------- --------
18,520 20,727 26,419
-------- -------- --------
Net Interest Income 13,332 15,064 13,181
Provision for loan losses 914 285 231
-------- -------- --------
Net Interest Income After Provision For
Loan Losses 12,418 14,779 12,950
-------- -------- --------
Other Income
Gain on sale of subsidiary 962 747
Loss on sale of securities (61)
Service charges on deposit accounts 819 755 704
Mortgage loan origination fees 3,724 4,457 6,112
Mortgage loan servicing fees 1,977 1,583 624
Insurance commissions 255 635 537
Other operating income 394 256 358
-------- -------- --------
$ 8,131 $ 8,433 $ 8,274
-------- -------- --------
</TABLE>
-55-
<PAGE>
UF BANCORP, INC. AND SUBSIDIARY CORPORATIONS
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1994 1993 1992
- ------------------ ---- ---- ----
(Restated)
<S> <C> <C> <C>
Other Expense
Salaries and employee benefits $ 6,639 $ 8,066 $ 7,463
Premises and equipment expense 1,446 1,572 1,481
Deposit insurance 872 664 850
Data processing 474 535 420
Communication, postage, printing and
office supplies 833 964 902
Advertising 469 437 420
Warranty losses on sold loans 1,482 456 111
Loan sub-servicing fees 416 423 202
Other operating expenses 2,167 2,051 1,895
------ ------ ------
14,798 15,168 13,744
------ ------ ------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting Method 5,751 8,044 7,480
Income taxes 2,072 3,094 2,735
------ ------ ------
Net Income Before Cumulative Effect of
Change in Accounting Method 3,679 4,950 4,745
Cumulative Effect of Change in Method of
Accounting for Income Taxes 300
Net Income $ 3,979 $ 4,950 $ 4,745
Per Share
Income Before Cumulative Effect of
Accounting Change $2.14 $2.74
Cumulative Effect of Change in Accounting
for Income Taxes .17
Net Income 2.31 2.74
</TABLE>
See notes to consolidated financial statements.
-56-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Treasury ESOP Loan Unearned Stockholders'
Shares Amount Capital Earnings Stock Guarantee Compensation Equity
--------- ------ ---------- -------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1991 $22,890 $22,890
Net income for 1992 4,745 4,745
Cash dividends ($.10 per share) (176) (176)
Issuance of common stock 1,851,981 $19 $17,072 17,091
Recognition of ESOP loan
guarantee $(1,296) (1,296)
Unearned compensation--RRP $(600) (600)
Purchase of treasury stock (92,599) $(1,109) (1,109)
Amortization of unearned
compensation 120 120
Principal repayments on ESOP
loan 138 138
--------- --- ------- ------- ------- ------ ----- -------
Balances, June 30, 1992 1,759,382 19 17,072 27,459 (1,109) (1,158) (480) 41,803
Net income for 1993 4,950 4,950
Cash dividends ($.43 per share) (748) (748)
Tax benefits of ESOP, stock
options and RRP 104 104
Exercise of stock options 6,482 65 65
Purchase of treasury stock (88,293) (1,961) (1,961)
Amortization of unearned
compensation 120 120
Principal repayments on ESOP
loan 186 186
--------- --- ------- ------- ------- ------ ----- -------
Balances, June 30, 1993 1,677,571 19 17,241 31,661 (3,070) (972) (360) 44,519
Net income for 1994/1/ 3,979 3,979
Cash dividends ($.485 per share) (788) (788)
Tax benefits of ESOP, stock
options and RRP 93 93
Purchase of treasury stock (83,878) (2,238) (2,238)
Amortization of unearned
compensation 120 120
Principal repayments on ESOP
loan 700 700
--------- --- ------- ------- ------- ------ ----- -------
Balances, June 30, 1994/1/ 1,593,693 $19 $17,334 $34,852 $(5,308) $ (272) $(240) $46,385
========= === ======= ======= ======= ====== ===== =======
</TABLE>
__________
/1/These amounts are restated.
See notes to consolidated financial statements.
-57-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Operating Activities
Net income $ 3,979 $ 4,950 $ 4,745
Adjustments to reconcile net income to
net cash provided (used) by operating activities
Provision for loan losses 914 285 231
Depreciation and amortization 759 787 787
Premium and discount amortization on investment
and mortgage-backed securities (1,242) (446) (373)
Accretion of net origination fees (311) (340) (307)
Origination fee receipts 246 363 310
Loss on sale of mortgage-backed securities 61
Changes in
Interest receivable 202 (334) 641
Prepaid expenses and other assets (1,061) (4,146) 346
Interest payable (61) (489) (863)
Loans held for sale 443 37,982 (9,091)
Other liabilities 1,267 (1,258) 2,607
Other adjustments, net (26) 50 (1,841)
-------- --------- --------
Net cash provided (used) by operating activities 5,109 37,404 (2,747)
-------- --------- --------
Investing Activities
Purchase of mortgage-backed securities (69,893) (115,232) (61,882)
Proceeds from mortgage-backed securities maturities
and principal repayments 71,894 47,373 45,419
Proceeds from sale of mortgage-backed securities 5,154
Purchase of investment securities (28,461) (5,497) (6,794)
Proceeds from investment securities maturities and
principal repayments 8,825 2,219 10,877
Net change in loans 19,249 25,291 21,701
Purchase of loans (9,358) (11,480) (5,482)
Proceeds from sale of real estate owned 431 474 423
Purchases of premises and equipment (486) (2,253) (709)
Proceeds from sale of fixed assets 714 376
Purchases of FHLB stock (1,101) (1,013) (400)
-------- --------- --------
Net cash provided (used) by investing activities (8,186) (59,742) 8,307
-------- --------- --------
</TABLE>
-58-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Cash Flows
(Dollars in Thousands)
(Continued)
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Financing Activities
Net increase in noninterest-bearing deposits,
NOW accounts and statement savings accounts $ 10,844 $ 17,691 $ 21,551
Net increase (decrease) in certificates of deposit (9,640) (26,730) (31,376)
Repayment of FHLB advances (100,000) (115,000) (61,000)
Proceeds from FHLB advances 110,800 142,000 60,000
Net increase (decrease) in advances by borrowers
for taxes and insurance (19) (81) 79
Net proceeds from issuance of stock 17,091
Proceeds from exercise of stock options 65
Tax benefits of ESOP, stock options and RRP 93 104
Purchase of treasury stock (2,238) (1,961) (1,109)
Purchase of stock for RRP (600)
Cash dividends (788) (748) (176)
--------- --------- --------
Net cash provided by financing activities 9,052 15,340 4,460
--------- --------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents 5,975 (6,998) 10,020
Cash and Cash Equivalents, Beginning of Year 22,027 29,025 19,005
--------- --------- --------
Cash and Cash Equivalents, End of Year $ 28,002 $ 22,027 $ 29,025
========= ========= ========
Additional Cash Flows and Supplementary
Information
Cash paid for interest $ 18,581 $ 21,130 $ 27,223
Income taxes paid 1,940 3,438 2,717
ESOP loan guarantee 1,296
</TABLE>
See notes to consolidated financial statements.
-59-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Summary of Significant Accounting Policies
The accounting and reporting policies of UF Bancorp, Inc. (the "Company")
and its wholly-owned subsidiary, Union Federal Savings Bank (the "Bank"), and
its wholly-owned subsidiaries, Unifin, Inc., Community Insurance Associates,
Inc., Union Security Mortgage, Inc. (USM), which was sold effective May 31,
1993, and the Union Financial Corp. (UFC), conform to generally accepted
accounting principles and reporting practices followed by the thrift industry.
The more significant of the policies are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all material intercompany
transactions and accounts.
Description of Business
The Bank generates real estate, mortgage, consumer and commercial loans and
receives deposits from customers located primarily in southern Indiana, western
Kentucky and southern Illinois. The Bank's loans are generally secured by
specific items of collateral including real property, consumer assets and
business assets. USM, which was sold on May 31, 1993, was in the mortgage
banking business, which included the origination, funding, selling, brokering
and servicing of mortgage loans in southern California. UFC, which was formed
in January, 1993, is in the same line of business as USM and serves the middle
Atlantic coast states.
Investments and Mortgage-Backed Securities
Investments and mortgage-backed securities are carried at amortized cost,
because management has the ability and intent to hold to maturity. Gain or
losses on the sale of investment and mortgage-backed certificates are
determined on a specific-identification basis. Premiums and discounts on
investment and mortgage-backed securities are amortized into income over the
life of the security using the level-yield method. Mortgage-backed securities
represent primarily participating interests in pools of long-term first
mortgage loans originated and serviced by the issuers of the securities.
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain
Investments in Debt and Equity Securities. This statement requires that
securities be classified in three categories and provides specific accounting
treatment for each. "Trading" securities are bought and held primarily for
sale in the near term and are carried at fair value, with unrealized holding
gains and losses included in earnings; "held-to-maturity" securities, for which
the intent is to hold to maturity, are carried at amortized cost; and
"available-for-sale" securities are all others and are carried at fair value
with unrealized holding gains and losses excluded from earnings and reported as
a separate component of stockholders' equity. The Company adopted SFAS No. 115
on July 1, 1994. At that date, investment securities with an approximate
carrying value of $6,718,000 and mortgage-backed securities with an approximate
carrying value of $177,800,000 were reclassified as available for sale. These
reclassifications resulted in a decrease in total stockholders' equity, net of
taxes, of $1,844,000. All other investment and mortgage-backed securities were
classified as "held to maturity".
-60-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. Loans are placed in a nonaccrual
status when the loans become delinquent ninety days or more. Interest income
previously accrued but not deemed collectible is reversed and charged against
current income. Interest on these loans is then recognized as income when
collected. Certain loan fees and direct costs are being deferred and amortized
as an adjustment of yield on the loans.
Mortgage Banking Activities
Mortgage loans held for sale are carried at the lower of cost or market
determined on an individual loan basis. The weighted average interest rate of
such loans at June 30, 1994 and 1993 was 7.5% and 6.6%. All mortgage loans
held for sale at June 30, 1994 and 1993 had commitments for sale to permanent
investors.
Mortgage loan origination fees incorporate all income associated with the
generation and selling of mortgage loans and includes loan origination,
processing, placement and commitment fees, gains and losses on sales of loans
and loan servicing rights and forward loan commitments. Loan origination and
processing fees, net of related direct costs, are recognized when the related
loans are sold to permanent investors. Loan placement fees are recognized when
all significant services have been performed. Loan commitment fees paid
relating to commitments with permanent investors are recognized when the
related loans are sold to permanent investors or recognized as an expense when
it becomes evident the commitment will not be used. Gains on sales of loans
and/or loan servicing rights are recognized when title and all risks and
rewards irrevocable pass to the buyer. Gains and losses on mandatory forward
commitments are recognized when the related loans are sold or management
determines that the commitment will not be utilized.
Real Estate Acquired in Settlement of Loans
Real estate properties acquired in settlement of loans are initially
recorded at the lower of the related loan balance or fair value, less estimated
selling costs, at the date of acquisition. When a reduction from the loan
balance to the fair value is required at the time of foreclosure, the
difference is charged to the allowance for loan losses. Further reduction from
recorded value to net realizable value are made through increases in the
allowance for losses on real estate owned. Costs relating to the development
and improvement of the property are capitalized, whereas costs relating to
holding the property are charged to expense.
Allowances for Loan and Real Estate Losses
Allowances for losses on loans and real estate owned are maintained to
absorb potential losses based on management's continuing review and evaluation
of the portfolios and its judgement as to the impact of economic conditions on
the portfolios. The evaluation by management includes consideration of past
loss experience, changes in the composition of the portfolios and the current
condition and amounts of loans outstanding and real estate owned.
-61-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Premises and Equipment
Premises and equipment are stated at cost net of accumulated depreciation.
Depreciation is computed on the straight-line method over their estimated
useful lives: buildings and land improvements, 20 to 50 years and furniture
fixtures and equipment, 3 to 7 years. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
Federal Home Loan Bank Stock
Federal Home Loan Bank (FHLB) stock is required investment for institutions
that are members of the FHLB system. The required investment in common stock
is based on a predetermined formula.
Pension Plan Costs
Pension plan costs are based on actuarial computations and charged to
current operations. The funding policy is to pay at least the minimum amounts
required by the Employee Retirement Income Security Act of 1974.
Income Taxes
Income taxes provided in the consolidated statement of operations includes
deferred income tax provisions or benefits for all significant temporary
differences in recognizing income and expenses for financial reporting and
income tax purposes. The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income
Taxes, for the year ended June 30, 1994. The Company and its subsidiaries file
consolidated income tax returns.
Net Income Per Share
Income per share computations are based on the weighted average number of
common shares and common share equivalents outstanding during the year. Common
stock options are considered common stock equivalents. Earnings per share for
the year ended June 30, 1994, based upon 1,718,909 average common and common
equivalent shares outstanding, was $2.31 and included a $.17 per share increase
resulting from the Company's adoption of SFAS No. 109.
Earnings per share for the year ended June 30, 1993 was $2.74, based upon
1,806,567 average common and common equivalent shares outstanding.
Net income per share is not meaningful for the year ended June 30, 1992
because all shares were issued October 30, 1991 and, therefore, only
outstanding for a portion of the year. Earnings per share for the six months
ended June 30, 1992, based on the average weighted common shares and common
equivalent shares outstanding for the six-month period would have been $1.34
(unaudited).
-62-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Restatement and Subsequent Events:
On December 13, 1994, CNB Bancshares, Inc. (CNB) and the Company jointly
announced the execution of a definitive merger agreement whereby CNB would
acquire the Company. Under the terms of the agreement, shareholders of UF
Bancorp will receive 1.366 shares of CNB common stock for each of the 1,607,693
outstanding common shares of UF Bancorp, assuming CNB's market price just prior
to the closing is not less than $26.66 per share or more than $36.06 per share.
In addition, CNB will reserve shares for future issuance pursuant to the
outstanding UF Bancorp options. The merger is subject to approval by the UF
Bancorp shareholders, the receipt of appropriate regulatory approvals and
certain other conditions. Under certain circumstances, should UF Bancorp not
complete this transaction, it may become obligated to pay CNB a termination fee
of $2 million.
During the continuous process of evaluating the adequacy of the Company's
valuation allowances management has concluded that certain facts and
circumstances were not completely considered in evaluating the adequacy of the
allowance for loan and warranty losses at June 30, 1994. Consideration of these
factors has led management to believe that the best estimate of potential losses
resulted in an increase in its allowance for loan losses of $585,000 and an
increase in its allowance for warranty losses of $1,086,000.
Therefore, the consolidated financial statements as of June 30, 1994, have
been restated to reflect the above adjustments. The effect of these
adjustments on the June 30, 1994, financial statements is as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
-------- -----------
<S> <C> <C>
Net interest income after provision of loan
losses $13,003 $12,418
Income before income taxes and cumulative
effect of change in accounting method 7,422 5,751
Net income 4,986 3,979
Earnings per share $ 2.90 $ 2.31
</TABLE>
During December, 1994, the Company, due to its intent to convert to a commercial
bank, recorded as an expense an income tax liability of $2,775,000 pertaining to
an allocation of income to bad debt deductions as of December 31, 1987 (as
discussed in the income taxes note). Also, subsequent to the issuance of the
June 30, 1994, financial statements, the Company canceled its proposed directors
stock option plan that at June 30 was subject to shareholder approval.
-63-
<PAGE>
. Sale of Union Security Mortgage, Inc.
On May 31, 1993, the Bank sold the operations and stock of its wholly owned
California mortgage bank subsidiary, USM. Immediately prior to the sale, all
non-acquired assets and liabilities, principally loans held for sale and the
loans serviced by others portfolio of $720,000,000, were transferred to the
Bank. The sales price consisted of a cash payment for the net assets and
liabilities sold and post-closing date payments to be made based on a
percentage of loans funded by USM over the twelve months following May 31,
1993. Post-closing date payments pertaining to the volume of loans funded
during June and July, 1993 were computed based upon a larger percentage factor
than payments thereafter.
The sale resulted in a fourth quarter 1993 pre-tax gain of $747,000, which
included $237,000 of post-closing date payments for loans closed in June, 1993.
Remaining post-closing date payments of $962,000 were recorded as additional
gain on sale in fiscal 1994.
Summarized operating results of USM are as follows:
<TABLE>
<CAPTION>
Eleven Months
Ended Year Ended
May 31, June 30,
1993 1992
---- ----
<S> <C> <C>
Net interest income $ 344 $ 106
Operating income 4,786 6,474
------ ------
5,130 6,580
Operating expenses 5,829 4,944
------ ------
Income (loss) before taxes (699) 1,636
Income taxes (benefit) (150) 677
------ ------
Net income (loss) $ (549) $ 959
</TABLE>
-64-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Investment Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
At June 30, 1994
U. S. Treasury $22,928 $18 $178 $22,768
Corporate 3,616 3,616
------- --- ---- -------
Totals $26,544 $18 $178 $26,384
======= === ==== =======
At June 30, 1993
U. S. Treasury $ 6,580 $11 $ 6,591
Corporate 143 $ 4 139
------- --- ---- -------
Totals $ 6,723 $11 $ 4 $ 6,730
======= === ==== =======
</TABLE>
The amortized cost and estimated market value of investments at June 30,
1994, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 6,718 $ 6,718
Due after one year through five years 15,210 15,128
Due after five years through ten years 4,616 4,538
------- -------
$26,544 $26,384
</TABLE>
There were no sales of investment securities during the years ended June 30,
1994, 1993 and 1992.
-65-
<PAGE>
- --------------------------------------------------------------------------------
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Mortgage-Backed Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
At June 30, 1994
FNMA participation certificates $ 24,704 $ 34 $ 392 $ 24,346
GNMA participation certificates 1,529 41 1,570
FHLMC participation certificates 50,344 190 699 49,835
Collateralized mortgage obligations 22,091 364 21,727
Other participation certificates 144,895 773 2,436 143,232
-------- ------ ------ --------
Totals $243,563 $1,038 $3,891 $240,710
======== ====== ====== ========
At June 30, 1993
FNMA participation certificates $ 34,614 $ 158 $ 12 $ 34,760
GNMA participation certificates 2,160 156 2,316
FHLMC participation certificates 19,062 770 39 19,793
Collateralized mortgage obligations 11,962 49 57 11,954
Other participation certificates 176,524 1,533 339 177,718
-------- ------ ------ --------
Totals $244,322 $2,666 $ 447 $246,541
======== ====== ====== ========
</TABLE>
Proceeds from sales of investments in mortgage-backed securities during the
year ended June 30, 1992 were $5,154,000. Gross losses of $61,000 were
realized on those sales. There were no sales of mortgage-backed securities
during the years ended June 30, 1994 or 1993.
-66-
<PAGE>
- -------------------------------------------------------------------------------
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Loans Receivable
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
(Restated)
Real estate mortgage loans
One-to-four family residential $118,116 $132,426
Multi-family dwellings 14,574 9,141
Non-residential real estate 16,371 13,760
Construction 5,004 3,576
Consumer loans 16,075 20,018
Commercial loans 4,291 3,852
-------- --------
Total loans 174,431 182,773
-------- --------
Undisbursed portion of loans (4,319) (2,184)
Unearned interest and fees (660) (693)
Allowance (1,535) (800)
-------- --------
(6,514) (3,677)
-------- --------
Totals $167,917 $179,096
======== ========
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
(Restated)
Allowance for loan losses
Balances at beginning of period $ 800 $ 648 $ 620
Provision for loan losses 914 285 231
Loans charged off (189) (152) (214)
Recoveries 10 19 11
------ ----- -----
Balances at end of period $1,535 $ 800 $ 648
====== ===== =====
</TABLE>
At June 30, 1994, the Bank had real estate mortgage loans totaling
$116,960,000 (170% of outstanding advances) pledged as collateral for advances
from the Federal Home Loan Bank of Indianapolis.
-67-
<PAGE>
- -------------------------------------------------------------------------------
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amount of loans serviced for the benefit of others was $661,980,000,
$787,270,000, $448,995,000 at June 30, 1994, 1993 and 1992. Of these loans
serviced, $551,834,000, $730,450,000 and $405,896,000 pertain to loans
originated by USM which are serviced by a subservicing agency. Loan servicing
fees for loans originated by USM, net of costs of this subservicing
arrangement, were $1,233,000, $827,000 and $290,000 for June 30, 1994, 1993 and
1992. Costs of subservicing are included in other operating expenses.
The Bank had a total of $168,000, $426,000 and $494,000 of nonaccrual loans
at June 30, 1994, 1993 and 1992. Additional interest of approximately $6,000,
$25,000 and $24,000 would have been recorded for the same periods had income on
these loans been accounted for on the accrual basis.
. Real Estate Owned
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C> <C>
Real estate owned $1,624 $1,861
Allowance for losses (152) (159)
------ ------
Totals $1,472 $1,702
====== ======
Year Ended June 30 1994 1993 1992
- ----------------- ---- ---- ----
Balances at beginning of period $159 $ 211 $ 259
Provision for losses 31 61 89
Real estate charged off (38) (113) (137)
---- ----- -----
Balances $152 $ 159 $ 211
==== ===== =====
</TABLE>
. Premises and Equipment
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
Cost
Land $ 2,637 $ 2,926
Buildings and land improvements 8,915 9,340
Furniture, fixtures and equipment 7,227 6,741
------- -------
Total cost 18,779 19,007
Accumulated depreciation (9,613) (8,854)
------- -------
Net $ 9,166 $10,153
======= =======
</TABLE>
-68-
<PAGE>
- -------------------------------------------------------------------------------
. Accrued Interest Receivable
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
Mortgage-backed securities $1,792 $1,956
Loans receivable 941 1,169
Investments and other 222 32
------ ------
Totals $2,955 $3,157
====== ======
</TABLE>
. Deposits
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
Weighted Weighted
Average Average
June 30 Amount Rate Amount Rate
- ------- ------ ---- ------ ----
<S> <C> <C> <C> <C>
Deposits
Certificates $230,338 4.60% $245,353 4.92%
Passbook savings account 57,104 2.75 48,500 3.10
NOW and checking accounts 58,168 2.92 53,662 3.16
Money market deposit accounts 26,604 2.85 27,508 3.10
Non-interest bearing accounts 10,702 6,689
-------- --------
Total deposits $382,916 $381,712
======== ========
</TABLE>
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
June 30 Amount Per Cent Amount Per Cent
- ------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Certificates maturing in
1 year and less $120,643 52.4% $147,358 60.1%
1 to 2 years 59,446 25.8 56,509 23.0
2 to 3 years 24,760 10.7 16,669 6.8
Over 3 years 25,489 11.1 24,817 10.1
-------- ----- -------- -----
Totals $230,338 100.0% $245,353 100.0%
======== ===== ======== =====
</TABLE>
-69-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The table below sets forth the amount, by interest rates, of savings deposits in
the Bank as of the dates indicated:
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
4% and under $242,498 $231,133
4.01% to 6% 107,368 87,965
6.01% to 8% 22,409 43,544
8.01% to 10% 10,049 18,154
Over 10% 592 916
-------- --------
Totals $382,916 $381,712
======== ========
</TABLE>
Interest expense for deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------- ---- ---- ----
<S> <C> <C> <C>
NOW and money market accounts $ 2,493 $ 2,584 $ 3,126
Passbook savings accounts 1,436 1,461 1,829
Certificate accounts 11,152 13,284 18,802
------- ------- -------
$15,081 $17,329 $23,757
======= ======= =======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $22,027,000 and $22,072,000 at June 30, 1994 and
1993.
. Advances From Federal Home Loan Bank
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
Weighted Weighted
Average Average
Years Ending June 30 Amount Rate Amount Rate
- -------------------- ------ ---- ------ ----
<S> <C> <C> <C> <C>
1994 $38,000 3.50%
1995 $33,000 4.92% 5,000 6.75
1996 15,000 9.29 15,000 9.29
1999 and after 20,800 4.78
------- -------
Totals $68,800 $58,000
======= =======
</TABLE>
-70-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The terms of a security agreement with the FHLB require the Bank to pledge as
collateral for advances both qualifying first mortgage loans and mortgage-backed
securities in an amount equal to at least 170 percent of these advances and all
stock in the FHLB. Generally, advances are subject to restrictions or penalties
in the event of prepayment.
. Income Taxes
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Income tax expense (benefit)
Currently payable
Federal $2,156 $2,276 $2,260
State 560 812 666
------ ------ ------
2,716 3,088 2,926
------ ------ ------
Deferred
Federal (506) 5 (156)
State (138) 1 (35)
------ ------ ------
(644) 6 (191)
------ ------ ------
Total income tax expense $2,072 $3,094 $2,735
====== ====== ======
Deferred provision (benefit) relating to
Depreciation $ (40) $ (80)
Loan fees (109) 108
Gain on loan sales (3) (94)
Compensation 55 (51)
Other 103 (74)
------ ------
Deferred provision (benefit) $ 6 $ (191)
====== ======
Reconciliation of federal statutory income tax to actual
Tax expense (benefit)
Federal statutory income tax at 34% $1,955 $2,735 $2,543
State franchise tax, net of federal benefit 274 536 440
Tax credits (150) (150) (150)
Bad debt deduction (120) (53)
Other, net (7) 93 (45)
------ ------ ------
Actual tax expense $2,072 $3,094 $2,735
====== ====== ======
</TABLE>
-71-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
A cumulative deferred tax asset of $580,000 is included in other assets. The
components of the asset are as follows:
<TABLE>
<CAPTION>
June 30 1994
- ------- ----
(Restated)
<S> <C>
Differences in accounting for loan fees $ 197
Differences in depreciation methods (390)
Differences in accounting for stock dividend (236)
Differences in accounting for pensions and other employee benefits 285
Differences in accounting for warranty losses on sold loans 434
Other 290
------
$ 580
======
Assets $1,491
Liabilities (911)
------
$ 580
======
</TABLE>
During 1994, the Company adopted SFAS No. 109. As a result, the beginning
deferred tax liability was reduced by $300,000, which is reported as the
cumulative effect of a change in accounting method. A valuation allowance was
not required at any time during fiscal year 1994.
Retained earnings include approximately $8,163,000 for which no deferred federal
income tax liability has been recognized. This amount represents an allocation
of income to bad debt deductions as of December 31, 1987 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which income would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $2,775,000.
. Stockholders' Equity and Regulatory Matters
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 requires
thrifts to maintain core capital and tangible capital of at least 3% and 1.5%,
respectively, of adjusted total assets and, subject to a phase-in period, risk-
based capital of at least 8% of risk-weighted assets. At June 30, 1994, the Bank
exceeded these capital requirements.
The Company's principal source of income and funds is dividends from its savings
association banking subsidiary and is not subject to any regulatory restrictions
on the payment of dividends to its stockholders. However, the Office of Thrift
Supervision (OTS) regulations set restriction on the amount of dividends the
Bank may pay. At June 30, 1994, total stockholder's equity of the banking
subsidiary was $37,481,000 of which $10,536,000 was available for the payment of
dividends without prior approval by the OTS.
-72-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At the time of conversion, a liquidation account was established in an amount
equal to the Bank's net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit accounts in the Bank after conversion. In the event of a complete
liquidation (and only in such an event), each eligible deposit account holder
will be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted subaccount balance for
deposit accounts then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was $22,890,000.
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 par
value, which remain unissued at June 30, 1994. In the event any preferred shares
are issued, the Board of Directors is authorized to fix the designation, powers,
preferences and rights of the shares and any qualifications, limitation or
restrictions thereon.
Effective October 30, 1991, Union Federal Savings Bank converted from a mutual
savings bank to a stock savings bank with all of its stock being issued to the
Company which issued 1,851,981 shares of its common stock with a $.01 per share
par value. Net proceeds of the Company's stock issuance after costs were
$17,091,000. The acquisition of the Bank by the Company was accounted for as if
it were a pooling of interest.
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required was $3,048,000 at June 30, 1994.
. Employee Benefit Plans
The Bank is a participant in a pension fund known as the Financial Institutions
Retirement Fund (FIRF). This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested benefits in the aggregate as of June 30, 1993, the date of the latest
actuarial valuation. No pension expense was recorded for any of the three years
ended June 30, 1994. Due to the Internal Revenue Service's full funding limit,
contributions to the plan have not been required since June, 1987. This plan
provides pension benefits for substantially all of the Bank's employees.
The Bank has adopted an employee savings plan under which employees can
contribute up to 12% of their annual salaries. The Bank will match, as a
minimum, 25% of employees' contributions up to 6% of salaries. At the discretion
of the Board of Directors, additional matching up to 100% can be made.
-73-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Also, at the discretion of the Board of Directors, an officer and employee bonus
can be paid based upon a predetermined formula based on earnings and net worth.
For the years ended June 30, 1994, 1993 and 1992, the Bank expensed $649,000,
$752,000 and $697,000 for the bonus arrangement. Amounts expensed by the Company
under this bonus arrangement can be used to fund contributions to the Company's
Employee Stock Ownership Plan (ESOP), or can be paid directly to employees.
As noted above, the Company has established an ESOP to provide Bank employees an
opportunity to acquire shares of the Company's common stock. The costs of the
ESOP are expensed by the Bank through contributions in amounts determined by the
Board of Directors. These contributions are allocated among participants based
upon compensation. The bank's contributions to the ESOP were $690,000, $117,710
and $295,000 for fiscal years 1994, 1993 and 1992, of which $40,800, $68,960 and
$62,000 (the amounts of interest incurred on the ESOP debt) are classified as
interest expense. The ESOP borrowed $1,296,390 from a third party lender which
is repayable over seven years and guaranteed by the Company. The loan is
included in other liabilities on the Company's balance sheet and also as an
offset in stockholders' equity. The Company had $676,000 of overnight deposits
pledged as collateral for this loan at June 30, 1994. The proceeds from the loan
were used to purchase 129,639 shares of the Company's common stock.
Also, in conjunction with the conversion, the Board of Directors of the Company
established a Recognition and Retention Plan and Trust (RRP). The Company
contributed $600,050 to the RRP for the purchase of 55,560 shares of Company
common stock. Effective with the conversion on October 30, 1991, awards of
grants for these shares were issued to various officers and employees of the
Company. These awards vest at a rate of 20% per year commencing June 30, 1992.
The unearned compensation portion of these stock awards is presented as a
reduction of stockholders equity.
The Board of Directors of the Company adopted (subsequently ratified by the
stockholders), a Stock Option and Incentive Plan (Option Plan) with
authorization to grant incentive stock options, non-qualified stock options,
stock appreciation rights, limited stock appreciation rights and restricted
stock. Upon the conversion, the Company reserved 185,198 shares of its common
stock and also granted options to purchase 161,308 shares of common stock at $10
per share (the stock issuance price at conversion) to various officers and non-
employee directors. These options are exercisable over a ten-year period. During
1993, 6,482 options were exercised and none awarded. During 1994, options to
purchase 17,170 shares were granted under this Option Plan to various officers
at an exercise price of $23.06. Also, additional options to purchase 6,720
shares under a new directors' stock option plan (subject to stockholder
approval) were granted to non-employee directors at an exercise price of $24.06.
No options were exercised during 1994. At June 30, 1994, there were a total of
178,716 options outstanding at an average option price of $11.78, of which
129,871 were exercisable at that date.
-74-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Commitments and Contingent Liabilities and Financial Instruments
With Off Balance Sheet Risk
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not included in the accompanying consolidated
financial statements.
At June 30, 1994, the Bank, excluding UFC, had outstanding commitments to extend
credit, which amounted to $5,629,000, consisting of $4,594,000 with adjustable
rates and $1,035,000 with fixed rates ranging from 8% to 9.38%. At June 30,
1993, the Bank, excluding UFC, had outstanding commitments to extend credit,
which amounted to $14,338,000 consisting of $12,007,000 with adjustable rates
and $2,331,000 with fixed rates ranging from 7% to 9%.
At June 30, 1994, UFC had commitments to fund loans of approximately
$35,575,000, consisting of $18,745,000 with adjustable rates and $16,830,000
with fixed rates varying from 6.9% to 10.5%. Offsetting these commitments to
fund loans, at June 30, 1994, UFC had commitments to sell loans of $27,700,000
and mortgage-backed securities of $8,000,000. At June 30, 1993, UFC had
commitments to fund loans of approximately $28,478,000, consisting of $5,229,000
with adjustable rates and $23,249,000 with fixed rates varying from 6.625% to
8.25%. UFC had commitments to sell all but $1,537,000 of these loans.
Commitments to fund loans are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Commitments to
sell loans to permanent investors generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Also, external market
forces impact the probability of commitments being exercised; therefore, total
commitments outstanding do not necessarily represent future cash requirements.
In the ordinary course of business, the Bank and UFC have liability under
representations and warranties made to purchasers and insurers of mortgage loans
and the purchasers of servicing rights. Under certain circumstances, they may
become liable for the unpaid principal and interest on defaulted loans (whether
recourse or nonrecourse) or other loans if there has been a breach of
representations or warranties. With the sale of USM on May 31, 1993, the Bank
assumed these representations and warranties for all loans sold by USM prior to
May 31, 1993. For the years ended June 30, 1994, 1993 and 1992, the Company
provided for losses of $1,482,000, $456,000 and $111,000 under these assumed
guarantees. The allowance for future losses at June 30, 1994 was $1,366,000.
The Company is also subject to claims and lawsuits which arise primarily in the
ordinary course of business. Based on information presently available and advice
received from legal counsel representing the Company in connection with such
claims and lawsuits, it is the opinion of management that the disposition or
ultimate determination of such claims and lawsuits will not have a material
adverse effect on the consolidated financial position or the results of
operations of the Company.
-75-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank has entered into employment contracts with six of its officers which
provide for the continuation of salary and certain benefits for specified
periods of time under certain conditions. Under the terms of the agreements,
these payments could occur in the event of involuntary termination for other
than cause following a change in control of the Company. The contingent
liability under the agreements in the event of a change in control is
approximately $1,300,000 at June 30, 1994.
. Business Segment Information
The Company's operations have been classified into two business segments:
community banking and mortgage banking. The community banking segment involves
primarily the traditional activities of obtaining retail deposits and the making
of mortgage and other types of loans and other traditional community banking
activities. The mortgage banking segment involves the making, purchasing,
selling and servicing of one-to-four family and single family loans.
Financial information by business segment is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Restated)
<S> <C> <C> <C>
Net Interest Income Before Provision for Loan Losses
Community banking $ 13,266 $ 14,728 $ 13,075
Mortgage banking 66 336 106
-------- -------- --------
$ 13,332 $ 15,064 $ 13,181
======== ======== ========
Net Income Before Taxes
Community banking $ 4,994 $ 7,860 $ 5,844
Mortgage banking 757 184 1,636
-------- -------- --------
$ 5,751 $ 8,044 $ 7,480
======== ======== =========
Total Assets
Community banking $493,848 $476,177 $419,711
Mortgage banking 10,035 13,349 50,966
-------- -------- --------
$503,883 $489,526 $470,677
======== ======== ========
Loans Serviced for Others
Community banking $ 65,380 $ 56,800 $ 43,095
Mortgage banking 596,600 730,470 405,900
-------- -------- --------
$661,980 $787,270 $448,995
======== ======== ========
</TABLE>
The gain on the sale of the California mortgage bank subsidiary of $962,000 and
$747,000 for 1994 and 1993 is included in the mortgage banking net income before
taxes presented above.
-76-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Fair Value of Financial Instruments
In December, 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, Disclosures About Fair Value of
Financial Instruments. This standard extends the existing fair value disclosure
practices for some instruments by requiring entities to disclose the fair value
of financial instruments for which it is practicable to estimate fair value. The
following methods and assumptions were used to estimate the fair value of each
type of financial instrument.
Cash, Cash Equivalents and FHLB Stock
For these instruments, the carrying value on reporting date is a reasonable
estimate of fair value.
Investment Securities and Mortgage-Backed Securities
For investment securities and mortgage-backed securities, fair values are
based on quoted market prices, if available. For securities where quoted
prices are not available, fair value is estimated based on market prices of
similar securities.
Loans and Loans Held for Sale
For most residential mortgage loans and certain other homogeneous categories
of loans, fair value is estimated by discounting future cash flows using
current rates at which similar loans would be made to borrowers with similar
credit rates for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowings
The carrying amount of short-term borrowings is a reasonable estimate of
fair value. For long-term borrowings, the fair value is estimated using the
rates currently offered for borrowings of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The carrying values of these items are not material to the Company's
financial condition.
-77-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The extended fair values of the Company's financial instruments at June 30, 1994
are as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- ------- --------
<S> <C> <C> <C> <C>
(Restated)
Cash and short-term investments $ 28,002 $ 28,002 $ 22,027 $ 22,027
FHLB stock 6,101 6,101 5,000 5,000
Investment securities 26,544 26,384 6,723 6,723
Mortgage-backed securities 243,563 240,710 244,322 246,541
Mortgage loans held for sale 9,623 9,623 10,066 10,070
Loans 167,917 169,252 179,096 185,448
Deposits 382,916 380,903 381,712 384,445
Short-term borrowings 33,000 33,000 38,000 38,000
Long-term borrowings 35,800 36,378 20,000 21,693
</TABLE>
. Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
<TABLE>
<CAPTION>
Condensed Statement of Financial Condition
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
(Restated)
Assets
Cash $ 737 $ 434
Investments 6,718 4,579
Investment in subsidiary 37,481 37,848
Other assets 1,182 1,711
------- -------
$46,118 $44,572
======= =======
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ (267) $ 53
Stockholders' equity 46,385 44,519
------- -------
$46,118 $44,572
======= =======
</TABLE>
-78-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Income
Dividends from subsidiary $ 5,149 $5,760 $ 185
Interest income 176 210 110
------- ------ ------
Total income 5,325 5,970 295
Expenses 331 415 156
------- ------ ------
Income before income tax benefit and equity in
undistributed earnings of subsidiary 4,994 5,555 139
Income tax benefit 53 70 23
------- ------ ------
Income before equity in undistributed earnings of subsidiary 5,047 5,625 162
Equity in undistributed earnings of subsidiary (1,068) (675) 4,583
------- ------ ------
Net income $ 3,979 $4,950 $4,745
======= ====== ======
Condensed Statement of Cash Flows
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Operating activities
Net income $ 3,979 $ 4,950 $ 4,745
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Equity in undistributed earnings of subsidiary 1,068 675 (4,583)
Amortization of unearned compensation 120 120 120
Changes in other assets and accrued expenses 1,034 (1,140) (518)
------- ------- --------
Net cash provided (used) by operating activities 6,201 4,605 (236)
------- ------- --------
Investing activities
Purchase of investment securities (5,459) (4,497) (6,794)
Proceeds from investment securities maturities 3,320 2,034 4,678
Investment in limited partnership (826)
------- ------- --------
Net cash (used) by investing activities (2,965) (2,463) (2,116)
------- ------- --------
Financing activities
Net proceeds from issuance of stock 17,091
Contributions to RRP (600)
Capital contributed to Bank subsidiary (12,022)
Purchase of treasury stock (2,238) (1,961) (1,109)
Cash dividends (788) (748) (176)
Proceeds from exercise of stock options 65
Proceeds from tax benefits of ESOP, stock options and RRP 93 104
------- ------- --------
Net cash provided (used) by financing activities (2,933) (2,540) 3,184
------- ------- --------
Net increase (decrease) in cash 303 (398) 832
Cash, beginning of year 434 832
Cash, end of year $ 737 $ 434 $ 832
======= ======= ========
-79-
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is
incorporated by reference to pages 3 through 5 of the Holding Company's Proxy
Statement for its 1994 Annual Shareholder Meeting (the "1994 Proxy Statement").
Information concerning the Holding Company's executive officers is included in
Item 4.5 in Part I of this report.
Item 11. Executive Compensation
The information required by this item with respect to executive
compensation is incorporated by reference to pages 6 through 10 of the 1994
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to pages
3 through 4 of the 1994 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to pages
10 through 11 of the 1994 Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List the following documents filed as part of the report:
Financial Statements
--------------------
Consolidated Statement of Financial
Condition at June 30, 1994, and 1993
Consolidated Statement of Operations for
the Fiscal Years Ended June 30, 1994,
1993 and 1992
Consolidated Statement of Changes in Stockholders'
Equity for the Fiscal Years ended June 30,
1994, 1993, and 1992
Consolidated Statement of Cash Flows for the
Fiscal Years ended June 30, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
(b) The Holding Company filed no reports on Form 8-K during the fourth
quarter of fiscal year 1994.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 39.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
-80-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Index* Page
- -------------- ----
<C> <S> <C>
3(1) The Certificates of Incorporation of the Registrant is incorporated
by reference to Exhibit 3.1 to the Registration Statement on Form
S-1 (Registration No. 33-41377).
3(2) The Code of By-Laws of the Registrant is incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-1
(Registration No. 33-41377).
10(1) Supplemental Executive Retirement Plan between the Bank and Donald
Rausch dated 3/19/91 is incorporated by reference to exhibit 10(1) of the
Registrant's Form 10-K for the fiscal year ended June 30, 1992 (1992 10-K).
First Amendment to the Union Federal Savings Bank Supplemental Executive
Retirement Plan dated January 20, 1994.
10(2) Director Deferred Compensation Master Agreement and related Director
Deferred Compensation Joinder Agreements, all dated August 1, 1993.
10(3) Employment Agreement between the Bank and Donald A. Rausch dated
10/30/91 is incorporated by reference to exhibit 10(3) of the Registrant's
1992 10-K. First Amendment to Employment Agreement dated November 18, 1992.
Second Amendment to Employment Agreement dated October 30, 1993.
10(4) Employment Agreement between the Bank and Ennis R. Griffith dated 10/30/91 is
incorporated by reference to exhibit 10(4) of the Registrant's 1992 10-K.
First Amendment to Employment Agreement dated November 18, 1992. Second
Amendment to Employment Agreement dated October 30, 1993.
10(5) Employment Agreement between the Bank and Terry G. Johnston dated 10/30/91
is incorporated by reference to exhibit 10(5) of the Registrant's 1992 10-K.
First Amendment to Employment Agreement dated November 18, 1992. Second
Amendment to Employment Agreement dated October 30, 1993.
10(6) Employment Agreement between the Bank and Paul E. Wargel dated 10/30/91 is
incorporated by reference to exhibit 10(6) of the Registrant's 1992 10-K.
First Amendment to Employment Agreement dated November 18, 1992. Second
Amendment to Employment Agreement dated October 30, 1993.
10(7) Termination Agreement between the Bank and J. Ray Justice dated 10/30/91 is
incorporated by reference to exhibit 10(7) of the Registrant's 1992 10-K.
First Amendment to Special Termination Agreement dated November 18, 1992.
Second Amendment to Special Termination Agreement dated October 30, 1993.
10(8) Termination Agreement between the Bank and Steven E. Fowler dated 10/30/91
is incorporated by reference to exhibit 10(8) of the Registrant's 1992 10-K.
First Amendment to Special Termination Agreement dated November 18, 1992.
Second Amendment to Special Termination Agreement dated October 30, 1993.
10(9) UF Bancorp, Inc. 1991 Stock Option and Incentive Plan is incorporated by
reference to Exhibit A to the Registrant's definitive Proxy Statement in
respect of its 1992 Annual Shareholder Meeting.
10(10) Recognition and Retention Plan and Trust Plan is incorporated by reference to
Exhibit B to the Registrant's definitive Proxy Statement in respect of its
1992 Annual Shareholder Meeting.
11 Computation of Per Share Earnings
-81-
</TABLE>
<PAGE>
21 Subsidiaries of the Registrant
23 Consent of Geo. S. Olive & Co. LLC
______________
* Management contracts and plans required to be filed as exhibits are included
as Exhibits 10(1) - 10(10).
-82-
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report
to be signed on behalf of the undersigned, thereto duly authorized.
UF BANCORP, INC.
Date: June 14, 1995 By: /s/ Donald A. Rausch
---------------------------
Donald A. Rausch,
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on this 14th day of
June, 1995.
/s/ Donald A. Rausch
- ----------------------------------- ------------------------------
Donald A. Rausch James D. Foulke, Director
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Ennis R. Griffith /s/ Andrew E. Goebel
- ----------------------------------- ------------------------------
Ennis R. Griffith Andrew E. Goebel, Director
Senior Vice President,
Chief Financial Officer,
and Secretary/Treasurer
(Principal Financial and Accounting Officer)
------------------------------
Robert R.C. Miller, Director
/s/ James H. Muehlbauer
------------------------------
James H. Muehlbauer, Director
/s/ John R. Stalling
------------------------------
John R. Stalling, Director
/s/ W. Earl Williams
------------------------------
W. Earl Williams, Director
-83-
<PAGE>
EXHIBIT D
<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1995
___________________________
Commission File Number 0-19523
____________
UF Bancorp, Inc.
_______________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 35-1833698
________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Main Street, Evansville, Indiana 47708
________________________________________________________________
(Address of principal executive office) (Zip Code)
(812) 425-7111
________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the 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
As of May 12, 1995, there were outstanding 1,627,139 common shares, with $.01
par value, of the registrant.
<PAGE>
UF BANCORP, INC.
FORM 10-Q/A
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statement of Financial
Condition..................................... 1
Consolidated Statement of Operations............ 2
Consolidated Condensed Statement
of Changes in Stockholders' Equity............ 3
Consolidated Condensed Statement of Cash Flows.. 4
Notes to Consolidated Financial Statements...... 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 8-19
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.. 20
Item 5. Other Information.................................... 20
Item 6. Exhibits and Reports on Form 8-K..................... 20,22
Signatures.................................................... 21
<PAGE>
UF BANCORP, INC and SUBSIDIARY CORPORATIONS
Form 10-Q/A
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
(In thousands) MARCH 31, JUNE 30,
(Unaudited) 1995 1994
------------ ------------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Cash $ 10,542 $ 13,021
Federal funds sold 5,200 3,300
Short-term interest bearing deposits 1,014 11,681
------------ ------------
Cash and cash equivalents 16,756 28,002
Investments:
Securities held to maturity 26,544
(market value $26,384)
Securities available for sale 35,606
Mortgage-backed securities:
Mortgage-backed securities held to maturity 243,563
(market value $240,710)
Mortgage-backed securities available for sale 261,151
Loans receivable, net 200,505 167,917
Mortgage loans held for sale 8,913 9,623
Real estate acquired in settlement of loans, net 828 1,472
Premises and equipment 8,748 9,166
Federal Home Loan Bank stock, at cost 7,749 6,101
Interest receivable 3,878 2,955
Prepaid expenses and other assets 8,907 8,540
------------ ------------
Total assets $553,041 $503,883
============ ============
LIABILITIES
Deposits $359,150 $382,916
Advances from Federal Home Loan Bank 146,926 68,800
Interest payable 2,185 1,424
Other liabilities 6,061 4,358
------------ ------------
Total liabilities 514,322 457,498
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
Authorized and unissued--1,000,000 shares
Common Stock, $.01 par value:
Authorized - 4,000,000 shares
Issued 1,872,463 and 1,858,463 shares 19 19
Additional paid-in capital 17,810 17,334
Retained earnings--substantially restricted 30,815 34,852
------------ ------------
48,644 52,205
Less:
Treasury stock-at cost-264,770 shares (5,308) (5,308)
Reduction for ESOP loan guarantee (133) (272)
Unearned compensation (150) (240)
Unrealized loss on securities available for sale (4,334)
------------ ------------
Total stockholders' equity 38,719 46,385
------------ ------------
Total liabilities and stockholders' equity $553,041 $503,883
============ ============
</TABLE>
See notes to consolidated financial statements
-1-
<PAGE>
UF BANCORP, INC. and SUBSIDIARY CORPORATIONS
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ----------------------
1995 1994 1995 1994
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Interest Income (Restated)
Loans $3,987 $3,718 $11,232 $11,461
Mortgage-backed securities 4,578 3,307 13,324 10,698
Other interest and dividends 806 266 2,152 757
Loans held for resale 263 278 731 1,684
----------- ----------- ----------- -----------
9,634 7,569 27,439 24,600
----------- ----------- ----------- -----------
Interest Expense
Deposits 3,840 3,691 10,997 11,417
FHLB of Indianapolis advances 2,473 704 6,037 2,852
----------- ----------- ----------- -----------
6,313 4,395 17,034 14,269
----------- ----------- ----------- -----------
Net Interest Income 3,321 3,174 10,405 10,331
Provision for loan losses 50 83 1,065 247
----------- ----------- ----------- -----------
Net Interest Income After Provision
for Loan Losses 3,271 3,091 9,340 10,084
----------- ----------- ----------- -----------
Other Income
Gain (loss) on:
Sale of subsidiary 0 195 0 880
Sale of investment securities 0 0 (533) 0
Mortgage-backed securities available
for sale 82 0 (768) 0
Service charges on deposit accounts 196 192 641 605
Mortgage loan origination fees 293 780 1,040 2,938
Mortgage loan servicing fees 406 468 1,281 1,500
Insurance commissions 67 69 242 193
Other operating income 78 78 133 246
----------- ----------- ----------- -----------
1,122 1,782 2,036 6,362
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits 1,557 1,668 4,470 5,192
Premises and equipment expense 325 382 1,015 1,079
Deposit insurance 210 218 652 654
Data processing 117 130 334 374
Communication, supplies, etc. 182 239 556 648
Advertising 110 120 344 344
Warranty losses on sold loans 0 0 2,514 176
Professional fees 12 8 745 31
Other operating expenses 549 596 1,917 1,819
----------- ----------- ----------- -----------
3,062 3,361 12,547 10,317
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes and Cumulative
Effect of Change in Accounting Method 1,331 1,512 (1,171) 6,129
Income Taxes 437 487 2,187 2,285
Net Income (Loss) Before Cumulative Effect of ----------- ----------- ----------- -----------
Change in Accounting Method 894 1,025 (3,358) 3,844
Cumulative Effect of Change in Accounting Method 0 0 0 300
----------- ----------- ----------- -----------
Net Income (Loss) $894 $1,025 ($3,358) $4,144
=========== =========== =========== ===========
Per Share:
Net Income (loss) before cumulative effect of
change in accounting method $0.52 $0.61 ($1.96) $2.23
Net income (loss) $0.52 $0.61 ($1.96) $2.40
Dividends $0.150 $0.125 $0.425 $0.360
Average common and common equivalent
shares outstanding 1,724,580 1,686,993 1,710,132 1,727,752
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
UF BANCORP, INC. and SUBSIDIARY CORPORATIONS
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Nine months ended
March 31,
-------------------------
1995 1994
---------- ----------
(Restated)
<S> <C> <C>
Balance, June 30 $46,385 $44,519
Adoption of FAS 115 - Unrealized loss on available for sale
securities at July 1 (1,844)
ESOP Loan repayments 139 653
Amortization of Deferred Compensation 90 90
Sale of additional 14,000 shares of stock 476
Purchase of treasury stock (2,238)
Net change in unrealized loss on available for sale securities (2,490)
Dividends paid (679) (588)
Net income (loss), nine months ended March 31 (3,358) 4,144
---------- ----------
Balance, March 31 $38,719 $46,580
========== ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
UF BANCORP, INC and SUBSIDIARY CORPORATIONS
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------
1995 1994
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
Net income ($3,358) $4,144
Adjustments to reconcile net income to
net cash used by operating activities:
Provision for loan losses 1,065 247
Depreciation and amortization 521 570
Decrease (Increase) in mortgage loans held for sale 710 (5,062)
Other adjustments, net 3,809 3,746
------------- ------------
Net cash provided (used) by operating activities 2,747 3,645
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage backed securities held to maturity (36,637) (28,272)
Proceeds from held to maturity mortgage-backed securities
maturities and principal repayments 9,263 52,421
Purchase of available for sale mortgage-backed securities (29,004)
Proceeds from available for sale mortgage-backed securities
maturities and principal repayments 31,605
Purchase of held to maturity investment securities (29,754) (8,413)
Proceeds from held to maturity investment securities
maturities and principal repayments 8,825
Proceeds from sale of held to maturity investment securities 14,210
Proceeds from available for sale investment securities
maturities and principal repayments 6,857
Net change in loans (2,741) 7,118
Purchase of loans (31,122) (2,930)
Proceeds from sale of real estate owned 737 315
Purchases of premises and equipment (103) (462)
Purchase of FHLB of Indianapolis stock (1,648) (1,101)
------------- ------------
Net cash provided (used) by investing activities (68,337) 27,501
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing
deposits, NOW accounts and savings accounts (17,855) 14,541
Net increase (decrease) in certificates of deposit (5,911) (5,946)
Repayment of FHLB of Indianapolis advances (26,007) (95,000)
Proceeds obtained from FHLB of Indianapolis advances 104,133 62,800
Net increase (decrease) in advances
by borrowers for taxes and insurance 187 106
Proceeds from sale of common stock 476
Purchase of treasury stock (2,238)
Cash dividends (679) (588)
------------- ------------
Net cash provided (used) by financing activities 54,344 (26,325)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,246) 4,821
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,002 22,027
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $16,756 $26,848
============= ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest:
Advances $5,676 $2,628
Deposits 10,524 11,278
Income taxes paid 1,460 1,300
Reclassification of available for sale mortgage-backed
securities and investments 194,134
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
UF BANCORP, INC.
AND SUBSIDIARY CORPORATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Significant Accounting Policies
The consolidated financial statements include the accounts of UF Bancorp, Inc.
(the "Company") and its wholly-owned subsidiary, Union Federal Savings Bank
("the Bank"), and the Bank's three wholly-owned subsidiaries, Unifin, Inc.,
Community Insurance Associates, Inc., and Union Financial Corp. ("UFC").
The significant accounting policies followed by the Company and its subsidiaries
for interim financial reporting are consistent with those followed for annual
financial reporting.
All adjustments, consisting of normal accruals which in the opinion of
management are necessary for a fair presentation of the financial results, have
been included in the consolidated financial statements. The interim results of
operations presented are not necessarily indicative of the results that may be
expected for the full year. The June 30, 1994, statement of financial
condition is derived from the audited financial statements of June 30, 1994.
Reclassifications: Certain amounts in the June 30, 1994 consolidated financial
statements have been reclassified to conform to the March 31, 1995 presentation.
NOTE 2: Change in Accounting Method
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain
Investments in Debt and Equity Securities. This statement requires that
securities be classified in three categories and provides specific accounting
treatment for each. "Trading" securities are bought and held primarily for sale
in the near term and are carried at fair value, with unrealized gains and losses
included in earnings; "held-to-maturity" securities, for which the intent is to
hold to maturity, are carried at amortized cost; and "available-for-sale"
securities are all others and are carried at fair value with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity. The Company adopted SFAS No. 115 on July 1, 1994. At
that date, investment securities with an approximate carrying value of
$6,718,000 and mortgage-backed securities with an approximate carrying value of
$177,800,000 were reclassified as available for sale. These reclassifications
resulted in a decrease in total stockholders' equity net of taxes, of
$1,844,000. All other investment and mortgage-backed securities were classified
as "held to maturity". At March 31, 1995, mortgage-backed securities with a
fair value of $261,151,000 and investment securities of $35,606,000 were
classified as available for sale. At March 31, 1995, the net unrealized loss on
these "available for sale" securities of $4,334,000 was recorded as a reduction
of stockholder's equity.
NOTE 3: Merger Agreement
On December 13, 1994 CNB Bancshares, Inc. (CNB) and UF Bancorp, Inc. (UFBI),
jointly announced the execution of a definitive merger agreement whereby CNB
would acquire UF Bancorp. (the "Merger Agreement".)
Under the terms of the agreement, shareholders of UF Bancorp will receive 1.366
shares of CNB common stock for each of the 1,607,693 outstanding common shares
of UF Bancorp, assuming CNB's market price just prior to closing is not less
than $26.66 per share or more than $36.06 per share. In addition, CNB will
reserve shares for future issuance pursuant to the outstanding UF Bancorp
options. The merger is subject to approval by the UF Bancorp shareholders, the
receipt of
-5-
<PAGE>
appropriate regulatory approvals and certain other conditions.
Under certain circumstances, should UF Bancorp not complete this transaction, it
may become obligated to pay CNB a termination fee of $2 million.
During the quarter ending December 31, 1994, professional fees of approximately
$700,000 were incurred in connection with the proposed merger with CNB.
NOTE 4: Federal Home Loan Bank Advances
During the nine months ended March 31, 1995, the Bank increased its borrowings
from the FHLB of Indianapolis by $78.1 million. $76 million of the new advances
have original terms to maturity of six months to two years, variable interest
rates, and $40 million may be prepaid without penalty. $2.1 million of the new
advances are community low income housing advances which have fixed rates and
are to be amortized over a 20 year term.
NOTE 5: Deferred Tax Liability
At June 30, 1994 retained earnings included approximately $8,163,000 for which
no deferred federal income tax liability had been recognized. This amount
represented an allocation of income to bad debt deductions as of December 31,
1987 for tax purposes only. The unrecorded deferred income tax liability on the
above amount was approximately $2,775,000.
The Company's intention is to convert Union Federal to commercial bank status
even if the merger with CNB is not completed. Accordingly, the deferred income
tax liability of $2,775,000 was recorded with a corresponding increase in income
tax expense during the quarter ending December 31, 1994.
NOTE 6: Increase in Loan Loss Reserves
The Company recorded a loan loss provision of $1,065,000 for the nine months
ended March 31, 1995 and had net chargeoffs of $658,000. The allowance for loan
losses at March 31, 1995, was $1,942,000 or .97 percent of loans at that date.
NOTE 7: Warranty Loss Provisions
For the nine months ended March 31, 1995, the Company provided for $2,514,000 of
warranty losses and had net chargeoffs of $1,343,000 in connection with
warranties made to purchasers and insurers of mortgage loans and the purchasers
of servicing rights by its former California mortgage banking subsidiary, USM.
The balance in the reserve for warranty losses account at March 31, 1995 was
$2,537,000, which management considers adequate to cover all future losses.
Note 8: Loss On Sale of Held to Maturity Securities
With the Company's intention to convert Union Federal to commercial bank status
(see Note 5 above), and with the current regulatory environment discouraging
"structured notes", it was determined to revise the Bank's investment policy.
Accordingly, during the quarter ending December 31, 1994, the Company
restructured its "held to maturity" investment portfolio primarily by selling
its entire portfolio of federal agency "step up" securities, which are a form of
"structured notes". A loss of $533,000 was recorded on the sale of the $14.2
million amortized cost and principal amount of these securities. As a result of
this transaction, the Company reclassified its investments and mortgage-backed
securities previously classified as "held to maturity" to "available for sale."
-6-
<PAGE>
Note 9: Loss on Available for Sale Mortgage-Backed Securities
During the current nine month period, the Company recorded a net loss of
$768,000 on available for sale mortgage-backed securities for which the Company
determined to be no longer eligible as 20% risk based capital qualifying items
under the Secondary Mortgage Market Enhancement Act ("SMMEA") provisions.
Note 10: Capital Contribution to Union Federal
During the quarter ending December 31, 1994, the Company made a capital
contribution of $5 million to its principal subsidiary, Union Federal Savings
Bank. The purpose of the contribution was to maintain Union Federal's
classification of "well capitalized" under FDIC and FEDICIA guidelines.
Note 11: Restatement
The Company has restated its September 30, 1994 and December 31, 1994 quarterly
earnings as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
------------- -----------
<S> <C> <C>
Three months ended September 30, 1994
- -------------------------------------
Provision for loan losses $ 60,000 $ 895,000
Warranty losses on sold loans 324,000
Three months ended December 31, 1994
- -------------------------------------
Provision for loan losses $2,040,000 $ 120,000
Warranty losses on sold loans 3,600,000 2,190,000
</TABLE>
-7-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Total assets were $553.0 million at March 31, 1995 compared to $503.9 million at
June 30, 1994. This $49.1 million increase resulted primarily from increases in
mortgage-backed securities of $20.9 million, loans of $31.5 million, investment
securities of $9.1 million and FHLB stock of 1.6 million, offset by a decrease
in cash and cash equivalents of $11.3 million. The net asset increase was
funded primarily by increases in FHLB advances of $78.1 million offset by a
decline in deposits of $23.8 million.
The Company recorded net income of $894,000 or $.52 per share for the three
months ended March 31, 1995 compared to net income of $1,025,000 or $.61 per
share for the comparable period of 1994.
The earnings performance in the current quarter, when compared to the 1994
quarter, was negatively affected by declines in mortgage loan origination fees
of $487,000 and loan servicing fees of $62,000. Additionally, last year's
quarter included a $195,000 gain on the sale of the Company's West Coast
mortgage banking subsidiary ("USM"). Positively affecting the comparable
results was an increase in net interest income of $147,000 and a decline in
operating expenses of $299,000. (See "Condensed Consolidating Income
Statement", "Other Income", "Net Interest Income", and "Other Expense".)
For the nine months ended March 31, 1995, the Company recorded a net loss of
$3,358,000 or $1.96 per share compared to net income of $4,144,000 or $2.40 per
share for the 1994 period. The primary factors of this $7,502,000 decrease in
after tax income were:
(a) The recognition of a deferred tax liability of $2,775,000 and a
corresponding increase in income tax expense in connection with previous
allocations of income to tax bad debt reserves. (See Note 5 of "Notes to
Consolidated Financial Statements" and "Income Taxes".)
(b) An increase in general loan loss reserves via a provision of $1,065,000
for loan losses in the nine month period ended March 31, 1995 versus
$247,000 provision in the prior year's comparable period. (See Note 6 of
"Notes to Consolidated Financial Statements" and "Provision for Loan
Losses".)
(c) An increase in reserve for warranty losses via a provision of $2,514,000
in the current nine month period as compared to $176,000 in last year's
comparable period. (See Note 7 of "Notes to Consolidated Financial
Statements" and "Other Expenses".)
(d) Losses of $533,000 and $768,000, respectively, on the sale of held to
maturity investment securities and loss on available for sale mortgage-
backed securities in the nine month period ended March 31, 1995. (See
Notes 8 and 9 of "Notes to Consolidated Financial Statements" and "Other
Income".)
(e) Professional fees of approximately $700,000 were incurred this period in
connection with the proposed merger with CNB. (See Note 3 of "Notes to
Consolidated Financial Statements" and "Other Expenses".)
(f) Mortgage loan origination fees in the current nine month period were
$1,040,000, a decline of $1,898,000 from last year's figure of
$2,938,000. This was primarily a result of declines in loan origination
and sales of UFC. (See "Other Income".)
-8-
<PAGE>
(g) The 1994 nine month period includes a $880,000 gain on the sale of the
California mortgage operations, with no comparable item included in this
year's financials. (See "Other Income".)
(h) The 1994 nine month period includes a $300,000 increase in net income
relating to a change in accounting method. (The Company adopted "FAS 109
Accounting for Income Taxes", effective July 1, 1993.)
RESULTS OF OPERATIONS
- ---------------------
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The following tables present for
the periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollar
amounts and rates, and the net interest margin. The tables do not reflect any
effect of income taxes. All average balances are daily average balances and
include the balances of non-accruing loans. The yields and costs for the
periods indicated include fees which are considered adjustments to yield.
-9-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
($ thousands)
1995 1994
----------------------------------- ---------------------------------------
INTEREST INTEREST
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
LOANS $187,317 $11,232 8.00% $178,984 $11,461 8.54%
MORTGAGE-BACKED SECURITIES 276,772 13,324 6.42% 237,236 10,698 6.01%
INVESTMENT SECURITIES 26,916 1,443 7.15% 6,692 189 3.77%
OTHER INTEREST-EARNING ASSETS 25,172 1,440 7.63% 51,518 2,252 5.83%
----------- ---------- --------- ----------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS $516,177 $27,439 7.09% $474,430 $24,600 6.91%
----------- ---------- --------- ----------- ---------- ---------
OTHER ASSETS 24,118 28,321
----------- -----------
TOTAL ASSETS $540,295 $502,751
=========== ===========
INTEREST-BEARING LIABILITIES:
DEPOSITS $351,859 $10,997 4.17% $374,177 $11,417 4.07%
FHLB ADVANCES 128,904 6,037 6.24% 68,241 2,852 5.57%
----------- ---------- --------- ----------- ---------- ---------
TOTAL INTEREST-BEARING
LIABILITIES $480,763 $17,034 4.72% $442,418 $14,269 4.30%
----------- ---------- --------- ----------- ---------- ---------
NON-INTEREST-BEARING LIABILITIES 18,383 14,976
STOCKHOLDERS' EQUITY 41,149 45,357
----------- -----------
TOTAL LIAB & EQUITY $540,295 $502,751
=========== ===========
NET INTEREST INCOME/INTEREST
RATE SPREAD $10,405 2.36% $10,331 2.61%
========== ========= ========== =========
NET INTEREST MARGIN (1) 2.69% 2.90%
========= =========
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
($ thousands)
1995 1994
----------------------------------- ---------------------------------------
INTEREST INTEREST
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
---------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
LOANS $199,561 $3,987 7.99% $176,815 $3,718 8.41%
MORTGAGE-BACKED SECURITIES 274,262 4,578 6.68% 229,093 3,307 5.77%
INVESTMENT SECURITIES 23,069 462 8.01% 6,427 58 3.61%
OTHER INTEREST-EARNING ASSETS 29,591 607 8.21% 40,233 486 4.83%
----------- ---------- --------- ----------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS $526,483 $9,634 7.32% $452,568 $7,569 6.69%
----------- ---------- --------- ----------- ---------- ---------
OTHER ASSETS 24,857 29,093
TOTAL ASSETS ----------- -----------
$551,340 $481,661
=========== ===========
INTEREST-BEARING LIABILITIES:
DEPOSITS $343,251 $3,840 4.47% $378,502 $3,691 3.90%
FHLB ADVANCES 149,432 2,473 6.62% 40,990 704 6.87%
TOTAL INTEREST-BEARING ----------- ---------- --------- ----------- ---------- ---------
LIABILITIES $492,683 $6,313 5.13% $419,492 $4,395 4.19%
----------- ---------- --------- ----------- ---------- ---------
NON-INTEREST-BEARING LIABILITIES 19,229 16,215
STOCKHOLDERS' EQUITY 39,428 45,954
TOTAL LIAB & EQUITY ----------- -----------
$551,340 $481,661
=========== ===========
NET INTEREST INCOME/INTEREST
RATE SPREAD $3,321 2.19% $3,174 2.50%
NET INTEREST MARGIN (1) ========== ========= ========== =========
2.52% 2.81%
========= =========
(1) Net interest margin is net interest income
divided by average interest-earning assets
</TABLE>
-10-
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
- -------------------------------------------
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rate (i.e.,
changes in rate multiplied by prior volume) and (ii) changes in volume (i.e.,
changes in volume multiplied by prior rate). Changes attributable to both rate
and volume which cannot be segregated have been allocated proportionately to the
changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------- -----------------------------
1995 VS 1994 1995 VS 1994
----------------------------- -----------------------------
($ thousands) ($ thousands)
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
------------------ INCREASE --------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- ------ --------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
LOANS $ 480 $(211) $ 269 $ 543 $ (772) $ (229)
MORTGAGE-BACKED SECURITIES 649 622 1,271 1,777 849 2,626
INVESTMENT SECURITIES 150 254 404 572 682 1,254
OTHER INTEREST-EARNING ASSETS (129) 250 121 (1,152) 340 (812)
------ ----- ------ ------- ------ ------
TOTAL INTEREST-EARNING ASSETS 1,150 915 2,065 1,740 1,099 2,839
------ ----- ------ ------- ------ ------
INTEREST-BEARING LIABILITIES:
DEPOSITS (353) 502 149 (686) 266 (420)
FHLB ADVANCES 1,862 (93) 1,769 2,536 649 3,185
------ ----- ------ ------- ------ ------
TOTAL INTEREST-BEARING
LIABILITIES 1,509 409 1,918 1,850 915 2,765
------ ----- ------ ------- ------ ------
(DECREASE) IN NET INTEREST
INCOME $ (359) $ 506 $ 147 $ (110) $ 184 $ 74
====== ===== ====== ======= ====== ======
</TABLE>
-11-
<PAGE>
CONDENSED CONSOLIDATING INCOME STATEMENTS
- -----------------------------------------
The following are condensed consolidating income statements for the three and
nine months ended March 31, 1995 and March 31, 1994, showing the operations of
the Company, the Bank and other subsidiaries ("Company and other subsidiaries")
separately from the operations of the mortgage banking subsidiary, Union
Financial Corp. ("UFC").
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31,1995 MARCH 31,1994
--------------------------------------- ---------------------------------------
(thousands) (thousands)
Company Company
and other and other
subsidiaries UFC Total subsidiaries UFC Total
------------ ---------- ----------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $3,200 $121 $3,321 $3,202 ($28) $3,174
Provision for loan losses $50 50 $83 83
----------- --------- ----------- ------------ --------- -----------
Net interest income after
provision for loan losses $3,150 $121 $3,271 $3,119 ($28) $3,091
----------- --------- ------------ ------------ --------- -----------
Other income 808 314 1,122 993 789 1,782
Other Expense 2,259 803 3,062 2,408 953 3,361
----------- --------- ------------ ------------ --------- -----------
Income before taxes 1,699 (368) 1,331 1,704 (192) 1,512
Income taxes 569 (132) 437 556 (69) 487
----------- --------- ------------ ------------ --------- -----------
Net income (loss) before
acccounting method change 1,130 (236) 894 1,148 (123) 1,025
----------- --------- ------------ ------------ --------- -----------
Cumulative effect of change
in accounting method
----------- --------- ------------ ------------ --------- -----------
Net income (loss) $1,130 ($236) $894 $1,148 ($123) $1,025
=========== ========= ============ =========== ========= ===========
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1994
--------------------------------------- ----------------------------------------
(thousands) (thousands)
Company Company
and other and other
subsidiaries UFC Total subsidiaries UFC Total
------------ --------- ------------ ----------- --------- ---------
Net interest income $10,043 $362 $10,405 $10,388 ($57) $10,331
Provision for loan losses $1,065 1,065 $247 247
----------- --------- ------------ ----------- ---------- ---------
Net interest income after
provision for loan losses $8,978 $362 $9,340 $10,141 ($57) $10,084
----------- --------- ------------ ----------- ---------- ---------
Other income 916 1,120 2,036 3,502 2,860 6,362
Other Expense 10,138 2,409 12,547 7,453 2,864 10,317
----------- --------- ------------ ----------- ---------- ---------
Income before taxes (244) (927) (1,171) 6,190 (61) 6,129
Income taxes 2,521 (334) 2,187 2,308 (23) 2,285
----------- --------- ------------ ----------- ----------- ---------
Net income (loss) before
acccounting method change (2,765) (593) (3,358) 3,882 (38) 3,844
----------- --------- ------------ ----------- ----------- ---------
Cumulative effect of change
in accounting method 300 300
----------- --------- ------------ ----------- ----------- ---------
Net income (loss) ($2,765) ($593) ($3,358) $4,182 ($38) $4,144
=========== =========== ============ =========== =========== =========
</TABLE>
-12-
<PAGE>
NET INTEREST INCOME
- -------------------
Net interest income is the Company's largest component of income and represents
the difference between interest and fees earned on loans, mortgage-backed
securities, loans held for sale and investments and the interest paid on
interest bearing deposits and FHLB of Indianapolis advances. Net interest income
was $10,405,000 for the nine months ended March 31, 1995, compared to
$10,331,000 for the same period in 1994, an increase of $74,000 or 0.7%. Net
interest income was $3,321,000 and $3,174,000 for the three months ended March
31, 1995 and 1994, respectively.
The Company's net interest margin decreased to 2.52% and 2.69%, respectively,
for the three months and nine months ended March 31, 1995, from 2.81% and 2.90%
for the comparable 1994 periods. Offsetting the effect of the decreased net
interest margins were the increases in average interest earning assets for the
periods. (See "Results of Operations" and "Rate/Volume Analysis of Net
Interest Income".)
The Company's net interest margin peaked in early 1993 and has since been
erratically but slowly decreasing. The Company believes that the net interest
margin will continue to decrease in the near future, due to the following
factors: (i) the cost of funds is rising, (ii) a significant portion of the
adjustable rate mortgage-backed securities is tied to a lagging index (the
Eleventh District Cost of Funds), and (iii) low introductory rates on new
portfolio loans.
INTEREST INCOME
- ---------------
For the three and nine months ended March 31, 1995, the effect of overall
increasing yields and the increased average balances of interest-earning assets,
resulted in increases in interest income of $2,065,000 and $2,839,000,
respectively, when compared to the comparable 1994 periods. The Company's
effective average yield on earning assets was 7.32% and 7.09% for the three and
nine months ended March 31, 1995 respectively, compared to 6.69% and 6.91% for
the comparable periods of 1994. (See "Results of Operations", and "Rate/Volume
Analysis of Net Interest Income".)
The increase in average interest earning assets of $73.9 million and $41.7
million, respectively, for the three and nine months ended March 31, 1995, over
the comparable 1994 periods was due primarily to increased average balances of
mortgage-backed securities ($45.2 million and $39.5 million increases),
investment securities ($16.6 million and $20.2 million increases) and loans
($22.7 million and $8.3 million increases), offset by declines in average other
interest earning assets of $10.6 million and $26.3 million, respectively. The
decrease in average balance of "Other Interest Earning Assets" over the
comparable periods of 1994 was mainly due to the decreased average balance of
its primary component, "Mortgage Loans Held for Sale", primarily because of a
decline in the volume of business at UFC, the Company's mortgage banking
subsidiary. (See "Results of Operations", and "Rate/Volume Analysis of Net
Interest Income" and the table in part (b) of "Other Income".)
INTEREST EXPENSE
- ----------------
The $1,918,000 and $2,765,000 increases in interest expense for the three and
nine months ended March 31, 1995, respectively, compared to the same periods of
1994 were due to overall increases in total interest bearing liabilities and an
overall increase in rates paid on total interest bearing liabilities. (The
effect of the increased average balances of FHLB advances and increased average
rates paid on FHLB advances offset the effect of the decline in average deposits
for the nine months ended March 31, 1995 when compared to the comparable 1994
periods.) With the increases in market interest rates which began in early
1994, it is expected that the Company's overall cost of funds will continue to
increase. (See "Results of Operations", and "Rate/Volume Analysis of Net
Interest Income".)
-13-
<PAGE>
PROVISIONS FOR LOAN LOSSES
- --------------------------
The Company provided $1,065,000 for loan losses for the nine months ended March
31, 1995. The Company had net charge-offs of $658,000 for the current nine
months, which brought the allowance for loan losses to $1,942,000 at March 31,
1995. (During the previous quarter, a commercial real estate loan in the amount
of $835,000 began experiencing cash flow problems and became delinquent on
payments. The Company determined that collectibility on the entire loan amount
was doubtful and charged $535,000 of the loan to the loan loss reserve.) The
balance at March 31, 1995 compares to $1,889,000 at December 31, 1994,
$1,535,000 at June 30, 1994 and $800,000 at June 30, 1993.
The definitive merger agreement with CNB calls for merging the operations of
Union Federal Savings Bank, the Company's principal subsidiary, into certain
commercial bank subsidiaries of CNB. While there can be no guarantee that the
merger will be completed as contemplated by the merger agreement, the Company's
Board intends to proceed with the conversion and restructuring of Union Federal
to a commercial bank and/or seek out another commercial bank acquirer even if
the merger with CNB for some reason is not consummated.
With the decision to restructure and convert to commercial bank status, Union
Federal increased its loan loss reserves to an amount more in line with the
commercial banking industry averages. Additionally, the merger agreement with
CNB calls for Union Federal to adjust its loan classifications and levels of
reserves for possible loan losses to conform with CNB's classifications and
levels. Furthermore, as indicated above, during the quarter ended December 31,
1994, the Company charged off $535,000 of a commercial real estate loan. For
the foregoing reasons, Union Federal increased the loan loss provision to
$1,065,000 during the nine months ended March 31, 1995.
The allowance for loan losses at March 31, 1995, of $1,942,000 represents .97%
of total loans. The $1,535,000 of allowance for loan losses at June 30, 1994 was
.91% of total loans at the same date.
OTHER INCOME
- ------------
Other income decreased by $660,000 and $4,326,000, respectively, for the three
and nine months ended March 31, 1995, from the corresponding periods in 1994.
The primary components of the decreases were:
(a) For the three and nine months ended March 31, 1994, the Company had
gains on the sale of its California mortgage operations of $195,000 and
$880,000, respectively, while there were no corresponding items in the
current periods.
(b) Mortgage loan origination fees of $293,000 and $1,040,000 for the three
and nine months ended March 31, 1995, respectively, were down $487,000
and $1,898,000 (62% and 65%) from the prior year's periods. The
decreases primarily represent declines in loan origination volume at UFC
in the 1995 periods when compared to 1994. The following table
summarizes the loan sales of UFC: ($000's)
-14-
<PAGE>
<TABLE>
<CAPTION>
Quarter Servicing Servicing
Ending Retained Released Total
------- --------- --------- --------
<S> <C> <C> <C>
March 31, 1994 $27,675 $ 80,240 $107,915
December 31, 1993 31,878 146,051 177,529
September 30, 1993 4,286 76,509 80,795
------- -------- --------
9 Mos.Ended 3/31/94 $63,839 $302,800 $366,639
March 31, 1995 $ 2,623 $ 18,080 $ 20,703
December 31, 1994 4,787 21,224 26,011
September 30, 1994 14,750 18,191 32,941
------- -------- --------
9 Mos.Ended 3/31/95 $22,160 $ 57,495 $ 79,655
</TABLE>
The Company believes that the higher market interest rates in the
current three and nine months in relation to the prior year's market
rates have severely lessened the demand for the fixed rate loans which
UFC originates, sells and services. Unless UFC can increase its market
share of what is a very competitive market, or unless overall demand
increases, loan origination fees are likely to remain at levels
insufficient to produce operating profits at UFC. (See also "Condensed
Consolidating Income Statements".)
(c) The Company restructured its held to maturity investment portfolio in
the quarter ending December 31, 1994, by selling its entire portfolio of
agency multi-step callable bonds. With the increases in market interest
rates which occurred after the initial purchase of the bonds, a loss of
$533,000 was incurred on the sale. Additionally, the Company recorded a
loss of $768,000 on the sale of available for sale mortgage-backed
securities for which the Company determined no longer to be SMMEA
eligible. (No longer eligible as a 20% risk based capital qualifying
item.)
OTHER EXPENSES
- --------------
Other expenses decreased by $299,000 in the three months ended March 31, 1995
from the comparable period in 1994. A decrease in salaries and benefits expense
of $111,000 was the largest component of the decrease. The decrease in salaries
and benefits expense at UFC for the quarter was $145,000, accounting for more
than 100% of the decrease. The decrease at UFC relates to its decreased volume
of business activity. (See "Other Income", and "Condensed Consolidated Income
Statement".)
Other expenses increased by $2,230,000 for the nine months ended March 31, 1995,
when compared to the comparable 1994 period. The primary components of this
increase were increases in warranty losses on sold loans ($2,338,000) and
professional fees ($714,000) offset by decreased salaries and benefits expense
of $722,000. The December 31, 1994, quarter's provision of $2,190,000 for
warranty losses on sold loans and approximately $700,000 in professional fees
relating to the proposed merger with CNB were the primary components of these
increases. (See Notes 7 and 3 of "Notes to Consolidated Financial Statements".)
Effective June 1, 1993, the Bank sold complete ownership of its then wholly
owned subsidiary, Union Security Mortgage, Inc. ("USM"), to the Knight
Corporation ("Knight"). While the Bank owned USM, USM originated, sold and
services conventional single family residential loans through its offices in
Santa Ana and Woodland Hills, California. USM customarily sold all of the loans
that it originated to buyers in the secondary market on a non-recourse basis,
either as individual whole loans or as a packaged pool of loans. However,
subsequent to the sale of the loans it originated USM remained potentially
liable for losses incurred by a purchaser, including unpaid principal and
interest, under certain representations and warranties made to the purchaser at
the time of sale. In certain circumstances (for example, when the debtor made
fraudulent misrepresentations to USM in the origination process), USM was liable
for a purchaser's losses on a defaulted loan, regardless of whether the loan was
recourse or non-recourse, if there had been a breach of the representations and
warranties made to the purchaser by USM. Such fraud might occur with respect to
tax returns, employment verifications, and deposits and appraisals provided at
the time of origination. In connection with the sale of USM on June 1, 1993,
the Bank contractually assumed liability for losses
-15-
<PAGE>
to the Knight Corporation and repurchase demands resulting from breaches of the
representations and warranties. Moreover, in certain cases the Bank separately
guaranteed USM's obligations to loan purchasers pursuant to guarantees signed by
the Bank prior to the sale of USM. Although USM dissolved in 1994, and the Bank
is less likely to be asked to indemnify the Knight Corporation for claims
against USM for any breach of the representations and warranties, the Bank does
remain obligated under certain of the separate guarantees to loan purchasers for
losses relating to USM's prior operations.
When fraud claims relating to loans originated by USM began to surface in fiscal
1993, they were thought to be aberrational. However, additional repurchase
claims arose in 1994, and the Company discovered that these claims, some of
which were based on fraud, were arising in California because of the prior sharp
increases in the value of single family homes. During 1990 and 1991, borrowers
not capable of meeting mortgage payments obtained loans based on fraud with the
apparent expectation that they could profit from the resale of the homes in the
rising home market. However, the California economy deteriorated and housing
values dropped sharply. As a result, borrowers were unable to sell their homes
at a profit and pay off the mortgage loans. As borrowers defaulted, the fraud
was discovered and the repurchase and warranty loss claims occurred. By fiscal
1994, lenders and the public were generally aware of the fraud schemes in
California and the California housing market had stabilized.
In June, 1994, the Company identified eight loans with an aggregate outstanding
loan balance of $1,048,000, which had been sold to the Federal Home Loan
Mortgage Corporation and a loan sold to Federal National Mortgage Corporation
("FNMA") with a loan balance of $141,700, which appeared to have involved broker
fraud. No claims had been made at March 31, 1995 with respect to these loans.
In connection with its merger negotiations in November and December, 1994, the
Company and CNB Bancshares, Inc. undertook an extensive investigation and
analysis of pending and potential warranty claims relating to USM's operations.
The Company contacted each entity which had outstanding loans purchased from USM
to determine the number of loans outstanding, the balance outstanding for such
loans, the delinquency status for such loans, and the number of loans involving
fraud (regardless of their delinquency status). During the quarter ended March
31, 1995, the Bank received warranty loss claims for two loans, one of which
was determined to lack validity. The other claim received during the quarter
ended March 31, 1995 was for $39,000 on a $154,000 loan.
During the nine months ended March 31, 1995, the Bank incurred approximately
$541,000 in losses relating to warranty claims on five (5) loans, and entered
into an $800,000 settlement in November, 1994, with one of the largest
purchasers of USM's loans to cover all pending and future losses with respect to
that purchaser. At March 31, 1995, the Company had 3 warranty loss claims
pending and the estimated potential loss from these known claims and a claim
expected to be made as a result of a recent foreclosure on the FNMA loan
referred to above, totaled $275,000. The Company's allowance for warranty
losses was $2,537,000 at March 31, 1995, which management considers adequate.
The decreases in salaries and benefits expense relate primarily to the
decreased volume of business activity of UFC's mortgage banking operations.
(See "Other Income", and "Condensed Consolidating Income Statements".)
INCOME TAXES
- ------------
Included in income tax expense for the nine months ended March 31, 1995, is the
provision for $2,775,000 relating to previously untaxed bad debt reserves. (See
Note 5 of "Notes to Consolidated Financial Statements" and "Overview", Item
"a".) Offsetting the major portion of the $2,775,000 provision are credits at
regular tax rates for the losses before income taxes for the nine months ended
March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank's principal sources of funds are deposits, advances from the FHLB of
Indianapolis, amortization and prepayment of loan principal (including mortgage-
backed securities) and, to a lesser
-16-
<PAGE>
extent, maturities of investment securities, mortgage-backed securities, and
short-term investments and operations. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are influenced to a great degree by interest rates, general economic
conditions, and competition.
Federal regulations historically have required the Bank to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U. S. Government and corporate
securities and other obligations generally having remaining maturities of less
than five years. The Bank has historically maintained its liquidity ratio at
levels in excess of those required. For March 1995, the Bank's liquidity ratio
was 7.7%.
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) the projected amount of loans to be
originated by the mortgage banking subsidiary and held for re-sale, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits, and
(v) the objective of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires funds beyond its
ability to generate them internally, the Bank has additional borrowing capacity
with the FHLB and collateral eligible for reverse repurchase agreements.
The Company anticipates that it will have sufficient funds available to meet
current loan commitments. At March 31, 1995, the Bank, excluding UFC, had
outstanding commitments to extend credit which amounted to $9.3 million. UFC had
commitments to fund loans of $38.1 million at March 31, 1995.
Savings institutions insured by the Federal Deposit Insurance Corporation are
required by FIRREA to meet three regulatory capital requirements. If a
requirement is not met, regulatory authorities may take legal or administrative
actions, including restrictions on growth or operations, or, in extreme cases,
seizure. Institutions not in compliance may apply for an exemption from the
requirements and submit a recapitalization plan.
During the quarter ending December 31, 1994, the Company made a capital
contribution of $5 million to its principal subsidiary, Union Federal Savings
Bank. The purpose of the contribution was to maintain Union Federal's
classification of "well capitalized" under FDIC and FEDICIA guidelines.
Under these capital requirements, at March 31, 1995, the Bank had:
<TABLE>
<CAPTION>
($ 000's) Tangible Capital Core Capital Risk Based Capital
------------------ --------------------- -------------------
Amount Percent Amount Percent Amount Percent
------------------ --------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Actual $37,825 6.81% $37,825 6.81% $39,148 18.65%
Required 8,331 1.50% 16,662 3.00% 16,796 8.00%
------------------ --------------------- ------------------
Excess $29,494 5.31% $21,163 3.81% $22,352 10.65%
================== ===================== ===================
</TABLE>
-17-
<PAGE>
GENERAL ACCOUNTING ISSUES
- -------------------------
Accounting for Debt and Equity Securities. In 1993, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities ("SFAS No. 115"). SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Those
investments are classified and accounted for as follows:
Debt securities that the holder has the positive intent and ability to hold
until maturity are classified as held for investment and reported at amortized
cost. Securities that can be held for indefinite periods of time, including
those that may be used in an asset/liability management strategy, are not
classified as held for investment. This means that securities that could be
sold in response to changing interest rates, changes in prepayment risks,
increased loan demand, general liquidity needs, or other similar factors are not
classified as held for investment. However, securities that are held for
investment could be sold before they mature if the issuer's creditworthiness
deteriorates significantly. Debt and equity securities classified as available
for sale are reported at fair value, or marked to market. Unrealized gains and
losses are not included in income and are reported as a separate component of
equity. Debt and equity securities classified as held for current resale are
classified as trading securities and reported at fair value with unrealized
gains and losses included in income. Transfers between categories should be
accounted for at fair value. For any sales or transfers of securities
classified as held for investment, the cost basis, the realized gain or loss,
and the circumstances leading to the decision to sell are disclosed. SFAS No.
115 was adopted by the Company on July 1, 1994. (See Note 2 of "Notes to
Consolidated Financial Statements".)
At the time of purchase of new securities, management of the Company makes a
determination as to the appropriate classification of securities as available
for sale or held to maturity. Debt and mortgage-backed securities purchased
with the positive intent and ability to hold to maturity are classified as held
to maturity. Securities may be transferred to held to maturity from available
for sale. Other debt and mortgage-backed securities that will be held for
indefinite periods of time, such as securities that may be sold in response to
interest rate change or anticipated liquidity needs, are classified as available
for sale.
Accounting for Impairment of Loans. In 1993, FASB issued SFAS No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"). The purpose
of SFAS No. 114 is to eliminate inconsistencies in the accounting among
different types of creditors for loans with similar collection problems by
requiring a single method for measuring impaired loans. A loan is considered
impaired when, based on current information and events it is probable that
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. A bank will measure certain impaired loans
pursuant to SFAS No. 114 at a discounted amount on the balance sheet based on
the present value amount of the expected future cash flows using the loan's
effective interest rate. A valuation reserve should be recorded if the present
value of the expected cash flows is less than the recorded amount of the loan.
Formally restructured loans and loans evaluated as groups or pools of
homogeneous loans (e.g. single family residence) are excluded from SFAS No. 114.
In October, 1994, the FASB issued SFAS No. 118 ("SFAS No. 118"), entitled
Accounting by Creditors of Impairment of Loan - Income Recognition and
Disclosures. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to
require information about the recorded investment in certain impaired loans and
about how a creditor recognizes interest income related to those impaired loans.
The effective date of SFAS No. 114 and 118 is for fiscal years beginning after
December 31, 1994. The Company will adopt SFAS No. 114 and 118 July 1, 1995 and
management does not anticipate a material impact on earnings or financial
condition as a result of adoption.
Derivative Financial Statements and Fair Value Disclosures. In October, 1994,
FASB issued SFAS No. 119, Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments ("SFAS No. 119"). SFAS No. 119 requires
disclosures about derivative financial instruments--futures, forward, swap and
option contracts, and other financial instruments with similar characteristics
(e.g., interest rate caps or floors and loan commitments). The definition of
derivatives excludes all on-balance-sheet receivables and payables, including
those that "derive" their values or cash flows from the price of another
security or index, such as mortgage-backed securities, and interest-only and
principal-only obligations.
-18-
<PAGE>
This Statement requires disclosures about amounts, nature and terms of
derivatives that are not subject to SFAS No. 105 because they do not result in
off-balance-sheet risk of accounting loss. It requires that distinction between
and differing disclosure be made for financial instruments held or issued for
trading purposes and financial instruments held or issued for purposes other
than for trading. The required disclosures, either in the body of the financial
statements or in the footnote, include the face or contract amount (or notional
principal amount) and the nature and terms, including, at a minimum, a
discussion of (1) the credit and market risk of those instruments, (2) the cash
requirements of those instruments, and (3) the related accounting policy.
This Statement amends SFAS No. 105 and 107 to require disaggregation of
information about financial instruments with off-balance-sheet risk of
accounting loss and to require that fair value information be presented without
combining, aggregating, or netting the fair values of derivatives with the fair
value of nonderivatives and be presented together with the related carrying
amounts in the body of the financial statements, a single footnote, or a summary
table in a form that makes it clear whether the amounts represent assets or
liabilities. The Company will adopt SFAS No. 119 effective June 30, 1995. The
Company believes that SFAS No. 119 will not have a material impact on financial
position or results of operations.
-19-
<PAGE>
UF BANCORP, INC.
FORM 10-Q/A
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
NONE
Item 5. Other Information
-----------------
NONE
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 11, Statement regarding computation of per share earnings is
submitted herewith. No other exhibits are required to be filed.
________________________________________________________________________________
No other information is required to be filed under Part II of the form.
-20-
<PAGE>
UF BANCORP, INC.
FORM 10-Q/A
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 thereunto duly authorized.
UF Bancorp, Inc.
____________________________
(Registrant)
Date: June 13, 1995 /s/ Donald A. Rausch
by: ____________________________
Donald A. Rausch
Chairman of the Board &
President
Date: June 13, 1995 /s/ Ennis R. Griffith
by: ____________________________
Ennis R. Griffith, Senior
Vice President, Chief
Financial Officer
(Principal Accounting
Officer)
-21-
<PAGE>
UF Bancorp, Inc.
Form 10-Q/A
Exhibit 11 - Computation of Per Share Earnings
(Treasury Stock Method)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
March 31, March 31,
----------------------- ------------------------
1995 1994 1995 1994
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Average Shares:
Outstanding 1,607,693 1,593,693 1,599,526 1,632,368
Effect of stock options 116,887 93,300 110,606 95,384
---------- ---------- ----------- ----------
Average common and common
equivalent shares outstanding 1,724,580 1,686,993 1,710,132 1,727,752
========== ========== =========== ==========
Net income (loss) before cumulative effect of
change in accounting method $894,000 $1,025,000 $(3,358,000) $3,844,000
Cumulative effect of change in accounting method 300,000
---------- ---------- ----------- ----------
Net income (loss) $894,000 $1,025,000 $(3,358,000) $4,144,000
========== ========== =========== ==========
PER SHARE:
Net income (loss) before cumulative effect of
change in accounting method $0.52 $0.61 $(1.96) $2.23
Net income (loss) $0.52 $0.61 $(1.96) $2.40
</TABLE>
-22-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Bylaws of CNB provide that CNB shall indemnify any director or officer
of CNB against any and all liability and reasonable expense that said director
or officer may incur in connection with or resulting from any claim, action,
suit or proceeding, or civil, criminal, administrative or investigative action,
or threat thereof, by reason of said director's or officer's being or having
been a director or officer of CNB, or serving or having served at the request of
CNB as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, if either (i) the officer or director is wholly
successful in any such claim, action, suit or proceeding, or (ii) the officer or
director is not wholly successful but it is nevertheless determined that such
officer or director acted in good faith in what he reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, either said officer or director had
reasonable cause to believe his conduct was lawful or had no reasonable cause to
believe his conduct was unlawful. The Bylaws further provide that the board of
directors may (i) authorize like indemnification of persons who are not
directors or officers of CNB but are employees of CNB or are officers, directors
or employees of any subsidiary of CNB, and (ii) approve indemnification of
directors, officers persons to the full extent permitted by the Indiana Business
Corporation Law (the "Indiana Law") in effect at such time.
Section 23-1-37-9 of the Indiana Law provides for "mandatory
indemnification," unless limited by the articles of incorporation, by a
corporation against reasonable expenses incurred by a director who is wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the director was a party by reason of the director being or having been a
director of the corporation. Section 23-1-37-10 of the Indiana Law states that
a corporation may, in advance of the final disposition of a proceeding,
reimburse reasonable expenses incurred by a director who is a party to a
proceeding if the director furnishes the corporation with a written affirmation
of the director's good faith belief that the director has met the standard of
conduct required by Section 23-1-37-8 of the Indiana Law, that the director will
repay the advance if it is ultimately determined that he did not meet the
standard of conduct required by Section 23-1-37-8 of the Indiana Law, and that
those making the decision to reimburse the director determine that the facts
then known would not preclude indemnification under the Indiana Law.
CNB's Bylaws further provide, in accordance with the Indiana Law, that CNB
shall have the power to purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of CNB, or is or was
serving at the request of CNB as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not CNB would have
power to indemnify him against such liability under the Bylaws or the Indiana
Law. Pursuant to a policy of directors' and officers' liability insurance with
total annual limits of $10,000,000, CNB's directors and officers are insured,
subject to the limits, retention, exceptions and other terms and conditions of
such policy, against liability for any actual or alleged breach of duty,
neglect, error, misstatement, misleading statement, omission or other act done
or wrongfully attempted while acting in their capacities as directors or
officers of CNB.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration Statement
or incorporated by reference herein:
(2)(a) Agreement and Plan of Merger, dated December 12, 1994, among
CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc. (Exhibit A to Prospectus/Proxy Statement);
(2)(b) Amendment to Merger Agreement, dated June 9, 1995, among CNB
Bancshares, Inc., Citizens Bancshares, Inc. and UF Bancorp,
Inc. (Exhibit A to Prospectus/Proxy Statement);
(3)(a) Restated Articles of Incorporation of CNB Bancshares, Inc.;
(3)(b) Amended By-laws of CNB Bancshares, Inc.;
(5) Opinion of Lewis, Rice & Fingersh, L.C. re legality;
(8) Opinion of Lewis, Rice & Fingersh, L.C. re federal income tax
consequences;
(23)(a) Consent of Geo. S. Olive & Co. L.L.C.;
(23)(b) Consent of Geo. S. Olive & Co. L.L.C.;
(23)(c) Consent of Lewis, Rice & Fingersh, L.C. (in opinion re
legality);
(23)(d) Consent of Lewis, Rice & Fingersh, L.C. (in opinion re federal
income tax consequences);
(23)(e) Consent of Kemper Securities, Inc.;
(24) Powers of Attorney;
(99)(a) Form of Proxy Card;
(99)(b) Form of Letter to Shareholders to Accompany Prospectus/Proxy
Statement;
(99)(c) Notice of Special Meeting;
(99)(d) Fairness Opinion of Kemper Securities, Inc. (Exhibit B to
Prospectus/Proxy Statement);
(99)(e) UF Bancorp, Inc. 1994 Annual Report to Shareholders (Exhibit C
to Prospectus/Proxy Statement);
(99)(f) UF Bancorp, Inc. Quarterly Report on Form 10-Q for Quarter
Ended March 31, 1995 (Exhibit D to Prospectus/Proxy
Statement).
II-2
<PAGE>
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) or (c) of this Form.
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes as follows: That prior to
any public reoffering of the securities registered hereunder through the use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The undersigned Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act of 1933, as
amended, and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, as amended, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated document by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(4) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(5) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934, as amended) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) The undersigned Registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
II-3
<PAGE>
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
that, for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and to remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(7) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy expressed in
the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Evansville, State of
Indiana, on June 16, 1995.
CNB BANCSHARES, INC.
By /s/ H. Lee Cooper III
-------------------------------------------------
H. Lee Cooper III
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on June 16, 1995 by the following persons
in the capacities indicated.
Name Title/Position
- ---- --------------
/s/ H. Lee Cooper III Chairman of the Board and
- ------------------------------- Chief Executive Officer
H. Lee Cooper III (principal executive officer)
/s/ James J. Giancola President, Chief Operating Officer
- ------------------------------- and Director
James J. Giancola
/s/ David L. Knapp Executive Vice President
- ------------------------------- and Secretary (principal
David L. Knapp financial officer)
/s/ Ralph L. Alley Senior Vice President and Controller,
- ------------------------------- Treasurer (principal accounting officer)
Ralph L. Alley
* Director
- -------------------------------
John D. Engelbrecht
* Director
- -------------------------------
Robert L. Koch, II
II-5
<PAGE>
* Director
- -------------------------------
Jerry A. Lamb
* Director
- -------------------------------
Burkley F. McCarthy
* Director
- ------------------------------
Robert K. Ruxer
* Director
- -------------------------------
Thomas W. Traylor
* Director
- -------------------------------
Paul G. Wade
* By /s/ David L. Knapp
-------------------------------
Attorney-in-fact
II-6
<PAGE>
INDEX TO EXHIBITS
Number Exhibit Page
- ------ ------- ----
(2)(a) Agreement and Plan of Merger, dated December 12, 1994,
among CNB Bancshares, Inc., Citizens Bancshares, Inc.
and UF Bancorp, Inc. (Exhibit A to Prospectus/Proxy
Statement) ..........................................................
(2)(b) Amendment to Merger Agreement, dated June 9, 1995, among
CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc. (Exhibit A to Prospectus/Proxy Statement) .............
(3)(a) Restated Articles of Incorporation of CNB Bancshares, Inc.
is incorporated by reference herein from CNB Bancshares,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1993 ...................................................
(3)(b) Amended By-laws of CNB Bancshares, Inc. is incorporated by
reference herein from CNB Bancshares, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1993 ...................
(5) Opinion of Lewis, Rice & Fingersh, L.C. re legality .................
(8) Opinion of Lewis, Rice & Fingersh, L.C. re federal income
tax consequences ....................................................
(23)(a) Consent of Geo. S. Olive & Co., L.L.C. ..............................
(23)(b) Consent of Geo. S. Olive & Co., L.L.C. ..............................
(23)(c) Consent of Lewis, Rice & Fingersh, L.C. (in opinion re
legality) ...........................................................
(23)(d) Consent of Lewis, Rice & Fingersh, L.C. (in opinion re
federal income tax consequences) ....................................
(23)(e) Consent of Kemper Securities, Inc. ..................................
(24) Powers of Attorney ..................................................
(99)(a) Form of Proxy Card ..................................................
(99)(b) Form of Letter to Shareholders to Accompany
Prospectus/Proxy Statement ..........................................
(99)(c) Notice of Special Meeting ...........................................
(99)(d) Fairness Opinion of Kemper Securities, Inc. (Exhibit B to
Prospectus/Proxy Statement) .........................................
(99)(e) UF Bancorp, Inc. Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1994 (Exhibit C to
Prospectus/Proxy Statement) .........................................
(99)(f) UF Bancorp, Inc. Quarterly Report on Form 10-Q/A for
Quarter Ended March 31, 1995 (Exhibit D to
Prospectus/Proxy Statement) .........................................
<PAGE>
EXHIBIT (5)
-----------
<PAGE>
June 16, 1995
CNB Bancshares, Inc.
20 N.W. Third Street
Evansville, Indiana 47739
St. Louis, Missouri 63101
Re: Registration Statement on Form S-4
Gentlemen:
In connection with a certain Registration Statement on Form S-4 (the
"Registration Statement") to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations promulgated thereunder, you have requested that we
furnish you our opinion as to the legality of the shares of the common stock,
$1.00 stated value (the "Common Stock"), of CNB Bancshares, Inc. (the "Company")
registered thereunder, which Common Stock is to be issued pursuant to a Plan and
Agreement of Merger (the "Merger Agreement"), dated December 12, 1994, as
amended June 9, 1995, among the Company, Citizens Bancshares, Inc. and UF
Bancorp, Inc.
As counsel to the Company, we have participated in the preparation of
the Registration Statement. We have examined and are familiar with the Company's
Restated Articles of Incorporation, By-laws, as amended, records of corporate
proceedings and such other information and documents as we have deemed necessary
or appropriate.
Based upon the foregoing, we are of the opinion that the Common Stock
has been duly authorized and will, when issued as contemplated in the
Registration Statement and the Merger Agreement, be validly issued, fully paid
and non-assessable.
We consent to the use of this opinion as an Exhibit to the Registration
Statement.
Very truly yours,
LEWIS, RICE & FINGERSH, L.C.
/s/ Lewis, Rice & Fingersh, L.C.
<PAGE>
EXHIBIT (8)
-----------
<PAGE>
[LETTERHEAD OF] LEWIS, RICE & FINGERSH Appears Here
A LIMITED LIABILITY COMPANY
ATTORNEYS AT LAW
500 N. BROADWAY, SUITE 2000
ST. LOUIS, MISSOURI 63102-2147
TEL (314) 444-7600
June 16, 1995
Board of Directors
CNB Bancshares, Inc.
20 N.W. Third Street, 12th Floor
Evansville, IN 47739
Attention: H. Lee Cooper, Chairman
Board of Directors
UF Bancorp, Inc.
501 Main Street
P.O. Box 3125
Evansville, IN 47731
Attention: Donald A. Rausch, Chairman and President
RE: MERGER OF UF BANCORP, INC. INTO CITIZENS BANCSHARES, INC.
Gentlemen:
You have requested our opinions as to the federal income tax
consequences of the proposed merger (the "Merger") of UF Bancorp, Inc. ("UFB")
into Citizens Bancshares, Inc. ("Holding Company") pursuant to the Agreement and
Plan of Merger, dated December 12, 1994, as amended June 9, 1995 ("Merger
Agreement"), by and among CNB Bancshares, Inc. ("CNB"), UFB and Holding Company.
In issuing the opinions set forth in this letter, we have relied upon
(1) the factual representations made by CNB, Holding Company, The Citizens
National Bank of Evansville ("Subsidiary"), Citizens Bank of Kentucky, Citizens
Bank of Illinois, N.A. and Citizens Bank of Jasper in written statements, each
dated March 23, 1995 and the factual representations made by UFB and Union
Federal Savings Bank ("Bank") in written statements, each dated March 31, 1995
(the "Representations"), (2) the Merger Agreement, (3) the Agreement to Merge to
be executed by Bank and Subsidiary and joined in by CNB, ("Subsidiary Merger
Agreement") and (4) the facts, information and documentation set forth in the
Registration Statement on Form S-4 of CNB filed with the Securities and Exchange
Commission in connection with the Merger ("Registration Statement").
ST. LOUIS, MISSOURI . KANSAS CITY, MISSOURI . CLAYTON, MISSOURI . WASHINGTON,
MISSOURI . BELLEVILLE, ILLINOIS . HAYS, KANSAS . LEAWOOD, KANSAS
<PAGE>
June 16, 1995
Page 2
The opinions set forth in this letter are predicated upon our understanding
of the facts set forth in the Merger Agreement, the Subsidiary Merger Agreement,
the Representations, and the Registration Statement. Any change in such facts
may adversely affect our opinions. Furthermore, as explained below, our
opinions are based upon our understanding of the existing provisions of the
Internal Revenue Code of 1986, as amended ("Code"), currently applicable
regulations promulgated under the Code, current published administrative
positions of the Internal Revenue Service such as revenue rulings and revenue
procedures, and existing judicial decisions, all of which are subject to change
either prospectively or retroactively. Any change in such authorities may
adversely affect our opinions. We assume no obligation to update our opinions
for any deletions or additions to or modification of any law applicable to the
Merger.
The following opinions reflect our legal judgment solely on the issues
presented and discussed herein. The issues in this matter are complex. There
are no published cases, rulings, regulations or administrative positions
directly on point to support the opinions set forth herein. The Internal
Revenue Service, however, has issued a private letter ruling to a taxpayer in a
substantially similar situation which held favorably for the taxpayer. While
private letter rulings provide guidance on the Internal Revenue Service position
on issues, they cannot be relied on by other taxpayers and do not extend to
transactions other than the transactions described therein. Accordingly, we
cannot assure you that the Internal Revenue Service will agree with the opinions
expressed herein, nor can we assure you that a court of competent jurisdiction
will agree with such opinions. Our opinions are, therefore, qualified by, and
should be understood to reflect the fact that, the resolution of such issues is
not free from doubt.
Based on the limited amount of reliable authority described above and on
our review of the Merger Agreement, the Subsidiary Merger Agreement, the
Representations, and the Registration Statement, and assuming that the
Subsidiary Merger Agreement is executed in substantially the form we have
reviewed and that the transactions described therein are completed as described,
our opinions as to the federal income tax consequences of the Merger are as
follows.
1. The Merger will constitute a reorganization within the meaning of
Sections 368(a) of the Code.
2. Pursuant to Section 354(a)(1) of the Code, no gain or loss will be
recognized by shareholders of UFB who exchange all of their UFB common stock
solely for shares of CNB voting common stock.
3. Pursuant to Section 358(a)(1) of the Code, the basis of the CNB common
stock received by those shareholders of UFB receiving solely CNB common stock
(including any fractional share interest to which such shareholder would be
entitled) will be the same, in each instance, as the basis of the UFB common
stock surrendered in exchange therefor.
4. Pursuant to Section 1223(1) of the Code, the holding period of CNB
common stock received by the shareholders of UFB (including any fractional
shares to which they may be entitled) will include, in each instance, the period
during which the UFB common stock surrendered in exchange therefor was held,
provided that such stock is held as a capital asset in the hands of such
shareholders on the date of the exchange.
<PAGE>
June 16, 1995
Page 3
5. If a cash payment is received by a shareholder of UFB in lieu of a
fractional share interest of CNB voting common stock, the cash payment will be
treated as received by the shareholder as a distribution in full payment in
exchange for the fractional share redeemed.
We express no opinion with regard to the federal income tax consequences of
the Merger not addressed expressly by the above opinions. In addition, we
express no opinion as to any state or local tax consequences with respect to the
Merger. We express no opinion with respect to any tax consequences relating to
the merger of Bank into Subsidiary.
The shareholders of UFB should consult with a qualified tax advisor with
respect to any reporting requirements which may be applicable, or any other tax
considerations not expressly mentioned herein.
We consent to the use of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
LEWIS, RICE & FINGERSH, L.C.
/s/ Lewis, Rice & Fingersh
<PAGE>
EXHIBIT (23)(a)
---------------
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
-----------------------------
We consent to the incorporation by reference in this Registration Statement of
CNB Bancshares, Inc. on Form S-4 of our report dated January 25, 1995, appearing
in the Annual Report, which is incorporated by reference in Form 10-K of CNB
Bancshares, Inc. for the year ended December 31, 1994; of our report dated May
15, 1995 on the consolidated financial statements of CNB Bancshares, Inc. (as
restated for the February, 1995 acquisitions of Harrisburg Bancshares, Inc. and
King City Federal Savings Bank) for the year ended December 31, 1994 in the
Current Report on Form 8-K dated May 23, 1995 of CNB Bancshares, Inc., and to
the reference to us under the heading "Experts" in the Prospectus, which is
part of this Registration Statement.
/s/ Geo. S. Olive & Co. LLC
Geo. S. Olive & Co. LLC
Evansville, Indiana
June 16, 1995
<PAGE>
EXHIBIT (23)(b)
---------------
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
-----------------------------
We consent to the incorporation by reference of our report dated August 6, 1994,
except for the restatement and subsequent events note for which the date is June
7, 1995, on the consolidated financial statements of UF Bancorp, Inc. for the
year ended June 30, 1994 in the Registration Statement on Form S-4 filed by CNB
Bancshares, Inc., and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ Geo. S. Olive & Co. LLC
Geo. S. Olive & Co. LLC
Evansville, Indiana
June 16, 1995
<PAGE>
EXHIBIT (23)(e)
---------------
<PAGE>
-- CONSENT OF INVESTMENT BANKING FIRM --
We hereby consent to the use of our firm's name in the Registration
Statement on Form S-4, as filed with the Securities and Exchange Commission and
the joint Prospectus/Proxy Statement of CNB Bancshares, Inc. and UF Bancorp,
Inc. contained therein relating to the Merger, as defined therein, and consent
to references to our fairness opinion in such Registration Statement and joint
Prospectus/Proxy Statement. We further consent to the filing of the
aforementioned fairness opinion as an exhibit to each of the Registration
Statement and joint Prospectus/Proxy Statement. Our fairness opinion is to be
dated of even date with the joint Prospectus/Proxy Statement when, as, and if
declared effective, provided that conditions at that time warrant the giving of
such fairness opinion.
/s/ Kemper Securities, Inc.
KEMPER SECURITIES, INC.
Date: June 16, 1995
<PAGE>
EXHIBIT (24)
------------
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated 12-20 , 1994
----------- -
/s/ H. Lee Cooper III
------------------------------
H. Lee Cooper III
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated Dec. 20 , 1994
------------- -
/s/ John David Engelbrecht
------------------------------
John David Engelbrecht
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated Dec. 20 , 1994
------------- -
/s/ Robert L. Koch II
------------------------------
Robert L. Koch II
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated 12/20 , 1994
----------- -
/s/ Jerry A. Lamb
------------------------------
Jerry A. Lamb
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated 12/20 , 1994
----------- -
/s/ B.F. McCarthy
------------------------------
Burkley F. McCarthy
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated Dec. 20 , 199 4
------------- ---
/s/Robert K. Ruxer
-------------------------------
Robert K. Ruxer
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated Dec. 20 , 199 4
------------- ---
/s/Thomas W. Traylor
--------------------------------
Thomas W. Traylor
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated 12-20 , 199 4
----------- ---
/s/Paul G. Wade
------------------------
Paul G. Wade
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated Dec. 20 , 199 4
------------- ---
/s/Ralph L. Alley
------------------------
Ralph L. Alley
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated Dec. 20 , 199 4
------------- ---
/s/James J. Giancola
------------------------
James J. Giancola
<PAGE>
POWER OF ATTORNEY
1933 ACT REGISTRATION STATEMENTS
of
CNB BANCSHARES, INC.
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints H. LEE COOPER III, JAMES J. GIANCOLA and
DAVID L. KNAPP, and each of them, the true and lawful attorneys-in-fact and
agents for him and in his name, place and stead, in any and all capacities, to
sign and file, or cause to be signed and filed, with the Securities and Exchange
Commission (the "Commission"), any registration statement or statements on Form
S-4 under the Securities Act of 1933, as amended, relating to the issuance of
common stock of CNB Bancshares, Inc. in connection with the Agreement and Plan
of Merger by and among CNB Bancshares, Inc., Citizens Bancshares, Inc. and UF
Bancorp, Inc., and any and all amendments and supplements thereto, before or
after effectiveness of such statements, and any and all other documents required
to be filed with the Commission in connection therewith, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully and to all
intents and purposes as the undersigned might or could do in person, and
ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
Dated Dec. 20 , 199 4
------------- ---
/s/David L. Knapp
------------------------
David L. Knapp
<PAGE>
EXHIBIT (99)(a)
---------------
<PAGE>
PROXY
SPECIAL MEETING OF SHAREHOLDERS
UF BANCORP, INC.
____________, 1995
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
UF BANCORP, INC.
The undersigned shareholder of UF Bancorp, Inc., a Delaware corporation
("UFB"), hereby appoints ____________, ____________ and ____________, and any of
them, with full power to act alone, as proxies, each with full power of
substitution and revocation, to vote all shares of Common Stock of UFB which the
undersigned is entitled to vote at the Special Meeting of Shareholders to be
held at the main office of UFB located at 501 Main Street, Evansville, Indiana
on ____________, 1995, at ____________ __.m., local time, and at any adjournment
or adjournments thereof, with all powers the undersigned would possess if
personally present, on the following:
Proposal to approve an Agreement and Plan of Merger, dated December 12,
1994, as amended June 9, 1995, by and among UFB, CNB Bancshares, Inc.
("CNB") and Citizens Bancshares, Inc. ("CBI"), a wholly owned subsidiary of
CNB, providing for CNB's acquisition of UFB by means of the merger (the
"Merger") of UFB with and into CBI.
______ FOR ______ AGAINST ______ ABSTAIN
Proposal to permit the Special Meeting to be adjourned or postponed, in the
discretion of the proxies, which adjournment or postponement could be used
for the purpose, among others, of allowing time for the solicitation of
additional votes to approve the referenced Agreement and Plan of Merger and
the Merger.
______ FOR ______ AGAINST ______ ABSTAIN
The undersigned hereby ratifies and confirms that all said proxies, or any of
them or their substitutes, may lawfully do or cause to be done by virtue hereof,
and acknowledges receipt of the notice of said meeting and the Prospectus/Proxy
Statement accompanying it.
THIS PROXY WILL BE VOTED AS SPECIFIED BY YOU ABOVE. IF NO SPECIFICATION IS
MADE, YOUR SHARES WILL BE VOTED "FOR" THE PROPOSALS DESCRIBED ABOVE.
Dated _________________, 1995
--------------------------------------------------
Please insert date of signing. Sign exactly as
name appears at left. Where stock is issued in
two or more names, all should sign. If signing as
attorney, administrator, executor, trustee or
guardian, give full title as such. A corporation
should sign by an authorized officer and affix
seal.
<PAGE>
EXHIBIT (99)(b)
---------------
<PAGE>
On letterhead of:
UF Bancorp, Inc.
----------------
____________, 1995
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of UF Bancorp, Inc., a Delaware corporation ("UFB"), on
____________, 1995. The Special Meeting will be held at the main office of UFB
located at 501 Main Street, Evansville, Indiana commencing at _________ _.m.
local time.
At the Special Meeting, shareholders will be asked to consider and vote
upon a proposal to approve an Agreement and Plan of Merger (the "Merger
Agreement") providing for the acquisition of UFB by CNB Bancshares, Inc. ("CNB")
by means of the merger of UFB with and into Citizens Bancshares, Inc., a wholly
owned subsidiary of CNB (the "Merger"). As a result of the Merger, each
outstanding share of UFB common stock will be converted into the right to
receive 1.366 shares of common stock of CNB, subject to possible upward or
downward adjustment based upon the average of the per share closing prices of a
share of common stock of CNB during the twenty day period preceding the fifth
calendar day preceding the consummation of the Merger as set forth in the Merger
Agreement and described in the accompanying Prospectus/Proxy Statement.
Shareholders are urged to read carefully the accompanying Prospectus/Proxy
Statement which describes the Merger and related matters in more detail.
The Board of Directors of UFB approved the Merger Agreement and recommends
that you vote for approval of the Merger Agreement.
The affirmative vote of the holders of a majority of the outstanding shares
of UFB common stock is required to approve the Merger Agreement. In addition to
the approval of the Merger Agreement by the shareholders of UFB, the Merger is
subject to certain other conditions, including, among others, approval of the
Merger by various regulatory agencies.
It is important that your shares be represented at the Special Meeting,
whether or not you plan to attend in person. Therefore, we ask that you please
sign and date the enclosed proxy card and mail it as soon as possible in the
enclosed postage-paid envelope so that your shares will be represented at the
Special Meeting. If you attend the Special Meeting, you may vote in person if
you wish, even if you have previously mailed in your proxy card.
Sincerely,
Donald A. Rausch
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
EXHIBIT 99(c)
-------------
<PAGE>
UF BANCORP, INC.
A DELAWARE CORPORATION
-----------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ____________, 1995
-----------------------------
The Special Meeting of Shareholders of UF Bancorp, Inc., a Delaware
corporation ("UFB"), will be held on _______________, 1995, at _______ __.m.,
local time, at the main office of UFB located at 501 Main Street, Evansville,
Indiana, for the following purpose:
1. Proposal to approve an Agreement and Plan of Merger, dated December
12, 1994, as amended June 9, 1995, by and among UFB, CNB Bancshares,
Inc., an Indiana corporation ("CNB") and Citizens Bancshares, Inc.
("CBI"), an Indiana corporation and wholly owned subsidiary of CNB,
attached as Exhibit A to the accompanying Prospectus/Proxy Statement,
providing for CNB's acquisition of UFB by means of the merger of UFB
with and into CBI.
2. Proposal to permit the Special Meeting to be adjourned or postponed,
in the discretion of the proxies, which adjournment or postponement
could be used for the purpose, among others, of allowing time for the
solicitation of additional votes to approve the referenced Agreement
and Plan of Merger and the Merger.
Only the holders of common stock of UFB of record at the close of business
on ____________, 1995, are entitled to notice of and to vote at the Special
Meeting or at any adjournments or postponements thereof.
EACH SHAREHOLDER IS URGED TO COMPLETE AND RETURN PROMPTLY THE ACCOMPANYING
PROXY WHETHER OR NOT HE OR SHE PLANS TO ATTEND THE MEETING. The prompt return
of your signed proxy will help assure a quorum and aid UFB in reducing the
expense of additional proxy solicitation. The giving of such proxy does not
affect your right to vote in person in the event you attend the meeting.
By Order of the Board of Directors
Secretary
Evansville, Indiana
______________, 1995
UFB SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE
THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FOR SUBMITTING SUCH
CERTIFICATES.
